AUDIT IN PROPERTY , PLANT AND EQUIPMENT

GROUP 4 : (SESI 1 2021/2022)

1. NURUL NADIAH BINTI MUHD FAWZY (10DAT19F1036)
2. NUR NAJWA HANIS BINTI IZSMA SHAHARIL (10DAT19F1027)
3. NORSYUHADA BINTI ROSLAN (10DAT19F1029)
4. KAVISHA A/P NAGALINGGAM (10DAT19F1501)
5. AMIRAH ZULAIKHA BINTI ZULKEFLI (10DAT19F1201)

Property, Plant & Equipment

PPE is a fixed asset of the company that is held for the long term and used in the business for production activities. The amount spent to buy PPE is deducted through depreciation in the statement of profit and loss.

We will cover the audit procedures for Property Plant and Equipment (PPE). This is also commonly called the audit procedures for Non-Current Assets or Fixed Assets. It is really important to perform proper audit procedures for Fixed Assets in order to obtain sufficient appropriate evidence. Property, Plant & Equipment are material items on the balance sheet. There are inherent risks on PPE and auditors should be more concerned about these items during the audit

What is one of the key segregation of duties for the property management process?

SEGREGATION OF DUTIES

When there is segregation of duties, the person responsible for processing a transaction is different from the one who is keeping records of business activities. It is the basic methodology through which the business entities ensure that the chances of fraud and misappropriation of funds are minimized.

If the person who is charge of record – keeping is also the custodian it causes a violation of the segregation of duties principle. Thus, the custodian and record keeper of the property should not be the same person.

-The PPE records function should be segregated from the general ledger function.

-If a periodic physical inventory of property, plant and equipment is taken, the individual responsible for the inventory should be independent of the custodial and record – keeping functions.

-The function of initiating the purchase of capital asset acquisition should be segregated from the final approval function.

Analytical procedures VS Substantive analytical procedures

Analytical procedure is the process of analyzing plausible relationships among data including both financial and non-financial data. Likewise, substantive analytical procedures are the audit procedures that auditors perform to obtain evidence about the reasonableness of amounts shown in the financial statements by using such plausible relationships among data.

Substantive analytical procedures are usually performed when the risk of material misstatement is low and there are adequate control procedures in place. And of course, only when there are plausible relationships among data, could auditors perform analytical procedures.

Auditors usually perform substantive analytical procedures by building their expectations and compare them to the client’s record. If there is a significant difference between auditor’s expectation and the client’s record, further test is usually performed for investigation of the reasons behind such difference.

Identify three substantive analytical procedures that can be used to audit property, plant, and equipment

1. Computing and comparing the depreciation ratio is a part of the substantive analytical procedure followed by the auditors

2. Insurance costs ratio computation and comparison are also covered under the substantive analytical procedure.

-Example: an auditor is auditing Company A in 2021, then Company A buys a machine in 2020, so the auditor has to calculate the insurance percentage on the machine for the current year and the year before and you have to compare the insurance percentage of the current year and the year before whether there is a change in terms of that percentage

3. The depreciation of last year is compared with the current year to know whether there is any deviation in the method of computing depreciation

- The depreciation method should be reviewed at least annually and, if the pattern of consumption of benefits has changed, the depreciation method should be changed prospectively as a change in estimate under IAS 8. [IAS 16.61] Expected future reductions in selling prices could be indicative of a higher rate of consumption of the future economic benefits embodied in an asset. [IAS 16.56]

- Example: Before this, Company A used the straight line method to calculate depreciation, suddenly in 2021 Company A changed to the reducing balance method

IASB Clarifies Depreciation & Amortisation

12 May 2014

The International Accounting Standards Board (IASB) has published 'Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38)'. The amendments provide additional guidance on how the depreciation or amortisation of property, plant and equipment and intangible assets should be calculated.

Effective Date

The amendments are effective for annual periods beginning on or after 1 January 2016 with earlier application is permitted

Amendments

-Amendments to IAS 16 Property, Plant and Equipment

The requirements of IAS 16 are amended to clarify that a depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate. This is because such methods reflects a pattern of generation of economic benefits that arise from the operation of the business of which an asset is part, rather than the pattern of consumption of an asset’s expected future economic benefits.

Amendments to both standards

Guidance is introduced into both standards to explain that expected future reductions in selling prices could be indicative of a higher rate of consumption of the future economic benefits embodied in an asset.

What procedures would an auditor use to verify the completeness, rights and obligations, and valuation assertions for property, plant, and equipment

AUDIT PROCEDURES FOR PPE

In the audit procedures for PPE, we need to test various audit assertions including existence, valuation, completeness, and rights and obligations. This is so that we can make sure PPE balances reported in the financial statements actually exist and reflect their actual economic value.

COMPLETENESS

-For the PPE audit, we test completeness assertion to ensure that all PPE transactions that occurred during the year have been recorded. Lack of completeness would result in the understatement of PPE.

Example : Test of completeness in PPE audit

-Reconcile and compare the PPE register with the general ledger.

-Select a sample of PPE items that physically exist.

-Trace the selected items to the PP register

We need to obtain proper explanations if there are any differences between the PPE register and the general

RIGHTS AND OBLIGATIONS

- Right and obligation assertion tests whether the client has the right and ownership of all PPE shown on the financial statements as at reporting date.

Example : Test of right and obligations in the PPE audit

-Select a sample of PPE items in the register.

-Examine the title documents or title deeds of the selected items to ensure they really belong to the client.

VALUATION

- In the audit of PPE, we test the valuation assertion to ensure that the PPE balances are mathematically correct and proper valuation method has been made. The valuation assertion usually relates to the depreciation of PPE.

Example : Test of depreciation in the PPE audit

-Review the client depreciation method to evaluate it is in accordance with the applicable accounting standards.

-Perform recalculation on the depreciation of PPE.

-Compare the result of recalculation to the clients figures.

-Examine the useful life of PPE to evaluate whether the clients estimate is reasonable by comparing with industry standard. Professional judgement is required and very important here.

EXISTENCE

- When we perform the PPE audit, we test the existence assertion to ensure that the PPE balance shown on the balance sheet really exist at the reporting date.

Example : Test of existence on the PPE audit

-Select a sample of items in PPE register

-Perform physical inspection on the selected items.

When performing the physical inspection of PPE, we need to make sure not only that the selected items really exist, but they also need to be in a working condition.

In Conclusion, Property, plant, and equipment generally termed as PPE has been an influential contributor of the assetside of balance sheet (Statement of FinancialPosition).Even it gets a lot of emphases when we calculating materiality because depreciation charged on this has a direct effect on gross margin . That is why the audit for PPE is important to the auditor

PowerPoint

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