REO DISCUSSION 2. Inquire whether the capital budgets are compared to AUDITOR’S TEST OF CONTROLS PROCEDURES 4.
TEST OF CONTROLS PROCEDURES 4. Examine or analyze lease or rent expense and repairs
 Auditor must take into consideration that generally,
the balance of PPE does not necessarily change from
year to year and this affects the nature, timing and
extent of the auditor’s procedures.
 Auditors also obtain evidence about the related
accounts of depreciation expenses, accumulated
depreciation, rent or lease expense and repair and
maintenance expenses.
TEST OF CONTROLS
3 CONTROL OBJECTIVES
1. Execution of transactions – acquisitions and disposals
of PPE are properly authorized.
2. Recording of transactions – PPE are properly recorded
and classified, appropriately depreciated and written
down, if necessary.
3. Custody of assets – PPE are adequately secured and
properly maintained.
CONTROL OBJECTIVE: GENERAL
CLIENT’S CONTROL PROCEDURES
 Assess adequacy of relevant Fixed Asset Policies and
Procedures.
 Segregation of duties.
AUDITOR’S TEST OF CONTROL PROCEDURES
1. Obtain and review all the relevant polices and
procedures for the Fixed Asset Management process.
2. Make an assessment of the adequacy of these policies
and procedures in addressing the major aspects of
control in this area.
3. Determine whether the purchasing function is
performed independently of the receiving and
recording of acquisition functions as well as
independent from the custody of PPE function.
- Best auditor procedure for segregation of
duties: OBSERVATION.
CONTROL OBJECTIVE: AUTHORIZATION
CLIENT’S CONTROL PROCEDURES
 Capital budgets shall be prepared by someone directly
responsible to the BOD and should be in accordance
with the MoM or at least place through memo.
- Should be approved by the BOD.
 Capital budgets shall be properly maintained.
 Purchases of PPE are made in accordance with BOD’s
authorization.
 The acquisition of PPE shall be documented which is
signed as authorized by BOD or other authorized
official.
 Disposal of PPE should be authorized. The company
should have an effective disposal policies and
procedures.
AUDITOR’S TEST OF CONTROL PROCEDURES
1. Check the authorization of PPE transactions to the
BOD’s MoM, capital expenditure budgets and capital
expenditure forms.
actual expenditures on a monthly basis and significant
differences are analyzed.
3. Review the policies for disposing or / retiring capital
assets.
4. Review the authorization policies for capital asset
disposal / retirements.
CONTROL OBJECTIVE: RECORDING
CLIENT’S CONTROL PROCEDURES
 Establish whether the company has formal
capitalization and depreciation policies. Depreciation
rates should be properly authorized.
 A register of PPE should be maintained for each major
group. The register should contain details of cost and
depreciation.
 The company has standards for depreciable lives and
salvage values.
 Depreciation expense should be reviewed and checked
for accuracy of computation (independent checking).
 Recorded balances are compared with existing assets
at reasonable intervals.
 PPE should be reviewed for the need for any write-
down or impairment.
AUDITOR’S TEST OF CONTROLS PROCEDURES
1. Trace transactions for purchases and sales of PPE
through the system.
2. Confirm existence of PPE register or records which
adequately identifies assets and comments on their
condition.
3. Check authorization of depreciation rates and
particular changes in depreciation policies.
4. Examine evidence of checking of correct calculation of
depreciation.
5. Review significant changes in the composition of PPE.
6. Inspect documents regarding proper recording of
assets in the fixed asset register.
7. Make inquiries of management/relevant staff about
the policies governing the distinction between
expenditures to be capitalized and those to be charged
to repairs and maintenance.
8. Review the policies for reporting items that are retired
or abandoned. Make note of how applicable
gains/losses are recognized.
CONTROL OBJECTIVE: CUSTODY
CLIENT’S CONTROL PROCEDURES
 A physical inspection of PPE should be carried out
periodically and checked to PPE register or records.
Any discrepancies should be noted and investigated.
- Also to check if PPE is in good condition,
needs to be disposed or retired.
 Assets should be properly maintained and adequately
insured.
 limit the number of employees who has access over
custody of PPE.
 The title deeds or registration documents are kept in
safe custody and verified periodically.
1. Review reports by internal auditors on their periodic
inspection of PPE.
2. Test of access controls.
3. Review system of identifying and reporting damaged,
obsolete and idle fixed assets.
