AUDITING J. Abellar/R.

Soriano

COVID-19 Project for Accountants

AUDIT OF PROPERTY, PLANT, AND EQUIPMENT:

Audit Objectives:
Assertions Account Balances Audit Objectives
Existence All PPE presented in the statement of financial position exist.
All PPE owned and/or controlled are recorded and included in
Completeness
the statement of financial position.
Valuation and The PPE are stated in the statement of financial position at the
Allocation appropriate amounts.
All PPE presented in the statement of financial position are
Rights and
owned and/or controlled by the Company and any liens thereto
Obligations
are disclosed in the financial statements.
All PPE are properly classified, described, and disclosed in the
Presentation and
financial statements, including the notes to financial statements,
Disclosure
in accordance with the applicable financial reporting framework.

Audit Procedures for Shareholders’ Equity:

Assertions and Audit
Objectives
Existence, Completeness, A. General Procedures for the Audit of PPE:
Valuation and Presentation
and Disclosure
• Do recorded additions
exist?
• Have existing additions
been recorded?
• Have retirements been
recorded? B. Procedures for PPE Additions:
• Are all PPEs valued at
historical cost less
accumulated
depreciation less
accumulated impairment
losses? (If the Company
is using the Cost Model)
Audit Evidence and Procedures
o Obtain PPE Lapsing Schedule and match totals
with the trial balance. Ensure that amounts
matches.
o Obtain Accounting Policy for PPEs.
o Obtain Minutes of Board Meetings for PPE
additions and/or disposals and other matters that
may affect PPEs.
o Determine movements in the PPEs (e.g.
Additions, Disposals, etc.)
o Obtain PPE Additions Listing. And match0
o Examine existence of PPE Additions by (not
necessarily all procedures):
• Inspecting major additions especially if control
over PPE is weak
• Vouch PPE Additions by obtaining and
examining the following documents:
✓ Purchase request by the requesting
department
✓ Vendor’s Invoice
✓ Freight Bills
✓ Work orders for constructed assets
✓ Receiving Report / Proof of
completion
• Determine if PPE additions are properly
authorized by examining the Minutes of BOD
Meetings.
o Determine the propriety of the Company’s
accounting for additions in relation to its Policies.
o For self-constructed assets, recalculate:
• Overhead Allocation; and
• Borrowing cost capitalized

1|Page jsabellar/rcsoriano
AUDITING J. Abellar/R. Soriano
Assertions and Audit
Audit Evidence and Procedures
Objectives
C. Procedures for PPE Disposals:
• Have impaired assets o Obtain PPE Disposal Schedule and match
been properly reflected balances with the lapsing schedule. Ensure that
at their recoverable amounts matches.
amounts? o Determine propriety of disposals in relation to the
Company’s policies.
o Examine Company’s Minutes of BOD Meetings for
• Have expenditures been
approval of PPE disposals.
properly classified as o Examine the existence and completeness of PPE
asset or expense? disposals by obtaining and examining the
following documents:
• Are there any liens • Approved Disposal Reports
against these PPEs and • If destroyed, the proof of destruction
where these disclosed? • If sold, sales invoice or official receipt.
Determine if any gains or losses are
recognized and determine appropriateness of
such gains or losses.
• Trace disposals to bank statements

D. Examine Repairs and Maintenance Accounts and

Recompute Depreciation Expense:
o Increase in depreciation may denote additions to
PPE (decrease may denote retirements);
o Increase in repairs and maintenance expense
may be the result of PPE additions having been
erroneously expense (decrease may indicate
capitalization of ordinary repairs); and
o Favorable Repairs and Maintenance budget
variance may also indicate possible errors in
capitalization of ordinary repairs.
o Examine supporting documents in relation to
repairs and maintenance.
o Evaluate appropriateness and consistency of
depreciation methods.
o Calculate change in deferred taxes related to
temporary differences between book and tax
depreciation.

E. Evaluate management’s assessment and computation

of impairment losses/revaluation of PPE.

F. Procedures for Presentation and Disclosure:

o Inquire as to assets not used in production:
• Assets on standby;
• Assets awaiting disposal; and
• Those held for investment purposes
o Examine all lease agreements and determine
proper classification.
o Examine loan agreements for possible lien to
PPEs.

2|Page jsabellar/rcsoriano
AUDITING J. Abellar/R. Soriano

A. SUBSTANTIVE TESTING:

1. A weakness in internal control over recording retirement of equipment may cause

an auditor to
a. Inspect certain items of equipment in the plant and trace those items to the
accounting records.
b. Review the subsidiary ledger to ascertain whether depreciation was taken on
each item of equipment during the year.
c. Trace additions to the other assets account to search for equipment that is
still on hand but no longer being used.
d. Select certain items of equipment from the accounting records and locate
them in the plant.

