Chapter 13: Property, Plant and

determine that the presentation and disclosure of information about

property, plant and equipment are appropriate, including the disclosure

Equipment: Depreciation and

of depreciation methods

auditors will also obtain evidence of

Depletion related accounts of depreciation expense

accumulated depreciation

Course ACC5400 repairs and maintenance expense

Status Done Contrast with Audit of Current Assets

though these assets represent a large portion of the assets, they are generally

Property, Plant, and Equipment transactions and are easier to verify than current assets

they also have little change year over year

The Auditorsʼ Objectives in Auditing Property, Plant, and
for plant assets, the cutoff at the end of the year does not matter as much
Equipment
either
the auditors objectives in the audit of property plant and equipments are to
has no impact on net income
use the understanding of the client and its environment to consider
inherent risk, including fraud risks, related to property, plant an equipment Internal Control over Plant and Equipment
obtain an understanding of internal control over property, pkant and for manufacturing companies, maintenance, rearrangement and depreciation
equipment of these assets are major expenses in the income statements

assess the risk of material misstatement and design tests of controls and thus needed strong internal control present
substantive procedures that
errors in measurement of income may be material if
substantiate the existence of property, plant and equipment and the assets are scrapped without their cost being removed from the
occurence of the related transactions accounts
establish the completeness of recorded property, plant and equipment
distinction between capital and revenue expenditures is nor maintained
verify the cutoff of transactions of recorded property, plant and consistently
equipment certain larger manufacturing companies might have annual plant budgets that
determine that the client has rights to the recorded property, plant and are used to forecast and control acquisitions and retirements of plant and
equipment equipment

establish the proper valuation or allocation of property, plant and other key controls applicable to plant and equipment are as follows:
equipment
 a sub ledger consisting of a separate record for each unit property

a system of authorizations requiring advance executive approval of all

plant and equipment acquisitions

a required review of construction and lease contracts by competent

personnel

management review controls that involve prompt identification of unusual

items and relationships that might be indicative of misstatements

an authoritative written statement of company policy disntinguishing

between capex and revenue expenditures

a policy requiring all purchases of plant and equipment to be handled

through the purchasing departments and subjected to standard routines
for receiving, inspection and payment

periodic physical inventories designated to verify the existence, location analyses of repairs and maintenance expense accounts and tests of
and condition of all property listed in the accounts and to disclose the depreciations are also considered
existence of any unrecorded units

a system of retirement procedures stating reasons for retirement and

Initial Audits and Repeat Engagements
bearing appropriate approvals reviews can be done of predecessors auditors work to then be justified in
using those beginning balances
policies and procedures for the periodic evaluation of PP&E for impairment
by competent personnel using appropriate models in any other case, the ideal approach is a complete historical analysis of the
property accounts
Audit Documentation
although time consuming, it is important as it affections depreciation which
key audit WPs for audit emphasizes the changes during the year under the is an important aspect of NI
audit

Audit of Property, Plant, and Equipment

the following steps indicate the general patter of work performed by the
auditors in the verification go PP&E

use the understanding of the client and its environment to consider

inherent risks, including fraud risks, related to property, plant and
equipment

obtain and understanding of internal control over PP&E

assess the risks of material misstatement and design further audit
procedures

perform further audit procedures - tests of controls

test controls over the purchase and retirement of property, plant and
equipment

test management review controls

if necessary, revise the risks of material misstatement based on the

results of tests of controls

perform further audit procedures - substantive procedures for property,

plant and equipment

obtain a summary analysis of changes in property owned and

reconcile to ledgers

vouch additions to PP&E during the year

make physical inspections of major acquisitions of PP&E

analyze repair and maintenance expense accounts

investigate the status of PP&E not in current use

test the clientʼs provision for depreciation

evaluate and test the accounting for impairments of PP&E

investigate retirements of PP&E during the year

examine evidence of legal ownership of PP&E

review rental revenue from land, buildings and equipment owned by

the client but leased to others
A. Use the understanding of the client and its environment to
evaluate and test the accounting for lease agreements on PP&E consider inherent risks, including fraud risks, related to property,
plant and equipment
perform analytical procedures or data analytics for PP&E
after an understanding of the client has been obtained, risks are identified and
evaluate financial statement presentation and disclosure for plant
assessed related to PP&E
assets and for related revenue and expenses
if the risks have the possibility of fraud, IC is considered and also whether or
not they have been implemented
 auditors will then design an appropriate response to that risk  test controls over the purchase and retirement of property, plant and
equipment
B. Obtain an understanding of internal control over PP&E
consists of additional tests of controls such as
auditors may utilize a written description, flowcharts or internal questionnaire
selecting a sample of purchases of plant and equipment to test the
after preparing a description of IC, the auditors will determine whether the controls related to authorizations, receipt and proper recording of the
controls have been implemented transactions
generally done through observations same can be done with retirements

