Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao

Since 1977

AUDITING PRACTICE OCAMPO/OCAMPO

AP.3402 - Audit of Property, Plant and Equipment MAY 2023

INTERNAL CONTROL MEASURES

1. Additions and dispositions of fixed assets should be properly authorized and approved by the board of directors or
executive committee or person to whom authority has been delegated.

2. A clearly defined and sound policy for differentiation of capital and revenue expenditures should be established.

3. Cost of constructed fixed assets should be controlled through work orders.

4. Fixed assets controlling account should be supported by detailed plant records.

5. Physical inspection of fixed assets should be conducted and investigated.

SUBSTANTIVE AUDIT OF PROPERTY, PLANT AND EQUIPMENT

Existence: Recorded property, plant and equipment exist Rights and obligations: Property, plant and equipment are
owned by the entity
1. Physically inspect the assets for a sample of property,
plant and equipment recorded in the plant ledger. 7. Determine whether liens or mortgages have been
placed on property, plant and equipment by examining
2. Physically inspect the assets and examine supporting bank confirmations and reading minutes of the board
documentation for additions to property, plant and of directors’ meetings.
equipment.
Valuation and allocation: Property, plant and equipment
3. Verify that existing retirements and disposals are are valued in accordance with GAAP
recorded and properly valued.
8. Verify accuracy of recorded property, plant and
equipment.
Completeness: All property, plant and equipment are
recorded 9. Verify depreciation.

4. Perform analytical procedures.

Presentation and disclosure: Property, plant and
5. Analyze repairs and maintenance for expenditures that equipment are classified and disclosed in accordance with
should have been capitalized. GAAP

6. Examine lease and loan agreements to identify any 10. Review financial statements and perform analytical
liabilities that should be recorded. procedures to determine whether accounts are
classified and disclosed in the financial statements in
accordance with GAAP.

- end -

Page 1 of 5 www.teamprtc.com.ph AP.3402

TEAM PRTC

PROBLEM NO. 1 delivery of equipment 56,000

Payment of installation costs on equipment 120,000
White Company commenced operations on July 1, 2022.
Payment for safety equipment surrounding
During the year, the company acquired a tract of land,
equipment 110,000
demolished the building on the land and built a new
Payment for removal of safety fence 20,000
factory. Equipment was acquired for the factory and, in
Payment for new fence surrounding the
October 2022, the plant was ready to commence
factory 80,000
operation.
Payment for advertisements in the local
paper about the forthcoming factory and
During this period, the following inflows and outflows
its benefits to the local community 5,000
occurred:
Payment for opening ceremony 60,000
While searching for a suitable block of land,
White Company placed an option to buy QUESTIONS:
with three real estate agents at a cost of
Determine the cost of the following:
P10,000 each. One of these blocks of
land was later acquired. 1. Land
Payment of option fees P 30,000 a. P1,160,000 c. P1,700,000
Receipt of loan from bank 4,000,000 b. P1,180,000 d. P1,800,000
Payment to settlement agent for title
2. Land improvements
search, stamp duties and settlement
a. P674,000 c. P540,000
fees 100,000
b. P620,000 d. Nil
Payment for property taxes in arrears on
building and land 50,000 3. Building
Payment for land 1,000,000 a. P3,519,000 c. P2,899,000
Payment for demolition of current building b. P3,439,000 d. P2,845,000
on land 120,000
Proceeds from sale of material from old 4. Equipment
building 55,000 a. P926,000 c. P816,000
Payment to architect 230,000 b. P870,000 d. P760,000
Payment to council for approval of building 5. When auditing property, plant and equipment, an
construction 120,000 auditor would least likely verify that
Payment for safety fence around a. The financial statement presentation of property,
construction site 34,000 plant and equipment is appropriate.
Payment to construction contractor for b. The client has used proper depreciation method.
factory building 2,400,000 c. Impaired items have been properly accounted for.
Payment for external driveways, parking d. Items used as collateral are derecognized.
bays and safety lighting 540,000
Payment for safety inspection on building 30,000
Payment for equipment 640,000
Payment of freight and insurance costs on

PROBLEM NO. 2
You were engaged in making your second annual examination of Indigo Company. The Machinery and Accumulated
Depreciation accounts are shown below:
Machinery
01/01 Balance P 500,000 09/01 Sale of machine
No. 3 P 10,000
06/01 Machine No. 23 150,000 12/31 Balance 644,000
09/01 Dismantling of
Machine No. 3 4,000 .
P 654,000 P 654,000

Accumulated Depreciation
12/31 Balance P 344,400 01/01 Balance P 280,000
. 12/31 Depreciation 64,400
P 344,400 P 344,400

