AP-6: Audit Program for Property

Company Balance Sheet Date

The company has the following general ledger accounts that will be classified in the property
component of the balance sheet.

General Ledger Account Number

Accumulated
Description of Account Fixed Asset Depreciation Related Expense

Audit Program for Property

Company Balance Sheet Date

Audit N/A Workpaper

Objectives Performed Index
Audit Procedures for Consideration by
FINANCIAL STATEMENT ASSERTIONS

E/O Existence or occurrence. V/A Valuation or

allocation.
C Completeness. P/D Presentation
and disclosure.
R/O Rights and obligations.

AUDIT OBJECTIVES

A. Property, plant, and equipment reflected in the accounts

represent a complete listing of capitalizable cost of assets
purchased, constructed or leased by the company, and such assets
are physically on hand. Accordingly, noncapitalizable costs are
properly expensed, and capitalizable costs are excluded from
maintenance or other expense accounts (assertions E/O, C, and
R/O).

B. Property, plant, and equipment is valued at cost in

accordance with GAAP (assertion V/A).

C. The costs and related depreciation applicable to all sold,

abandoned, damaged, or obsolete property have been properly
removed from the accounts (assertions E/O, C, and V/A).

D. Depreciation charged to income during the period is

adequate but not excessive and has been computed on an
acceptable basis consistent with that used in prior years (assertion
V/A).

E. The balances in the depreciation allowance accounts are

reasonable, considering the expected useful lives of the property
units and estimated salvage value. Accordingly, the net carrying
values of property presented in the financial statements are
expected to be recoverable in the ordinary course of business
(assertion V/A).

F. Property is properly classified in the balance sheet, and

liens, significant fully depreciated assets, idle property, and
property held for investment purposes are properly disclosed. The
financial statements also include disclosure of the major classes of
depreciable assets, accumulated depreciation, depreciation methods
and amounts, basis of valuation, amounts of capitalized interest,
capital leases, impaired assets, assets held for sale, and asset
 retirement obligations (assertion P/D).

G. Information necessary to prepare the companys tax return

has been obtained (optional objective if the auditor also has tax
return responsibilities).
IDENTIFICATION CODES

The letters preceding each of the above audit objectives, i.e., A, B,

etc., serve as identification codes. These codes are presented in the
left column labeled Audit Objectives when a procedure
accomplishes an objective. If the alpha code appears in a bracket,
e.g., [A], [B], etc., the audit procedure only secondarily
accomplishes the objective. If an asterisk precedes a procedure, it is
a preliminary step or a follow up step that does not accomplish an
objective.

BASIC PROCEDURES

* 1. Determine the most efficient workpaper approach to audit

property(a) work directly from a copy of the companys detailed
property records or (b) use a lead schedule that summarizes the
transactions in each account, then supplement with detailed
schedules showing significant additions, retirements, or
adjustments to each account. Test the clerical accuracy of these
workpapers, cross reference amounts, and tie totals to the general
ledger.
Practical Considerations:

The auditors firm may also be engaged to prepare the detailed

property records. When this occurs, it is normally less expensive to
have one of the firms paraprofessionals update the property
records before the start of the audit.

If the auditor has tax return responsibility or maintains the

detailed property records, it may be more efficient to audit directly
from the detailed records, assuming a copy can be obtained for the
workpapers.

If the client uses packaged accounting software and the auditor

has determined that the client is unable to make changes to
program coding, testing the mechanical accuracy (i.e., footing) of
the fixed asset detail may not be necessary. If procedures are
performed to test mechanical accuracy in this situation, they may
be limited.

If a summary lead schedule is used as the primary workpaper,

it should contain the following columns for each property and
related accumulated depreciation account.

Prior year-end general ledger property balance.

Current year additions to property.

Current year retirements of property.

Other adjustments (a column just in case there were transfers

between property accounts).

Current year-end general ledger property balance.

Adjustment column(s) (this can be one column or separate

debit and credit columns).

As adjusted current year general ledger property balance.

A column with a brief description of the depreciation method

and life.

Prior year-end general ledger depreciation allowance balance.

Additions to the allowance account for current year

depreciation.

Reductions to the account for current year retirements, sales,

disposals, etc.

Other adjustments (a column just in case there were transfers

between allowance accounts).