C. Assess the risks of material misstatement and design further  test management review controls
audit procedures by consider whether the controls would be effective at detecting and
auditors will ten identify and assess the romms, identify relevant assertions correcting misstatements in the relevant assertions
and design appropriate further audit procedures in response if deemed effective, they may test the controls by inspecting
documentation of their performance

 if necessary, revise the risks of material misstatement based on the results of

tests of controls

if the tests reveal that operating effectiveness of controls is not as

anticipated, romms are reassessed

substantive procedures may be increased

E. Perform further audit procedures - substantive procedures for

property, plant and equipment
 obtain a summary analysis of changes in property owned and reconcile to
ledgers

D. Perform further audit procedures - tests of controls

auditors may verify the beginning balances by references to the PY WPs
 summary analysis will show the additions and retirements of plant and vouch purchases of PP&E to invoices, deeds, contracts or other
equipment during the year under the audit supporting documents

auditors will also verify sub ledger amounts to controlling accounts ensure expenses are not capitalized

done through recs investigate all instances in which the actual cost of acquisition
substantially exceed authorize amounts
 vouch additions to PP&E during the year
investigate fully any debits to PP&E not arising from acquisition

determine that the total cost of any PP&E purchased on installment

plan is reflected in the asset accounts and the corresponding parts in
liability

review changes during the year in CIP and examine supporting work
orders

trace transfers to the CIP account to property accounts, observing

property of classification

generally, assets acquired in a non-monetary exchange is reported at FV

assets created by company are recorded at the total cost needed to

complete

auditors may compare this to current market to determine iff any

excess cost should be expensed in the current period

related party transaction

auditors should inquire into the methods by which the sales price was
determined, the cost of the property to the vendor, the lenght of
ownership by the vendor and another other available evidence that
might indicate an arbitrary determined valuation

material RPT must be disclosed in the FS notes

the vouching process utilizes a Wp analysis of the GL control accounts an  make physical inspections of major acquisitions of PP&E
inclues the tracing of entires through the journals to original documents

crucial part of substantive testing and the extent depends on the

assessed risk level

Specific steps in investigating te years addition will include the following:

 the principal objective in analyzing repair and maintenance expense
accounts is to discover expenditures for fixed assets or other items that
should have been capitalized

auditors should also consider the companyʼs minimum expenditure to

be capitalized

auditors will generally trace larger expenditure with written

descriptions

one useful way of identifying would be to obtain or prepare an analysis of

the monthly amounts of expense with corresponding amount for PY

 investigate the status of PP&E not in current use

auditors usually make a physcial inspection of major units of PP&E

acquired during the year

may also be extended to older PP&E

the procedure can go from records to assets or the other way around

either existence or completeness

 analyze repair and maintenance expense accounts

PP&E not in current use should be investigated thoroughly to determine

the prospects for their future use in operations
 plant assets that are temporally idle do no have to be reclassified and usually involves a valuation calculation which relies on various
depreciation may be continued at normal rates assumption thus being a substantial risk

otherwise they should be written does to an estimated realizable auditors should consider
value and excluded from PP&E
the appropriateness of the valuation model used
 test the clientʼs provision for depreciation
enter the significant assumptions are reasonable and
consistent with economic conditions and past history

the accuracy, completeness and relevance of the important

data on which teh FV measurements are based

valuation specialists may be employed by the auditors as well

 investigate retirements of PP&E during the year

 evaluate and test the accounting for impairments of PP&E

accounting standards require that LT asset be reviewed for impairment

whenever evets or chnages in circumstances indicate that the carrying the principal purpose of this procedure is to determine whether any
among of an asset may not be recoverable property has been replaces, sold, dismantled or abandoned without such
if the sum of the expected discounted cash flow from the asset is less action being reflected in the accounting records
than its carrying amount, an impairment loss is recognized generally avoided by requiring authorization before scraping things
auditors should be aware of any impairment looses as well as the the following measures are generally taken by auditors
reasonableness in impairment losses recognize
determine whether old equipment was traded in or replaced by the
new units
 analyze miscellaneous revenue account to locate any cash proceeds
fro the sale of plant assets

if any of the companyʼs products have been discontinued during the

yer, investigate the disposition of plant facilities formerly used in
manufacturing such products

inquire of executives and supervisors whether anything have been

retired

examine retirement work orders for authorizations

invetigate any reduction in insurance coverage for retirement

 examine evidence of legal ownership of PP&E

in testing rental revenue from land and buildings, it is often desirable for
the auditors to obtain or to sketch a map of the property and to make a
physcial inspection of each unit

helps account for all available rental space and any vacancies

examination of leases will indicate whether tenants are responsible for

utilities

auditors should also verify if the appropriate lease accounting is being

used

 evaluate and test the accounting for lease agreements on PP&E

to determine if the assets are the property of the client, auditors look for
evidence such as a deed, title insurance policy, property tax bills, receipts
for payments for mortgage and fire insurance policies

 review rental revenue from land, buildings and equipment owned by the client
but leased to others
 ratios and trends that may be used for reasonableness are
auditors should also beware that GAAP requires differing accounting
total cost of plant assets divided by the annual output in currency
treatments for operating and finance leases ( right of use asset and lease
liability should be recorded is a leasee total cost of plant assets divided by COGS