Your examination disclosed the following information:

a. The following adjusted balances appeared on Dec. 31,
2021 working papers: Machinery – P500,000;
Accumulated Depreciation –P 280,000.
b. The company has depreciated all items of machinery at
10% per annum. The oldest item owned is seven years
old as of Dec. 31, 2022.
c. It is the company’s policy to take full year’s
depreciation in the year of acquisition and none in the
year of disposition.
d. Machine No. 3, which was purchased on Mar. 1, 2018,
at a cost of P80,000, was sold on Sept. 1, 2022 for
P10,000 cash.
e. Included in charges to Repairs and Maintenance
account was an invoice for installation of Machine No.
23, in the amount of P35,000.
QUESTIONS:
Based on the information presented above and the result
of your audit, answer the following:

Page 2 of 5 www.teamprtc.com.ph AP.3402

TEAM PRTC

1. How much is the loss on the sale of Machine no. 3? PROBLEM NO. 3
a. P38,000 c. P42,000
In the audit of the books of Yellow Corporation for the
b. P37,333 d. P 0
year 2022, the following items and information appeared
2. The adjusting entry to correct the entry made in in the Production Machine account of the client:
recording sale of Machine no. 3 will include a debit to
Date Particulars Debit Credit
a. Loss on sale of machinery P42,000
01/01 Balance–Machine 1, 2,
b. Accumulated depreciation P32,000
3, and 4 at P180,000 P 720,000
c. Both a and b
each
d. No adjusting entry is necessary.
02/28 Machine 5 396,000
3. How much is the adjusted balance of the Machinery Machine 1 P 6,000
account as of December 31, 2020? 09/01 Machine 6 192,000
a. P644,000 c. P605,000 12/01 Machine 7 432,000
b. P296,500 d. P609,000
The Accumulated Depreciation account contained no
4. How much is the total depreciation expense on
entries for the year 2022. The balance on Jan. 1, 2022 per
machinery for 2022?
your audit, was as follows:
a. P64,400 c. P50,000
b. P60,500 d. P58,125 Machine 1 P168,750
Machine 2 78,750
5. How much is the balance of the Accumulated Machine 3 67,500
Depreciation account as of Dec. 31, 2022? Machine 4 45,000
a. P308,500 c. P344,000
b. P301,458 d. P340,500 Based on your further inquiry and verification, you noted
6. Property, plant and equipment is typically judged to be the following:
one of the accounts least susceptible to fraud because 1. Machine 5 was purchased for cash; it replaced Machine
a. The amounts recorded on the balance sheet for 1, which was sold on this date for P6,000.
most companies are immaterial. 2. Machine 2 was destroyed by the thickness of engine oil
b. The depreciated values are always smaller than used leading to explosion on Dec. 1, 2022. Machine 7
cost. was to replace Machine 2.
c. Internal control is inherently effective regarding 3. Machine 3 was traded in for Machine 6 at an allowance
this account. of P24,000; the difference was paid in cash and
d. The inherent risk is usually low. charged to Production Machine account.
4. Depreciation rate is recognized at 25% per annum.
7. When few property and equipment transactions occur
during the year the continuing auditor usually obtains QUESTIONS:
an understanding of internal control and performs
a. Tests of controls Based on the above and the result of your audit, answer
b. Analytical procedures to verify current year the following:
additions to property and equipment 1. The adjusting entry to correct the entry made on the
c. A thorough examination of the balances at the sale of Machine 1 will include a
beginning of the year. a. Debit to Accumulated Depreciation P176,250
d. Extensive tests of current year property and b. Debit to Cash P6,000
equipment transactions. c. Credit to Production Machine P180,000
8. Which of the following combinations of procedures is d. Credit to Gain on Sale of Machine P5,250
an auditor most likely to perform to obtain evidence 2. The adjusting entry to correct the entry made on the
about fixed asset addition? destruction of Machine 2 will include a
a. Inspecting documents and physically examining a. Debit to Accumulated Depreciation P120,000
assets. b. Debit to Loss on Destruction of Machine P101,250
b. Recomputing calculations and obtaining written c. Credit to Production Machine P101,250
management representations. d. Credit to Cash P432,000
c. Observing operating activities and comparing
balances to prior period balances. 3. The adjusting entry to correct the entry made on
d. Confirming ownership and corroborating trade-in of Machine 3 will include a
transactions through inquiries of client personnel. a. Debit to Accumulated Depreciation P67,500
b. Debit to Loss on Exchange P58,500
9. Additions to equipment are sometimes understated. c. Credit to Production Machine P67,500
Which of the following accounts would be reviewed by d. Credit to Cash P192,000
the auditor to gain reasonable assurance that additions
are not understated? 4. The total depreciation for the year ended Dec. 31,
a. Accounts payable 2022 is
b. Depreciation expense a. P237,000 c. P233,250
c. Gain on disposal of equipment b. P232,500 d. P236,250
d. Repairs and maintenance expense 5. The carrying amount of production machine as of Dec.
10. In violation of policy, Coat Company erroneously 31, 2022 is
capitalized the cost of painting its warehouse. An a. P1,024,500 c. P1,069,500
auditor would most likely detect this when b. P1,029,000 d. P 990,750
a. Discussing capitalization policies with controller. 6. Determining that proper amounts of depreciation are
b. Examining maintenance expense accounts. expensed provides assurance about management’s
c. Observing that the warehouse had been painted. assertions of valuation and
d. Examining construction work orders that support a. Presentation and disclosure. c. Completeness.
items capitalized during the year. b. Rights and obligations. d. Existence.

