AP03-04 jsabellar/aljabinal/aeibay

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 the
Completeness
statement of financial position.
The PPE are stated in the statement of financial position at the
Valuation and Allocation
appropriate amounts.
All PPE presented in the statement of financial position are owned
Rights and Obligations and/or controlled by the Company and any liens thereto 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, in
Disclosure
accordance with the applicable financial reporting framework.
 Assertions and Audit
Audit Evidence and Procedures
Objectives
Existence, Completeness, A. General Procedures for the Audit of PPE:
Valuation and Presentation Obtain PPE Lapsing Schedule and match totals with
and Disclosure the trial balance. Ensure that amounts matches.
Obtain Accounting Policy for PPEs.
Do recorded additions Obtain Minutes of Board Meetings for PPE additions
exist? and/or disposals and other matters that may affect
PPEs.
Have existing additions Determine movements in the PPEs (e.g. Additions,
been recorded? Disposals, etc.)

Have retirements been B. Procedures for PPE Additions:

recorded? Obtain PPE Additions Listing and match with the PPE
lapsing schedule. Ensure that amounts matches.
Are all PPEs valued at Examine existence of PPE Additions by:
historical cost less Inspecting major additions especially if control over
accumulated depreciation PPE is weak
less accumulated Vouch PPE Additions by obtaining and examining
impairment losses? (If the the following documents:
Company is using the Purchase request by the requesting
Cost Model) department

Freight Bills
Work orders for constructed assets
Receiving Report / Proof of completion
Examine authorization on PPE acquisition through
BOD Minutes.
Determine the propriety of the c
for additions in relation to its Policies.
For self-constructed assets, recalculate:
Overhead Allocation; and
Borrowing cost capitalized

Assertions and Audit

Audit Evidence and Procedures
Objectives
C. Procedures for PPE Disposals:
Have impaired assets been Obtain PPE Disposal Schedule and match balances
properly reflected at their with the lapsing schedule. Ensure that amounts
recoverable amounts? matches.
Determine propriety of disposals in relation to the

approval of PPE disposals.

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 Have expenditures been Examine the existence and completeness of PPE
properly classified as asset disposals by obtaining and examining the following
or expense? documents:
Approved Disposal Reports
If destroyed, the proof of destruction
Are there any liens against If sold, sales invoice or official receipt. Determine
these PPEs and where if any gains or losses are recognized and
these disclosed? determine appropriateness of such gains or
losses.
Trace disposals to bank statements

D. Examine Repairs and Maintenance Accounts and

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

E.
impairment losses/revaluation of PPE.

F. Procedures for Presentation and Disclosure:

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

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 risk of overstatement (rather than understatement) >> existence and valuation
potential causes of high inherent risk >> factors other than I/C (risky, complex, high degree of judgment )
PP&E are generally not easily stolen, depreciation calc is straightforward, no high degree of judgment involved)
A.. SUBSTANTIVE TESTING:
less susceptible to theft/fraud, not complex accounting -- but you can assess this on a per assertion basis, as
warranted
Property, plant and equipment is typically judged to be one of the accounts least
susceptible to fraud because
A. The amounts recorded on the balance sheet for most companies are immaterial.
B. The inherent risk is usually low. though amount may be high, risk is generally low but not always the
C. The depreciated values are always smaller than cost. case
D. Internal control is inherently effective regarding this account.

2. When few property and equipment transactions occur during the year, the continuing
auditor usually obtains an understanding of internal control and performs
A. Tests of controls. (only few, why not full substantive) ; WT vs TOC
B. Analytical procedures to verify current year additions to property and equipment.
C. A thorough examination of the balances at the beginning of the year.
D. Extensive tests of current year property and equipment transactions. (u can perform interim testing)

3. Determining that proper amounts of depreciation are expensed provides assurance about

A. Presentation and disclosure C. Rights and obligations

B. Completeness D. Existence
(how much are expensed and capitalized)
4. When auditing prepaid insurance, an auditor discovers that the original insurance policy
(indicates na meron on record but with issue on existence)
indicates the possibility of a (an)
a. Lien on the plant equipment.
b. Insurance premium due but not recorded. (not an issue of completeness but existence)
c. Deficiency in the coinsurance provision. (even so, in this case, still u can produce the ins contract)
d. Understatement of insurance expense. (risk of oversstatement -- existence)

5. Which of the following combinations of procedures would an auditor most likely perform
to obtain evidence about fixed asset additions?
a. Recomputing calculations and obtaining written management representations.
b. Observing operating activities and comparing balances to prior period balances.
c. Inspecting documents and physically examining assets.
d. Confirming ownership and corroborating transactions through inquiries of client
personnel.

6. The following are part of your general procedures in the audit of property, plant and
equipment except which one?
a. Obtain the PPE lapsing schedule and ensure that the balances per lapsing
matches with the trial balance. (agree procedures)

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 b. Obtain the accounting policy of PPEs an
the recognition, measurement, disclosure and disposal of the fixed assets.
c. Obtain Minutes of BOD meetings and check if there are items involving
acquisition or disposal of fixed assets including any liens thereto.
d. Recalculate
culate depreciation of all PPEs. (u can do on test basis, or even a different method of SAP)
7. Generally, when testing depreciation expense, the auditor performs substantive
analytics rather than extensive vouching of sampled PPEs. Which of the following
may be the best reason for such? find that which is effective and efficient
a. It is more efficient to conduct substantive analytics for depreciation than to do
extensive vouching.
b. The computation of depreciation is relatively straightforward
(efficient) and may be
recalculated by the audit staff.(effective)
c. The more effective procedure for the test of Depreciation is substantive
analytics than extensive vouching of sampled PPEs. (not efficient)
d. The computation of depreciation is relatively easy and may be done by a non-
CPA staff. (not sure to be effective if done by non-CPA without acctg bakground)

8. Among the choices, which is not a document that will be obtained by an auditor when
testing additions of PPEs.
a. c. Work orders of repaired fixed assets (repairs and maintenance)
b. Receiving Report d. Minutes of BOD meetings

9. Among the following documents, which can provide support for the propriety of the

a. Contract to Sell c. Tax declaration and payment for the land

b. Canceled check d. Certificate of Title annotated by registry of
deeds

10. When assessing the accuracy of amounts recorded for self-constructed assets, the
auditor must be alert in checking which of the following items?
a. Purchased materials
b. Direct labor capitalized
c. Indirect labor capitalized
d. Applied construction overhead. split between capitalized and expensed

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