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AUD390
AUDIT OF PROPERTY PLANT & EQUIPMENT
MAIN OBJECTIVES OF CONTROL OVER PROPERTY, PLANT AND EQUIPMENT
 To ensure all a...
DISCLOSURE REQUIREMENT FOR PPE
A company should properly disclose its PPE which consists of:-
Accounting policy, cost, dep...
Internal Control Ascertain record and evaluate internal control system and review
compliance test before auditor could rel...
Internal Control Ascertain record and evaluate internal control system and review
compliance test before auditor could rel...
Internal Control Ascertain record and evaluate internal control system and review
compliance test.
Audit Objective Verific...
During your audit on a company’s non-current asset, the auditor realized that there are
additional motor vehicles and offi...
The company maintains a register for all PPE, and annual depreciation is charged at the
following rates:
Building 2% on co...
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Topic 11 notes and question on ppe

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Topic 11 notes and question on ppe

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Topic 11 notes and question on ppe

  1. 1. AUD390 AUDIT OF PROPERTY PLANT & EQUIPMENT MAIN OBJECTIVES OF CONTROL OVER PROPERTY, PLANT AND EQUIPMENT  To ensure all acquisitions are properly authorized.  To safeguard all the assets.  To ensure all assets are properly recorded.  To ensure assets are written off over their useful life.  Appropriate depreciation i.e. adequate provisions and accurate calculation for provisions of depreciation.  To ensure profits and losses on disposal of fixed assets are properly accounted for. INTERNAL CONTROL FOR PROPERTY, PLANT AND EQUIPMENT  Delegation powers of authorization for acquisitions.  Authorization limit and procedures including board approval for major item.  Physical security of assets and all assets are identified and recorded.  Assets registers recording date of acquisition, cost, depreciation rate and location  Frequent review of record with existing assets (actual) by senior independent officers.  Authorization of disposals and write-off.  Division of duties between purchase, recording and disposal of assets.  Regular maintenance of assets.  Formal and consistent policy for the treatment of capital and revenue expenditure.  Procedures for the disposal of fixed assets. INHERENT RISK FACTORS FOR PROPERTY, PLANT AND EQUIPMENT  Complex accounting issues such as lease accounting, self-constructed assets and capitalized interest.  Difficult to audit transaction such as transactions involving donated assets, non monetary exchanges.  Misstatement detected in prior audits. If the auditor has detected misstatement in prior audits, the likelihood of misstatements in the current year is higher.
  2. 2. DISCLOSURE REQUIREMENT FOR PPE A company should properly disclose its PPE which consists of:- Accounting policy, cost, depreciation for the year, accumulated depreciation, net book value, and comparative figures. ANALYTICAL PROCEDURES FOR PPE  Review capital budgets and comparison of the amounts spent with amounts budgeted.  Compare prior year balances in PPE and depreciation charges with current year balances after consideration of any changes in condition or assets composition.  Compute the ratio of depreciation charges to the PPE account and compare with prior year ratio. AUDIT VERIFICATION PROCEDURES OF PROPERTY, PLANT AND EQUIPMENT 1. Freehold Land And Building Internal Control Ascertain record and evaluate internal control system and review compliance test before auditor could rely on such controls to form part of audit evidence and before he continued with follow-up verification. Audit Objective Verification Audit Procedures C - Cost Ensure that there is no evidence that the buildings are subject to a mortgage or charge. Check invoice, contract and cost records for any new items of acquisition. Vouching Inquiry and scanning Physical examination A - Authorization Check directors’ minutes’ book for approval. For smaller items, probably rely on authorization limits in internal control system. Vouching Documentation Inquiry and scanning V - Valuation a) Agree the balance sheet amount to the underlying records and book of accounts. b) Check that balance brought forward for cost and accumulated Re-computation Analytical review Confirmation
  3. 3. Internal Control Ascertain record and evaluate internal control system and review compliance test before auditor could rely on such controls to form part of audit evidence and before he continued with follow-up verification. Audit Objective Verification Audit Procedures depreciation agree with the previous year file. Ensure that in year of audit: i) Cost less accumulated depreciation ii) Depreciation rate adequate and appropriate iii) Consistent application of accounting policy and correctly disclosed. iv) Proper procedures for the disposal of fixed assets. E - Existence Physical inspection of vehicle, road tax and vehicle registration documents against the motor vehicles register Vouching Physical examination Analytical review B - Benefit If leased out or rent, check hire or rent receipts. Inquiry and scanning Documentation Re-computation O - Ownership 1) Check document of title of ownerships 2) If no document of title, vehicle registration document is secondary evidence which should be backed up by physical inspection Inquiry and scanning Documentation Re-computation D - Disclosure 1) Valued at cost less accumulated depreciation. 2) Check the proper disclosure and presentation as required by General procedures Inquiry and scanning