Page 3 of 5 www.teamprtc.com.ph AP.3402

TEAM PRTC

7. The auditor may conclude that depreciation charges 10. The auditor is least likely to learn of retirements of
are insufficient by noting equipment through which of the following?
a. Insured values greatly in excess of book values. a. Review of the purchase return and allowance
b. Large numbers of fully depreciated assets. account.
c. Continuous trade-in of relatively new assets. b. Review of depreciation.
d. Excessive recurring losses on assets retired. c. Analysis of the debits to the accumulated
depreciation account.
8. In testing for unrecorded retirements of equipment, an
d. Review of insurance policy.
auditor is most likely to
a. Select items of equipment from the accounting
records and then locate them during the plant tour.
SOLUTION GUIDE (Questions 4 and 5):
b. Compare depreciation journal entries with similar
prior-year entries in search of fully depreciated 12/31/22
equipment. No Remarks Cost Acc. Dep. 2022 Dep.
c. Inspect items of equipment observed during the 1
plant tour and then trace them to the equipment 2
subsidiary ledger. 3
d. Scan the general journal for unusual equipment 4
additions and excessive debits to repairs and 5
maintenance expense. 6
9. A weakness in internal control over recording of 7
acquisitions of equipment may cause an auditor to
a. Select certain items of equipment from the
accounting records and locate them in the plant.
b. Inspect certain items of equipment in the plant
and trace those items to the accounting records.
c. Review the subsidiary ledger to ascertain whether
depreciation was taken on each item of
equipment during the year.
d. Trace additions to the “other assets” account to
search for equipment that is still on hand but no
longer being used.

PROBLEM NO. 4
Survive, Inc.’s property, plant and equipment at Dec. 31, 2021:
P R T C
Original cost P175,000 P255,000 P400,000 P400,000
Year Purchased 2016 2017 2018 2020
Useful life 10 years 75,000 hours 15 years 10 years
Salvage value P15,500 P15,000 P25,000 P25,000
Depreciation method SYD Activity Straight-line Double-declining
balance
Note: In the year an asset is purchased, Survive, Inc. does not record any depreciation expense on the asset.
In the year an asset is retired or traded in, Survive, Inc. takes full year depreciation on the asset.

The following transactions occurred during 2022: 1. How much is the gain or loss on sale of Asset P?
a. P20,500 gain c. P32,100 gain
1. On May 5, Asset P was sold for P65,000 cash.
b. P20,500 loss d. P32,100 loss
2. Asset R was used for 10,500 hours during 2022.
Accumulated usage as of Dec. 31, 2021 is 40,800 2. How much is the depreciation of Asset T for 2022?
hours. a. P32,500 c. P30,000
3. On Dec. 31, before computing depreciation expense on b. P42,858 d. P46,428
Asset T, the management of Survive, Inc. determined
3. How much is the total depreciation expense for 2022?
that the useful life remaining from Jan. 1, 2022 is only
a. P166,600 c. P161,200
10 years.
b. P177,498 d. P164,100
4. On Dec. 31, it was discovered that a plant asset
purchased in 2021 had been expensed completely in 4. How much is the adjusted cost of property, plant and
that year. This asset costs P110,000 and has useful life equipment as of Dec. 31, 2022?
of 10 years and no salvage value. Management has a. P1,340,000 c. P1,230,000
decided to use the double-declining balance for this b. P1,055,000 d. P1,165,000
asset, which can be referred to as “Asset I.”
5. How much is the carrying amount of property, plant
QUESTIONS: and equipment as of Dec. 31, 2022?
a. P435,160 c. P763,440
Based on the above and the result of your audit, answer b. P729,840 d. P860,400
the following: (Disregard tax implications)

Page 4 of 5 www.teamprtc.com.ph AP.3402

TEAM PRTC

PROBLEM NO. 5 1. The carrying amount of the new warehouse as of Dec.

