Professional Documents
Culture Documents
Audit of Property, Plant, and Equipment
Audit of Property, Plant, and Equipment
Bearer biological assets (BBA) are matured biological assets held for more than one financial period
capable of bearing consumable biological assets (CBA) to be harvested as agricultural produce. BBA are
held for generating income from the sale of produce; for example,
1. Livestock from which milk is produced
2. Grapevines
3. Oil palm and rubber trees
4. Fruit trees, and
5. Trees from which firewood is harvested while the tree remains.
Bearer biological assets are not agricultural produce but, rather, are self-regenerating. Bearer plant assets
are accounted as PPE under PAS 16, provided it will meet the criteria in the said standard, while bearer
animals are accounted as biological assets under PAS 41. Produce growing on bearer plants is a biological
asset.
Refer to the table on the next page for the summary of the measurement of PPE.
Purchase Price
Cash basis 1. Cash
2. Lump-sum/basket price - allocate on the basis of relative fair value
On account 1. Invoice price minus cash discount, whether taken or not
Installment Method 1. Cash price equivalent
2. Present value if no cash price equivalent
Issuance of share capital 1. FV of property received
2. FV of share capital
3. Par value or stated value of share capital
Issuance of bonds payable 1. FV of bonds payable
2. FV of property received
3. Face value of bonds payable
Depreciation Methods
1. Straight line
• Depreciable amount / useful life
• Depreciable amount x depreciable rate
Depreciable rate = 1 / useful life
2. Group / Composite
• Cost x depreciation rate
Depreciation rate = Annual depreciation / total cost
3. Units of production
• Output x Depreciation rate
Depreciation rate = Depreciable amount / Total estimated output
4. Working hours
• Hours used x depreciation rate
To provide a focal point for applying substantive tests, the auditor should prepare or obtain a schedule of
plant assets and accumulated depreciation showing balances at the beginning of the year additions and
disposals during the year and balance at the end of the year. Exhibit 1 illustrates a Lead Schedule for
Property and Equipment and Related Accumulated Depreciation.
Beginning balance of plant and equipment assets may be verified by reference to the prior year's audit
working papers. While additions and disposals/retirements may be verified as the audit progresses.
Before making a detailed analysis of change in property accounts, the auditor should be sure that the
amounts in the working paper agree with the ledger balances, both subsidiary and general. Although the
audit testing will be performed on the subsidiary ledger, any audit adjustment will be posted by the
client to the controlling account.
ASSETS
Land G.1 P 130,000 P 60,000 P 30,000 P 160,000 ✓
Land improvements G.2 50,000 50,000 ✓
Buildings G.3 786,000 160,000 86,000 860,000 ✓
Machinery and
✓
equipment G.4 345,000 85,000 45,000 385,000
Autos and trucks G.5 120,000 30,000 28,000 122,000 ✓
Office furniture &
✓
equipment G.6 86,000 12,000 6,000 92,000
P1,517,000 (✓)^ P 347,000 ^ P 195,000 ^ P1,669,000 ✓^
WTB 1
ACCUMULATED
DEPRECIATION AND
AMORTIZATION
Land improvements G.2 P 20,000 P 5,000 P 25,000 ✓
Buildings G.3 453,000 40,000 P 72,000 421,000 ✓
Machinery and
✓
equipment G.4 126,000 35,000 42,000 119,000
Autos and trucks G.5 65,000 24,000 25,000 64,000 ✓
Office furniture and
✓
equipment G.6 43,000 17,000 3,000 57,000
P 707,000 (✓)^ P 121,000 ^ P 142,000 ^ P 686,000 ✓^
4. The amount shown in the machinery and equipment asset retirement column represents cash
received on September 5 upon disposal of a machine purchased in July 2009 for P48,000. The
chief accountant recorded depreciation expense of P3,500 on this machine in 201B.
