AP 05

ACC 51113
Auditing Practice Audit of PPE and Intangible Assets

UNIVERSITY OF SANTO TOMAS

SUBSTANTIVE TEST OF PROPERTY, PLANT, AND EQUIPMENT
AUDIT OBJECTIVES
1. Presentation. All items reported as property, plant, and equipment are properly classified, clearly
described, and related disclosures are relevant and understandable in the context of PFRS. Also, liens,
pledges, security interests and restrictions to PPE are appropriately identified and disclosed.
2.Accuracy, Valuation, and Allocation. Property, plant, and equipment are carried at their
appropriate valuation taking into account the requirements of PAS 16 and PAS 36.
at the reporting date are
3. Completeness. All property, plant, and equipment owned by the entity
included on the Statement of Financial Position and all income and expenses accruing from these items
are appropriately recorded and reported.
Existence. All items reported as property, plant, and equipment at the reporting date exist and
are
4.
either held by the entity or by others for the entity.
at the
5. Rights. The entity owns, or has a legal right to, all property, plant, and equipment reported
reporting date.
6, Classification. All items related to property, plant, and equipment are properly classified and reported
to appropriate accounts.

AUDIT PROCEDURES
The auditor's primary substantive procedures for property, plant, and equipment will typically include the
following:
Obtaining a lapsing schedule and reconciling with ledgers;
Vouching for additions and disposals (including retirements) of PPE during the year;
Physically inspecting major acquisitions of PPE during the year;
Examining proof of ownership and restrictions of PPE;
Analyzing lease, repair, and maintenance expense accounts;
Testing for the accuracy and reasonableness for provision on depreciation or depletion;
Investigating current and potential impairments of PPE;
Performing analytical procedures to check for reasonableness of PPE and related expense reported in
the financial statements; and
7
Evaluating financial statement presentation and disclosures for an item of PPE including its related
revenue and expense.

SUBSTANTIVE TEST OF INTANGIBLE ASSETS AND PREPAID EXPENSES

AUDIT OBJECTIVES
1. Presentation. All items reported as intangible assets and prepaid expenses are properly classified,
clearly described, and related disclosures are relevant and understandable in the context of PFRS.
2. Accuracy, Valuation, and Allocation. Intangible assets and prepaid expenses are included on the
Statement f Financial Position at the appropriate amounts and are being allocated in a systematic and
rational manner to the accounting periods estimated to be benefited. In addition, goodwill is included
on the Statement of Financial Position at the appropriate amount, and impairments, if applicable, are
appropriately identified and recorded
3. Completeness. All intangible assets and prepaid expenses owned by the entity at the reporting date
are included on the Statement of Financial Position and all income and expenses accruing from these
items are appropriately recorded and reported.
Existence. All items reported as intangible assets and prepaid expenses at the reporting date exist.
Also, goodwill shall only be recognized as intangible assets if it arises as a result of business
combination.
5. Rights. The entity owns, or has a legal right to, all intangible assets reported at the reporting date
and is entitled, at the reporting date, to the future benefits related to the prepaid expenses reported.
6. Classification. All items related to intangible assets and prepaid expenses are properly classified and
reported to appropriate accounts.

AUDIT PROCEDURES
The auditor's primary substantive procedures for intangible assets, goodwill and prepaid expenses
typically include the following:
/
Analyzing and examining evidence of valuation of intangible assets, goodwill and prepaid
expense;
Verifying existence and valuation of prepaid expenses;
analyticalin procedures
Performingreported to check for reasonableness of intangible assets, goodwill and prepaid
expenses the financial statements, and
Evaluating financial statement presentation and disclosures for an intangible asset, goodwill, prepaid
expense including related income statement accounts.

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ACC 51113
AP 05
Auditing Practice
Audit of PPE and Intangible Assets
THEORETICAL CONCEPTS
1. In the examination of
property, plant, and equipment, the auditor tries to determine all of the
following except the:
A. Extent of the control risk.
B. Extent of property abandoned during the
year.
C.
Adequacy of replacement funds.
D.
Reasonableness of the depreciation.

