AUDIT OF PROPERTY, PLANT, AND EQUIPMENT PAS 16 AUDIT OBJECTIVES IN AUDITING PPE

INTRODUCTION ASSERTIONS AUDIT OBJECTIVES

Existence All recorded PPE on the statement
Property, plant, equipment (PPE) of financial position (including
- one of the most significant portions of an entity’s noncurrent asset assets leased under finance lease)
exist.
- tangible assets with a service life of more than one year and are used in Completeness All PPE owned and leased under
the operation of business finance lease by the entity at the
reporting date are included on the
- usually is the biggest portion in the asset statement of financial position.
Valuation and Allocation PPE is carried at the appropriate
- issue is more on its existence amount taking into account the
Initial Measurement: Cost or the amount of cash/cash equivalent paid or requirements of PAS 16, PPE and
PAS 36 Impairment of Assets.
the fair value of the other consideration given. It is measured at the cash
Rights and Obligations The entity owns, or has a legal
price equivalent at the acquisition date.
right to all PPE reported on the
Cost compromises of: statement of financial position at
the reporting date.
1. Purchase price including import duties, insurance, nonrefundable Presentation and Disclosure PPE and related income accounts
taxes, less trade disc. And rebates are properly classified, described
2. Direct cost including freight, professional fees, cost of site and disclosed in the FS, including
preparation notes, in accordance with the
3. Initial measurement of dismantlement, removal, and site applicable PFRS.
restoration costs
Liens, pledges, security interest
When planning the audit of PPE, the auditor should consider that the and restrictions to PPE are
amounts for this PPE is material to the statement if financial position and identified and properly disclosed.
expect that the account balance do not necessarily change significantly
from year to year.
PRIMARY SUBSTANTIVE TEST/ AUDIT PROCEDURES FOR PPE
The auditor normally assess control risk at the maximum level and performs
1. Obtaining a summary analysis of changes in property owned and
extensive substantive tests which emphasize the review of significant
reconcile with ledgers;
additions and disposal, and analytical procedures to test the provisions for
2. Vouching for additions and disposals (including retirements) of PPE
depreciation (estimate) and depletion.
during the year;
In conjunction with the audit of PPE, the auditors also obtain evidence about 3. Physical inspection of major acquisition of PPE during the year;
the related accounts of depreciation expense, accumulated depreciation, 4. Examining proof of ownership of PPE;
lease (rent) expense, impairment loss (if any) and repairs and maintenance 5. Analyzing lease, repair and maintenance expense accounts;
expense. Implication is on taxation purposes. 6. Testing for the accuracy and reasonableness for provision for
depreciation and depletion;
 7. Investigating current and potential impairments of PPE;
8. Performing analytical procedures for reasonableness of PPE and
related expense reported in the FS; and
9. Evaluating FS presentation and disclosures for item of PPE
including its related revenue and expense.
RECONCILING OF SL AND GL (Valuation & Allocation, Completeness)
- Make sure total of SL and GL are the same/equal, including the trial
balance and control account.
- Before doing the detailed analysis of additions, disposals,
retirement or any reclassification and depreciation of PPE including
capitalized leases, ensure to tie up/ agree the general ledger
balances from subsidiary ledger balance.
- If not equal, inquire and ask client entity’s management to
reconcile.
The reconciliation schedule should normally include:
1. Asset description/ asset classification
2. Cost for each asset or asset classification, including the opening
balances at the beg. Of the year, any additions and disposals,
retirement and the balance at the end of the year (LAPSING
SCHEDULE)
3. Accumulated depreciation, showing:
• Beginning balance of the year;
• Debts to acc. Dep. Due to transfers, derecognition and
reversals;
• Depreciated book value before the CY depreciation, if the
provision is based on the declining balance;
• Depreciation or depletion rate for each asset classification
• Depreciation or depletion expense for the year; and
• Balance at the end of the year
EXAMINATION OF ADDITIONS/DISPOSALS (INCLUDING RETIREMENTS)
(Existence/Occurrence (Income Statement account), Valuation and Rights)
- After GL/SL reconciliation, vouching of additions and disposals
including retirements should be performed.
- Vouching is one of the important substantive tests for PPE/
Investment Property.
- Extent of vouching is dependent upon the auditor’s assessment of
control risk for the existence and valuation of PPE.
Additions : How to perform vouching for additions?
1. Check any additions (by purchase)
2. Check for any construction of assets and its related costs that
should be capitalized (PAS 16 -PPE and PAS 23 – Borrowing Cost)
3. Addition from Donation
4. Generally, vouching is 100% (since this is not a voluminous
transaction)
What documents to check?
1. For acquisition of property, examine the capital expenditure
authorization and purchase agreement, contract deeds, cancelled
checks, and other important documentation. The auditor should
ensure all costs of acquisition are included in the PPE accounts.
2. Other additions – check the purchase orders, capital expenditure
authorization, contracts, architect’s certificates, legal
correspondence, supplier’s invoices, cancelled checks, etc.
3. For cost incurred related to PPE (Land improvements, bldg..