Current year-end general ledger allowance balance.

Adjustment column(s).
 As adjusted current year general ledger allowance balance.

G 2. If you are responsible for the preparation of the companys

federal income tax return, obtain the following information:

a. For additions: date acquired, detailed description of the

asset, its cost, useful life, and depreciation method for tax return.

b. For retirements: date retired, depreciation through

retirement date, proceeds (if any) from sale of the asset, and
original acquisition date of the property.
Practical Consideration:

If a copy of the detailed property records is used as the primary

audit schedule, a significant portion of this material may already be
captured or can be easily added to the detailed records.

A, B, 3. For current year additions to property, perform the

[C] following procedures:

a. Inquire of the owner/manager if there are any major

additions (purchased or constructed by the company or
capitalizable leases) that are omitted from the workpapers obtained
in Steps 1 or 2. Relate these facts to additions you observed during
the inventory observations or plant tours.

b. If repairs and maintenance accounts have material

balances, obtain an analysis of transactions in the account. Scan the
analysis to determine if additional vouching of repairs and
maintenance is necessary. If so:

(1) Examine significant invoices for repairs and maintenance

expenses. Document the items tested.

(2) Determine if the expenses contain significant components

that should be capitalized as current year additions to property,
plant, or equipment.
Practical Consideration:

SAS No. 96, Audit Documentation, requires documentation of

substantive tests of details involving inspection of documents to
 include identification of the items tested. The authors believe items
tested can be identified by listing the items; by including a detail
schedule in the workpapers, such as a detailed analysis of repairs
and maintenance expense, on which the items are identified; or by
documenting in the workpapers the source and selection criteria.
For example:

For tests of significant items, documentation may describe the

auditors scope and the source of the items (for example, all
disbursements greater than $5,000 from the 20X2 repairs and
maintenance expense detail).

For haphazard or random samples, documentation should

include the identifying characteristics of the items (for example, the
specific invoice numbers, check numbers, property numbers, etc.).

For systematic samples, documentation may indicate the

source, starting point, and sampling interval (for example, a
selection of additions from the detailed property records for the
period 1/1/X2 to 12/31/X2, starting with item number 2150 and
selecting every 10th item thereafter).

. SAS No. 96 is effective for audits of financial statements for

periods beginning on or after May 15, 2002, with early application
permitted.

c. Scan the workpapers obtained in Steps 1 and 2 to determine

if additional procedures are warranted. Additional procedures
normally are not warranted unless there are significant additions.

C 4. For current year retirements, perform the following

procedures:

a. Inquire of the owner/manager if there are any major

retirements, sales of property, abandonments, or damages to
property not reflected on the workpapers obtained in Steps 1 and 2.
Relate these facts to retirements, abandonments, etc., you noted
during the inventory observation or plant tours.

b. Scan revenue accounts for significant proceeds from the

sale of assets. Determine if the related cost and accumulated
depreciation of the assets sold are reflected in the retirement
 workpapers obtained in Steps 1 and 2.

c. Inquire if any major sales of fixed assets were

sale/leaseback transactions. If so, determine the propriety of
accounting for them.

d. Scan the workpapers obtained in Steps 1 and 2 to

determine if additional procedures are warranted. Additional
procedures normally are not warranted unless there are significant
retirements.

D 5. Test the adequacy of current year depreciation by

performing the following procedures.

a. Inquire of the owner/manager if there has been any change

in depreciation lives or methods, and if there are significant
amounts of fully depreciated assets.

b. Scan the workpapers obtained in Steps 1 and 2 to

determine if useful lives of assets are reasonable, if depreciation
methods are in accordance with GAAP and consistent, and if
depreciation expense for the year appears reasonable.

c. Perform analytical procedures, if practical, to test the

reasonableness of the current year depreciation. (A predictive test
based on prior year methods and ratios may be effective.)

d. If considered necessary, recompute depreciation expense

on selected assets.

e. Cross-reference current year depreciation charged to the

various allowance accounts to depreciation reflected in the expense
accounts.
Practical Considerations:

If the auditors firm has tax return preparation responsibility,

and depreciation for tax purposes is computed using a different
method than for financial statement purposes, additional procedures
may be necessary for recording deferred income taxes.