5. Cebu City donated land and building appraised at P100,000 and P400,000, respectively, to Haven
Corporation for a plant. On September 1, the company began operating the plant. Since no costs
were involved, the chief accountant made no entry for the above transaction.
REQUIRED:
Prepare the adjusting journal entries that you would propose on December 31, 201B, to adjust the
accounts for the above transactions. Disregard income tax implications. The accounts have not been
closed. Computations should be rounded off to the nearest peso. Use a separate adjusting journal entry
for each of the above five paragraphs.
SOLUTION:
Entries, December 31, 201B
(1) Prepaid Rent 1,250
Rent Expense 3,750
Lease contract payable 35,400
Machinery and equipment 40,400
To correct April 1, 201E entry for lease
of die casting machine
The auditors usually make a physical inspection of major units of property, plant, and equipment acquired
during the year under audit to determine the existence of the asset. The number of property, plant, and
equipment that needs to be inspected will depend on the auditors' consideration of the risk of material
misstatement and the number of PPE in consideration. The auditor's direction in examining a PPE may
flow in either of the following:
1. Inspect the item of plant and equipment and trace it to the property, plant, and equipment ledger.
This type of procedure provides evidence of completeness of recorded asset.
2. Select items of plant and equipment from the ledger to the physical assets. This type of procedure
provides evidence of existence and condition of assets. However, this procedure does not provide
evidence regarding the ownership of the asset. To verify the ownership of an item of PPE, the
auditor performs the next procedure below.
3. Vouch additions to property during the year. Investigate disposals and retirements.
Primary Audit Objectives: Existence or occurrence, Rights, Completeness, and Valuation
The auditor should examine on a test basis documentation supporting plant asset additions and disposals.
Vendor's invoices and freight bills provide evidence supporting proper valuation and ownership of
purchased assets. While for constructed plant assets, work orders provide the information covering
materials, labor and overhead applied to them. Materials, labor, and direct overhead charges should be
traced to requisitions and time tickets on a test basis. Fixed overhead should be recalculated to support
the reasonableness of the application rates. The auditor should also determine whether interest should
be capitalized as part of the project.
To verify legal ownership of the asset, the auditor must examine evidence such as deeds, transfer
certificate of title (TCT), insurance policy, and property tax bills. Assets owned by the client but held by
third parties under operating lease agreements may be confirmed with the third parties. While assets held
by the client under a capital lease agreement should be verified against the lease contract to determine
whether correct accounting entries were made. For capital or financing leases, the auditor should
recalculate minimum lease payments and evaluate the appropriateness of the discount used in
capitalizing the leases. The ownership of machinery and equipment can be verified by examining the
purchase invoices and contract of sale. While ownership of cars, trucks, and other delivery equipment can
be ascertained by reference to certificates of titles and registration documents.
5. Review rental revenue from the land, buildings, and equipment owned by the client and leased to
others.
Primary Audit Objectives: Rights and obligation
In testing revenue from the rental of land, buildings, and equipment, the auditor should account for all
available rental space and determine the premises occupied by lessees and those which are vacant. The
auditor can obtain the floor plan of the building as well as copies of lease contracts.
The auditors' principal objective in analyzing the lease (rent), repair, and maintenance expense accounts
is to ensure that all capital expenditure should not be included in these expense accounts. Normally, the
items of lease expense and repairs and maintenance examined by the auditor are those items that involve
a significant amount. For lease expense, the auditor will normally examine the term of the lease contract
to determine if the lease is appropriately classified as operating lease, otherwise, this should be accounted
as an asset and depreciated. For the repairs and maintenance expense accounts, the auditor should obtain
the companies written policy regarding the capitalization of expenditures incurred in relation to a
property, plant, and equipment as a basis in determining the appropriateness of the classification of the
accounts.
PAS 36 requires that an entity should review assets for impairment whenever events or changes in
circumstances indicate that carrying value may not be recoverable. The management should provide
impairment loss if the carrying amount of an asset is greater than its recoverable amount. Therefore, in
assessing the proprietary of impairment, the auditor should inquire with management their approach in
identifying indicators of impairment and the actions taken as a result of any potential impairment noted.
