Auditing Property, Plant and Equipment | Auditing and Attestation | CPA Exam

IN this session, I will discuss auditing property, plant and equipment.
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The primary accounting record for equipment and other property, plant, and equipment accounts is generally a fixed asset master file. The master file includes a detailed record for each piece of equipment and other types of property owned. Each record in the file includes a description of the asset, date of acquisition, original cost, current year depreciation, and accumulated depreciation for the property.

Auditors verify equipment differently from current asset accounts for three reasons:
1. There are usually fewer current period acquisitions of equipment, especially large equipment used in manufacturing.
2. The amount of any given acquisition is often material.
3. The equipment is likely to be kept and maintained in the accounting records for several years.
Because of these differences, the auditing of equipment emphasizes the verification of current period acquisitions rather than the balance in the account carried forward from the preceding year. In addition, the expected life of assets over one year requires depreciation expense and accumulated depreciation accounts, as shown in Figure 19-1, which are verified as part of the audit of the assets. Finally, equipment may be sold or disposed of, triggering a gain or loss entry that the auditor may need to verify.
Although the approach to verifying equipment differs from that used for current assets, several other asset accounts are verified in much the same manner. These include patents, copyrights, catalog costs, and all property, plant, and equipment accounts.
In the audit of equipment and related accounts, it is helpful to separate the tests into the following categories:
• Perform substantive analytical procedures
• Verify current year acquisitions
• Verify current year disposals
• Verify the ending balance in the asset account
• Verify depreciation expense
• Verify the ending balance in accumulated depreciation
Next, let’s examine the use of these categories of tests in the audit of equipment, depreciation expense, accumulated depreciation, and gain or loss on disposal accounts.
The failure to capitalize a fixed asset, or the recording of an acquisition at the incorrect amount, affects the balance sheet until the company disposes of the asset. The income statement is affected until the asset is fully depreciated.
In testing acquisitions, the auditor must understand accounting standards to make certain the client follows the related requirements. For example, the auditor needs to be alert for the possibility of the client’s failure to include material transportation and installation costs as part of the asset’s acquisition cost and the failure to properly record the trade-in of existing equipment.
Auditors should also verify recorded transactions for correct classification among various equipment accounts. In some cases, amounts recorded as manufacturing equipment should be classified as office equipment or as a part of the building.

Transactions involving the disposal of equipment are often misstated when company internal controls lack a formal method to inform management of the sale, trade-in, abandonment, or theft of recorded machinery and equipment. If the client fails to record disposals, the original cost of the equipment account will be overstated indefinitely, and net book value will be overstated until the asset is fully depreciated.
Detail tie-in tests of the recorded disposals schedule are necessary, including footing the schedule, tracing the totals on the schedule to the recorded disposals in the general ledger, and tracing the cost and accumulated depreciation of the disposals to the property master file.
he following procedures are often used for verifying disposals:
• Review whether newly acquired assets replace existing assets
• Analyze gains and losses on the disposal of assets and miscellaneous income for receipts from the disposal of assets
• Review plant modifications and changes in product line, and changes in major, costly computer-related equipment; property taxes; or insurance coverage for indications of deletions of equipment
• Make inquiries of management and production personnel about the possibility of the disposal of assets
Verify Ending Balance of Asset Account
Two of the auditor’s objectives when auditing the ending balance in the equipment accounts include determining that:
1. All recorded equipment physically exists on the balance sheet date (existence)
2. All equipment owned is recorded (completeness)