Testing depreciation calculations on selected assets should be

 considered when (1) depreciation expense is not reasonable in
relation to prior periods (after considering current year activity), (2)
asset additions are material, or (3) unusual items are identified
when scanning the schedules.

When differences between depreciation calculated using tax

depreciation methods vs. GAAP are not material, consider using
tax depreciation for the financial statements to avoid duplicate
book and tax records.

When an analytical procedure is used as the principal

substantive test of a significant financial statement assertion, SAS
No. 56, Analytical Procedures, as amended by SAS No. 96, Audit
Documentation, requires the auditor to document (1) the
expectation and the factors considered in its development (unless
readily determinable from the work performed), (2) the results of
the comparison between the expectation and recorded amounts, and
(3) any additional procedures performed in response to significant
unexpected differences and the results of those procedures. SAS
No. 96 is effective for audits of financial statements for periods
beginning on or after May 15, 2002, with early application
permitted.

E 6. Using information obtained in the above procedures,

evaluate whether the remaining useful lives of assets are reasonable
and if the net carrying values of property are recoverable in the
ordinary course of business.
Practical Considerations:

This evaluation does not have to be complex, nor does

documentation have to be elaborate. A note or a simple OK
reference by this step is adequate to document the evaluation.

According to SFAS No. 144, Accounting for the Impairment or

Disposal of Long-Lived Assets, the following conditions may
indicate that an asset has been impaired:

A significant decline in the market price of the asset. (This

applies particularly to assets that are held for sale or expected to be
sold in the foreseeable future.)

A significant adverse change in the extent or manner of the

 assets use (for example, a significant decline in the use of a
machine).

A significant adverse physical change in an asset (for

example, physical damage).

A significant adverse change in legal factors or in the

business climate that affects the value of the asset or an adverse
assessment or action by a regulator (for example, a machine
suddenly becomes obsolete, or changes in environmental
regulations significantly restrict the use of a particular machine or
plant). (The additional procedures section of AP-1 includes audit
procedures for environmental remediation liabilities.)

Significant cost overruns beyond the amount originally

expected to be needed to acquire or build the asset.

A current period operating or cash flow loss combined with a

history of operating or cash flow losses associated with the use of a
long-lived asset.

Budgets or prospective financial information showing

continuing losses associated with an asset (for example, a plant site
that is expected to generate significant operating losses for the
foreseeable future).

It is more likely than not that an asset will be sold or disposed

of significantly before the end of its estimated useful life.

SFAS No. 144 supersedes SFAS No. 121 and portions of

APB Opinion No. 30, and is effective for financial statements for
fiscal years beginning after December 15, 2001, with early
application encouraged.

Auditors should be aware of inconsistent approaches to

writedowns. Inconsistency may indicate an attempt by management
to manipulate earnings.

F, [A], 7. Determine the following based on inquiry of the

[B] owner/manager and the results of procedures performed in other
areas (i.e., review of minutes, items noted during inventory
observations, confirmation procedures in liabilities and reading
 lease agreements):

a. Whether idle property and property held for sale is

appropriately identified and valued.

b. Whether encumbrances and liens related to property have

been identified. Conversely, whether property currently pledged as
collateral on a loan has not been sold or damaged.

c. Whether significant amounts of property held for

investment purposes are properly identified.

d. Whether significant capitalizable leases exist that are not

reflected in the schedules obtained in Steps 1 and 2. (If so, propose
adjustments to record such capital leases.)

e. Whether the company has any legal obligations associated

with the retirement of long-lived assets that should be recognized in
accordance with Statement of Financial Accounting Standards No.
143, Accounting for Asset Retirement Obligations.
Practical Consideration:

SFAS No. 143 is effective for financial statements for fiscal

years beginning after June 15, 2002, with early application
encouraged. The additional procedures section of AP-9 includes
procedures for testing asset retirement obligations.

F 8. Obtain or prepare workpapers showing the proper

classification of idle property, property held for sale, and capital
leases.

F 9. Summarize in the workpapers the information needed to

prepare any required financial statement disclosures.

