No. 125 Brgy.

San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

AP03-04 jsabellar/aljabinal/aeibay

AUDIT OF PROPERTY, PLANT, AND EQUIPMENT:

Audit Objectives:
Assertions Account Balances Audit Objectives
Existence All PPE presented in the statement of financial position exist.
All PPE owned and/or controlled are recorded and included in the
Completeness
statement of financial position.
The PPE are stated in the statement of financial position at the
Valuation and Allocation
appropriate amounts.
All PPE presented in the statement of financial position are owned
Rights and Obligations and/or controlled by the Company and any liens thereto are disclosed
in the financial statements.
All PPE are properly classified, described, and disclosed in the
Presentation and
financial statements, including the notes to financial statements, in
Disclosure
accordance with the applicable financial reporting framework.

Audit Procedures for Shareholders’ Equity:

Assertions and Audit
Audit Evidence and Procedures
Objectives
Existence, Completeness, A. General Procedures for the Audit of PPE:
Valuation and Presentation o Obtain PPE Lapsing Schedule and match totals with
and Disclosure the trial balance. Ensure that amounts matches.
o Obtain Accounting Policy for PPEs.
• Do recorded additions o Obtain Minutes of Board Meetings for PPE additions
exist? and/or disposals and other matters that may affect
PPEs.
• Have existing additions o Determine movements in the PPEs (e.g. Additions,
been recorded? Disposals, etc.)

• Have retirements been B. Procedures for PPE Additions:

recorded? o Obtain PPE Additions Listing and match with the PPE
lapsing schedule. Ensure that amounts matches.
• Are all PPEs valued at o Examine existence of PPE Additions by:
historical cost less • Inspecting major additions especially if control over
accumulated depreciation PPE is weak
less accumulated • Vouch PPE Additions by obtaining and examining
impairment losses? (If the the following documents:
Company is using the ✓ Purchase request by the requesting
Cost Model) department
✓ Vendor’s Invoice
✓ Freight Bills
✓ Work orders for constructed assets
✓ Receiving Report / Proof of completion
• Examine authorization on PPE acquisition through
BOD Minutes.
o Determine the propriety of the company’s accounting
for additions in relation to its Policies.
o For self-constructed assets, recalculate:
• Overhead Allocation; and
• Borrowing cost capitalized
 Assertions and Audit
Audit Evidence and Procedures
Objectives
C. Procedures for PPE Disposals:
• Have impaired assets been o Obtain PPE Disposal Schedule and match balances
properly reflected at their with the lapsing schedule. Ensure that amounts
recoverable amounts? matches.
o Determine propriety of disposals in relation to the
Company’s policies.
• Have expenditures been
o Examine Company’s Minutes of BOD Meetings for
properly classified as asset
approval of PPE disposals.
or expense? o Examine the existence and completeness of PPE
disposals by obtaining and examining the following
• Are there any liens against documents:
these PPEs and where • Approved Disposal Reports
these disclosed? • If destroyed, the proof of destruction
• If sold, sales invoice or official receipt. Determine
if any gains or losses are recognized and
determine appropriateness of such gains or
losses.
• Trace disposals to bank statements

D. Examine Repairs and Maintenance Accounts and

Recompute Depreciation Expense:
o Increase in depreciation may denote additions to PPE
(decrease may denote retirements);
o Increase in repairs and maintenance expense may be
the result of PPE additions having been erroneously
expense (decrease may indicate capitalization of
ordinary repairs); and
o Favorable Repairs and Maintenance budget variance
may also indicate possible errors in capitalization of
ordinary repairs.
o Examine supporting documents in relation to repairs
and maintenance.
o Evaluate appropriateness and consistency of
depreciation methods.
o Calculate change in deferred taxes related to
temporary differences between book and tax
depreciation.

E. Evaluate management’s assessment and computation of

impairment losses/revaluation of PPE.

F. Procedures for Presentation and Disclosure:

o Inquire as to assets not used in production:
• Assets on standby;
• Assets awaiting disposal; and
• Those held for investment purposes
o Examine all lease agreements and determine proper
classification.
o Examine loan agreements for possible lien to PPEs.

