Ch 13 Property, Plant, and Equipment Depreciation

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Ch 13 Property, Plant, and Equipment
Depreciation
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Classification of Long Term Tangible Assets

• Land
• Bldgs, Machinery Equipment, Land Improvements
• Natural Resources

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Contrast With Audit of Current Assets

• PPE is also significant often gt 50 of total
  assets
• However,generally much less activity
• Low turnover
• Fewer transactions
• Stable balances
• Cutoff usually not a key issue

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Controls Over Plant Equipment

• Use of a plant equipment capital budget
• Maintenance of detail subsidiary ledgers
• System of authorization
• Work orders for constructed assets
• Analysis of variances from budgeted expenditures
• Statement of policy distinguishing between
  capital expense(RM) expenditures
• Requirement that purchases of plant and equipment
  be subjected to normal purchasing procedures
• Periodic physical inventories
• System of retirement authorization and
  documentation

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Audit Objectives for Property, Plant and Equipment

• Consider inherent risks, including fraud
• Consider internal control
• Determine existence of recorded PPE
• Establish completeness of recorded PPE
• Establish that client has rights to recorded PPE
• Establish clerical accuracy of schedules of PPE
• Determine that valuation or allocation of cost is
  in accordance with GAAP
• Determine that presentation and disclosure is
  appropriate

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Potential Misstatements--Investments in Property,
Plant and Equipment

• Misstatement of acquisitions
• Charged to RM
• Self constructed assets
• RM is capitalized
• Failure to record retirements
• Proceeds on sales to Misc Inc or Asset A/C
• Trade-ins junked items not recorded
• Improper reporting-unusual transactions
• like kind exchanges, mergers
• WorldCom case

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Audit Program for Property, Plant, and Equipment

• Consider inherent risks, including fraud
• Consider I/C over PPE
• Obtain summary analyses of changes in PPE
  reconcile to ledgers
• Vouch additions during the year
• Physically inspect major acquisitions
• Analyze repair and maintenance expense accounts
• Test clients provision for depreciation
• Investigate the status of property not in use
• Investigate retirements of property during the
  year
• Examine evidence of legal ownership
• Examine lease agreements--capital leases?
• Perform analytical procedures
• Evaluate F/S presentation disclosure
• See Sample W/P following

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Audit Objectives for Depreciation

• Methods are acceptable under GAAP
• Methods are consistently applied
• Calculations and compilations are accurate

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Audit Procedures for Depreciation

• Review depreciation policies methods for
  propriety under GAAP
• Obtain schedules analyses
• Test depreciation calculations overall clerical
  accuracy and compilation
• Review deductions from accumulated depreciation
  accounts
• Perform analytical tests of current year
  provision
• See Figure 13-1

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Audit Program for Intangible Assets

• Determine appropriate capitalization
  classification of intangibles
• Review contractual legal aspects
• Vouch to agreements expenditures
• For purchased goodwill, determine appropriate
  method allocation of costs
• Review amortization (for amortizable intangibles
  G/W prior to FASB 141/142
• Periods
• Recompute current provision
• For G/W(under FASB 141/142)
• Determine FMV of purchased G/W make any
  writedowns as necessary