2. When there are numerous property and equipment transactions during the year, an
auditor who plans to assess control risk at a low level usually perform
a. Tests of controls and extensive tests of property and equipment balances at
the end of the year.
b. Analytical procedures for current year property and equipment transactions.
c. Tests of controls and limited tests of current year property and equipment
transactions.
d. Analytical procedures for property and equipment balances at the end of the
year.
.
3. Recorded entries in which of the following accounts are most likely to relate to the
property, plant and equipment completeness assertion?
a. Allowance for bad debts
b. Repairs and maintenance expense
c. Marketable securities
d. Prepaid insurance

4. Analysis of which account is least likely to reveal evidence relating to recorded

retirement of equipment?
a. Accumulated depreciation
b. Insurance expense
c. Property, plant and equipment
d. Purchase returns and allowances

5. Which of the following explanations most likely would satisfy an auditor who
questions management about significant debits to the accumulated depreciation
accounts:
a. The estimated remaining useful lives of plant assets were revised upward.
b. Plant assets were retired during the year.
c. The prior year’s depreciation expense was erroneously understated.
d. Overhead allocations were revised at year – end.

3|Page jsabellar/rcsoriano
AUDITING J. Abellar/R. Soriano

B. PROBLEM SOLVING
PROBLEM 1: QT Inc. commenced its operations on 1 January 2018. During the
following year, the company acquired a tract of land, demolished the building on the
land and built a new factory. Equipment was acquired for the factory and, in September
2016, the plant was ready to commence operation. A gala opening was held on
September 18, with Yorme opening the factory. The first items were ready for sale on
September 25.
During this period. The following cash inflows and outflows occurred:
While searching for a suitable block of land, QT placed an option to
buy with three real estate agents at a cost of P 1,250 each. P 3,750
Receipt of loan from bank 3,000,000
Payment of settlement agent for title search, stamp duties and
settlement fees 48,000
Payment of delinquent property taxes on land assumed by QT 50,000
Payment for land 3,000,000
Payment for the demolition of the building 210,000
Proceeds from sale of material from old building 78,000
Payment to architect 750,000
Payment to City Hall for approval of building construction 50,000
Payment for safety fence around the construction site 56,000
Payment to the contractor for factory building 5,000,000
Payment for external driveways, parking bays and safety lighting 730,000
Payment of interest on construction loan 400,000
Payment for safety inspection on building 30,000
Payment for equipment 570,000
Payment of freight and insurance on costs on equipment 48,000
Payment of installation cost on equipment 60,000
Payment for safety equipment surrounding equipment 140,000
Payment for removal of safety fence 20,000
Payment for new fence surrounding the factory 150,000
Payment for advertisements in the newspaper about the
forthcoming factory and its benefits to the community 10,000
Payment for opening ceremony 70,000
Payment to adjust equipment to more efficient operating levels
subsequent to initial operation 95,000

Based on the above data, answer the following:

1. The amount to be reported as expenses (excluding depreciation) on QT’s income
statement is
a. P 10,000 c. P 82,500
b. P 81,250 d. P 80,000

2. What is the cost of the equipment?

a. P 818,000 c. P 773,000
b. P 913,000 d. P 678,000

3. What is the cost of the land improvements?

a. P 936,000 c. P 730,000
b. P 786,000 d. P 880,000

4. What is the cost of the building?

a. P 6,306,000 c. P 6,456,000
b. P 6,438,000 d. P 5,906,000

5. What is the cost of the land?

a. P 3,381,250 c. P 3,233,750
b. P 3,231,250 d. P 3,099,250

4|Page jsabellar/rcsoriano
AUDITING J. Abellar/R. Soriano
PROBLEM 2: You requested the Company Accountant of Sir QT Corporation to provide
you the balances of the Property, Plant and Equipment Financial Statement Line Item.
The accountant presented you the following property, plant and equipment for the year
2019:
Account Balances as at January 1, 2019
Land P 7,500,000
Building 30,000,000
Accumulated Depreciation – building (6,577,500)
Machinery and Equipment 22,500,000
Accumulated Depreciation – M&E (6,250,000)
Automotive Equipment 5,750,000
Accumulated Depreciation – AE (4,230,000)

