Auditing Assingments

Property, plant and equipment (PPE), are assets that have expected lives of more than
one accounting year, are used in the business, and are not acquired for resale. the intent uses
the assets as the part of operation of the client’s business and their expected lives more than
one year are the significant characteristics that distinguish these assets from inventory, prepaid
expense and investment s. the following are some classifications of property, plant and
equipment accounts, namely;
Land and land improvement
Building and building improvement
Furniture and fixture
Autos trucks
Leasehold improvement
Construction in process for property, plant and equipment
After listed above classifications accounts about property, plant and equipment, now would
take manufacturing equipment account as case study
Manufacturing equipment;
The primary accounting record for manufacturing equipment and other property, plant and
equipment accounts is generally a fixed assets master file
The master file includes all details for each piece of equipment and other types of property
owned, each records in the file includes
1.descriptions of the assets
2.date of the acquisition
3.Original cost
4.current yea depreciation
5.accumulated depreciation of the property
In order to audit the above equipment account details as our case study, the following
procedures could be considered;
Perform analytical procedure
Verify the current year acquisition
Verify the current year disposal
Verify the ending balance in the asset account
Verify the depreciation expenses
Verify the ending balance in the accumulation depreciation
1.PERFORM ANALYTICAL PROCEDURES
As in all audit area the type of analytical procedures depends on the nature of the client ’s
operation
The following illustration, illustrates analytical procedures often performed for manufacturing
equipment
Analytical procedure Possible misstatement s
Compare accumulated depreciation expenses Misstatement in depreciation expenses and

divided by gross manufacturing equipment accumulated depreciation
cost with previous years
Compare accumulated depreciation divided Misstatement in the accumulated
by gross manufacturing equipment cost with depreciation
the previous year
Compare monthly or annual repairs and Expense amount that should be capitalized
maintenance ,supplies expenses ,small tools
expenses and similar account with previous
years
Compare gross manufacturing cost divided by Idle equipment or equipment that was
some measures of production with previous disposed but not written off
year
2.TO VERIFY THE CURRENT YEAR ACQUISITION.

The companies must correctly records current year additions because the assets has long term
effect on the financial statement ,failure to capitalize fixed asset or the recordings of an
acquisition at the incorrect amount affect the balance sheet until the company disposes of the
asset ,the income statement is affected until the asset is fully depreciated .because of the
importance of current period acquisition in the audit of equipment ,auditor use seven of the
eight balance related audit objectives as frame of reference for tests of details of balance:
existence ,completeness ,accuracy ,classification ,right and obligation and valuation .
Assertions of audit are usually the measure objectives for this part of audit as explained below
 Completeness
All property, plant and equipment owned by the entity at the balance sheet date
are included in the financial statement.
 Accuracy.
Additions to and disposal property, plant and equipment and current period
depreciation are accurately
 Existence
Property, plant and equipment recorded in the account physically exist,
recorded addition to and disposal property, plant and equipment actual
occurred and were properly authorized
 Cutoff
Property, plant and equipment transaction were recorded in the proper period
 Valuation /allocation
NO material items were charged to expenses that should have been capitalized
or vise verse.
The cost or other basis of property, plant and equipment is appropriate,
Appropriate method of depreciations was properly and consistently are applied
to all items of property plant and equipment that should be depreciated.
The carrying of property, plant and equipment is appropriate in periods
subsequent to acquisition considering such factors as utilization, geographic
location, law and regulation and technological change
 Right and obligation
Property, plant and equipment recorded in the account are owned or leases
under capital leases
 Presentation and disclosure
Property, plant and equipment pledged as collateral are undefined and
disclosed along with other necessary disclosures.
3.TO VERIFY THE CURRENT YEAR DISPOSAL
Transaction involving the disposal of equipment are often misstated when company internal
controls lack a formal method to inform the management of the sell, trade-in, abandonment, or
theft of the recorded machinery and equipment. If the client fails to record the disposal, the
cost of the equipment account will be overstated indefinitely, and net book value will be
overstated until the asset is full depreciated. Formal methods of tracking disposal and provision
for proper authorization of the sell or other disposal of equipment help reduce the risk of
misstatement. There should also be adequate internal verification of recorded disposal to make
sure that assets are correctly removed from the accounting records.
The auditors’ main objectives in the verification of the sale trade-in or abandonment of the
equipment are together sufficient appropriate evidence that all disposals is recorded at the
correct amount. the following procedures are often used verifying disposal
( a ) review whether newly acquired assets replaced existing assets
( b) .analyze gains and losses on the disposal of assets and miscellaneous income for
receipts from disposal of the assets
( c) Review plant modification and changes in the product lines , change in major costly
computer related equipment ,property taxes ,or insurance coverage of deletion of equipment
(d) make inquiries of management and production personnel about possibility of the disposal
of assets
when assets are sold or disposed without having been traded in for replacement asset, the
accuracy of transaction may verified by examining the related sales invoice and property master
file the auditor should compare the cost and accumulated depreciation in the master file with
recorded entry in the generally journal and recomputed the gain or loss on the disposal of the
asset for the comparison with accounting records. When traded in of an asset for replacement
occur, the auditor should be sure that the new asset is capitalized and the replaced asset
correctly eliminated from the records, considering the book value of the asset traded in and the
addition cost of the new asset.
4.VERIFYING ENDING BALANCE OF ASSET ACCOUNT

