AUD390AUDIT OF PROPERTY PLANT &

EQUIPMENTMAIN OBJECTIVES OF CONTROL OVER PROPERTY, PLANT AND EQUIPMENT

To ensure all acquisitions are properly authorized. To safeguard all the assets. To ensure all assets are properly recorded. To ensure assets are written off over their useful life. Appropriate depreciation i.e. adequate provisions and accurate calculation for

provisions of depreciation. To ensure profits and losses on disposal of fixed assets are properly accounted

for.

INTERNAL CONTROL FOR PROPERTY, PLANT AND EQUIPMENT

Delegation powers of authorization for acquisitions. Authorization limit and procedures including board approval for major item. Physical security of assets and all assets are identified and recorded. Assets registers recording date of acquisition, cost, depreciation rate and location Frequent review of record with existing assets (actual) by senior independent

officers. Authorization of disposals and write-off. Division of duties between purchase, recording and disposal of assets. Regular maintenance of assets. Formal and consistent policy for the treatment of capital and revenue

expenditure. Procedures for the disposal of fixed assets.

INHERENT RISK FACTORS FOR PROPERTY, PLANT AND EQUIPMENT

Complex accounting issues such as lease accounting, self-constructed assets and capitalized interest.

Difficult to audit transaction such as transactions involving donated assets, non monetary exchanges.

Misstatement detected in prior audits. If the auditor has detected misstatement in prior audits, the likelihood of misstatements in the current year is higher.

DISCLOSURE REQUIREMENT FOR PPE

A company should properly disclose its PPE which consists of:-

Accounting policy, cost, depreciation for the year, accumulated depreciation, net book value, and comparative figures.

ANALYTICAL PROCEDURES FOR PPE

Review capital budgets and comparison of the amounts spent with amounts budgeted.

Compare prior year balances in PPE and depreciation charges with current year balances after consideration of any changes in condition or assets composition.

Compute the ratio of depreciation charges to the PPE account and compare with prior year ratio.

AUDIT VERIFICATION PROCEDURES OF PROPERTY, PLANT AND EQUIPMENT

1. Freehold Land And Building

Internal Control Ascertain record and evaluate internal control system and review compliance test before auditor could rely on such controls to form part of audit evidence and before he continued with follow-up verification.

Audit Objective Verification Audit Procedures

C - Cost Ensure that there is no evidence that the buildings are subject to a mortgage or charge. Check invoice, contract and cost records for any new items of acquisition.

Vouching

Inquiry and scanning

Physical examination

A - Authorization Check directors’ minutes’ book for approval. For smaller items, probably rely on authorization limits in internal control system.

Vouching

Documentation

Inquiry and scanning

V - Valuation a) Agree the balance sheet amount to the underlying records and book of accounts.

b) Check that balance brought forward for cost and accumulated

Re-computation

Analytical review

Confirmation

Internal Control Ascertain record and evaluate internal control system and review compliance test before auditor could rely on such controls to form part of audit evidence and before he continued with follow-up verification.

Audit Objective Verification Audit Procedures

depreciation agree with the previous year file.

Ensure that in year of audit:

i) Cost less accumulated depreciation

ii) Depreciation rate adequate and appropriate

iii) Consistent application of accounting policy and correctly disclosed.

iv) Proper procedures for the disposal of fixed assets.

E - Existence Physical inspection of vehicle, road tax and vehicle registration documents against the motor vehicles register

Vouching

Physical examination

Analytical review

B - Benefit If leased out or rent, check hire or rent receipts.

Inquiry and scanning

Documentation

Re-computation

O - Ownership 1) Check document of title of ownerships

2) If no document of title, vehicle registration document is secondary evidence which should be backed up by physical inspection

Inquiry and scanning

Documentation

Re-computation

D - Disclosure 1) Valued at cost less accumulated depreciation.

2) Check the proper disclosure and presentation as required by

General procedures

Inquiry and scanning

Internal Control Ascertain record and evaluate internal control system and review compliance test before auditor could rely on such controls to form part of audit evidence and before he continued with follow-up verification.