31, 2022 is
The draft balance sheet of Four Corporation as of Dec. 31,
a. P1,000,000 c. P950,000
2022 reported the net property, plant and equipment at
b. P 869,250 d. P987,500
P6,270,000. Details of the amount follow:
Land at cost P1,000,000 2. The adjusting entry to correct the entry made on the
Building at cost P4,000,000 disposal of plant will include a
Less accumulated a. Debit to Depreciation P33,750
depreciation at 12/31/21 ( 800,000) 3,200,000 b. Debit to Accumulated depreciation P630,000
Plant at cost 5,200,000 c. Credit to Gain on sale of plant P63,750
Less accumulated d. All of these
depreciation at 12/31/21 (3,130,000) 2,070,000 3. The carrying amount of plant as of Dec. 31, 2022 is
P6,270,000 a. P1,350,000 c. P1,282,500
b. P1,375,310 d. P1,710,000
The following matters are relevant
4. The total depreciation for the year ended Dec. 31,
(a) The company policy for all depreciation is that a full 2022 is
year’s charge is made in the year of acquisition or a. P736,250 c. P380,000
completion and none in the year of disposal. b. P735,750 d. P740,000
(b) Included in the sales revenue is P300,000 being the 5. The revaluation surplus as of Dec. 31, 2022 is
sales proceeds of an item of plant that was sold on a. P1,720,000 c. P1,800,000
June 30, 2022. The plant had originally cost P900,000 b. P1,710,000 d. P 960,000
and had been depreciated by P630,000 as of Dec. 31,
2021. Other than recording the proceeds in sales and
cash, no other accounting entries for the disposal of PROBLEM NO. 6
the plant have been made. All plant is depreciated at
25% per annum on the reducing balance basis. On Jan. 2, 2020, Calamba Company purchased land for
P450,000, from which it is estimated that 400,000 tons of
(c) On Sept. 30, 2022, the company completed the ore could be extracted. It estimates that it will cost
construction of a new warehouse. The construction was P80,000 to restore the land, after which it could be sold for
achieved using the company’s own resources as P30,000.
follows:
Purchased materials P150,000 During 2020, the company mined 80,000 tons and sold
Direct labor 800,000 50,000 tons. During 2021, the company mined 100,000
Supervision 65,000 tons and sold 120,000 tons. At the beginning of 2022, the
Design and planning costs 20,000 company spent an additional P100,000, which increased
Included in the above figures are P10,000 for materials the reserves by 60,000 tons. In 2022, the company mined
and P25,000 for labor costs that were effectively lost 140,000 tons and sold 130,000 tons. The company uses a
due to the foundations being too close to a neighboring FIFO cost flow assumption.
property. All the above costs are included in cost of
sales. The building was brought into immediate use QUESTIONS:
upon completion and has an estimated useful life of 20 Based on the above and the result of your audit, answer
years (straight-line depreciation). the following: (Round depletion rate to two decimal places)

(d) At the beginning of the current year, the company had 1. The depletion for 2021 is
an open market basis valuation of its properties a. P125,000 c. P107,200
(excluding the newly constructed warehouse). Land b. P134,000 d. P 80,000
was valued at P1.2 million and the property at P4.8 2. The depletion for 2022 is
million. The directors wish these values to be a. P175,000 c. P145,600
incorporated into the financial statements. The b. P114,800 d. P187,600
properties had an estimated remaining life of 20 years
at the date of the valuation (straight-line depreciation 3. The carrying amount of the natural resources as of
is used). The company makes a transfer to retained Dec. 31, 2022 is
earnings in respect of the excess depreciation on a. P290,200 c. P317,400
revalued assets. b. P259,400 d. P217,400
4. The depletion included in cost of sales for the year
(e) Depreciation for the year 2022 has not yet been
ended Dec. 31, 2022 is
accounted for the in the draft financial statements.
a. P173,300 c. P168,350
b. P137,300 d. P110,900
QUESTIONS:
5. Which method might an auditor utilize in testing
Based on the given information and the result of your
depletion expense?
audit, answer the following:
a. Estimating the useful life of the natural resource.
b. Observation of the physical count.
c. Obtaining management representation.
d. Using analytical procedures.

J - end of AP.3402 - J

Page 5 of 5 www.teamprtc.com.ph AP.3402