2. Which of the following account IS not normally examined in conjunction with the audit of PPE?
A Sales return and allowance
B. Depreciation expense
C. Lease expense
D. Repairs and maintenance expense

3. Verification of the
legal ownership of property relates to the assertion of
A. Existence
B. Valuation and allocation
C.
Rights and obligation
D. Presentation and disclosure

Which of the following is a least likely assertion addressed by examining supporting

4.

addition? documents to PPE

A. Existence or occurrence
B. Gross valuation
C. Presentation and disclosure
D. Rights and obligation
5.
Ensuring that
A. Completenessall retirements or disposal is recorded relates primary to the assertion of
B. Rights and obligations
C. Existence
D. Presentation and disclosure

auditing intangible assets, an auditor most likely would obtain evidence of ownership
6.
In
documentations in support of management's or supporting
A.
Presentation and disclosure. financial statement assertion of
B.
Rights and obligations.
C. Completeness."
D. Existence or occurrence.
7. The
mostlikely technique for the current year
continuing audit client. audit of goodwill which was acquired three
A. Confirmation years ago by
B. Observation
C. Recomputation
D. Inquiry
8. In verifying
the amount of goodwill recorded by a
auditor can obtain
A. comparing
Assessed value 1sasbyevidence recorded valuedent,
the bills.
by tax
the most
of assets convincing evidence which an
acquired with the
B. Seller's
C.
valuevalue
Insured book as evidence
as evidences by financial statements.
by insurance
D.
Appraised value policies.
as evidence by independent appraisals.
9. Determining that properof amounts of amortiatinn
management's
assertions valuation
A. Presentation and are expensed provides assurance about
and disclosure.
B. Rights and obligations.
C. Completeness.
D. Existence or occurrence.
10.
In connection with
the audit of the
usually not performed prepaid insurance
by the audito pre account, which of the
A. Recomputed
the portion following procedures is
the ca be. operan
B. of the
Prepare excerpts premium expired during year
C.
Confirm premium
D. Examine support
for
trest deatrea cumo
that
independent
an
premium payments
the
.the.re
insurance
broker
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 AP 05
ACC 51113
Audit of PPE and Intangible Assets
Auditing Practice
ILLUSTRATIVE PROBLEMS
PROPERTY, PLANT, AND EQUIPMENT
PROBLEM 1
On March 1, 2021, Levy Co. acquired land and building by paying P6,000,000 and assuming a mortgage of
P1,500,000. The building will be used by Levy Co. as its head office. 50,000
1 Cost of survey 50,000
2 Cost of paving parking lot adjoining building 7,000
Cost of option of the land not acquired 10,000
Broker's fee on the properties acquired
others in order to acquire
Cost of relocating and reconstructing the property belonging to 23,000
the properties 40,000
Payment to real estate agent 13,000
Registration fees and transfer of title.
15,000
Title insurance 5,000
9 Real property taxes on the land accrued after acquisition
53,000
10 Cost of shrubs, trees, and other landscaping
14,000
11 Unpaid real property taxes up to the date of acquisition 19,000
12 Driveway, parking bay and safety lighting 40,000
13 Payment for claim for injuries not covered by insurance 70,000
14 Cost of removing trees from the land 5,000
15 Salvage value of the timber recovered from the land 400,000
16 Renovation cost of the building renovation 8,600
17 Payment of medical bills of employees accidentally injured during building

cost of the following assuming that on the

Questions: Based on the above data, determine the adjusted
date of acquisition, the land and building have fair values of P6,000,000 and P2,000,000 respectively.
1. Land
A. P7,790,600
B. P7,730,000
C. P7,560,000
D. P5,833,250