they should be alert of the following comparison of repairs and maintenance expense on a monthly basis
from year to year
assets under a lease that re being improperly accounted for
comparison of acquisitions for the CY with PYs
leasehold improvements to buildings under leases that are being
depreciated over the estimated useful rather than the lease life comparison of retirements for the CY with PYs

improper accounting for items such as initial direct costs, lease  evaluate financial statement presentation and disclosure for plant assets and
incentives and variable payments for related revenue and expenses

 perform analytical procedures or data analytics for PP&E

 BS and notes should disclose the balances of major classes of depreciable review subsequent events or transactions bearing on the estimate
assets
develop an estimate of the amount to compare to managements
methods used for depreciation should be stated estimate

Adequate FS presentation and disclosure will state depreciation relates most directly to the valuation or allocation audit objective

the basis for valuation (cost or LCNRV for assets not in use) to meet tis, in examining the managements process for calculating
depreciation, determine that
property pledged to secure loans should be clearly identified
the methods used are acceptable
property not in current use should be segregated in the BS
the methods are being followed consistently

Depreciation calculations required by the chosen methods are accurate

The Auditorsʼ Perspective toward Depreciation Audit Program—Depreciation Expense and Accumulated
Depreciation
determining annual depreciation expense involves two decisions by the client
the outline of substantive procedures to be performed by the auditors in
company
reviewing depreciation are as follows
an estimate of the useful economic lives of various groups of assets and
review the depreciation policies set forth in the company manuals or other
a choose among several depreciation methods each of which would lead management directives
to a different answer
inquire whether any extra working shifts or other conditions of
methods used are commonly straight-lined or declining balance accelerated production are present that might warrant adjustment of
some methods of accelerated depreciation (highest in the first year) normal depreciation rates
are declining balance and sum of the years digits discuss with executives the possible need for recognition of
some clients might use MACRS based on federal income tax rules obsolescence resulting from technological or economic developments

obtain or prepare a summary analysis of accumulated depreciation for

The Auditorsʼ Objectives in Auditing Depreciation major property classifications as shown by GL control accounts
depreciation is an accounting estimate
compare beginning balances with the audited amount in PY WPs
first the auditors should obtain an understanding of the clients processes
determine that the total of accumulated depreciation recorded in the
and controls
plant and equipments sub records agree with the applicable GL
then they use one or more of the following three basic approaches controlling accounts

review and test managements process of developing the estimate test the provisions of depreciation

emphasis placed for depreciation purposes compare rates used in the CY with those employed in PY and
investigate any variances
 test computations of depreciation provisions fora representative in the audit of companies operating properties subject to depletion, the
number of units and trace individual records in the property ledger auditors follow a pattern similar to that used in evaluating the provision for
depreciation expense
compare credits to accumulated depreciation accounts for the years
depreciation provisions with debit entries with related depreciation generally harder to audit and to estimate and requires the use of
expense accounts specialists

test deductions from accumulated depreciation for assets retied

trace deductions to the working paper analyzing retirements of assets Audit of Intangible Assets
during the year
BS includes various assets in the intangible sections
test the accuracy of accumulated depreciation to the date of
characterized by a lack of physical substance
retirement
assets such as goodwill, patents, TMs, franchises and leases
perform analytical procedures for depreciation
the lack of physical substance and debatable benefits/valuation makes it
compute the relation of depreciation expense to total cost of plant and
harder to audit
compare with prior years
audit procedures
compare the percentage relationships between accumulated
depreciation and related property accounts with those prevailing in substantiation may begin with an analysis of the ledger accounts for these
prior years assets

for goodwill - it is traced back to the acquisition and may require the
Testing the Clientʼs Provision for Depreciation help of specialists
an overall test of the annual provision for deprecation requires the auditors to auditors should also review the reasonableness of the clients amortization
perform the following steps program and impairment tests
list the balances in the various asset accounts at the beginning of the year
Audit of Crypto-assets
deduct any fully depreciated assets because these item should no longer
be subject to depreciation typical crypto asset transactions may arise from

add on half of the asset additions for the year purchasing the crypto asset with cash

deduct one half of the asset retirements for the year accepting the crypto-asset for payments

this produces an estimate of depreciation expense for each of the a purchasing goods or services using the crypto-asset
major asset classes - any material differences should be investigated exchanging one type of crypto-asset for another type

Examination of Natural Resources selling the crypto-asset for cash

authoritative guidance states that crypto-assets do not meet its definitions of

cash, cash equivalents, financial instruments or inventory
 classified as intangible assets

the audit of crypto-assets rely on several factors such as

the method of storing

whether the client maintains the control over the assets

volatility fo market prices

generally difficult to audit as ownership is not aggregated and client might use
a service organization

might require SOC reports

Audit of Plant, Equipment, and Intangibles

in Advance of the Balance Sheet Date
most of the audit work on PP&E can be done in advance of BS date

initial audits are more complex as all beginning balances. need to be

verified