AUDIT OF PROPERTY, PLANT,

AND EQUIPMENT
PROPERTY, PLANT, AND EQUIPMENT

 Property, plant, and equipment generally termed as

PPE has been an influential contributor of the asset
side of balance sheet (Statement of Financial
Position).Even it gets a lot of emphases when we
calculating materiality because depreciation
charged on this has a direct effect on gross
margin.we often got confused about the audit
procedure of PPE. Following are the audit
procedure of property, plant, and Equipment:
Property, plant and equipment

 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
Objectives for the Audit of Property,
Plant and Equipment
 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.
 3.Assess the risks of material misstatement and design
tests of controls and substantive procedures that:
 4.Substantiate the existence of property, plant, and
equipment
 5.Establish the completeness of recorded property,
plant, and equipment
Objectives for the Audit of 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
Controls Over Plant and Equipment
 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
Steps in Audit of PPE
 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.
 Steps in Audit of PPE
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.
 Steps in Audit of PPE
 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.
Vouch Additions (1 of 2) 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.
Vouch Additions (2 of 2)

 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.
Analyze Expense Accounts

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

Impairment of Long-Lived Assets

 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
Investigate Retirements
 Determine if property sold, dismantled, or abandoned
without being reflected in accounting records
 Steps to discover unrecorded retirements:
 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
Presentation and Disclosure
 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.
Auditors’ Approach for Depreciation
 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
Natural Resources 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
 Freehold property
 Agree on opening balances to prior years working
papers/financial statement.
 Inspect the title deed to the property.
 Inquire any valuations have been carried out in the year.
 If any valuation shows a fall in value, propose an adjustment.
 Inspect the property to confirm (existence) that no provision for
fall in value is necessary.
 Confirm from the bank letter any charges on the property.
 Confirm all charges are properly disclosed in a note to the
financial statements.
 Re perform the calculation of depreciation, ensuring that
freehold land is not depreciated.
Plant and machinery and motor
vehicles
 Confirm opening balances to prior year financial statements.
 Obtain a list of additions in the year which reconciles with the total
in the financial statements.
 For a sample of additions-trace to purchase invoice to confirm
ownership-review board. minutes/capital expenditure Requisition
for authorization.
 Review the list of additions to confirm all items are capital nature.
 For a sample of the asset on the register, physically inspect to
confirm existence.
 Inspect vehicle registration document to confirm ownership.
 Compare the depreciation charge(as a percentage of cost) on a
category by category basis with that in the prior year to assess
reasonableness.
Plant and machinery and motor
vehicles
 Re-perform depreciation calculations for a sample of
the asset on the register.
 Obtain a list of disposal in the year which reconciles
with the total in the financial statements.
 For a sample of disposals-trace sales proceeds to sales
invoice and cash book-re perform. calculation of profit
on disposal and trace to profit and loss account.
 ·Review repairs and renewals account to ensure that no
items of a capital nature have been written off.
 Instead of this, we need to use professional judgement
in different circumstances 16(Property, Plant and
Equipment) should be applied in conjunction with the
audit procedure for a fruitful outcome.
Plant and machinery and motor
vehicles
Audit procedure for property, plant,
and equipment