2. Old building
A. P400,000
B. P2,296,750
C. P2,357,350
D. P2,418,750

3. Land Improvements
A. P60,600
B. P61,400
C. P122,000
D. P182,600

PROBLEM 2
tract of land (site number 143)
on January 1, 2020, Joy Waquiz Corporation purchased for P1,200;000, a and title
witha building. Waquiz paid a real estate broker's commission of P72,000, legal fees of P12,000,
that the land value was P1,000,000 and
indicated
guarantee insurance of P36,000. The closing statement cost of P108,000.
the building value was P200,000. Shortly after acquisition, the building was
razed at a

on March 1, 2020 for the

Waquiz entered into a P6,000,000 fixed-price contract with Cabeng Builders, Inc.
construction of an office building on land site number 143. The building was completed and occupied on
September 1, 2021. Additional construction costs were incurred as follows:
42,000
Plans, specifications, and blueprints
Architects' fees for design and supervision 164,000

will be depreciated using

The building is estimated to have a 40-year life from the date of completion and
the 150% declining balance method.
on January 1, 2020. The
To finance construction costs, Waquiz borrowed P1,000,000 with a 12% interest
loan was outstanding for the entire years of 2020 and 2021. The company's other interest-bearing debts
of 2020 and 2021):
include the following (Also outstanding for the entire years
Principal Borrowing cost
10% bank loan P 2,800,000 p 280,000
3,200,000 320,000
10% short-term note
2,000,000 240,000
12% long-term loan
P8.000.000 P 840,000

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ACC 51113
Auditing Practice AP 05
Audit of PPE and Intangible Assets
Expenditures on
the project were as follows:
Date Expenditures
January 1, 2020 P1,000,000
April 1, 2020 500,000
October 1, 2020 800,000
December 31, 2020 900,000
January 1, 2021 1,000,000
May 1, 2021 600,000
September 1, 2021 1,200,000
Questions:
Based on the above
data, compute for the following:
1. Total cost of the land
A. P1,272,000
B. P1,284,000
C. P1,320,000
D. P1,428,000

2.
Capitalizable borrowing cost for the year ended 2020.
A. P180,375
B. P187,500
C. P225,000
D. P960,000

3. Capitalizable borrowing cost for the year ended 2021.

A. P337,626
B. P340,750
C. P369,126
D. P560,000

4. Total cost of the building as of September 30, 2021.

A. P6,832,001
B. P6,771,750
C. P6,755,501
D. P6,724,001

5. Interest expense for the year 2021.

A. P622,374
B. P590,874
C. P340,750
D. P619,250

6. Depreciation expense for the building in 2021.

A. P84,050
B. P84,648
C. P84,500
D. P252,150

PROBLEM 3
ELISHA Corp., a manufacturer of computer parts, has been experiencing growth in the demand for its
products over the last several years. This prompted the company to obtain additional manufacturing
facility. A real estate firm located an available factory near ELISHA's production facility, and ELISHA
agreed to purchase the factory and used machinery from GABRIELLE Company on October 1, 2019.
Renovations were necessary to convert the factory for ELISHA's manufacturing use.
The terms of the agreement required ELISHA to pay GABRIELLE P1,500,000 when renovations started on
January 1, 2020, with the balance to be paid as renovations were completed. The overall purchase price
for the factory and machinery was P12,000,000. The building renovations were contracted to BUILDERS
Construction Company at P3,000,000. The payments made, as renovations progressed during 2020, are
shown below.
GABRIELLE BUILDERS_
January 1 1,500,000
April 2,700,000 P 900,000
October
3,300,000 900,000
December 31 4,500,000 1,200,000
P12,000,000 2 3.000.000
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 AP 05
ACC 51113 Audit of PPE and Intangible Assets
Auditing Practice
The factory was placed in service on January 1, 2021.
finance the
On January 1, 2020, ELISHA obtained a 2-year, P3 million loan with a 12% Interest rate to
2020.
renovation of the acquired factory. This is ELISHA's only outstanding loan during
there were no available data
of the land is P8,700,000. However,
ELISHA determined that the fair value cost GABRIELLE P9,000,000book
and
for the fair values of building and machinery. The building had originally net
had a net book value of P1,500,000, while the machinery
originally cost P3,750,000 and had a
value of P1,200,000 on the date of sale.
lehehle ma whais recorded on GABRIELLE's books at P1,200,000.
at the