If an impairment provision was made or the auditor considers it necessary, the auditor ordinarily should
perform the following procedures:
1. Evaluate the appropriateness of the valuation model and assumptions used;
Depreciation or depletion is an example of an accounting estimate. PSA 540 (revised and redrafted)
requires that in evaluating accounting estimates, auditors first obtain an understanding of the client's
process and controls in developing accounting estimates. In auditing depreciation or depletion, the
auditor's objective is to obtain sufficient appropriate audit evidence about whether:
a. Depreciation or depletion recognized in the financial statements are reasonable; and
b. Related disclosures required in the financial statements are adequate.
The following are audit procedures to test the reasonableness of depreciation and depletion:
1. Review the depreciation policies set forth in the company manuals and determine if it is applied
consistently;
2. Obtain or prepare a summary analysis of accumulated depreciation for the major property
classifications as shown by the general ledger control accounts, listing beginning balances,
provisions for depreciation during the year, disposals, retirements, and ending balances.
a. Compare beginning balances with the audited amounts in last year's working papers; and
b. Determine that the totals of accumulated depreciation recorded in the plant and equipment
subsidiary records agree with the applicable general ledger controlling accounts.
3. Test the provisions of depreciation.
a. Assess the reasonableness of the depreciation methods and rates used to calculate the
depreciation provision by comparing it with the methods and rates used in the prior years and
investigate any variances;
b. For assets acquired or disposed of during the year, check whether depreciation was provided
based on the accounting policy of the company;
c. Check the computation of depreciation by performing independent recalculation; and
d. Compare credits to accumulated depreciation for the year with the debits to depreciation
expense.
4. Test deductions from accumulated depreciation for assets retired.
a. Trace deductions to the working paper analyzing retirements of assets during the year; and
b. Test accuracy of accumulated depreciation to date of retirement.
5. Perform analytical procedures for depreciation.
a. Compute the ratio of depreciation expense to total cost of plant and compare with prior years;
and
b. Compare the percentage relationships between accumulated depreciation and the related
property accounts with those in prior years. Inquire with management any significant
variations from the normal depreciation.
When the entity's assets include natural resources, the auditor should review the geological surveys, the
results of the entity's explorations and other information used by the entity in estimating its recoverable
quantities. Since this involves a special area, the auditor may need to consult an expert.
Note: In analyzing depreciation or depletion, exclude land in the analysis since this is not a depreciable
asset.
Plant Assets
K G Q C
Original Cost P87,500 P127,500 P200,000 P200,000
Year Purchases 201A 201B 201C 201D
Useful Life 10 years 37,500 15 years 10 years
hours
Salvage value P7,750 P7,500 P12,500 P12,500
Depreciation method SYD Activity Straight-Line Double
declining-
balance
Note: In the year an asset is purchased, Moose, Inc, does not record any depreciation expense on the asset
In the year an asset is retired or traded in Moose, Inc takes a full year depreciation on the asset.
Suggested Answer:
1. Gain on sale – P10,250
2. Depreciation of Asset Q for 201E – P15,000
3. Asset R P55,000
Retained Earnings P55,000
4. Asset K P -
Asset G 127,500
Asset Q 200,000
Asset C 200,000
Asset R 55,000
Plant Assets, 12/31/1E P582,500
The specific trends and ratios used in judging the overall reasonableness of recorded amounts for
property, plant, and equipment will vary with the nature of the client's operation. Among the ratios and
trends commonly used by auditors for this purpose are the following:
1. Ratio analysis
a. Total cost of plant assets divided by annual output in pesos, pounds or other units.
b. Total cost of plant assets divided by cost of goods sold.
c. Total depreciation expense divided by total cost of property, plant, and equipment.