* 10. Consider the need to apply one or more additional

procedures. The decision to apply additional procedures should be
based on a consideration of whether information obtained or
misstatements detected by performing substantive tests or from
other sources during the audit alter your judgment about the need to
obtain a further understanding of control activities, the assessed
level of risk of material misstatements (whether caused by error or
fraud), and on an evaluation of whether the basic procedures have
 been sufficient to achieve the audit objectives. Attach audit
program sheets to document additional procedures.
Practical Considerations:

Certain common additional procedures relating to the

following topics are illustrated following this program:

Significant property additions.

Significant property dispositions.

Significant leases.

Additional procedures in response to fraud risk assessment.

Practitioners may refer to PPCs Guide to Fraud Investigations

for more extensive fraud detection procedures if it is suspected that
the financial statements are materially misstated due to fraud.

* 11. Consider whether procedures performed are adequate to

respond to identified fraud risk factors. If fraud risk factors or other
conditions are identified that require an additional audit response,
consider those risk factors or conditions and the auditors response
in connection with the performance of Step 11 in AP-1b.
Practical Consideration:

Specific responses to identified fraud risk factors are addressed

in individual audit programs. In connection with evaluation and
other completion procedures in AP-1b, the auditor considers the
need to perform additional procedures based on the results of
procedures performed in the individual audit programs and the
cumulative knowledge gained from performing those procedures.

* 12. Consider whether the results of audit procedures indicate

reportable conditions in internal control and, if so, add to the memo
of points for the communication of reportable conditions. (See
section 1504 for examples of reportable conditions, and see CX-18
for a worksheet that can be used to document the points as they are
encountered during the audit.)
CONCLUSION

We have performed procedures sufficient to achieve the audit

objectives for property and its related depreciation allowance
 accounts, and the results of these procedures are adequately
documented in the accompanying workpapers. (If you are unable to
conclude on any objective, prepare a memo documenting your
reason.)

Additional Audit Procedures for Property

Instructions: Additional procedures will occasionally be necessary on some small
business engagements. The following listing, although not all-inclusive, represents
common additional procedures and their related objectives.

Significant Property Additions

A, B Identify significant current year additions to property. Document

the items selected and perform the following procedures:

a. Test the cost by examining supporting documents such as

purchase orders, paid checks, vendors invoices, purchase contracts,
receiving reports, etc.

b. For construction in progress, examine appropriate

supporting documents such as work orders, job status reports, etc.
Determine that labor, materials, interim construction interest, and
other appropriate direct and indirect costs are included in the cost
of the asset.

c. For purchases of significant amounts of real property,

examine the deed or title certificate evidencing ownership.

d. Consider physically inspecting all or selected major

 additions not noted during the inventory observation.

Significant Property Dispositions

C Identify significant current year dispositions. Document the items

selected and perform the following procedures.

a. Vouch proceeds from sales of property to remittance

advices or notes receivable.

b. Recompute depreciation through the date of sale.

c. Trace the original cost and acquisition date of the asset to

prior period property records.

d. Recompute the gain or loss and cross-reference the amount

to the revenue/expense accounts.

e. Determine that the disposition was properly authorized and

did not include assets pledged on existing debt.

f. For significant sales of real estate (land or buildings),

determine that the gain or loss was recognized in accordance with
SFAS No. 66.

Significant Leases

A, B, F If a significant portion of the facilities or equipment is leased,

review new leases and determine whether they meet the criteria for
capital leases. Determine that the appropriate asset, related
depreciation, and related obligation have been properly recorded.
Include abstracts or copies of significant lease agreements in the
current or permanent workpaper files.

Practical Considerations:

If the capital leases are not significant, avoid the temptation to

spend the time to capitalize them, as it may confuse the client and
 normally does not result in a material GAAP departure. Also, the
review for capital leases may be performed during the notes
payable and long-term debt audit. See audit program AP-10.

In some jurisdictions, holders of long-term leases may be

responsible for environmental remediation liabilities. See the
additional procedures section of AP-1 for audit procedures relating
to environmental remediation liabilities.

Additional Procedures in Response to Fraud Risk Assessment

A, C If the auditor, based on his or her consideration of fraud risk

factors, decides to modify procedures related to fixed assets, the
following procedures should also be considered:

a. Perform a physical count to determine if any fixed assets

are missing.

b. Examine documentation supporting capital expenditures,

paying particular attention to delivery addresses.

c. Consider the business purpose of fixed assets additions.