improvement, major repairs), the auditor should examine the
supporting invoices and check whether the acquisition represents
capital expenditures based on the capitalization policy of the entity.
4. When it comes to land titles, make sure it is the original copy.
Implications: when only photocopy is given, possibility is that the
original copy is up as security or collateral.
5. For PPE under construction:
• Check that additions are properly approved and
authorized
• Verify the change in construction in progress (CIP)
account by examining contractor’s progress billings labor
changes, and other important documents.
 • Check that all costs incurred up to the reporting date and
any withholding payments have been properly recorded
(ex. Amount withheld from payments to contractors
pending satisfactory complerion of construction).
• Test calculation of capitalized borrowing cost (interest,
appropriate rate, amounts and capitalization periods have
been used, and whether these are in accordance with the
entity’s capitalization policy).
• Review and calculate the allocation of overhead charges
attributable to construction.
• Compare the total cost of self-constructed equipment
with bids or estimated purchase prices for similar
equipment from outside supplier, savings on construction
should not be recognized; and
• Trace transfer from the CIP account to the PPE observing
propriety of classification
6. For assets leased under finance lease, the auditor should ensure
the capitalized amount is in accordance with PFRS 16. Leases by
performing the following:
• Obtain a copy of the lease contract and examine the terms
to verify that the lease meets the criteria of finance lease;
• Recompute the PV of the minimum lease payments;
• Review the FV of the assets leased; and
• Check whether the capitalized value is the lower of the FV
of the leased asset and the PV of the minimum lease
payments.
Disposal/ Retirement Examination
The main purpose of checking any disposal/retirement of PPE is to
determine whether any PPE has been replaced, sold, dismantled,
abandoned without such being reflected in the accounting records.
The auditor typically includes the following procedures to discover
unrecorded retirements or disposals: (Completeness)
1. Inquire of executives and supervisors of PPE retirements of
disposals during the year;
2. For new additions, determine the status of old asset whether this
represent a replacement of old asset.
3. When verifying PPE acquisitions, check for any trade-in-credits
received and then check that the related assets trade-ins are
recorded in the disposals for the year.
4. Analyze miscellaneous revenue account for cash proceeds from
sale of PPE.
5. If company’s product lines are discontinued, investigate disposition
of plant facilities.
6. Consider whether property exists for all property taxes paid, and, if
not, determine whether the property was sold and included in the
disposals for the year;
7. Examine retirement work orders or other source documents for
proper authorization; and
8. Investigate any reduction in insurance coverage as this may
indicate retirement if PPE.
PHYSICAL INSPECTION OF MAJOR ADDITIONS OF PPE (Existence and
Completeness)
- Ocular inspection
- The # of PPE that needs to be inspected will depend on a. risk of
material misstatement b. number of PPE in consideration
- How to perform? (same as inventory)
a. Floor-to-list procedure (completeness)
b. List-to-floor procedure (existence and condition of property if
nonfunctioning or fully depreciated)
EXAMINE EVIDENCE OF LEGAL OWNERSHIP OF PPE (Rights and Obligations)
- Check the proof of ownership such as:
1. Deeds or property, land/lot title (real estate)
2. Vehicle registration documents
- The auditor should also inquire with the management of any
restriction on this item of PPE as they may be used as collateral for
a loan.
ANALYZE LEASE, REPAIR & MAINTENANCE EXPENSE ACCOUNTS (Valuation
& Allocation, Completeness and Classification)
- This procedure is to ensure that all capital expenditure should have
not been included in the expense accounts.
- Lease expense: check the terms of the lease contract (operating
lease)
- Repairs & Maintenance expense: check the written policy
regarding capitalization of capital expenditures.
TEST THE PROVISION FOR DEPRECIATION OR DEPLETION (Valuation &
Allocation, Accuracy)
- Depreciation/depletion re examples of accounting estimate and
PSA 540 (revised and redrafted) requires that in evaluating
accounting estimates, auditors first obtain an understanding of
client’s process and controls in developing accounting estimates.
- In auditing depreciation/depletion, the auditor’s objective is to
obtain sufficient appropriate audit evidence about whether:
1. Depreciation/depletion are reasonable
2. Related disclosures are adequate
c. Perform independent recalculation
d. Compare credits to accumulated depreciation for the year with
the debits to depreciation expense.
4. Trace deductions from accumulated depreciation for assets retired.
a. Trace deductions to the working paper analyzing retirements
of assets during the year; and
b. Test accuracy of accumulated depreciation to date of
retirement.
5. Perform analytical procedures
a. Compute the ratio of depreciation expense to total cost of PPE
compare with prior years;
b. Compare the % relationships between accumulated
depreciation and the related property accounts with those in
prior years.
c. Inquire with management any significant variations from the
normal depreciation.
EXAMINE IMPAIRMENTS OF PPE (Valuation & Allocation)
- PAS 36 requires that an entity should review assets for
impairment whenever events or changes in circumstances indicate
that carrying amount may not be recoverable.