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 A. SUBSTANTIVE TESTING:

1. Property, plant and equipment is typically judged to be one of the accounts least susceptible
to fraud because
A. The amounts recorded on the balance sheet for most companies are immaterial.
B. The inherent risk is usually low.
C. The depreciated values are always smaller than cost.
D. Internal control is inherently effective regarding this account.

2. When few property and equipment transactions occur during the year, the continuing auditor
usually obtains an understanding of internal control and performs
A. Tests of controls.
B. Analytical procedures to verify current year additions to property and equipment.
C. A thorough examination of the balances at the beginning of the year.
D. Extensive tests of current year property and equipment transactions.

3. Determining that proper amounts of depreciation are expensed provides assurance about
management’s assertions of valuation and allocation and
A. Presentation and disclosure C. Rights and obligations
B. Completeness D. Existence

4. When auditing prepaid insurance, an auditor discovers that the original insurance policy on
plant equipment is not available for inspection. The policy’s absence most likely indicates the
possibility of a (an)
a. Lien on the plant equipment.
b. Insurance premium due but not recorded.
c. Deficiency in the coinsurance provision.
d. Understatement of insurance expense.

5. Which of the following combinations of procedures would an auditor most likely perform to
obtain evidence about fixed asset additions?
a. Recomputing calculations and obtaining written management representations.
b. Observing operating activities and comparing balances to prior period balances.
c. Inspecting documents and physically examining assets.
d. Confirming ownership and corroborating transactions through inquiries of client
personnel.

6. The following are part of your general procedures in the audit of property, plant and
equipment except which one?
a. Obtain the PPE lapsing schedule and ensure that the balances per lapsing matches
with the trial balance.
b. Obtain the accounting policy of PPEs and examine the Company’s policy as to
the recognition, measurement, disclosure and disposal of the fixed assets.
c. Obtain Minutes of BOD meetings and check if there are items involving
acquisition or disposal of fixed assets including any liens thereto.
d. Recalculate depreciation of all PPEs.

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 7. Generally, when testing depreciation expense, the auditor performs substantive analytics
rather than extensive vouching of sampled PPEs. Which of the following may be the best
reason for such?
a. It is more efficient to conduct substantive analytics for depreciation than to do
extensive vouching.
b. The computation of depreciation is relatively straightforward and may be
recalculated by the audit staff.
c. The more effective procedure for the test of Depreciation is substantive analytics
than extensive vouching of sampled PPEs.
d. The computation of depreciation is relatively easy and may be done by a non-
CPA staff.

8. Among the choices, which is not a document that will be obtained by an auditor when
testing additions of PPEs.
a. Vendor’s invoice c. Work orders of repaired fixed assets
b. Receiving Report d. Minutes of BOD meetings

9. Among the following documents, which can provide support for the propriety of the
Company’s claim on the land presented in the Financial Statements?
a. Contract to Sell c. Tax declaration and payment for the land
b. Canceled check d. Certificate of Title annotated by registry of deeds

10. When assessing the accuracy of amounts recorded for self-constructed assets, the auditor
must be alert in checking which of the following items?
a. Purchased materials
b. Direct labor capitalized
c. Indirect labor capitalized
d. Applied construction overhead.

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PRACTICE PROBLEM NO. 1
NALLA, Inc. started its operations at the beginning of 2020. In your audit of NALLA, Inc., you
were able to obtain the following PPE schedule from the audit client. The balances are as follows:
Land P 10,000,000
Building 6,500,000
Equipment 6,000,000
Furniture and Fixtures 3,500,000
Total P 26,000,000

Audit Notes:
1. NALLA, Inc. acquired the land at the beginning of the year at a total purchase price of
P10,000,000. The term of the acquisition calls for a 20% down payment and the issuance
of a 5-year non-interest bearing note for the balance. The note is payable equally at the end
of each year starting December 31, 2020. The implicit rate on this date is 10%.

2. The building was constructed by QT, Inc. which cost around P6.5M. The constructed
started even before the commencement of operations in 2020 and was completed in time
for the company’s inception of operation at the beginning of 2020. The agreement with QT
calls for the issuance of 100,000 NALLA’s own shares in exchange of the constructed
building. The prevailing fair value of the shares on this date was P70 per share.