  4. 4. Internal Control Ascertain record and evaluate internal control system and review compliance test before auditor could rely on such controls to form part of audit evidence and before he continued with follow-up verification. Audit Objective Verification Audit Procedures accounting and statutory requirements. 2. Plant And Equipment Internal Control Ascertain record and evaluate internal control system and review compliance test. Audit Objective Verification Audit Procedures C - Cost Examine invoice, contract or cost records for items purchased and constructed internally. Vouching Inquiry and scanning Physical examination A - Authorization Check directors’ minutes’ book and contract agreement for approval. For smaller items, probably rely on authorization limits in internal control system. Vouching Documentation Inquiry and scanning V - Valuation a) Agree the balance sheet amount to the underlying records and book of accounts. b) Check that balance brought forward for cost and accumulated depreciation agree with the previous year file. Ensure that in year of audit: i) Cost less accumulated depreciation ii) Depreciation rate adequate and appropriate iii) Consistent application of accounting policy and correctly Re-computation Analytical review Confirmation
  5. 5. Internal Control Ascertain record and evaluate internal control system and review compliance test. Audit Objective Verification Audit Procedures disclosed. iv) Proper procedures for the disposal of fixed assets. E - Existence Physical inspection of vehicle by comparisons with plant registers. Vouching Physical examination Analytical review B - Benefit If leased out or rent, check hire or rent receipts. Inquiry and scanning Documentation Re-computation O - Ownership 1) No document of title of ownerships 2) Can confirm by overall checks on existence and custody on accounts to ensure nothing is sold and by letter of representation from management. Inquiry and scanning Documentation Re-computation D - Disclosure 1) Appropriate description of assets. 2) Valued at cost less accumulated depreciation. 3) Check the proper disclosure and presentation as required by accounting and statutory requirements. General procedures Inquiry and scanning Question Related To Audit Of PPE OCT 2007 Q3(C) Explain two (2) audit objectives and related verification procedures to verify land and buildings. APR 2009 Q3 (B)
  6. 6. During your audit on a company’s non-current asset, the auditor realized that there are additional motor vehicles and office equipment amounting to RM150, 000. The transactions have been properly accounted for in the company’s non current asset register. What would be the specific audit procedures to satisfy the assertion of existence and ownership of these non-current assets? OCT 2004 Q4 (a), (b), (d) Describe any three (3) analytical procedures that are commonly used in auditing property, plant and equipment? Discuss three (3) factors that an auditor should consider in assessing the inherent risk for property, plant and equipment? Explain the disclosure requirements for property, plant and equipment in the financial statements. APR 2006 Q4 (A) You have been asked to audit the property, plant and equipment (PPE) of Darulaman Engineering Berhad for the year ended 31 December 2004. The draft accounts show the following movements on PPE during the year. Freehold land and building Plant and machinery Motor vehicles Total RM RM RM RM Cost or valuation At 1 January 2004 Additions Disposals 353,000 292,000 - 406,000 86,000 (29,000) 173,000 65,000 (47,000) 932,000 443,000 (76,000) At 31 December 2004 645,000 463,000 191,000 1,299,000 Depreciation At 1 January 2004 Charge for the year On disposals 132,000 12,900 - 187,000 43,000 (25,000) 74,000 42,000 (32,000) 393,000 97,900 (57,000) At 31 December 2004 144,900 205,000 84,000 433,900 Net Book Value 31 December 2004 500,100 258,000 107,000 865,100
  7. 7. The company maintains a register for all PPE, and annual depreciation is charged at the following rates: Building 2% on cost Plant and Machinery 10% on cost Motor Vehicles 25% on cost It is the company policy to charge full year’s depreciation in the year of purchase and none in the year of disposal. Required: a) Describe four substantive audit procedures that should be performed to verify the movements of PPE during the year ended 31 December 2004 b) Identify documentary evidence that should be obtained to verify the ownership of freehold land and buildings, plant and machinery and motor vehicles respectively? c) If the company does not maintain a proper PPE register, how would it affect your audit work?

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