Property, Plant, and Equipment: Depreciation and

Depletion

Chapter 13

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Audit Approach—Current AccountsVersus Noncurrent Account

Cash

Securities

Accounts Receivable

Inventories

Accrued Liabilities

Accounts Payable

Short-Term Notes

Property, Plant & Equipment

Intangible Assets

Long-Term Liabilities

Owner’s Equity Accounts

High turnover accounts

Audit approach—audit the balance

Low turnover accounts

Audit approach—audit the changesin the accounts

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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

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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:

a.Substantiate the existence of property, plant, and equipment

b.Establish the completeness of recorded property, plant, and equipment

c.Verify the cutoff of transactions affecting property, plant, and equipment

d.Determine that the client has rights to recorded property, plant, and equipment

e.Establish the proper valuation or allocation of property, plant, and equipment and the accuracy of transactions affecting property, plant, and equipment

f.Determine that the presentation and disclosure of property, plant, and equipment are appropriate

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Substantive Tests of Property, Plant, and Equipment

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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

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Audit of Intangibles

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