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Question 1
a) Explain any THREE (3) key control procedures in property, plant and equipment.
b) Describe FOUR (4) substantive procedures that an auditor may carry out in auditing PPE.
Question 2
PPE is one of the items that will be audited by auditor in the financial statement audit. Explain T WO
(2) reasons for the above audit.
1) PPE are significant items in the Statement of Financial Position subject to possible
material misstatement High IR High AR.
2) PPE involve complex accounting issues and difficult to audit Possible of non-
compliance of accounting standards High IR High AR.
Question 3
Your firm has recently been appointed auditor of Oris, a limited liability company, and you have
been asked to carry out the audit of non-current assets at the company’s year ended of 30 Sept
2018.
The company does not maintain fixed assets register. An extract from the most recent management
accounts shows:
Non-current assets
Depreciation:
Computation
1/10/2018 2,104 20,059 20,059
Casting
Addition 1,102 4,878 4,878
Disposal 0 (4,808) (4,808)
30 Sept 2019 3,206 21,129 20,059
Shall read as 20,129
Required:
Describe audit procedures to be carried out, for each of the procedure mentioned, you should
identify the associated objective(s).
B) Account balance
1) Confirmation
Obtain lead schedule of PPE and agreed the opening balances with previous
year audited report-PPE (SOFP) F/S assertion: Accuracy.
Obtain lead schedule of PPE and agreed the closing balances with Trial
Balance (Statement of Financial Position – PPE F/S assertion:
Completeness.
C) Transactions – Additions
1) Physical inspection of documents
i) Validate the Directors’ minute of meeting on the acquisition of PPE F/S
assertions: Occurrence / Right & Obligation.
ii) Tracing Trace from the original source documents (Capex > PR > PO >
ARN > PI) to GL-PPE F/S assertions: Completeness.
iii) Vouching Vouch from GL-PPE to the original source documents (Capex >
PR > PO > ARN > PI) to GL-PPE F/S assertions: Occurrence.
iv) Validate the acquisition few days before and few days after the financial
year end F/S assertions: Proper Cut-off.
v) Validate the deeds or title documents for proof of ownership. Example:
Inspection of the original car registration card to proof the motor vehicle is
owned by the company F/S assertion: Rights and obligation.
vi) Review sensitive codes (expenses account) that related to PPE, i.e. vouch
Repair & Maintenance expenses F/S assertions: Proper Classification.
vii) Review sensitive codes (expenses account) that related to PPE, i.e. vouch
leasing expenses (financial or operating lease) to leasing agreements F/S
assertions: Proper Classification.
viii) Validate the payment of the acquisition of fixed assets in cash flow
statement (Cash flow from investing activities) F/S assertions: Valuation,
Allocation and accuracy.
Example: Cash Flow Statement (Extracted)
D) Transactions – Disposals
1) Physical inspection of documents
i) Validate the Directors’ minute of meeting on the disposal of PPE F/S
assertions: Occurrence / Right & Obligation.
ii) Validate the sales proceeds in cash flow statement (Cash flow from investing
activities) F/S assertions: Valuation, Allocation and accuracy.
iii) Validate the disposal / sales of PPE few days before few days after the financial
year end F/S assertions: Proper Cut-off.
2) Reperformance
i) Reperform the disposal of PPE, i.e. Fixed assets, accumulated depreciation,
Gain / (Loss) on disposal and money received F/S assertions: Valuation,
Allocation and accuracy.
E) Transactions – Depreciation
1) Analytical procedures and Confirmation
To validate the reasonableness of depreciation method applied by the audit
client, i.e. to compare with depreciation method applied by other
companies within the same industry F/S assertions: Proper Valuation.
2) Reperformance
Reperform the computation of depreciation F/S assertions: Accuracy,
occurrence, valuation, allocation, classification, proper cut-off.
Question 4
Segregation of duties is one of the key controls for property, plant and equipment.
Explain THREE (3) types of segregation of duties that can be implemented for property, plant and
equipment. Describe ONE (1) possible error or fraud that might occur if each of these segregation of
duties is not implemented.
1) The initiation function should be segregated from final approval function to avoid / prevent
unauthorized or unnecessary purchase.
Risk: Unauthorized purchases
Implication: If one individual is responsible for initiating a PPE transaction and also has
authority to approve the transaction it is likely unauthorized purchases of assets can
occur.
This can result in purchase of unnecessary assets that do not meet the company’s
quality control standards or illegal payments to supplier or contractors overstated of
PPE understated of expenses overstated of profits affect true and fair view of
F/S.
2) The PPE records function (Non-current assets register) should be segregated from the general
ledger-PPE function
Risk: Conceal any defalcation.
Implication: If one individual is responsible for the PPE records and also for the general
ledger functions, that individual can conceal any defalcation that would normally be
detected by reconciling subsidiary records with the GL control account overstated of
PPE understated of expenses overstated of profits affect true and fair view of
F/S.
3) The PPE records function should be segregated from the custodial function.
Risk: Stolen / theft
Implication: If an individual is responsible for the PPE records and also has the custodial
responsibility for the related assets, tools and equipment can be stolen and the theft can
be concealed by adjustment of the accounting records overstated of PPE
understated of expenses overstated of profits affect true and fair view of F/S.
4) If a periodic physical inventory of PPE is taken, the individual responsible for the inventory
should be independent of the custodial and record keeping functions.
Risk: Theft’
Implication: If an individual who is responsible for the periodic physical inventory of PPE
is also responsible for the custodial and record keeping functions, theft of the entity’s
physical assets can be concealed overstated of PPE understated of expensed
overstated of profits affect true and fair view of F/S.