The following values were determined based on appraisal conducted by independent appraisers
time of acquisition,
Building 3,150,000
Machinery 1,350,000

ELISHA estimated the following: of P900,000;

with an estimated residual value
Y the renovated plant would be used for 15 years,
and and residual
value of P90,000.
useful life of years
the machinery would have a remaining
and the
the 200% declining balance method forinmachinery
depreciation is taken the year the plant
ELISHA's depreciation policy is to apply
150% declining balance method for the plant. One-halfthe
year's
property is disposed of or retired.
is placed in service and one-half year is allowed when

In connection with your audit, answer the following:

1. Land
a. P7,500,000
b. P7,909,000
c. P8,700,000
d. P9,060,000

2. Building
a. P3,223,600
b. P5,310,000
C. P5,670,000
d. P6,223,600
3. Machinery
P1,335,300
b. P1,227,300
c. P1,098,000
d. P990,000

4. Depreciation expense for Building for year 2021

P238,500
b. P265,500
C. P283,500
d. P311,180

5. Depreciation expense for Machinery for year 2021

a. P180,000
b. P198,000
c. P219,600
d. P227,460

PROBLEM 4
On January 1, 2022, an entity showed land with carrying amount of P50,000,000 and building with cost of
P300,000,000 and accumulated depreciation of P90,000,000. The land and building were revalued on
same date and the revaluation revealed the land with sound value of P70,000,000 and the building with
sound value of P315,000,000. There were no additions or disposals during 2022. The original useful life of
the building is 20 years and depreciation is computed on the straight line.

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ACC 51113 AP 05
Auditing Practice Audit of PPE and Intangible Assets
What is the pretax revaluation surplus on January 1, 2022?
A. 125,000,000
B. 105,000,000
C. 385,000,000
D. 315,000,000

2.
What is the pretax revaluation surplus on December 31, 2022?
A. 117,500,000
B. 125,000,000
C. 105,000,000
D. 119,750,000

3. What is the depreciation of the building for 2022?

A. 15,000,000
B. 22,500,000
C. 15,750,000
D. 27,500,000

PROBLEM 5
On June 30, 2022, an entity reported the following information:
Equipment at cost 30,000,000
Accumulated depreciation 10,500,000
The equipment was measured using
the cost model and depreciated on a straight-line basis over 10-year
period. On December 31, 2022, the management decided to changé the basis of measurement from the
cost model to the revaluation model. The equipment was revalued at the fair value of P27,000,000 with no
change in useful life. The income tax rate is 25%.

1. What amount should be reported as depreciation for 2023?

A. 4,500,000
B. 2,700,000
C. 3,000,000
D. 1,500,000

2. What is the revaluation surplus on December 31, 2023?

A. 6,750.000
B. 9,000,000
C. 5,625,000
D. 7,500,000

PROBLEM 6

On January 1, 2018, an entity

residual value. On purchased a building for P20,000,000, useful life of 20 years and
December 31, 2022, the entity tested the asset for impairment and the fair value less
no

cost of disposal on such date was P12,000,000. On December 31, 2024, the entity decided to
revaluation model. On such date, the fair value less cost of disposal had risen use the
to P18,000,000.
1.
What is the impairment loss for 2022?
A. 3,000,000
B. 5,000,000
C. 8,000,000
D. 0

2. What is the gain on reversal of impairment

for 2024?
A. 3,000,000
B. 4,000,000
c. 2,600,000
D.

amount should be recorded as revaluation surplus in 2024?