Practical Consideration:

Practitioners may refer to PPCs Guide to Fraud Investigations

for more extensive fraud detection procedures if it is suspected that
the financial statements are materially misstated due to fraud.

Additional Audit Procedures for Property

Beginning Balance in Initial Audit
Company Balance Sheet Date

Audit N/A Workpaper

Objectives Performed Index
Audit Procedures for Consideration by
 Instructions: Additional procedures will be necessary in an
initial audit. These procedures are applied to opening balances and
differ depending whether you are relying on your review of a
predecessors work or placing no reliance on a predecessors audit.
(Section 1803 discusses considerations when replacing a
predecessor auditor, including a discussion of what the term
reliance means when used in this program.) These procedures may
be applied in conjunction with the basic procedures applied to the
ending balance. The asterisks preceding the procedures indicate
that they are an intermediate step in achieving audit objectives for
the ending balance.

* 1. If a predecessors audit of the prior periods financial

statements is to be relied on:

a. Review the predecessors workpapers or detailed property

records, inquire of the predecessor, and consider the adequacy of
the predecessors approach for:

(1) Significant additions.

(2) Significant retirements.

(3) Review of repairs and maintenance accounts.

(4) Inspection of title for real property and minutes for

acquisition approval.

(5) Consideration of capital leases and capitalized interest on

constructed assets.

(6) Consideration of depreciation methods and lives and

reasonableness of accumulated depreciation.

(7) Consideration of the existence of encumbrances and liens,

pledged property, and fully depreciated assets.
Practical Considerations:

If the predecessor has maintained detailed property records,

early arrangements should be made to obtain a copy.
 Since the opening balances for property accounts normally
have been accumulated over several years, it may be necessary to
supplement review of the predecessors workpapers by discussion
with the predecessor and the owner/manager about past policies
and transactions.

b. Inquire about and scan records of gain or loss on

retirements for the past few years and any depreciation rates
changed as a result of IRS agent examination; consider
reasonableness and consistency of depreciation policies.

* 2. If no reliance on a predecessor is planned or possible:

a. Obtain or prepare detailed schedules of opening balances of

real property, equipment, and machinery owned, foot schedules,
and trace totals to general ledger accounts; the information should
include a description, the age, and the current estimate of useful
life.
Practical Consideration:

See the practical considerations for basic procedures 1 and 2.

b. During the inventory observation or plant tour, relate

significant items on property and equipment schedules to items
observed.
Practical Considerations:

A complete inventory of property and equipment is not usually

necessary because adequate records are normally maintained for
preparation of the companys income tax returns, and fixed assets
are generally not readily susceptible to theft.

Normally it is sufficient to relate the observations during the

inventory observation or plant tour to the property and equipment
records by the following steps.

List the larger items of machinery or equipment observed

(note the condition of equipment) and trace to the records.

Before the inventory observation or plant tour, prepare a list

of significant items and locate those items.
 c. Identify all significant items included in schedules of
property and equipment. Document the items selected and perform
the following procedures:

(1) Test the cost by examining supporting documents such as

purchase orders, paid checks, vendors invoices, purchase
contracts, receiving reports, etc.

(2) For significant real property, examine the deed or title

certificate evidencing ownership.

(3) Support authorization by reference to minutes of meetings

of the board of directors, capital asset budget, or evidence of
approval by appropriate, responsible personnel as applicable.

d. Identify significant retirements for the last three to five

years. Document the items selected and perform the following
procedures:

(1) Vouch proceeds from sales to remittance advices or notes

receivable.

(2) Recompute depreciation through the date of sale.

(3) Trace the original cost and acquisition date of the asset to
prior period records.

(4) Recompute the gain or loss, trace to revenue or expense

accounts of the period of retirement, and consider the implications
of gain or loss for the reasonableness and consistency of
depreciation policies.

e. Scan repairs and maintenance accounts and property

records for the past three to five years and consider whether:

(1) Capitalization policies are reasonable.

(2) Significant items have been expensed.

(3) Minor items have been accumulated and capitalized.

 f. Inspect lease agreements for significant items and consider
whether the items should have been capitalized.

g. Consider whether any idle property, property held for sale,

or fully depreciated assets identified as a result of performing basic
procedure 7 should have been classified differently in prior
periods.
Practical Consideration:

See the practical considerations for basic procedure 6.