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Audit of Ppe

Audit of Ppe

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Published by: Marilou K. Espocia-Malquisto on Jun 26, 2012
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Perform substantive tests of property, plant and equipment, and related revenue and expenses1.
 
Obtain a summary analysis in changes in property owned and reconcile to ledgers.The auditors may be verify the balances of plant and equipment assets by reference to
the prior year’s audit working papers. In addition to beginning balances, the summary analysis
will show the additions and retirements of plant and equipment during the year under audit.As the audit progresses, the auditors will examine a sample of these additions andretirements. The detailed working papers showing this verification will support and be cross-indexed to the summary analysis worksheet.Before making a detailed analysis of changes in property accounts during the year, theauditors will want to be sure the amounts in the subsidiary ledgers agree in total with thebalances in the controlling accounts. Reconciliation of the subsidiary ledgers with thecontrolling accounts can be performed very quickly with the use of generalized audit software.2.
 
Vouch additions property, plant, and equipment during the year.The vouching of additions to the property, plant and equipment accounts during theperiod under audit is one of the most important substantive tests. The extent of the vouching
is dependent upon the auditors’ assessment of control risk for the existence and valuation of 
plant and equipment. The vouching process utilizes a working paper analysis of the generalledger controlling accounts and includes the tracing of the entries trough the journals tooriginal documents, such as contracts, deeds, construction work orders, invoices, canceledchecks, and authorization by appropriate individuals.The specific steps to be taken in investigati
ng the year’s addition usually will include
the following:a.
 
Review changes during the year in construction in progress and examinesupporting work orders, both incomplete and closed.b.
 
Trace transfers from the Construction in Progress account to the propertyaccounts, observing propriety of classification. Determine that all completed itemshave been transferred.c.
 
On a test basis, vouch purchases of plant property, and equipment to invoices,deeds, contracts, or other supporting documents. Recompute extensions,footings, and treatment of discounts. Make certain revenue expenditures werenot improperly capitalized.d.
 
Investigate all instances in which the actual costs of acquisitions substantiallyexceed authorized amounts. Determine whether such excess expenditures wereanalyzed and approved by appropriate officials.e.
 
Investigate fully any debits to property, plant, and equipment accounts not arisingfrom acquisition of physical assets.f.
 
Determine that the total cost of any plant and equipment assets purchased on theinstallment plan is reflected in the asset accounts and that unpaid installments areset up as liabilities. Ascertain that all plant and equipment leases that, in effect,
 
are installment purchases are capitalized. Interest charges should not becapitalized as a cost of the asset required.The accounting for plant asset acquired in a trade-in or other exchange is specified by
ABP Opinion No. 29, “ Accounting for an Nonmonetary Transactions.” No gain is recognized
when a plant asset is exchanged for a similar plant asset. The asset required in the exchange isvalued at the carrying amount of the asset given up plus any additional cash paid or amountfinanced.Asset constructed by a company for its own use should be recorded at the cost of direct material, direct labor, and applicable overhead cost. However, auditors may apply theadditional test of comparing the total cost of self-constructed equipment with bids orestimated purchase prices for similar equipment from outside suppliers; excess cost of self-constructed asset should be expensed in the period that construction is completed.Related Party Transactions. Assets acquired from affiliated corporations, from promotersor stockholders, or by any type of related-party transaction not involving
arm’s
-lengthbargaining between buyer and seller have sometimes been recorded at inflated amounts. Theauditor should inquire into the methods by which the sales price was determined, the cost of the property to e vendor, length of ownership by the vendor, and any other availableevidence that might indicate an arbitrarily determined valuation. Material related partytransactions must be disclosed in the notes to the financial statements.3.
 
Make a physical inspection of major acquisition of plant and equipment.The auditors usually make a physical inspection of major units of plant and equipmentacquired during the year under audit. This step is helpful in maintaining a good workingknowledge
of the client’s operation and also in interpreting the accounting
entries for bothaddition and retirements.The audit procedure of physical inspection may flow in either direction between theplant assets and records of plant assets. By tracing items in the plant ledger to the physicalassets, the auditors prove that the assets shown in the accounting records actually exist andare in the current use. The alternative testing procedure is to inspect selected assets in the inthe plant and trace these assets to the detailed records. This test provides evidence thatexisting assets are recorded.The physical inspection of plant assets may be limited to major units acquired duringthe year or maybe extended to include tests of older equipment as well. In a few situations(especially when control risk is very high), the auditors may conclude that the taking of completely physical inventory is needed. Bear in mind, however, that a complete physicalinventory of plant and equipment is a rare event. If such
inventory is required, the auditors’
role is to observe the physical inventory.Let us consider an example of a situation in which the auditors might conclude that acomplete physical inventory of equipment is needed. Assume that a client is engaged in
 
commercial construction work and that the client owns and operates a great many units of costly mobile equipment. Such equipment may often be scrapped or sold upon theauthorization of a field supervisor. Under these circumstances, the auditor might regard acomplete physical inventory of plant and equipment as essential. Similarly, in the audit of clients owning a large number of automobile and trucks, the auditors may insist uponobserving a physical count as well as examining legal title.Some large companies, as part of their internal control, perform occasional physicalinventories of plant and equipment at certain location or in selected departments. Theobservation of these limited counts is often carried out by the clients internal auditing staff rather than by the independent auditors.4.
 
Analyze repair and maintenance expense accounts.The auditors principal objective in analyzing repair and maintenance expense accountsis to discover items that should have been capitalized. Many companies have a written policysetting the minimum expenditure to be capitalized. For example, company policy mayprescribe that no expenditure for less than $300 shall be capitalized regardless of the servicelife of the item purchased. In such cases, the auditors will analyze the repair and maintenanceaccounts with a view toward determining the consistency of application of this policy as wellas compliance with generally accepted accounting principles. To determine that the accountscontains only proper repair and maintenance charges, the auditors will trace the largerexpenditures to written aut
horizations for transaction. The accuracy of the client’s accounting
for the expenditures maybe verified by reference the vendors invoices, to materialrequisitions, and to labor time records.One useful means of identifying any capital expenditures that are included in therepair and maintenance accounts is to obtain or to prepare an analysis of monthly amounts of expense with corresponding amount listed for the preceding years should be fullyinvestigated. If maintenance expense is classified by the departments serviced, the variationsare especially noticeable.5.
 
Investigate the status of property, plant and equipment not in current use.Land, buildings, and equipment not in current use should be investigated thoroughlyto determine the prospects for their future use in operations. Plant assets that are temporarilyidle need not be reclassified, and depreciation may be continued at normal rates. On theother hand idle equipment that has been dismantled, or that for any reason appearsunsuitable for the future operating use, should be written down to an estimated realizablevalue and excluded from the plant and equipment classification. In the case of standbyequipment and other property not needed at present or prospective levels of operation, theauditors should consider whether the carrying value is recoverable through future use inoperations.ILLUSTRATIVE CASE
During 1970’s, many larger public utility companies began he construction of nuclear power
plants which were believed to be the best source of electricity for the future. By the mid-
1980’s, however, number of these projects had turned into financial nigh
tmares. In many

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