3.
What
A. 5,000,000
B. 6,000,000
C. 4,000,000
D.

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 AP 05

rc 51113
Practice

PROBLEM 7 AP 05
Refore 2021, Albay Enterprises Auditof PPE and Intangible Assets
prepared financial
audited because the ownership is
statements internally. The company has not been
however,
audited financial statementsprepared in
andcompletely by one familf and is not
held
In anticipation of bank loans actively sold. As
posglble public offering,of common stock, the companyof needs
2021,
conformity
corperation's partialunadjusted trial ballanoa with aenerally accepted accouin tihg omiiples.
appears as follows: The
Trademark P1,430,000
Franchise 1,004,000
1,790,000
All patents were purchased
from another
These patents are being company, when Albaylifebegan operations on January 2, 2014.
equipment covered over an
patent costing expected useful
Amortization in
by the
P150,000 was debited
of
15 years. Improvements made to
patent. 2019-2020 included to the account in January 2019.
for the remaining life of the relevant

The competitive patent did not extennetita

bier thes petemm iner
years,
was in
originally a dons uterei
tih ns eongy
tann oassigned u i oli. iin iDetents, Oi, dandiere
useful life of the original patent. on January
P300,000.
cost of
1 2021,
of only 4
The cost of
trademark includes the purchase price from
20benditures
2021 and were successful
for also litigation
debited ih 'Gersn orice fe Group Company for P800,000 on July 1, 2018.
to
the account. Through trademark totaling P204,000 were paid on July 1,
anti theoli ct 1b 202s bo ute orf a aeginein Thoucth cong ile thi emdenan i
P75,000 per year. The useful life
the trademark is expected to have an
expected to generate
horizon. (Assume appropriate of trademark still
discount rate for the trademarkis 10%) extends beyond the foreseeable
franchise fee of P1,700,000. ofagreement to operate as a franchisee of Teofila Service, Inc.
Panuary
On
1 2021, Albay signed an
Initial
this amount, P500,000 was paid when the
chaises nis res iaspie nost Pome.n hen asep ois.cos Pond, Pie ginminog aineoni y h trots SeRy
Farin eratie for thd oan ot ins tapelie e. .s, .o02021t h ofofthe
The revenue
tie four inue payments' discounted at 14% (the
Cie neannual
per use ulfranchise franchisewere
life of thepayment romite
tennyea Tot
to bedebited for an annual payment of 5% ofits
periodic
to
the
the cost
ranchiee fe Tozl was -19oo God."hstbt of S Yh of its
initial franchise fee
and the 5% of the
of franchise account.
Questions: Based on the
Amortization above
2024 compute for the following:
in data,
1.

A. P178,750
of the patent
B. P198,750
C. P216,250
D. P240,000
2.
Adjusted carrying value of the patent as of
A. P1,190,000
B.
P1,213,250 December 31, 2021.
C. P1,231,250
D. P1,251,250
3.
Impairment loss of the
A. Nil trademark in 2021
B. P50,000
C. P289,157
D.
P339,157

* Ad
A.ustod. arrving value of the trademark as of
P800,000
B.
P750,000 December 31,2021.
C. P510,843
D. P460,843

• Amortization of the franchise

A. Nil in 2021
B. P87,400
C. P137,400
D. P274,800

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AP 05
ACC 51113
Auditing Practice AP 05
PROBLEM 8 Audit of PPE and Intangible Assets
on December 31, 2021, the following data are available on one of the cash-generating units of Allan Corp:
Carrying amount before impairment:
Inventory
Investments at fair value P10,000,000
through other comprehensive income
Property,
Patent
plant and equipment 20,000,000
30,000,000
Goodwill 10,000,000
Total 2,000,000_
P72,000,000
On December 31,
2021, Allan Corp. has impairment testing of the cash generating unit and
determined the valuein use of the unit atundertook
P60,000,000.
Questions:
Based on
the above
1. How much is
data, answer the following:
the impairment loss to be allocated to goodwill?
a. Nil
b. P322,581
C. P476,190

d. P2,000,000

2. How much is the impairment loss to be allocated to inventory?

a, Nil
b. P1,428,571
c. P1,612,903
d. P10,000,000

3.
How much is the impairment loss to be allocated to investments at FVTOCI?
a, Nil
b. P2,857,143
C. P3,225,806
d. P20,000,000

4. How much is the impairment loss to be allocated to PPE

(at cost model)?
a, P4,285,714
b. P4,838,710
c. P7,142,857
d. P7,500,000

5. How much is the impairment loss to be allocated to Patent?

a. P1,428,571
b. P1,612,903
C. P2,380,952
d. P2,500,000

END

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