Question 5
a) Briefly describe FIVE (5) types of internal control that may be implemented by a company in
controlling the company’s property, plant and equipment.
1) The purchase of PPE must pass through a specific capital budgeting process which
should require higher approval authority Proper information processing &
authorisation and approval F/S assertions: Occurrence.
2) Acquisition of PPE function and approval function must be in charge by different
personnel Proper segregation of duty, supervision and authorization and approval
F/S assertions: Occurrence / Completeness.
3) Monthly reconciliation PPE subsidiary ledger ( Non-current assets register) vs GL
proper information processing F/S assertions: Completeness, accuracy.
4) Periodic inspection of assets and inspect the condition of PPE and reconcile with non-
current register Proper physical control and information processing F/S assertions:
Accuracy, occurrence, existence, valuation.
5) Acquisition function must be separated from GL-PPE function proper segregation of
duties F/S assertions: Occurrence / Completeness.
b) Briefly explain analytical procedures and TWO (2) uses of analytical procedures in auditing.
Analytical procedures:
ISA 520 define AP as consisting of evaluations of financial information made by a
study of plausible relationship among both financial and non-financial data. The
important concept of AP is the ‘comparison’ of figures and ratio in order to identify
unusual items.
1) To assist in planning the nature, timing and extent of other audit procedures. It is
also known as PRELIMINARY AP (BEFORE AUDITNG).
Example: 3 years trends number of days used for auditing PPE.
2) As substantive procedures when their use can be more effective and efficient than
other procedures in reducing detection risk for specific financial statement
assertions. It is also known as SUBSTANTIVE AP (DURING AUDITING).
Example: 3 to 5 years trends Depreciation expensed, PPE balances.
3) As part of the overall review of financial statements when completing the audit. It is
also known as FINAL AP (AFTER AUDITING). The objective of AP at the overall review
stage of an audit is to assist the auditor in assessing the conclusions reached and
evaluating the overall financial statement presentation.
Example: fixed asset turnover.
c) List THREE (3) analytical procedures that can be used in auditing property, plant and
equipment.
A) Amount
1) Review capital budgets and comparison of the amounts spent with amounts
budgeted.
Example: Compare Capital budget vs Actual spent
2) Compare prior year balances in PPE with current year balances after consideration of
any changes in conditions or asset composition.
Example: 3 to 5 years trends PPE balances
3) Compare prior year depreciation charges with current year charges.
Example: 3 to 5 years trends Depreciation charges.
B) Ratio
1) Compute the ratio of depreciation charges to the related PPE account and
comparison to prior years’ ratios.
Example: 3 to 5 years trends Depreciation / PPE.
2) Compute the ratio of repairs and maintenance expense to the related PPE account
and comparison to prior years’ ratios.
Example: 3 to 5 years trends Repair & Maintenance / PPE.
3) Compute the ratio of insurance expense to the related PPE account and comparison
to prior years’ ratio.
Example: 3 to 5 years trends Insurance / PPE.
Question 6
Recruitment Co is a limited liability company which operates as a recruitment agency. Its most
recent financial statement is for year ended 31 March 2018. The directors have developed a
strong internal control environment and introduced effective internal controls. These include the
review of monthly management accounts, and use of non-current assets register.
Notes:
The company has 36 employees, most of them are provided with a company car. It is the
company’s policy to purchase only new cars and to replace them when they are two years old.
Employees are allowed to purchase replace cars, and they do so by forwarding sealed bids to the
company as and when replaced car become available.
To protect the company from receiving only low bids from the employees, sealed bids are also
received from independent motor car dealers.
Notes:
Risks: Disposal of cars proper disposal??
1) Employees are allowed to purchase replace cars sealed bids to the company
2) Sealed bids from independent motor car dealers
Based on the above information sounds to have an effective internal control system
But as auditor TOC.
During the year ended 31 March 2018, the company purchased large quantities of office furniture,
as part of the company ongoing expansion programme. This included RM30,000 of furniture
which was ordered on 18 February 2018. The company records show that the furniture was
delivered on 31 March 2018 and the associated supplier invoice was received 30 April 2018.
Notes:
Required:
a) State four (4) objectives of the internal controls that should be exercised over non-current
assets.
1) All the non-current assets are properly safeguarded and valued.
To prevent and detect misappropriation of assets Proper valuation.
2) All the NCA transactions (disposal and acquisition) are properly approved and
authorized.
To prevent and detect fraud and errors Occurrence.
3) All the acquisition and disposal of fixed assets are actually recorded on a timely basis.
To ensure timeliness which may affect true and fairness of F/S Proper cut-off.
4) All the transactions (disposal and acquisition) are completely recorded.
To ensure no omission which may affect true and fairness of F/S
Completeness.
5) All the transactions (acquisition and disposal) are classified properly.
To ensure proper classification which may affect true and fairness of F/S
Proper Classification.
b) Explain how the non-current assets register, if properly maintain may be useful to the company.
1) A complete information for each PPE such as description, location and serial number,
date of purchase, installation cost, depreciation method, residual value and estimated
useful economic life are completely recorded.
2) Any addition or disposal of PPE could be easily identified and managed.
3) It facilitates the calculation of depreciation.
c) State some key information that should be recorded in the non-current assets register.
f) With regard to the delivery of office furniture to the company on 31 March 2018:
i) State how the company should have reflected the transaction in its accounting records.
1) 18/02/2018 Ordered FYE 2018
No accounting implication