Two of the auditor’s objectives when auditing the ending balance in the equipment accounts
include determining that
1.All recorded equipment physically exists on the balance sheet date(existence)
2.All equipment owned is recorded (completeness)
When designing audit tests to meet this objectives, auditors first consider the nature of internal
controls over equipment. Ideally, auditors are able to conclude that controls are sufficiently
strong to allow them to rely on balance carried forward from the prior year. Important control
includes the use of master file for individual fixed assets, adequate physical control over assets
that are easily movable (such as computers, tools, and vehicles), assignment of identification
numbers to each plant assets, and period physical count of fixed assets and their reconciliation
by accounting personnel.
Typically, the first audit step concerns the detail tie-in objective: equipment as listed in the
master file, agrees with the general ledger. Examining a print out of the master file that totals
to the general ledger balance is ordinarily sufficient. The auditor may choose to use software to
foot an electronic version of the master file or manually test –foot a few page.
After assessing control risk for the existence objective, the auditor decides whether it is
necessary to verify the existence of individual items of equipment included in the master file,
the auditor can select the sample from the master file and examine the actual assets. Similarly
based on the auditor’s assessment control risk for the completeness objective, the auditor may
physically examine sample of major equipment items by tracing back to the master file.
5.VERIFYING DEPRECIATION EXPENSES.
Is material, more tests of the few expense accounts not verified as part of tests of controls and
substantive tests of transactions. The recorded amounts are determined by the internal
allocations rather than by the exchange transaction with outsides parties. When depreciation
expense is material, more tests of details of depreciation expense are required than for an
account that has already been verified through test of control and substantive test of
transaction.
The most balance-related audit objective for depreciation expense is accuracy. Auditors focus
on determining whether the client followed a consistent depreciation policy from period to
period, and client’s calculation are correct.
In determining the former,auditors must weigh for consideration
1.the useful life of current period acquisition
2.the method of depreciation
3.the estimated salvage value
4. the policy of depreciation assets in the year of acquisition and the
disposition
Auditor must consider physical life of the assets,expected life and established company policies
on trading in equipment .occasionally changing in circumstance may necessitate a company to
revaluate the useful life an assets. When this occur the revaluation should involved a change in
accounting estimate rather than a change in accounting principle .the effect of this on
depreciation must be evaluated .
6. VERIFYING ENDING BALANCE IN ACCUMULATED DEPRECIATION
The debits to accumulated depreciation are normally tested as a part of the audit of disposals
of assets while the credit are verified as a part of depreciation expense if the auditor trace
selected transaction to the accumulated depreciation record in the property master files as a
part these tests ,then little addition testing should be required for the ending balance in
accumulated depreciation .
Two objective are usually emphasized in the audit of the ending balance in accumulated
depreciation
1.accumulated depreciation as stated in the property master file agrees with the general
ledger. this This objective can can be satisfied by test footing the accumulated depreciation in
the property of the master file and tracing the total to the general ledger
2. accumulated depreciation in the master is accurate
IN some cases, the life of the equipment may be significantly reduced because of reduction in
customer demand for product, an expected physical deterioration. A modification in the
operations or other changes. because of this possibilities, an auditor must evaluate the
adequacy of the allowance for the accumulated depreciation each year to make sure that the
net book values does not exceed the realizable value of the assets

Auditing Assingments

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Auditing Assingments

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Property, plant and equipment (PPE), are assets that have expected lives of more than

Analytical procedure Possible misstatement s

Compare accumulated depreciation expenses Misstatement in depreciation expenses and

2.TO VERIFY THE CURRENT YEAR ACQUISITION.

4.VERIFYING ENDING BALANCE OF ASSET ACCOUNT

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