How to audit? - Management should recognize impairment loss if the CA of PPE is

more than its recoverable amount.
1. Review the company manuals discussing the depreciation policy.
2. Obtain or prepare a summary of analysis of accumulated How to perform?
depreciation.
1. Evaluate the appropriateness of the valuation model and
a. Compare the beginning balances with the audited amounts in
assumptions used;
last year’s working papers; and
2. Assess the reasonableness of management’s estimates; and
b. Determine the totals of accumulated depreciation recorded in
3. Evaluate the accuracy, completeness and the relevance of the
the SL of PPE agrees with the GL recorded. important data on which the estimates or measurements are based.
3. Test the provision for depreciation
a. Assess the reasonableness of the depreciation methods and
rates by comparing it from last year and investigate any
PERFORM ANALYTICAL PROCEDURES (Existence/Occurrence, Rights &
material difference.
Obligations, Completeness, Valuation and Allocation)
b. For assets acquired or disposed during the year, check whether
depreciation was provided based on the accounting policy of
the company.
How to perform? SUMMARY OF AUDIT PROCEDURES CALSSIFIES PER ASSERTION

1. Ratio Analysis ASSERTION CATEGORY PRIMARY AUDIT PROCEDURES

a. Total cost of PPE divided by annual output in pesos, pounds or Existence or Occurrence • Reconciling of general ledger with
other units; subledger
b. Total cost of PPE divided by cost of goods sols; • Examination of additions and
c. Total depreciation expense divided by total cost of PPE disposals
2. Trend Analysis • Physical inspection of major
a. Comparison of repairs and maintenance expense on a monthly additions of PPE
basis and from year to year; • Perform analytical procedures for
b. Comparison of acquisition for the CY with PY PPE and its related accounts (lease
expense, depreciation expense,
c. Comparison of retirements for the CY with PY
accumulated depreciation, repairs
and maintenance, property taxes
and property insurance.)
EVALUATE THE FS PRESENTATION AND DISCLOSURE (Presentation and Completeness • Reconciliation of GL w SL
Disclosure) • Physical inspection of major
acquisition of PPE
- Under PAS 16, the following each class of PPE should disclose the following:
• Analysis of lease, repair and
1. Basis for measuring carrying amount; maintenance account
• Perform analytical procedures for
2. Depreciation method used; reasonableness of PPE and related
expense reported in the FS
3. Useful lives or depreciation rates used; Valuation and Allocation • Examination of additions and
4. Gross carrying amount and accumulated depreciation and disposals including retirements
• Analysis of lease, repair and
impairment losses at the beginning and end of the period
maintenance account
5. restrictions on title • Test of provision for depreciation or
depletion
- The auditor should also be satisfied that any revaluation surplus should be • Examination of PPE
properly presented as part of “Other Comprehensive Income” in the • Perform analytical procedures for
statement of comprehensive income. reasonableness of PPE and related
expense reported in the FS
- Items of PPE are presented as non-current asset in a line item in the SFP as Rights and Obligations • Examination of additions and
“Property, Plant, and Equipment.” disposals including retirements
• Examination of proof of ownership
of PPE
Presentation and • Evaluate FS presentation and
Disclosure disclosures for PPE and relates
revenue and expense account.
Classification • Analysis of lease, repair and
maintenance account
Accuracy • Test of provision for depreciation or
depletion