4. Observation of physical count of PPE.
5. Perform a general review of the Fixed Asset Register
to determine whether each fixed asset register include
insurance information, warranty information,
maintenance schedules and/or leasing information.
6. Review polices for requesting, receiving, tracking and
recording a transferred asset.
SUBSTANTIVE PROCEDURES
3 MAJOR CATEGORIES OF PPE
1. Land (not subject to depreciation)
2. Building, machinery, equipment and land
improvements (subject to depreciation)
3. Natural resources (wasting assets subject to depletion)
ASSERTION: EXISTENCE
To determine that PPE presented in the balance sheet
actually and physically exists.
1. Obtain or prepare a summary of PPE transactions and
analysis of accumulated deprecation during the year
and reconcile to the ledger.
2. Conduct physical inspection of major acquisition of
PPE.
- SHEET TO FLOOR: From the records to physical
item of PPE.
3. Vouch supporting documents evidencing ownership
and authorization of acquisition.
4. For PPE under construction, the auditor shall check
the validity of the capitalization of cost as well as test
calculation of capitalized borrowing cost.
5. For assets leased under finance lease, the auditor shall
ensure that the capitalization of right-of-use asset is in
accordance with PFRS 16.
6. For disposal and credits to the PPE account, the
auditor shall vouch the disposal to supporting
documents and determine whether the disposal is
properly authorized and accounted for.
7. Perform analytical procedures.
ASSERTION: COMPLETENESS
To determine that all PPE owned or leased under finance
lease at the reporting date is included on the statement of
financial position and are not expensed.
1. Obtain or prepare a summary of PPE transactions and
analysis of accumulated depreciation during the year
and reconcile to the ledger.
2. Conduct physical inspection of major acquisition of
PPE.
- FLOOR TO SHEET: All items of PPE in the area
should be in the record.
3. Perform analytical procedures.
and maintenance expense account for possible asset
acquisition charged as expense.
- Major repairs should be capitalized as PPE.
- Minor repairs are expensed.
- Finance lease payments are capitalized as
ROU asset, not expensed.
(1) Examine significant items through audit sampling;
(2) Obtain lease contract and written company policy
to determine the appropriateness of the accounts.
5. Search for unrecorded retirements or disposals.
(1) Examine cash receipts, tax declaration, scrap sales,
and inquiry to knowledgeable company personnel;
(2) Plant tour to observe indications of equipment
retirement.
ASSERTION: VALUATION / ALLOCATION
To determine that PPE are properly measured at balance
sheet date; this includes determination of proper write-
down of PPE if necessary.
1. Examinations of additions and disposals.
2. Examine or analyze lease or rent expense and repairs
and maintenance expense account for possible asset
acquisition charged as expense.
3. Test the provision of depreciation or depletion.
- Recalculation.
4. Examine impairments of PPE.
5. Perform analytical procedures.
6. Investigate status of PPE not in current use.
- Assess if temporary or permanently idle for
retirement / disposal.
ASSERTION: RIGHTS AND OBLIGATIONS
To determine that the entity has a legal title or equivalent
ownership to PPE included in the balance sheet and the
related lease obligation of right-of-use asset is recognized.
1. Vouch supporting documents evidencing ownership.
2. Examine lease agreement on PPE leased to and from
others.
ASSERTION: PRESENTATION AND DISCLOSURE
To determine that PPE are properly described and classified
in the balance sheet and related disclosures are adequate.
1. Evaluate FS presentation and disclosure for PPE and
related revenue and expense account.
SCHOOL DISCUSSION
If there are no differences in the documents and there are - There should be tagging for the assets. - Take a sample - Only labor of the workers is capitalized (food
no findings, what will you do?  PHYSICAL INVENTORY - Inquire and others not included)
- Always find a fault of an error in their process. - Warehouseman is in charge of physical - IF CONFIDENT IN IC: less substantive tests  NEW BUILDING
inventory. - IF NOT CONFIDENT: more substantive tests; - Excavation costs
answer the assertions of PPE  LOANED BUILDING
REQUEST FOR PURCHASE
- ASC 835
 PURHCASE REQUEST FORM
RECORDING - Interest expense not capitalizable under
- Purchasing department can receive the form
1. General Ledger EXISTENCE construction in progress
and forward them to CANVASSER.
2. Lapsing Schedule  Ensure that PPE truly exists - QUALIFYING ASSET
- Report of inspection is attached to the
Both should be segregated among 2 different persons (can  Physical inspection  Intended for future use of the
purchase request form.
