Which assertion is considered high risk for the audit of property plant and equipment?
External Auditors of most manufacturing organisations usually scope in PPE as a risk area during their annual audit due to its materiality. A combination of controls testing and substantive testing is usually adopted when obtaining audit assurance on PPE. Show The subject matter for discussion on audit readiness this week is Property, Plant and Equipment (PPE). This item falls within the scope of IAS 16. This standard is applicable in accounting for property, plant and equipment, which it defines as tangible items that:
The Standard excludes the following from its scope: Property, plant and equipment classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations;
External Auditors of most manufacturing organisations usually scope in PPE as a risk area during their annual audit due to its materiality. A combination of controls testing and substantive testing is usually adopted when obtaining audit assurance on PPE. Within the business cycles selected for testing during a particular period, the principal business activities and the sub processes are tested. The objectives for testing the sub processes are: Acquiring fixed assets Recorded fixed asset acquisitions represent fixed assets acquired by the organization. Fixed asset acquisitions are accurately recorded. Fixed asset acquisitions are recorded in the appropriate period. All fixed asset acquisitions are recorded. The recognition criteria for property, plant and equipment are derived from the general principles for asset recognition reflected in the Conceptual Framework for Financial Reporting. An item of property, plant and equipment is to be recognised as an asset if, and only if:
Depreciating fixed assets Depreciation charges are valid. Depreciation charges are accurately calculated and recorded. All depreciation charges are recorded in the appropriate period. Depreciation, as defined in IAS 16:6, is the systematic allocation of the depreciable amount of an asset (i.e. the cost of the asset, or other amount substituted for cost, less its residual value) over its useful life. In order to comply with the requirements of IAS 16 relating to depreciation, it is necessary to identify: The parts (components) of each item of property, plant and equipment that are to be depreciated separately;
Disposing of fixed assets Recorded fixed asset disposals represent actual disposals. All fixed asset disposals are recorded. Fixed asset disposals are accurately calculated and recorded. Fixed asset disposals are recorded in the appropriate period. Managing fixed assets Records of fixed asset maintenance activity are accurately maintained. Fixed assets are adequately safeguarded. Fixed asset maintenance records are updated timely. Fixed assets reflect the existing business circumstances and economic conditions in accordance with the accounting policies being used. Financial information is not presented in a misleading way and all information that is necessary for fair presentation and compliance with professional standards or legal requirements is disclosed. Maintaining fixed asset register and/or master file Only valid changes are made to the fixed asset register and/or master file. All valid changes to the fixed asset register and/or master file are input and processed. Changes to the fixed asset register and/or master file are accurate. Changes to the fixed asset register and/or master file are processed timely. Fixed asset register and/or master file data remains pertinent. External Auditors would always request to examine documents to support the assertions that the above objectives are reasonably met. Processes that do not leave a visible trail are tested via observation or re-performance. Where internal controls are strong, Auditors may reduce the planned level of substantive assurance. This is usually the case and that is why it is desirable for entities to ensure that internal controls are very in design and also very efficient and effective in operation. Impairment Review External Auditors may also be interested in entities impairment review documentation. Entities should refer to the requirements of IAS 36 Impairment of Assets to determine whether an item of property, plant and equipment is impaired. IAS 36 explains how an entity reviews the carrying amount of its assets, how it determines the recoverable amount of an asset, and when it recognises or reverses an impairment loss. Occasionally, an entity may receive a compensation for impairment or loss. When an asset is impaired, lost or given up, any compensation from third parties is included in profit or loss when the compensation becomes receivable. [IAS 16:65] Examples of such circumstances include: Reimbursements by insurance companies after the impairment or loss of items of property, plant and equipment (e.g. due to natural disasters, theft etc.); Indemnities by governments for items of property, plant and equipment that are expropriated (e.g. compulsory purchase of land to be used for public purposes);
The Standard emphasises that impairments or losses of items of property, plant and equipment, related claims for or payments of compensation from third parties, and any subsequent purchase or construction of replacement assets are separate economic events and should be accounted for as such. Netting of transactions is not allowed. The three economic events should be accounted for separately as follows: In respect of impairment or loss:
Violation of these rule may result to audit reversals which may taint the competence of the accounting function. Derecognition The Auditors may also test the application of the de-recognition policy. IAS 16 requires that the carrying amount of an item of property, plant and equipment should be derecognised:
The reality is that certain organizations still include in the carrying amount of their PPE, the value of PPE of on which future economic benefits are reasonably not expected from their use or disposal. Their documentation and available facts do not support this assertion. What are the assertions for property plant and equipment?The primary relevant property assertions are:. Existence and occurrence.. Completeness.. Valuation.. Classification.. What is high risk in audit?Audit Risk
Possible signs of a high-risk engagement include a company with lots of year-end transactions; extremely complex transactions; a lack of internal controls; and executive compensation based on reported earnings.
How do you audit property plant and equipment?How to Audit Property, Plant and Equipment. Physical verification of fixed assets.. Test of controls on purchasing of fixed assets to booking of assets on fixed asset register.. Substantive audit procedures on newly built/purchased asset.. What are the 4 types of audit risk?Types Of Audit Risks. Meaning and Definition Of Audit Risks. ... . Types of Audit Risks. ... . Inherent Risk. ... . Detection Risk. ... . Control Risk.. |