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13-1
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Tangible assets with a service life of more than
one year that are used in the operation of the
business and are not acquired for the purpose
of resale
Three major subgroups:
Land
 Buildings, machinery, equipment and land
improvements
 Natural resources

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13-2
1. Use the understanding of the client and its
environment to consider inherent risk,
including fraud risks, related to property,
plant, and equipment.
2. Obtain an understanding of internal control
over property, plant, and equipment.
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13-3
1.
Assess the risks of material misstatement and design
tests of controls and substantive procedures that:
a. Substantiate the existence of property, plant, and
b.
c.
d.
e.
f.
equipment
Establish the completeness of recorded property, plant, and
equipment
Verify the cutoff of transactions affecting property, plant,
and equipment
Determine that the client has rights to recorded property,
plant, and equipment
Establish the proper valuation or allocation of property,
plant, and equipment and the accuracy of transactions
affecting property, plant, and equipment
Determine that the presentation and disclosure of property,
plant, and equipment are appropriate
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13-4
Cash
Accrued Liabilities
Securities
Accounts Payable
Accounts Receivable
Short-Term Notes
High turnover
accounts
Audit approach—
audit the balance
Inventories
Property, Plant
& Equipment
Long-Term
Liabilities
Intangible Assets
Owner’s Equity
Accounts
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Low turnover
accounts
Audit approach—
audit the changes
in the accounts
13-5
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Use of a plant and equipment capital budget
Maintenance of a subsidiary ledger
A system of authorizations
Analysis of variances from budgeted expenditures
A statement of policy distinguishing between capital and
revenue expenditures
A requirement that purchases of plant and equipment are
subjected to normal purchasing procedures
Periodic physical inventories
A system of retirement authorization and documentation
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13-6

Working papers




Summary analysis that emphasizes changes during
the year under audit
Analyses of additions and retirements for the current
year
Analyses of repairs and maintenance expense
accounts
Tests of depreciation
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13-7

Beginning balances


Substantiated by review of predecessor firm’s
working papers
If not previously audited, a complete historical
analysis of property accounts is needed
 Thorough review of all major charges and credits to
property accounts
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13-8
A. Use the understanding of the client and its
environment to consider inherent risks, including
fraud risks, related to property, plant, and equipment.
B. Obtain an understanding of internal control over
property, plant, and equipment.
C. Assess the risks of material misstatement and design
further audit procedures.
D. Perform further audit procedures—tests of controls.
1. Nature of tests of controls.
2. If necessary, revise the risks of material misstatement based on the
results of tests of controls.
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13-9
E. Perform further audit procedures—substantive procedures for
property, plant, and equipment.
1. Obtain a summary analysis of changes in property owned and
reconcile to ledgers.
2. Vouch additions to property, plant, and equipment during the
year.
3. Make a physical inspection of major acquisitions of plant and
equipment.
4. Analyze repair and maintenance expense accounts.
5. Investigate the status of property, plant, and equipment not in
current use.
6. Test the client’s provision for depreciation.
7. Investigate potential impairments of property, plant, and
equipment.
8. Investigate retirements of property, plant, and equipment
during the year.
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13-10
E. Perform further audit procedures (cont.)
9. Examine evidence of legal ownership of property, plant, and
equipment.
10. Review rental revenue from land, buildings, and equipment
owned by the client but leased to others.
11. Examine lease agreements on property, plant, and equipment
leased to and from others.
12. Perform analytical procedures for property, plant, and
equipment.
13. Evaluate financial statement presentation and disclosure for
plant assets and for related revenue and expenses.
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13-11
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13-12
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13-13
Specific steps:
a. Review changes during the year in construction in progress and
examine supporting work orders, both incomplete and closed.
b. Trace transfers from the Construction in Progress account to the
property accounts, observing propriety of classification.
Determine that all completed items have been transferred out of
the account.
c. On a test basis, vouch purchases of property, plant, and
equipment to invoices, deeds, contracts, or other supporting
documents. Recompute extensions, footings, and treatment of
discounts. Make certain repairs and maintenance expenses were
not improperly capitalized.
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13-14
Specific steps (cont.)
d. Investigate all instances in which the actual cost of
acquisitions substantially exceeded authorized
amounts. Determine whether such excess expenditures
were analyzed and approved by appropriate officials.
e Investigate fully any debits to property, plant, and
equipment accounts not arising from acquisition of
physical assets.
f. Determine that the total cost of any plant and
equipment assets purchased on the installment plan is
reflected in the asset accounts and that the unpaid
installments are set up as liabilities.
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13-15

Analyze repairs and maintenance expense
accounts to:



