substantive audit procedure of property, plant and equipment PDF

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Substantive procedures for property, plant and equipment

The auditor's primary substantive procedures for property, plant and equipment will typically include the following: 1. Obtaining a lapsing schedule and reconcile with ledgers – a lapsing schedule is a worksheet comprising detailed accounting data about PPE such as: asset classification or description; asset classification or its cost, including the opening balance, additions and disposals, retirements and the ending balance; and accumulated depreciation showing the beginning balance, disposal and reversal, depreciation/depletion rate, book value, depreciation expense and the ending balance. After having the lapsing schedule, the auditor will check the footing and will look for the general ledger or trial balance to reconcile the amounts.

2. Disposals and additions of PPE during the year will go under vouching – after the previous process, the auditor vouches for disposals and additions which includes retirements. Proof of additions to the property, plant and equipment accounts during the audit period is considered one of the most important substantive tests. Additions to PPE are attained and recorded at purchase or acquisition cost. Whilst, vouching is verifying the entries in the books by looking for the documentary evidences such as receipts, title or certificate of ownership.

3. Inspecting physically all the major acquisition of PPE during the year - the auditor should review the receipts and verify whether the acquired PPE is an investment based on the company's capitalization policy

4. Evaluating proof of ownership and limitations of PPE – this includes looking for land titles, certificate of ownership or transfer of ownership. As well as the construction limitation within the area and this also includes all the costs incurred on the construction as well as the construction contracts.

5. Analyzing repair, lease, and maintenance expense accounts – this includes verifying the lease certificate and its related costs. Examining the discounts, it includes recomputing. As well as evaluating recorded maintenance expenses and repairs with the evidences of receipts.

6. Testing for the correctness and fairness for provision on depletion or depreciation – this includes testing for the fairness of the rate used or the depreciation method used for the PPE and as well as evaluating whether the PPE is over depreciated or under depreciated. Tis also includes checking the beginning and ending balances of the related accounts for depreciation.

7. Inspecting existing and possible impairments of PPE – this examines the valuation model and the assumption used by the entity, it also examines the entity’s reasonableness in their estimates.

8. Performing systematic procedures to check for reasonableness of PPE and related expense stated in the financial statements – this examines the depreciation method and the expenses is properly measured.

9. Assessing the presentation and disclosures in the financial statement of an item of PPE including its related revenue and expense – this assess whether proper disclosure is performed whether over depreciated or idle PPE is disclosed....