Chapter 9: Audit Procedures and Obtaining Evidence

Objective: To comment on the matters to be considered and the audit evidence expected to be
available in the audit of financial statements.

Exam advice

Audit areas are mainly examined in two ways:

- "Design/recommend the principal audit procedures" addressing IFRS Standards and assertions"
and
- "Comment on/explain the matters to be considered and the (further) audit evidence you would expect to
find in the audit working papers/obtain".
 1.1 Considerations
When an auditor sets out to design appropriate audit procedures for any particular
area of the financial statements, any or all of the following may be considered:
 Is the matter expected to be material?
o Quantitatively or qualitatively?
o Has it been material historically? Is there any reason for it to have changed this year?

Exam advice

Matters that do not appear to be material in isolation should be considered in aggregate in assessing the
cumulative effect of unadjusted items. If an exam scenario has more than one matter that is "borderline" material
it is particularly important to assess whether their effects are in the "same direction" (e.g. in overstating assets or
understating liabilities). Candidates are expected to demonstrate their professional judgement in suggesting what
adjustment(s) should be made to ensure that the cumulative unadjusted errors are not material.

 What are relevant accounting standards?

o Which IFRS Standard, if any?
o Best practice, if not yet subject to any particular IFRS Standard?
o Local legislative requirements?

 Which financial statement assertions are most at risk? For example:

o Lease liabilities – is most likely to be completeness;
o Biological assets – may be valuation.

 What evidence is expected to be available?

o Internal or external?
o Written or oral?

 What will be the impact on the auditor's report?



About this Chapter

 This chapter summarises the matters to be considered in the design of audit procedures from the
perspectives of:
o the statement of financial position (i.e. assets and liabilities);
o the statement of comprehensive income (i.e. events and transactions);
o the statement of cash flows; and
o notes to the financial statements and related disclosures.

 Although written representations are not specifically mentioned in each relevant area these could be
determined to be necessary to support other evidence (see Chapter 8).

 The use of disclosure checklists is considered in Chapter 12.

2.1 Plant, Property and Equipment

 2.1.1 Materiality and Relevant Accounting Standards
For most entities, the property, plant and equipment balance will be material. It is particularly relevant to
shareholders and analysts in considering the adequacy of the return made on tangible assets and also to
lenders and other creditors as security.
The relevant accounting standards are:
 IAS 16 Property, Plant and Equipment – is relevant to all issues related to plant, property and equipment.
 IAS 20 Government Grants – where an entity sets a grant received against the cost of the related asset.
 IAS 23 Borrowing Cost – where the "qualifying asset" is eventually recorded as an item of property, plant
or equipment.
 IAS 36 Impairment of Assets – where general circumstances or a particular event have reduced the
recoverable amount of the asset to less than the carrying amount.
 IAS 37 Provisions, Contingent Liabilities and Contingent Assets – when an entity makes provision for
decommissioning cost on acquisition.
 IFRS 5 Non-current Assets Held for Sale and Discontinued Operations – when an asset is held for sale.
 IFRS 16 Leases – all leases are capitalised and included as non-current assets as a right-of-use asset (with a
corresponding lease liability).

Key Point

The only exceptions are short-term leases (not more than 12 months) and low-value assets (i.e. less than $5,000
when new).

2.1.2 Assertions at Risk

Remember that there are six assertions relevant to transactions and events ("COCO AP") and six assertions
related to balances ("CARE PC") (see Chapter 8).

Occurrence – this is relevant to events during the period that affect the carrying amount of property, plant
and equipment – additions, disposals and impairment – and the appropriate disclosures.

Completeness – that all capital expenditure has been included in additions and not expensed as revenue
expenditure. A "capitalisation policy" may set a minimum amount below which the cost of insignificant assets
is expensed as incurred.

Accuracy (initial costs):

 Where an asset is self-constructed, the adequacy of the accounting system that has separated/segregated
the direct costs and directly attributable overheads becomes an audit concern.
 The appropriateness and accuracy of the inclusion of borrowing costs under IAS 23 is relevant.
 The cost of a right-of-use asset should include the initial lease liability (see s.3.1), direct costs incurred and
any dismantling costs.

Classification (subsequent costs) – is subsequent expenditure an asset (improvement) or expense (repair)?

For example a major repair involving the replacement of part(s) may need to be accounted for as the addition
of the cost of the parts and the disposal of the parts replaced.
Presentation:
  Movements in property, plant and equipment need to be correctly presented and transactions correctly
classified.
 Additional disclosures are necessary when assets are revalued under IAS 16.
 Assets held for sale under IFRS 5 should be separately disclosed.
 Right-of-use assets should be separately disclosed in the statement of financial position or the notes.

Accuracy, allocation and valuation (subsequent measurement of carrying amount):

 Depreciation is an accounting estimate based on estimates of useful life, residual value and pattern of
consumption of economic benefits.
 A write down of an impaired asset may jeopardise the adequacy of security if the asset has been pledged.
 The allocation of a reversal of an impairment loss on a revalued asset is usually to other comprehensive
income.
 Assets held for sale are reclassified and shown at the lower of carrying amount and fair value less costs to
sell.

Key Point

Up to the point of reclassification, non-current assets will be treated in accordance with IAS 16 and depreciated.
After reclassification, they will not be depreciated.

Rights/obligations – for leased assets, the lessee has the right to use the underlying assets and a lease liability
for the obligation to make lease payments.

Existence – recorded items of property, plant and equipment may not exist if they have been disposed of, but
they are usually physically inspected by the auditor (internal and/or external) at the year end.

2.1.3 Evidence
Examples of source of evidence include:
 Non-current (“fixed”) asset register.
 Invoices for additions, disposals, repairs/improvements, other commissioning costs, parts and overheads
associated with self-constructed assets.
 Lease agreements for right-of-use assets.
 Payroll records for self-constructed assets.
 Relevant interest rates for capitalised borrowing costs.
 Professional valuations, if assets are revalued.
 Budgets, forecasts, strategic plans, planned asset management decisions, to support a consideration of
useful life.
 Plant/production management with whom valuation and use issues can be discussed.
 Held for sale assets are available for immediate sale in present condition and that sale is highly probable:
o management intentions, plans, board minutes;
o management actions (e.g. to find/encourage a buyer);
o asking price is reasonable;
o expected to be sold within one year;
o proof of after date disposal.
 Estimate of fair value.