Audit Objective Verification Audit Procedures

accounting and statutory requirements.

2. Plant And Equipment

Internal Control Ascertain record and evaluate internal control system and review compliance test.

Audit Objective Verification Audit Procedures

C - Cost Examine invoice, contract or cost records for items purchased and constructed internally.

Vouching

Inquiry and scanning

Physical examination

A - Authorization Check directors’ minutes’ book and contract agreement for approval. For smaller items, probably rely on authorization limits in internal control system.

Vouching

Documentation

Inquiry and scanning

V - Valuation a) Agree the balance sheet amount to the underlying records and book of accounts.

b) Check that balance brought forward for cost and accumulated depreciation agree with the previous year file.

Ensure that in year of audit:

i) Cost less accumulated depreciation

ii) Depreciation rate adequate and appropriate

iii) Consistent application of accounting policy and correctly

Re-computation

Analytical review

Confirmation

Internal Control Ascertain record and evaluate internal control system and review compliance test.

Audit Objective Verification Audit Procedures

disclosed.iv) Proper procedures for the

disposal of fixed assets.

E - Existence Physical inspection of vehicle by comparisons with plant registers.

Vouching

Physical examination

Analytical review

B - Benefit If leased out or rent, check hire or rent receipts.

Inquiry and scanning

Documentation

Re-computation

O - Ownership 1) No document of title of ownerships2) Can confirm by overall checks on

existence and custody on accounts to ensure nothing is sold and by letter of representation from management.

Inquiry and scanning

Documentation

Re-computation

D - Disclosure 1) Appropriate description of assets.2) Valued at cost less accumulated

depreciation.3) Check the proper disclosure and

presentation as required by accounting and statutory requirements.

General procedures

Inquiry and scanning

Question Related To Audit Of PPE

OCT 2007 Q3(C)

Explain two (2) audit objectives and related verification procedures to verify land and buildings.

APR 2009 Q3 (B)

During your audit on a company’s non-current asset, the auditor realized that there are additional motor vehicles and office equipment amounting to RM150, 000. The transactions have been properly accounted for in the company’s non current asset register. What would be the specific audit procedures to satisfy the assertion of existence and ownership of these non-current assets?

OCT 2004 Q4 (a), (b), (d)

Describe any three (3) analytical procedures that are commonly used in auditing property, plant and equipment?

Discuss three (3) factors that an auditor should consider in assessing the inherent risk for property, plant and equipment?

Explain the disclosure requirements for property, plant and equipment in the financial statements.

APR 2006 Q4 (A)

You have been asked to audit the property, plant and equipment (PPE) of Darulaman Engineering Berhad for the year ended 31 December 2004. The draft accounts show the following movements on PPE during the year.

Freehold land and building

Plant and machinery

Motor vehicles Total

RM RM RM RM

Cost or valuation

At 1 January 2004

Additions

Disposals

353,000

292,000

-

406,000

86,000

(29,000)

173,000

65,000

(47,000)

932,000

443,000

(76,000)

At 31 December 2004 645,000 463,000 191,000 1,299,000

Depreciation

At 1 January 2004

Charge for the year

On disposals

132,000

12,900

-

187,000

43,000

(25,000)

74,000

42,000

(32,000)

393,000

97,900

(57,000)

At 31 December 2004 144,900 205,000 84,000 433,900

Net Book Value

31 December 2004 500,100 258,000 107,000 865,100

The company maintains a register for all PPE, and annual depreciation is charged at the following rates:

Building 2% on cost

Plant and Machinery 10% on cost

Motor Vehicles 25% on cost

It is the company policy to charge full year’s depreciation in the year of purchase and none in the year of disposal.

Required:

a) Describe four substantive audit procedures that should be performed to verify the movements of PPE during the year ended 31 December 2004

b) Identify documentary evidence that should be obtained to verify the ownership of freehold land and buildings, plant and machinery and motor vehicles respectively?

c) If the company does not maintain a proper PPE register, how would it affect your audit work?