(1) REQUESTOR
be given to the same person as long as there is review).  EXTERNAL AUDITOR company
 LAPSING SCHEDULE - Only there to observe everything  Not qualifying if property is already
(2) DATE – there are company rules (e.g., request
- Accounting staff in-charge should work hand - Inventory count won’t start without external existing
should be made 3-5 days prior to date of use)
in hand with warehouseman. auditor - Not all expenses related to construction is
(3) REFERENCE #: there might be purchases
 Should go to warehouse; inquiry is - PRE – COUNT (IMPORTANT) included
referenced by wrong ref. # or not properly
not enough. - DIFFERENCE IN PRE – COUNT & ACTUAL
approved.
- DATA: acquisition date, particulars, quantity, INVENTORY COUNT
(4) PARTICULARS: whatever it is that is approved,
it is what it is.
unit price, amount, reference (can be the RR  Release order THINGS TO CONSIDER:
(5) REVIEWER: May come from the department.
#)  Releasing form, request for item  WHEN TO RECOGNIZE BUILDING / ASSET
 From warehouse information - Know where to find the property - When certificate of completion is received
(6) APPROVER: Superior of the reviewer.
 Accounting staff still does not know - There must be TAGGING which matches the - IF NO CERTIFICATE OF COMPLETION:
(7) RECEIVER: May come from the purchasing
department.
useful life LIST  Substantation like Board Resolution (if
 CANVASS
- ASSIGN: intended useful life, depreciation  INTERNAL AUDITOR BOD approves)
method (written), depreciation expense - Facilitate the count  Building permit
- 3 suppliers (minimum)
- SUBSEQUENT: Accumulated depreciation prior - Must finish the count beginning to end  Permit to operate
- To find the lowest cost/price with the best
quality/availability.
yr., current yr. depreciation, accumulated  REVIEW ADDITIONS  Date of blessing
depreciation current yr., carrying amount - Vouch additions to supporting documents
- IF NOT LOWEST PRICE, question the decision, NOTES:
 ONCE DONE, signed by:  Lapsing schedule to lapsing
inquire directly/immediately.  IF NO DEED OF SALE
(1) PREPARER documents
- Date, reference #. Canvasser, approver, - Look for real property tax
reviewer
(2) REVIEWED – the one preparing  Supporting documents should be
the GL (must review lapsing named after the company (RIGHTS
- Approver and reviewer are crucial when it
schedule and verify mathematical AND OBLIGATIONS)
comes to expenses.
 PURCHASE ORDER
accuracy)  Must include cost, date of purchase,
(3) APPROVER – department head depreciation (VALUATION)
- Prepared by the purchasing department
 GENERAL LEDGER
- PO #, canvass #, particulars, costs, signatures
- Reviewed lapsing schedule and supporting
(approver, preparer, reviewer)
documents COMPLETENESS
- Will be directly traced from the canvass
- No need to go to warehouse, additional docs  Tracing
report.
are attached to the lapsing schedule (OG
- Whatever it is in the canvass report should be
DOCS)
in the purchase order.
- REVIEWER: Supervisor
- Errors are not welcome. PRESENTATION
- APPROVER: Department head
 Notes to FS
- Methods of accounting / depreciation
WAREHOUSE - Disposal & encumbered properties (MoM, RR)
DISPOSAL
 RECEIVING REPORT
 SALE
- Must match what is stated in the purchase
- Selling price less carrying value = gain / (loss)
order. CONSTRUCTION IN PROGRESS
on sale
- Only quantity may not match.  Not allowed to depreciate the asset if construction is
 Recorded in OCI
- Excess will be recorded on another receiving not yet completed.
 Not part of company revenue
report.
 RETIREMENT / IMPAIRMENT
- Both reports (full and excess) should be
- No longer usable
shown in the GL. WHAT TO INCLUDE:
- Fully depreciate the equipment
- Some receiving report will be delivered after.  BUILDING
- NEEDS APPROVAL from the BOD
- Ref. # of PO will be the basis for knowing - Percentage of completion
 MoM
which RR is received. - Progress billings
 Board resolution (if agreed, DEED OF
- Sales invoice might already be included.  IF IN HOUSE:
SALE)
- Some companies won’t pay without sales - Know what to capitalize
invoice. - Include all materials needed
- A/P department will not process the payment - Whatever is used for the construction of the
if there is no sales invoice. TEST OF CONTROLS
building
 LIST OF ASSETS HOW TO TEST THE CONTROL OF A CERTAIN PROCESS?
 WALKTHROUGH