In addition, the accountant provided you the following policies for depreciating the
above assets:
• Building: 150% declining balance; 25 years
• Machinery and equipment: Straight-line; 10 years
• Automotive equipment: SYD; 4 years
• Leasehold Improvements: Straight-line
• The residual value of the depreciable assets is immaterial.
• Depreciation is computed to the nearest month.
The following transactions transpired during 2019:
a. On January 2, 2019, Sir QT purchased a new car for P 1,000,000 cash and a
trade-in of a 2-year old car with a cost of P 900,000 and a book value of P
270,000. The new car has a cash price of P 1,200,000; the market value of the
trade-in is not known.

b. On April 1, 2019, a machine purchased for P 575,000 on April 1, 2014, was

stolen. Sir QT recovered P 387,500 from its insurance company.

c. On May 1, 2019, costs of P 8,400,000 were incurred to improve leased office

premises. The leasehold improvements have a useful life of 8 years. The related
lease, which terminates on December 31, 2021, is renewable for an additional 6-
year term. The decision to renew will be made in 2021 based on office space
needs at that time.

d. ON July 1, 2019, machinery and equipment were purchased at a total invoice

cost of P 7,840,000, inclusive of 12% VAT; additional costs of P 125,000 for
freight and P 625,000 for installation were incurred.

e. Sir QT determined that the automotive equipment comprising the P 5,750,000

balance on January 1, 2019 would have been depreciated at a total amount of P
900,000 for the year ended December 31, 2019.

Based on the above data, determine the following:

1. Depreciation expense for 2019 on Buildings
a. P 929,700 c. P 1,405,350
b. P 1,200,000 d. P 1,800,000

2. Depreciation expense for 2019 on Machinery and Equipment

a. P 2.594.375 c. P 2,651,875
b. P 2,637,500 d. P 2,981,875

5|Page jsabellar/rcsoriano
AUDITING J. Abellar/R. Soriano
3. Depreciation Expense for 2019 on Automotive Equipment
a. P 1,020,000 c. P 1,200,000
b. P 1,110,000 d. P 1,380,000

4. Depreciation expense for 2019 on Leasehold Improvements

a. P 700,000 c. P 933,333
b. P 840,000 d. P 1,050,000

5. Gain (loss) on trade-in car on January 2, 2019

a. P (200,000) c. P (70,000)
b. P 200,000 d. P 70,000

6. Accumulated Depreciation – Buildings, 12/31/2019

a. P 8,377,500 c. P 7,777,500
b. P 7,982,850 d. P 7,507,200

7. Accumulated Depreciation – M&E, 12/31/2019

a. P 8,556,875 c. P 8,644,375
b. P 8,600,000 d. P 8,844,375

8. Accumulated Depreciation – AE, 12/31/2019

a. P 5,430,000 c. P 4,710,000
b. P 4,800,000 d. P 4,620,000

9. Gain from compensation received from the insurance company

a. P -0- c. P 287,500
b. P 100,000 d. P387,500

10. Loss on derecognition of the stolen machinery

a. P -0- c. P 287,500
b. P 100,000 d. P387,500

PROBLEM 3: Ivana Company acquired a machine on January 1, 2032, at a cost of P

120,000. It was expected to have a useful life of 10 years. Ivana uses the straight-line
method in depreciating its machinery and equipment and reports on a calendar year
basis. On December 31, 2034, the machine was appraised as having a gross
replacement cost of P 150,000. Ivana applies the revaluation model in valuing this class
of property, plant, and equipment after its initial recognition.

Required:
1. How much should be credited to revaluation surplus on December 31, 2034?
a. 30,000 c. 21,000
b. 105,000 d. 9,000

2. What is the balance of the revaluation surplus account on December 31,2035

assuming piecemeal realization of revaluation surplus is in order?
a. 30,000 c. 18,000
b. 21,000 d. 15,000

6|Page jsabellar/rcsoriano
AUDITING J. Abellar/R. Soriano
PROBLEM 4: Ivana Corp. purchased a machinery on January 1, 2026 for P 5,000,000.
The same had an expected useful life of 8 years. Straight-line depreciation method is in
place for similar items. On December 31, 2027, the asset is appraised as having a sound
value of P 4,500,000. On December 31, 2030, the asset had a recoverable value of P
1,375,000.

Required:
1. How much is credited to the revaluation surplus as a result of the revaluation in
2027?
a. 1,500,000 c. 1,000,000
b. 1,250,000 d. 750,000

2. What is correct depreciation to be recognized in 2028?

a. 750,000 c. 1,250,000
b. 1,000,000 d. 1,500,000

3. How much is the loss on impairment should be recognized on January 1, 2030?

a. 750,000 c. 250,000
b. 500,000 d. 0

PROBLEM 5: On January 1, 2033, Ivana Company acquired two assets within the same
class of plant and equipment. Information on these assets is as follows:
Cost Expected Useful Life
Machine A P 300,000 5 years
Machine B P 180,000 3 years

The machines are expected to generate benefits evenly over their useful lives. This class
of plant and equipment is measured using the revaluation model.

