Professional Documents
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Audit of Property, Plant and Equipment (
Audit of Property, Plant and Equipment (
Auditors verify manufacturing equipment differently from current asset accounts for :
Usually fewer current period acquisition of manufacturing equipment The amount of any given acquisition is often material The equipment is likely to be kept and maintained in the accounting records for several years
Analytic procedures
Test Categories
Verifying the ending balance in the assets account Verifying current year disposal Verifying current year acquisitions
Analytic Procedure
Include comparison of financial information with : Prior periods Budgets Forecasts Similar industries
Includes consideration of predictable relationships, such as : Gross profit to sales Payroll costs to employees Financial information and non-financial information, for examples the CEOs reports and the industry news.
Table below show type of ratio and trend analysis often performed for manufacturing equipment
Analytic procedures Compare depreciation expenses divided by gross manufacturing equipment cost with previous year Compare accumulated depreciation divided by gross manufacturing equipment cost with previous years Compare annually or monthly repairs and maintenance, supplies expenses, small tool expenses and similar acc with previous years Compare gross manufacturing cost divided some measure of production with previous years
Possible misstatement Misstatement in depreciation expenses and accumulated depreciation Misstatement in accumulated depreciation Expensing amount that should be capitalized
Idle equipment or equipment that was disposed of but not written off
Long term effect on the financial statement Improper amount will affects : The balance sheet until the company dispose of the asset Income statement effects until the asset fully depreciated
Select a sample of entries in the acquisitions journal and trace to capital asset master file Select a sample of entries in the acquisitions journal and trace to vendor invoices and receiving reports
Example of procedure
Select a sample of entries in the acquisitions journal and physically examine the related assets
Testing acquisition : Auditor must know the clients capitalisation policies to make sure that : It is record accordance to accounting standard Treated consistently in the preceedings year For example : Client expenses items that less than certain amount, such as RM1000 So, auditor should alerts for the transportation and installation cost.
abandonment are :-
Existing disposal The auditors main are recorded objectives in the verification of sale, Disposals are trade-in, accurately recorded
It is the starting point to verify client disposal Includes date of disposals, name of person who acquire the assets, selling price, original cost of assets, acquisition date and accumulate depreciation of asset Detail tie-in tests of the schedule is necessary, including footing the schedule, tracing the totals on the schedule to be recorded disposals in the general ledger, and tracing the cost and accumulate depreciation of the disposals to the property master file
The search for unrecorded disposals is essential. The nature and adequacy of the controls over disposals affect the extent of the search. The following procedures are often used to verify disposals. Review whether newly acquired assets replace existing assets Analyze gains, losses and miscellaneous income from the disposals of assets Review plant modifications and changes in product line, property taxes, or insurance coverage Make inquiries of management and production personnel about the possibility of the disposal of assets
Auditors objectives when auditing manufacturing equipment include determining that : Existence - all recorded equipment physically exists on the balance sheet date Completeness all equipment owned is recorded
Auditor have to consider the nature of internal controls over the manufacturing company This is including the use of master file for individual fixed asset, adequate physical controls over assets that are easily movable, assignment of identification numbers to each plant asset and periodic physical amount to fixed asset A formal method of informing the accounting department of all disposals of fixed asset is also an important control over the balance of fixed asset carried forward into the current year
After assessing the control risk for the existence objective, the auditors have to decide whether its necessary to verify the existence of individual item of the manufacturing equipment If there is a high likelihood of material missing fixed asset still included in the master file, the auditor can select a sample from the master file and examine the actual assets In rare cases, the auditor may decide it is necessary for the client to take a complete physical inventory of fixed assets to make sure they all exist
The auditor normally doesnt need to test the accuracy or classification of fixed assets recorded in prior periods because they were verified in previous audits at the time they were required But the auditor should be aware that companies may occasionally have manufacturing equipment on hand that is no longer used in operations
In addition to performing procedures to obtain evidence related to balanced-related audit objectives for fixed assets, auditors also perform audit procedures related to the four presentation and disclosure objectives for fixed assets A major consideration in verifying disclosures related to fixed assets is the possibility of legal encumbrances
Next, the proper presentation and disclosure of manufacturing equipment in the financial statement must be evaluated carefully to make sure that accounting standards are followed Manufacturing equipment should include the gross cost and should ordinarily be separated from other fixed assets Leased property should also be disclosed separately and all liens on property must be included in the footnotes
Auditors focus on determining whether the client followed consistent depreciation policy and the clients calculation are correct
Reasonableness test
Auditor must consider the physical life if the asset, the expected lifespan and established company policies on trading in equipment Made by un-depreciated fixed assets by depreciation rate for the year - make adjustments If cannot be accomplished - more detailed tests are needed (recomputing, reconciliation)
It is necessary to evaluate the adequacy of the allowances for accumulated depreciation each year to ensure NBV not > realizable value of the assets
Modification in operation
Unexpected physical deterioration
Life manufacturing equipment may be significantly reduced because of possibilities of
2 objectives are usually emphasized in the audit of the ending balance in accumulated depreciation
Accumulated depreciation as stated in the property master file agrees with the general ledger. This objective can be satisfied by test footing the accumulated depreciation in property master file and tracing the total to the general ledger