2. Trend analysis
a. Comparison of repairs and maintenance expense on a monthly basis and from year to year.
b. Comparison of acquisitions for the current year with prior years.
c. Comparison of retirements for the current year with prior years.
It may be clarified that the foregoing is only an illustrative list of analytical review procedures which an
auditor may employ in carrying out an audit of property, plant, and equipment and its related account.
The exact nature of analytical review procedures to be applied in a specific situation is a matter of
professional judgment of the auditor.
10. Evaluate Financial Statement Presentation and Disclosures for Plant Assets and for Related Revenue
and Expenses
Primary Audit Objectives: Presentation and disclosure
For each class of property, plant, and equipment, the auditor should check whether the entity has
disclosed the following requirements under PAS 16:
1. Basis for measuring carrying amount;
2. Depreciation method(s) used;
3. Useful lives or depreciation rates used;
4. Gross carrying amount and accumulated depreciation and impairment losses at the beginning and
end of the period;
5. Reconciliation of the carrying amount at the beginning and the end of the period;
6. Restrictions on title;
7. Expenditures to construct property, plant, and equipment during the period;
8. Commitments to acquire property, plant, and equipment; and
9. Compensation from third parties for items of property, plant, and equipment that were impaired,
lost or given up that is included in profit or loss.
The auditor also should be satisfied that any revaluation surplus should be properly presented as part of
other comprehensive income in the statement of comprehensive income. Items of property, plant, and
equipment are presented as non-current asset in a line item in the statement of financial position as
"Property, Plant, and Equipment".
Illustrative Case 3:
The following items are included in the PPE section of the audited statement of financial position of
DRUMS CORP. as of December 31, 201A:
Land P 3,450,000
Buildings 13,350,000
Leasehold improvements 9,900,000
Machinery and equipment 13,125,000
1. Land A was acquired for P12,750,000. In connection with the acquisition, Drums paid a P765,000
commission to a real estate agent. Costs of P525,000 were incurred to clear the land. During the
course of clearing the land, timber and gravel were recovered and sold for P195,000.
2. Land B with an old building was acquired for P7,500,000. On the acquisition date, the fair value of the
land was P4,200,000 and the fair value of the building was P1,800,000. The old building was
demolished at a cost of P615,000 shortly after acquisition. A new building to be used as an owner-
occupied property was constructed for P4,950,000 plus the following costs:
LAPSING SCHEDULE
Lapsing schedule is a worksheet containing specific accounting data about fixed assets such as the original
purchase cost, useful life, accumulated depreciation, additions, sales of assets, and so on. Lapsing
schedule is ordinarily provided by the audit client and may slightly differ from one entity to another.
Presented below is an example of a lapsing schedule, which is essential in conducting an audit of PPE.
Current
Classification Date Useful Year Carrying Carrying
Description Original Cost Method Accumulated
of PPE Acquired Life Depreciation Value - Beg Value - End
Depreciation
Expense
Land Makati St. 1/1/201B 6,000,000.00 6,000,000.00 6,000,000.00
Building Office Building 1/1/201B 5,000,000.00 SL 20 250,000.00 250,000.00 5,000,000.00 4,750,000.00
Building Factory 1/1/201A 3,500,000.00 DDB 20 315,000.00 665,000.00 3,150,000.00 2,835,000.00
IT Equipment Computers 1/1/201A 2,000,000.00 SL 8 250,000.00 500,000.00 1,750,000.00 1,500,000.00
And so on…
References
(2019, November 15). Retrieved from Scribd: Scribd.com
Asuncion, D. J., Ngina, M. A., & Escala, R. F. (2018). Applied Auditing Book 1 of 2. Baguio: Real Excellence
Publishing.
Cabrera, M. B., & Cabrera, G. B. (2017). Applied Auditing. Maila: GIC Enterprises & Co., Inc.
Roque, G. S. (2016 - 2017). CPA Examination Reviewer: Auditing Problem. Manila: GIC Enterprises & Co.,
Inc.