Chapter 18 Substantive Test of Property, Plant and Equipment

Assertions men tioned in this textbook relate to primaty assertion addressed by {he audit procedures
discussed. However, some other assertions may “150 be addressed.

geconciliatiop of Subsidiary Ledger with General Ledger Mmar§Audit Before making a detailed analysis
of changes in PPE 0" ectives: ' ' accounts during the year, the auditor should obtain a X3223)?“ schedule
of property, plant and equipment, including comvleteness capitalized leases, and related additions,
disposals, retirements, reclassihcations and depreciation (PPE subledger) and agree balances to the
respective general ledger accounts. Reconciliation of the subsidiary ledgers with the controlling accounts
can be

performed with the use of generalized audit software.

The reconciliation schedule normally includes the following items:

1. A description of the asset or asset classifications;

2. Cost for each asset or asset classification, including the opening balance at the beginning of the year,
additions and disposals, retirements and the balance at the end of the year;

3. Accumulated depreciation, showing:

a. Balance at the beginning of the year;

b. Debits to accumulated depreciation due to transfers, derecognition and reversals;

c. Depreciated book value before the current year’s depreciation, if the provision is based on the
declining balance;

d. Depreciation or depletion rate for each asset classification;

e. Depreciation or depletion expense for the year; and

f. Balance at the end of the year.

Examination of Additions and Disposals (including retirements) PrimariAuditf 1After reconciling the
general ledger and sub-ledgers 0f 0b'ect1ves:* the PPE, the auditor vouches additions and disposalg

EXiStence °r ’(including retirements). Vouching of additions to thg occurrence .

Valuation property, plant and equipment accounts dunng thg Ri;hts period under audit is considered
one of the most

important substantive tests. The extent of vouching is “ependent upon the auditors’ assessment of
control risk for the existenCQ \nd valuation of plant and equipment.

“dditions

Normally, additions to property, plant and equipment are acquired and. erefore, recorded at purchase
or acquisition cost. An entity that constructs

hssets for its own use may capitalize interest costs that it incurs during the the required to bring the
asset to the condition and location for its

‘ntended use, as permitted by PAS 16 Property, Plant and Equipment and

683

Chapter 18 Substantive Test of Property, Plant and Equipment

PAS 23 Borrowing Cost. If the PPE is donated or acquired for consideration other than cash, the cost of
the acquisition is determined in reference to PAS 16 Property, Plant and Equipment.
When testing additions, the auditor normally vouches all additions but in some cases, the auditor may
decide to vouch only sample additions. The specific steps typically performed by the auditor to verify
additions during the year will include the following:

1. For acquisitions of property (e.g., land and buildings), the auditor should verify the occurrence and
cost of the addition by examiningthe capital expenditure authorization and purchase agreement,
contraq deeds, cancelled checks, or other documentation. The auditor should also ensure that all costs
of acquisition are included in the PPE account;

2. For other additions to PPE, verify the occurrence and valuation by tracing the description and amount
to purchase orders, capital expenditure authorizations, contacts, architects’ certificates, legal
correspondence, supplier’s invoices, cancelled checks, or other appropriate documentation;

3. For cost incurred related to PPE (e.g., land improvements, building improvements, major repairs,
etc.), the auditor should examine supporting invoices and check whether the acquisition represents
capital expenditure based on the capitalization policy of the entity,

4. For PPE under construction:

a. Check that additions are properly approved in accordance with the entity’s authorization;

b. Verify the change in Construction in Progress (CIP) accountbl’ examining contractors’ progress billings,
labor charges, and other supporting documentation for additions;

c. Check that all costs incurred up to the reporting date and W withholding payments (e.g., amounts
withheld from paymean contractors pending satisfactory completion of construction) ha“ been properly
recorded;

d. Test calculations of capitalized borrowing cost (e.g. interest)? determine if the appropriate rates,
amounts and capitalization periods have been used, and whether these are in accordance with the
entity's capitalization policy;
Review and calculate the allocation of overhead chaf895 httributable to construction; f Compare the
total cost of self-constructed equipment with bids."r ' estimated purchase prices for similar equipment
from 0115““ §upplier, savings on construction should not be recognized; and Trace transfers from the
CIP account to the property accounts’ g’ pbserving propriety of classification.

8.