COMPUTATIONS OF PPE Net PP&E:

Cost of PP&E: Formula: Net PP&E = Cost of PP&E - Accumulated

Depreciation
Formula: Cost of PP&E = Purchase Price + Additional Costs Example: If the cost of machinery is $100,000 and
for Bringing Asset to Location and Condition for Use accumulated depreciation is $20,000, the net PP&E is
Example: If a company purchases machinery for $50,000 and $80,000.
incurs an additional $5,000 for transportation and installation,
the cost of PP&E is $55,000. COMPUTATIONS OF DEPRECIATION

Accumulated Depreciation: Straight-Line Depreciation:

Formula: Accumulated Depreciation = Depreciation Expense x Formula: Depreciation Expense = (Cost - Salvage Value) /
Number of Years Useful Life
Example: If the annual depreciation expense for a piece of Example: A machine with a cost of $50,000, a salvage value of
equipment is $10,000 and it has been in use for 3 years, the $5,000, and a useful life of 5 years would have an annual
accumulated depreciation would be $30,000. straight-line depreciation expense of ($50,000 - $5,000) / 5 =
$9,000.
Book Value of PP&E:
Units of Production Depreciation:
Formula: Book Value = Cost of PP&E - Accumulated
Depreciation Formula: Depreciation Expense = (Cost - Salvage Value) /
Example: If the cost of a building is $200,000 and accumulated Total Units of Production * Units Produced
depreciation is $50,000, the book value would be $150,000. Example: A printing press with a cost of $100,000, a salvage
value of $10,000, and an estimated production of 50,000 units.
Depreciation Expense: If it produces 10,000 units in a given year, the depreciation
expense would be ($100,000 - $10,000) / 50,000 * 10,000 =
Formula: Depreciation Expense = (Cost of PP&E - Salvage $18,000.
Value) / Useful Life
Example: If a machine has a cost of $80,000, a salvage value
of $5,000, and a useful life of 8 years, the annual depreciation
expense is ($80,000 - $5,000) / 8 = $9,375.
Double Declining Balance Depreciation: Objectives
At the end of the module, you should be able to:
Formula: Depreciation Expense = (2 / Useful Life) * Book 1. Describe the auditor's objectives for the substantive tests of
Value at Beginning of the Year details of balances of intangible assets accounts.
Example: If a computer with a cost of $4,000 and a useful life 2. Describe the nature of the audit procedures to accomplish
of 3 years, the annual double declining balance depreciation the auditors' objectives for the audit of intangible assets.
would be (2 / 3) * $4,000 = $2,667 for the first year. The book 3. Understand and prepare audit working papers to
value at the beginning of the second year would then be document audit procedures for intangible assets.
$4,000 - $2,667 = $1,333.
AUDIT OF INTANGIBLE ASSETS
Sum-of-the-Years-Digits Depreciation:
Intangible assets are assets that provide economic benefit for
Formula: Depreciation Expense = (Remaining Useful Life / longer than a year,but lack physical substance. This includes
Sum of Years Digits) * (Cost - Salvage Value) patents, leaseholds, copyrights, formulas,organizational costs,
Example: A vehicle with a cost of $20,000, a salvage value of franchise fees, and goodwill acquired in a business
$2,000, and a useful life of 5 years. In the second year, the combination. The essential features of substantive tests
remaining useful life is 4 years, and the sum of the years' of balances for intangibles are emphasis on specific
digits is 15. The depreciation expense for the second year audit objectives related to existence and valuation
would be (4 / 15) * ($20,000 - $2,000) = $4,533.33. achieved primarily by vouching, inspection of legal document
and recomputation or analytical tests. Whenever the client
treats an expenditure as creating an intangible asset, the
AUDIT OF INTANGIBLE ASSETS auditor must look for objective evidence that a genuine asset
has come into existence.
Overview
This module will discuss the audit of intangible AUDIT OBJECTIVES AND PROCEDURES
assets. Specifically, this will involve audit objectives to
primarily achieve the overall objectives for intangible assets Figure 16-1 summarizes the financial statement assertions,
and audit procedures for the substantive tests of details of specific audit objectives and the common audit procedures
balances to determine that the intangible assets exist by traditionally used to achieve the objectives for intangibles
reviewing appropriate documentation. assets accounts.
Figure 16-1: Assertions, Objectives and Procedures for
Presentation and To determine 7. Evaluate
Intangible Assets Disclosure whether financial statement
Assertions Audit Objectives Audit Procedures presentation and presentation and
disclosures disclosure for
Existence or To determine that 1.Obtain an concerning intangibles.
Occurrence intangibles exist analysis of ledger intangibles are
and are accounts for adequate and in
represented by intangibles. accordance with
contractual rights, PAS/PFRS.
intangibles. 2. Examine
privileges or documentation
earning power supporting
owned by the intangibles. 1. Obtain an analysis of ledger accounts for intangibles.
company.
The auditor may begin with the substantiation of intangible
Completeness To determine that 3.Vouch additions assets with the analysis of the ledger accounts for these
all transactions to or acquisitions assets. The balance should be traced to the general ledger.
related to during the year.
intangibles have 4.Evaluate
been properly dispositions and 2. Examine documentation.
recorded. write offs during
the year. The auditor should examine legal documents that supporting
intangibles such as certificate of patent registration, franchise
Rights and To determine that 5.In addition to and merger agreements or corporate articles of incorporation
Obligations the intangibles are audit procedure
to prove existence of rights and economic advantages.
owned by the no. 2, perform
company. analytical
procedures. 3&4. Vouch additions to or acquisitions during the year.
Evaluate dispositions and write offs during the year.
Valuation or To determine that 6.In addition to
Allocation intangibles are audit procedures Debits to the accounts representing acquisition should be
stated at cost less no.3 & 4, evaluate
traced to documentary evidence of the right benefits acquired
amortization. amortization policy
and verify (e.g., certificate of registration, franchise agreements) as well
computation of as to cash records for the payments made or canceled checks.
amortization. For the intangible assets which are internally developed, the
auditor must vouch debits to evidence of costs incurred in their
development, such as internal cost documents for materials, 7. Evaluate financial statement presentation and disclosure for
labor and overhead. intangibles.

Credits to the accounts representing amortization should be The auditor should evaluate future economic benefit by
independently calculated and reconciled with the client's relating assets to revenues produced by them. He should also
program of amortization while credits representing write-off of inquire of management and legal counsel as to possible
the asset should be traced to appropriate authorization or contingencies relating to intangible assets (e.g. patent
minutes of directors' meetings. Also, the auditor should inquire infringement suits). PAS/PFRS require that the intangibles be
if there is any change in the estimated period to be benefited. shown at their amortized cost and disclosure of the
amortization policy should be made.
5. Perform analytical procedures.

The auditor should apply analytical procedures to Research

and Development expense by company with those of prior
year and budgeted amounts. Material changes and/or
variances should be investigated.

An analytical review of the intangible accounts should be done

to determine the reasonableness of the account balances.
This will include:

● Amortization costs for the current year and prior year.

● Ratio of amortization costs to unamortized balances for
the current year and prior year.

6. Evaluate amortization policy and amortization period.

The auditor should evaluate appropriateness of amortization

policy and amortization period and recalculate amortization on
a test basis.