Auditing Property Plant and Equipment

Summary

This video provides an insightful overview of auditing Property, Plant, and Equipment (PPE). It covers key steps such as the acquisition process, testing internal controls, and performing substantive tests to verify PPE's existence, accuracy, and valuation. The video also delves into essential audit assertions like completeness and rights, highlighting the importance of analytical procedures, documentation checks, and sampling. Practical tips for auditors, including handling depreciation and relying on internal auditors’ work, make this a valuable resource for anyone involved in PPE audits.

Takeaways

• 😀 PPE refers to Property, Plant, and Equipment, which are non-current assets on an entity's balance sheet, distinct from personal protective equipment.
• 😀 The process of acquiring PPE starts with a request for purchase, usually requiring quotes and approval from different levels of authority based on the amount to be spent.
• 😀 PPE purchases often require a centralized purchasing department to handle orders, with a receiving process to ensure everything ordered is received and checked.
• 😀 Internal controls play a key role in PPE acquisition, ensuring that purchases are approved, documented, and recorded correctly in the fixed asset register.
• 😀 Segregation of duties is a critical internal control to ensure that the person preparing PPE transactions is different from the person approving them.
• 😀 Auditors test internal controls by vouching purchases back to documentation, ensuring approvals are in place, and verifying that items are added to the fixed asset register.
• 😀 Substantive testing involves verifying assertions about PPE’s existence, accuracy, valuation, and allocation, with physical inspections to confirm existence.
• 😀 The accuracy of PPE is tested by recalculating acquisition costs, depreciation, and gains or losses on disposals to ensure correct accounting.
• 😀 Completeness tests include analytical procedures to ensure all PPE is recorded, such as identifying unrecorded PPE or unusual cash expenditures.
• 😀 Depreciation methods and assumptions should be reviewed to ensure they align with industry standards and accurately reflect the useful life and value of the asset.
• 😀 Rights and obligations tests ensure the company has rightful ownership of its PPE, particularly when dealing with leased assets, which have different accounting treatment.
• 😀 Internal auditors’ work can sometimes be relied upon, especially if they are former external auditors, but their work must comply with auditing standards and be assessed under ISA 610.

Q & A

What is the primary focus of auditing Property, Plant, and Equipment (PPE)?

The primary focus of auditing PPE is to ensure that the assets are properly recorded, valued, and depreciated on the financial statements. This includes testing the existence, accuracy, completeness, and classification of the PPE, as well as verifying that depreciation is correctly calculated and recorded.

How do auditors verify the existence of PPE in an organization?

Auditors verify the existence of PPE by physically inspecting a sample of assets and ensuring they match the records in the fixed asset register. This helps to confirm that the assets listed on the balance sheet are real and present.

Why is the concept of depreciation critical in auditing PPE?

Depreciation is critical because it directly affects the valuation of PPE. Auditors must verify that depreciation is accurately calculated, properly recorded, and that it aligns with the asset's useful life, ensuring the asset is not overstated on the balance sheet.

What is the role of analytical procedures in testing the completeness of depreciation expense?

Analytical procedures help auditors assess whether the depreciation expense is complete and reasonable by comparing it to changes in the company's PPE. For example, auditors can check if the increase in depreciation expense corresponds to the increase in the value of fixed assets over time.

How do auditors test the accuracy of accumulated depreciation?

Auditors test the accuracy of accumulated depreciation by examining the methods, assumptions, and data used to calculate it. They also ensure that depreciation is properly recorded and that it reflects the appropriate depreciation method (e.g., straight-line or declining balance).

What controls are typically in place for the acquisition of PPE, and why are they important?

Controls for PPE acquisition usually include a formal approval process, which may involve different levels of authority for low-value and high-value assets. These controls ensure that assets are purchased with proper authorization and that they are accurately recorded in the company's financial system.

What is the significance of segregation of duties in PPE acquisition and disposal processes?

Segregation of duties is important to prevent fraud and errors. By separating responsibilities (e.g., one person prepares the purchase order, and another approves it), it reduces the risk that unauthorized transactions or inaccuracies could occur in the acquisition or disposal of PPE.

Why might auditors rely on the work of internal auditors during a PPE audit?

Auditors might rely on the work of internal auditors if the internal audit department has tested PPE in accordance with general auditing standards. This reliance can provide additional assurance without duplicating efforts, especially if the internal auditors' work is thorough and reliable.

What is the role of a fixed asset register in the audit process?

The fixed asset register is crucial because it serves as the primary record for all PPE assets, listing details such as cost, location, useful life, and accumulated depreciation. Auditors rely on this register to verify that assets are properly recorded and to perform substantive tests of the PPE.

How do auditors ensure that depreciation expense is recorded in the correct period?

Auditors ensure depreciation expense is recorded in the correct period by examining the asset's usage period. For example, if an asset was in use for part of the year, auditors would ensure the depreciation is calculated for the actual number of days the asset was operational, aligning with the fiscal period.