AUDIT OF PLANT, PROPERTY AND EQUIPMENT

AUD339

6.53

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INTRODUCTION

• Tangible assets that are held by an enterprise for use in the production or supply of goods or services, for rental to others, or for administrative or maintenance purposes; and are expected to be used for more than one report periods
• Types of transactions: acquisition of fixed assets for cash or other non-monetary considerations; disposal of fixed assets through sale, exchange, retirement, or abandonment, depreciation of fixed assets over their useful economic life, and leasing of fixed assets

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OVERVIEW OF THE CYCLE

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Transactions are periodically entered both from the purchasing cycle and through direct input into the system.

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The property, plant and equipment (ppe) master file is then updated, and a number of reports are produced. The periodic report for ppe transactions is reviewed for proper recording by the physical plant department.

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The ppe subsidiary ledger is a record of all ppe assets owned by the entity. It contains information on the cost of the asset; the date acquired, the method of depreciation, and accumulated depreciation. The subsidiary ledger also includes the calculation of depreciation for both financial statement and income tax purposes.

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The general ledger is posted to reflect the new ppe transactions and depreciation charges. The subsidiary ledger should be reconciled to the general ledger control account monthly.

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INHERENT RISK ASSESSMENT

Property, Plant and Equipment

Complex accounting issues

A number of other ppe transactions can give rise to complex accounting issues such as lease accounting, self-constructed assets, and capitalized interest. It is not uncommon for such transactions to be accounted for incorrectly by the client.

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Difficult to audit transactions

Transactions involving donated assets, non-monetary exchanges and, self-constructed assets are more difficult to audit. Difficult to verify the fair value of an asset exchange or cost accumulation of self-constructed assets.

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Misstatement detected in prior audits

If the auditor has detected misstatements in prior audits, the assessment of inherent risk high unless the client has established new control procedures during current year’s audit.

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CONTROL RISK ASSESSMENT

Validity and Authorization

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• Purchase requisitions are initiated in relevant depts and authorized at the appropriate level within the entity.
• Purchase of equipment may require highly skilled engineers approve the technical specifications.
• Authorization to purchase ppe consistent with the authorization table (limits at each managerial level) to ensure that larger projects are brought to the attention of higher levels of management for approval before commitments are made.

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Completeness

The detailed ppr subsidiary ledger includes information:

• Description, location, and ID or serial number
• Date of acquisition and installed cost
• Depreciation methods, residual value, and estimated useful life

Monthly reconciliation of the ppe subsidiary ledger to the general ledger control accounts.

Segregation of duties

• Initiation function and final approval function
• Record function and general ledger function
• Records function and custodial function 

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ANALYTICAL PROCEDURES - PPE

• Compare prior-year balances in ppe and depreciation charges with current-year balances after consideration of any changes in conditions or asset composition
• Compute the ratio of depreciation charges to the related pp account and comparison to prior years’ ratios
• Compute the ratio of repairs and maintenance expense to the related pp account and comparison to prior years’ ratios
• Compute the ratio of insurance expense to the related ppe account and comparison to prior years’ ratios

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PROCEDURES FOR ACCOUNT BALANCES - PPE

Accuracy

Auditor obtaining a lead schedule and detailed schedules for additions and disposals of assets

Validity

Auditor obtains a listing of all major additions and vouches them to supporting documents such as suppliers’ invoices. Similarly, disposal of assets must be properly authorized, and supporting documentation such as sales receipts should indicate how the disposal took place. Auditor obtains a schedule of all major disposals and verifies that the asset was removed from the ppe records.

Completeness

Auditor physically examine a sample of asset & trace them to the ppe subsidiary ledger

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CONTINUE

Ownership – test ownership by examining suppliers’ invoices or other supporting documents such as property deeds, grants or title documents.

Valuation and classification – auditor test the recorded cost of new assets by examining suppliers’ invoices and other supporting documents used by the client to establish the recorded value of the assets.

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THANK YOU

Any question?

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