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Property, Plant, and Equipment; Depreciation

and Depletion At the same time, we also look at:

Gain or Loss on Disposition

Repair & Maintenance (Why?)

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Controls Over PP&E

Use of a plant and equipment (capital budget) Maintenance of a subsidiary ledger A system of authorizations Analysis of variances from budgeted expenditures A statement of policy distinguishing between capital and

revenue expenditures A requirement that purchases of plant and equipment

are subjected to normal purchasing procedures Periodic physical inventories A system of retirement authorization and documentation

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Objectives for the Substantive Tests of

PP&E Determine Existence of recorded PP&E. Establish Completeness of recorded PP&E. Establish that client has Rights to recorded PP&E. Establish clerical accuracy of schedules of PP&E. Determine that Valuation or allocation of the cost

of PP&E is in accordance with GAAP. Determine that Presentation and disclosure of

PP&E are appropriate.

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Most Likely Misstatements

PP&E and Related Accounts

Inaccurate recording of acquisitions

Inconsistent capitalization threshold

Failure to capitalize betterments

Failure to capitalize capital leases

Failure to record retirements

Improper reporting of unusual transactions

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Audit ApproachCurrent vs Noncurrent

Accounts

Balance Sheet Comment Cash Securities Accts Rec Inventories

AcctsPay

Acc. Liab. S/T Notes

High volume oftransactions

Audit thebalance

PP&E Intangibles

L/T Debt Owner’s Equity

Low volume oftransactions

Audit changes/transactions

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Substantive Tests of PP&E and Related

Accounts Obtain a summary analysis of changes in

property owned and reconcile to ledgers

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Substantive Tests of PP&E and Related

Accounts Obtain a summary analysis of changes in property owned and

reconcile to ledgers

Vouch additions during the year

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Substantive Tests of PP&E and Related

Accounts Obtain a summary analysis of changes in property owned and

reconcile to ledgers Vouch additions during the year

Make physical inspection of major acquisitions & existing PP&E

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Substantive Tests of PP&E and Related

Accounts Obtain a summary analysis of changes in property owned and

reconcile to ledgers Vouch additions during the year Make physical inspection of major acquisitions & existing PP&E

Analyze repair & maintenance expense accounts

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Substantive Tests of PP&E and Related

Accounts Obtain a summary analysis of changes in property owned and

reconcile to ledgers Vouch additions during the year Make physical inspection of major acquisitions & existing PP&E Analyze repair and maintenance expense accounts

Examine evidence of legal ownership

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Substantive Tests of PP&E and Related

Accounts Obtain a summary analysis of changes in property owned and

reconcile to ledgers Vouch additions during the year Make physical inspection of major acquisitions & existing PP&E Analyze repair and maintenance expense accounts Examine evidence of legal ownership

Investigate the status of property not in use

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Substantive Tests of PP&E and Related

Accounts Obtain a summary analysis of changes in property owned and

reconcile to ledgers Vouch additions during the year Make physical inspection of major acquisitions & existing PP&E Analyze repair and maintenance expense accounts Test the client’s provision for depreciation Examine evidence of legal ownership Investigate the status of property not in use

Investigate retirements of PP&E during the year

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Substantive Tests of PP&E and Related

Accounts Obtain a summary analysis of changes in property owned and

reconcile to ledgers Vouch additions during the year Make physical inspection of major acquisitions & existing PP&E Analyze repair and maintenance expense accounts Examine evidence of legal ownership Investigate the status of property not in use Investigate retirements of property during the year

Examine lease agreements

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Substantive Tests of PP&E and Related

Accounts Obtain a summary analysis of changes in property owned and reconcile to

ledgers Vouch additions during the year Make physical inspection of major acquisitions & existing PP&E Analyze repair and maintenance expense accounts Examine evidence of legal ownership Investigate the status of property not in use Investigate retirements of property during the year Examine lease agreements

Perform analytical procedures Test the client’s provision for depreciation Review rental revenue, impairment & intangible

assets

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Audit of Intangibles

Assets with definite useful lives are audited similar to property, plant and equipment.

Assets with indefinite useful lives (e.g., goodwill) must be tested for impairment.

Auditors generally rely on business valuation specialists to value goodwill for tests of impairment .

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Substantive Tests of PP&E and Related

Accounts Obtain a summary analysis of changes in property owned and

reconcile to ledgers Vouch additions during the year Make physical inspection of major acquisitions & existing PP&E Analyze repair and maintenance expense accounts Examine evidence of legal ownership Investigate the status of property not in use Investigate retirements of property during the year Examine lease agreements Perform analytical procedures Test the client’s provision for depreciation Review rental revenue, impairment & intangible assets

Evaluate F.S. presentation and disclosure

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Additional Tests – 1st Year Audit

• Determine if we can rely on work of prior auditor for the beginning balance of PP&E and Accumulated Depreciation accounts, but must do some testing.

• If not, must perform substantive tests for transactions occurring in prior years which could materially impact the F.S. currently being audited.

• Use analytical procedures to assess risks, esp. for completeness assertion for young organization.