AEC 64

Auditing and Assurance: Concepts and

Applications 2

Audit for Property, Plant, and Equipment

(From Cabrera)

Property, Plant, and Equipment

- Include all tangible assets with a service life of
more than one year that are used in the
operation of the business and are not
acquired for the purpose of resale.
- The audit approach is the same as for the
PPE
- Essential features of substantive test of
balances for PPE are emphasis on specific
audit objectives related to existence,
ownership, and valuation. (achieved by
substantiating additions and identifying
retirements during the period and verification
of depreciation and procedure

Three major subgroups:

1. Land - has a significant characteristic of not

being subject to depreciation
2. Buildings, machinery, equipment, and land
improvements - have limited service lives
and are subject to depreciation
3. Natural Resources (pero murag sa audit for
specialized industries na ni)
 Assertions Audit Objectives
Existence or Occurrence To determine whether property and
equipment included in the statement
of financial position physically exist.
Additions include only the
capitalizable cost of assets
purchased, constructed, or leased
and retirements are removed.
Completeness To determine that property and
equipment include all capitalizable
costs are not expensed.
Rights and Obligations To determine that a company has
legal title or equivalent ownership
rights to property and equipment
included in the statement of financial
position and the related lease
obligation of capitalized assets is
recognized
Valuation or Allocation To determine that property and
equipment is stated at cost and
allowances for depreciation or
depletion are the basis of acceptable
and consistent methods
Presentation or To determine that property and
Disclosure equipment are properly described and
classified in the statement of financial
position and related disclosures are
adequate
Audit Procedures
1. Obtain or prepare a summary of
property and equipment
transactions and analysis of the
accumulated depreciation during
the year and reconcile to ledger
2. Conduct physical inspection of
major acquisition of plant and
equipment
3. Vouch additions to property and
equipment during the year
4. Investigate disposals and
retirements of property and
equipment during the year
5. Examine evidence of legal
ownership of property and
equipment
6. Examine lease agreement on
property and equipment leased to
and from others.
7. Review rental revenue from land
buildings and equipment owned
by the client but leased to others.
8. Analyze repair and maintenance
expense accounts
9. Investigate status of property
computed and equipment not in
current use
10. Test clients computation of
depreciation
11. Perform analytical procedures for
property and equipment
12. Review financial statement
presentation and disclosure for
property and equipment and for
related revenue and expense.
Existence or Occurrence
1. Obtain and prepare a summary of property
and equipment transactions and analysis of
the accumulated depreciation during the
year and reconcile to ledger
- Prepare plant assets schedule and
accumulated depreciation
showing beginning of year
balances (verified through prior
year’s audit working paper) and
disposals during the year ending
balances (verified as the audit
progresses)
- Auditor should be sure that amounts
in the working paper agree with the
ledger balances both subsidiary and
general (before making detailed
analysis)
2. Conduct physical inspection of major
acquisitions of property and equipment
- Usually perform to determine that
assets do, in fact, exist
- Helpful in maintaining a good
working knowledge of the clients
operations and in interpreting the
validity of the accounting entries for
both additions and retirements
- Should have physical inspection if
client's internal control over PPE is
weak.
Completeness
3. Vouch additions to property during the year
4. Investigate disposals and retirements
- Examine on a test basis the
additions and disposals (can be
seen from vendor’s invoices and
freight bills its valuation and
ownership of assets)
- Materials, labor and direct overhead
charges should be traced to
requisitions and time tickets on a
test basis (for constructed plant
assets).
- Fixed overhead should be
recalculated to support
reasonableness of the application
rates
- Auditor should also determine
whether interest should be
capitalized as part of the project
For plant asset disposal:
- Examine remittance advices,
validated deposit slips, and bank
statements to verify whether material
amounts of receipts from sale were
properly recorded and deposited
intact
- Examine the minutes of director’s
meetings for proper authorization of
major acquisitions and disposals
Rights and Obligations
5. Examine evidence of legal ownership of
property and equipment
6. Examine lease agreement on property and
equipment leased to and from others
- Examine evidence such as deeds,
transfer certificate of title, insurance
policy and property tax bills.
- Assets owned by third parties may
be confirmed
- Asset held under capital lease
agreement should be verified
against the lease contract
- In financing leases, minimum lease
payments should be recalculated
and appropriateness of discount
should be evaluated
Verification of ownership:
Machinery and Equipment - through
purchase invoice and contract of
sale
Ownership of delivery equipments -
certificate of titles and registration
documents
7. Review rental revenue from land, buildings
and equipment owned by the client and
leased to others
- Account for all available rental space
- Determine premises actually
occupied by lessees and those
which are vacant
- Rental revenue account should be
analyzed (compare with lease
agreement and cash records)
Valuation or Allocation
8. Analyze repairs and maintenance account
- Analyzed to discover items that
should have been capitalized
- Evaluate company policy regarding
capitalization of extraordinary repairs
and its consistency
- Verify clients accounting
expenditures through vendor
invoices, material requisitions, labor
time records
- Compare repairs and maintenance
with those from prior years
- Material increase in repairs expense
may have possible expense
overstatement
9. Investigate status of property and
equipment not in current use
- Investigated through determining
properties for their future use in
operations
- Property and equipment that have
been dismantled should be written
down to its net realizable value
- Temporary idle plant assets need not
to be reclassified and depreciation
continue at normal rates
and equipment in the current year
and compare with prior year
● Compare the percentage
relationships of accumulated
depreciation and related property
account in the current year and
compare with prior year
Presentation and Disclosure
12. Evaluate financial statements presentation
and disclosure for property and equipment,
accumulated depreciation and related
revenue and expense accounts
- Total amount of depreciation should be
disclosed in the statement of
comprehensive income and supporting
notes
- Disclose the basis of valuation, property
pledged to secure loans, property not in
current use.
- Examine loan agreements for possible
pledging of property and equipment as
collateral
- Examine bank confirmations for evidence of
pledging
- For pledge item, disclosure is required

10. Test client’s computation of depreciation

- Evaluate appropriateness of
depreciation methods
- Recalculate depreciation charges on
a test basis
- Examine consistency on
depreciation charges with policy and
prior year

11. Perform analytical procedures

● Total cost of plant assets divided by

annual output in pesos or in units
● Total cost of plants assets divided by
cost of goods sold
● Comparison of repairs and
maintenance expense on a
month-to-month basis or from
year-to-year
● Comparison of additions and
retirements for the current year with
prior years
● Compare the ratio of depreciation
expenses to total cost of property
 Depreciation Methods (PPE
Review)

Straight line method

𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐶𝑜𝑠𝑡 − 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
= 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒

Sum-of-the-year’s digits
𝐿𝑖𝑓𝑒 + 1
SYD rate = Life x [ ]
2

Double Declining Balance method

2
=
𝑙𝑖𝑓𝑒

Units production method

Input method (based on hours)

= Depreciable amount/total hours

Output method (based on units produced)

= Depreciable amount /Estimated total units