At December 31, 2033, information about the assets is as follows:

Fair Value Expected Useful Life
Machine A P 252,000 4 years
Machine B P 114,000 2 years

On July 1, 2034, machine B was sold for P 87,000 cash. On the same day, Ivana acquired
machine C for P 240,000 cash. Machine C has an expected useful life of four years.

At December 31, 2034, information on the machineries is as follows:

Fair Value Expected Useful Life
Machine A P 168,000 3 years
Machine C P 205,500 2 years

Required:
1. The depreciation expense for 2033 is
a. 120,000 c. 165,000
b. 88,400 d. 123,000

2. The December 31, 2033, statement of financial position of Ivana should show
revaluation surplus at
a. 18,000 c. 6,000
b. 12,000 d. 0

3. The gain (loss) that should be recognized on the sale of Machine B on July
1, 2034 is
a. 1,500 c. 30,000
b. (27,000) d. 0

4. The amount of impairment loss to be reported on Ivana’s income statement

for the year ended December 31, 2034 is
a. 16,500 c. 9,000
b. 25,500 d. 4,500

7|Page jsabellar/rcsoriano
AUDITING J. Abellar/R. Soriano

5. The depreciation expense for 2034 is

a. 123,000 c. 160,000
b. 121,500 d. 114,500

PROBLEM 6: Ivana Company has a department that performs machining operations on

parts that are sold to contractors. A group of machines had an aggregate carrying amount
of P 3,690,000 on December 31, 2034. This group of machineries has been determined
to constitute a cash generating unit for purposes of applying IAS 36.

Presented below are data about future expected cash inflows and outflows based on the
diminishing productivity expected of the machinery as it ages and the increasing costs
that will be incurred to generate output from the machines:
Year Revenues Costs, excluding depreciation
2035 P 2,250,000 P 840,000
2036 2,400,000 1,260,000
2037 1,950,000 1,650,000
2038 600,000 450,000
Totals P 7,200,000 P 4,200,000

The fair value of the machinery in this cash generating unit, net of estimated disposition
costs, is determined to amount to P 2,535,000. The company discounts the future cash
flows of this cash generating unit by using a 5% discount rate. (use 5 decimal places in
computing the present value factors).

Required: How much impairment loss should be recognized at December 31, 2034?
a. 1,155,000 c. 224,427
b. 930,573 d. 0

PROBLEM 7: On December 31, 2026, Ivana subjected to impairment test a piece of

equipment. Data pertinent to the equipment as of December 31, 2026 follows:

Original cost P 2,400,000

Adjusted accumulated depreciation 600,000
Selling price 1,400,000
Estimated cost to make the sale 200,000
Value in use 1,100,000
Remaining useful life 6 years
Method of depreciation Straight line

On December 31, 2028, the asset is found to have a recoverable amount of P

1,300,000.

Required:
1. How much loss on impairment is recognized in 2026?
a. 400,000 c. 600,000
b. 500,000 d. 700,000

2. How much is the depreciation expense recognized in 2027?

a. 200,000 c. 300,000
b. 216,667 d. 333,333

3. How much gain on recovery is recognized in 2028?

a. 500,000 c. 300,000
b. 400,000 d. 200,000

4. How much is the depreciation expense recognized in 2029?

a. 325,000 c. 250,000
b. 300,000 d. 200,000

8|Page jsabellar/rcsoriano
AUDITING J. Abellar/R. Soriano
PROBLEM 8: On January 1, 2033, Ivana Company acquired a factory equipment at a
cost of P 150,000. The equipment is being depreciated using the straight-line method
over its projected useful life of 10 years. On December 31, 2034, a determination was
made that the asset’s recoverable amount was only P 96,000.

On December 31, 2035, the asset’s recoverable amount was determined to be P 111,000
and management believes that the impairment loss previously recognized should be
reversed.

Required:
1. How much impairment loss should be recognized on December 31, 2034?
a. 54,000 c. 24,000
b. 9,000 d. 0

2. What is the asset’s carrying amount on December 31, 2035 before recovery?
a. 84,000 c. 86,400
b. 90,000 d. 96,000

3. What is the asset’s carrying amount on December 31, 2035 had the
impairment not been recognized in 2034?
a. 105,000 c. 84,000
b. 96,000 d. 86,400

4. How much impairment recovery should be reported in the 2035 income

statement of Ivana Company?
a. 27,000 c. 6,000
b. 21,000 d. 0

9|Page jsabellar/rcsoriano