Discover items that should have been capitalized
Use company policy to determine consistency in
application
Analyze monthly amounts for significant variations
from:
 Month to month
 Between corresponding months of two years
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13-16
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Long-lived assets must be reviewed for
impairment whenever events or changes in
circumstances indicate that carrying value may
not be recoverable
Test involves projecting future cash flows
If impairment is indicated by cash flows asset
must be written down to fair value
May require the use of a valuation specialist
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13-17


Determine if property sold, dismantled, or abandoned
without being reflected in accounting records
Steps to discover unrecorded retirements:
1.
2.
3.
4.
5.
6.
For new additions, determine status of old equipment
Analyze miscellaneous revenue account for cash proceeds
If company’s products discontinued, investigate disposition of
plant facilities
Inquire of executives and supervisors of plant asset retirements
Examine retirement work orders for proper authorization
Investigate any reduction in insurance coverage
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13-18
Ratios and trends for overall reasonableness of
recorded amounts
a. Total cost of plant assets divided by annual output
in dollars, pounds, or other units.
b. Total cost of plant assets divided by cost of goods
sold.
c. Comparison of repairs and maintenance expense on
a monthly basis and from year to year.
d. Comparison of acquisitions for the current year
with prior years.
e. Comparison of retirements for the current year with
prior years.
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13-19
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Disclose major classes of depreciable assets
Accumulated depreciation
Principles:
a. The basis of valuation should be explicitly stated. At present, cost is the
generally accepted basis of valuation for plant and equipment;
property not in use should be valued at the lower of cost or estimated
realizable value.
b. Property pledged to secure loans should be clearly identified.
c. Property not in current use should be segregated in the balance sheet.
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13-20
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13-21
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Important because depreciation is an estimate.
Client makes
 Estimate of useful economic life
 Choice of several depreciation methods
Audit approach for estimate
 Review and test management’s process of
developing the estimate
 Review subsequent events or transactions bearing on
the estimate
 Independently develop an estimate of the amount to
compare to management’s estimate
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13-22
1. Review the depreciation policies set forth in company
manuals or other management directives. Determine
whether the methods in use are designed to allocate
costs of plant and equipment assets systematically over
their service lives.
a. Inquire whether any extra working shifts or other conditions
of accelerated production are present that might warrant
adjustment of normal depreciation rates.
b. Discuss with executives the possible need for recognition of
obsolescence resulting from technological or economic
developments.
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13-23
2. Obtain or prepare a summary analysis (see Figure 13.1)
of accumulated depreciation for the major property
classifications as shown by the general ledger control
accounts, listing beginning balances, provisions for
depreciation during the year, retirements, and ending
balances.
a. Compare beginning balances with the audited amounts in
last year’s working papers.
b. Determine that the totals of accumulated depreciation
recorded in the plant and equipment subsidiary records
agree with the applicable general ledger controlling
accounts.
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13-24
3. Test the provisions for depreciation.
a. Compare rates used in the current year with those employed in
prior years and investigate any variances.
b. Test computations of depreciation provisions for a
representative number of units and trace to individual records
in the property ledger. Be alert for excessive depreciation on
fully depreciated assets. Generalized audit software can be
used to test the depreciation calculations in the client’s records
if the client maintains computer based records.
c. Compare credits to accumulated depreciation accounts for the
year’s depreciation provisions with debit entries in related
depreciation expense accounts.
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13-25
4. Test deductions from accumulated depreciation for
assets retired.
a. Trace deductions to the working paper analyzing retirements of
assets during the year.
b. Test the accuracy of accumulated depreciation to date of
retirement.
5. Perform analytical procedures for depreciation.
a. Compute the ratio of depreciation expense to total cost of plant
and compare with prior years.
b. Compare the percentage relationships between accumulated
depreciation and related property accounts with those
prevailing in prior years. Discuss significant variations from the
normal depreciation plan with appropriate members of
management.
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13-26
Overall test
1. List the balances in the various asset accounts at the
beginning of the year.
2. Deduct any fully depreciated assets, since these items
should no longer be subject to depreciation.
3. Add one-half of the asset additions for the year.
4. Deduct one-half of the asset retirements for the year
(exclusive of any fully depreciated assets).
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13-27
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
Properties subject to depletion
Similar to depreciation
Recorded consistently and in accordance with GAAP
 Test mathematical accuracy
 Often rely on specialists for valuation
 Establish ownership

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13-28
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Assets with definite useful lives are audited
similar to property, plant and equipment
Assets with indefinite useful lives (e.g.,
goodwill) must be tested for impairment
Auditors generally rely on business valuation
specialists to value goodwill for tests of
impairment
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13-29
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Most work can be done in advance
Consideration of internal control can be carried
out at any convenient time
Many firms audit during interim work in
October and November
After balance sheet date, only need to exam
transaction for final two or three months
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13-30