3. Three equipment were acquired during the year by NALLA:

a. Equipment A was acquired on account at the beginning of January 2020 at

P2,000,000 payable three months from date of purchase. A 10% discount on the
price shall be provided if payment was made within January. Due to unavailability
of cash, the company paid the amount due at the end of March.

b. Equipment B was acquired on July 1, 2020 at a purchase price of P4,000,000.

NALLA incurred import duties and non-refundable taxes amounting to P250,000
which it had charged to operations. Additional installation costs were incurred at
P50,000 which were also charged to operations. The company expects to incur asset
retirement obligation on the asset upon retirement P161,051. The implicit rate is
10%.

c. Equipment C was not recorded in NALLA’s books. It was received from one of its
major stockholders – Archie, on September 1, 2020. The equipment had a
prevailing fair value on the same date at P1,200,000. The company incurred legal
fees in processing the donation at P100,000 which was charged to operating
expense.

4. Various furniture and fixtures were acquired at the beginning of the year from Custard
Bork Company with the following terms of payments:
Cash P 1,000,000
3-year non-interest bearing note 2,000,000
10,000 shares at par P50 500,000

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 It was ascertained that the total cash price of the various furniture and fixtures was at
P3,200,000.

5. NALLA has the following depreciation policy:

a. Building – 15 years useful life using the 150% Declining Balance Method
b. Equipment – 5 years using SYD
c. Furniture and Fixtures – 10 years using Straight Line
d. The salvage value of the asset was estimated at 10% of its initial cost.
Based on the foregoing, compute for the following:
i. Depreciation Expense
a. Building
b. Equipment A
c. Equipment B
d. Equipment C
e. Furniture and Fixtures

ii. Adjusted book values of

a. Land
b. Building
c. Equipment
d. Furniture and Fixtures

PRACTICE PROBLEM NO. 2

Koto, Inc. purchased a machine on January 1, 2019 at a cost of P100,000. It is being depreciated
using the straight line method over the life of 10 years. At December 31, 2019 the asset’s fair value
was P112,500. Accordingly, an entry was made on that date to recognize the revaluation write-up.

An impairment was detected on December 31, 2021 and the recoverable amount of the asset was
determined to be P68,000. At December 31, 2022 the fair value of the asset was determined to be
P73,000.

6. How much is the revaluation surplus balance at December 31, 2021, before recognition of
impairment loss?
a. P 17,500 b. P 20,000 c. P 22,500 d. P 25,000

7. How much would be the amount of impairment loss to be reported on Koto’s income statement
for the year 2021?
a. P 5,000 b. P 3,500 c. P 2,000 d. P 1,500

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 PRACTICE PROBLEM NO. 3:

In the course of your audit of PPE of QT, Inc. for the period ended December 31, 2020, you have
decided to review property additions to determine propriety of the items capitalized and the
company’s repairs and maintenance expense accounts to determine whether there are capitalizable
costs which were expensed during the year.
Audit Notes:
A. PPE Additions:
i. QT replaced its old wooden roof with a fireproof brick roof. The cost of the new roof
is P300,000.
ii. Repainting was made on QT’s plant buildings. The repainting costed QT P60,000.
iii. Other routinary repairs on the building amounted to P50,000.
iv. QT replaced some minor gears on its equipment. It cost QT P20,000 to buy these
replacement parts.
v. QT acquired new equipment to replace its retired factory equipment. The new
equipment costs P500,000.
vi. QT incurred rearrangement cost of a group of factory equipment to ensure greater
efficiency in production. The cost of rearrangement is P120,000 of which P40,000 is
for moving costs and P80,000 is for reinstallation costs.

B. Repairs and Maintenance Expense:

vii. Major improvements to the electrical wiring system – P70,000
viii. Service contract on office equipment – P40,000
ix. Acquisition of furniture – P50,000
x. Storm windows and screens installation - P162,000
xi. Automatic door-opening system installation – P200,000
xii. Sealing of rook leaks in the factory – P25,000
xiii. Overhead crane in the assembly department – P70,000

1. Based on the information above, how much should be capitalized to:

a. Building
b. Equipment
c. Furniture and Fixtures

2. How much should be expensed?

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