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Property audit
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AP-6: Audit Program for PropertyCompany Balance Sheet Date
The company has the following general ledger accounts that will be classified in the property component of the balance sheet.
General Ledger Account Number
Description of Account Fixed Asset AccumulatedDepreciation Related Expense
Audit Program for Property
Company Balance Sheet Date
Audit Objectives
Audit Procedures for Consideration
N/APerformed by
Workpaper Index
FINANCIAL STATEMENT ASSERTIONS
E/O Existence or occurrence. V/A Valuation or allocation.C Completeness. P/D Presentation and disclosure.R/O Rights and obligations.
AUDIT OBJECTIVES
A. Property, plant, and equipment reflected in the accounts represent a complete listing of capitalizable cost of assets purchased, constructed or leased by the company, and such assets are physically on hand. Accordingly, noncapitalizable costs are properly expensed, and capitalizable costs are excluded from maintenance or other expense accounts (assertions E/O, C, and R/O).
B. Property, plant, and equipment is valued at cost in accordance with GAAP (assertion V/A).
C. The costs and related depreciation applicable to all sold, abandoned, damaged, or obsolete property have been properly removed from the accounts (assertions E/O, C, and V/A).
D. Depreciation charged to income during the period is adequate but not excessive and has been computed on an acceptable basis consistent with that used in prior years (assertion V/A).
E. The balances in the depreciation allowance accounts are reasonable, considering the expected useful lives of the property units and estimated salvage value. Accordingly, the net carrying values of property presented in the financial statements are expected to be recoverable in the ordinary course of business (assertion V/A).
F. Property is properly classified in the balance sheet, and liens, significant fully depreciated assets, idle property, and property held for investment purposes are properly disclosed. The financial statements also include disclosure of the major classes of depreciable assets, accumulated depreciation, depreciation methods and amounts, basis of valuation, amounts of capitalized interest, capital leases, impaired assets, assets held for sale, and asset
retirement obligations (assertion P/D).
G. Information necessary to prepare the company’s tax return has been obtained (optional objective if the auditor also has tax return responsibilities).
IDENTIFICATION CODES
The letters preceding each of the above audit objectives, i.e., A, B, etc., serve as identification codes. These codes are presented in the left column labeled “Audit Objectives” when a procedure accomplishes an objective. If the alpha code appears in a bracket, e.g., [A], [B], etc., the audit procedure only secondarily accomplishes the objective. If an asterisk precedes a procedure, it is a preliminary step or a follow up step that does not accomplish an objective.
BASIC PROCEDURES
* 1. Determine the most efficient workpaper approach to audit property—(a) work directly from a copy of the company’s detailed property records or (b) use a lead schedule that summarizes the transactions in each account, then supplement with detailed schedules showing significant additions, retirements, or adjustments to each account. Test the clerical accuracy of these workpapers, cross reference amounts, and tie totals to the general ledger.
Practical Considerations:
¯ The auditor’s firm may also be engaged to prepare the detailed property records. When this occurs, it is normally less expensive to have one of the firm’s paraprofessionals update the property records before the start of the audit.
¯ If the auditor has tax return responsibility or maintains the detailed property records, it may be more efficient to audit directly from the detailed records, assuming a copy can be obtained for the workpapers.
¯ If the client uses packaged accounting software and the auditor has determined that the client is unable to make changes to program coding, testing the mechanical accuracy (i.e., footing) of the fixed asset detail may not be necessary. If procedures are
performed to test mechanical accuracy in this situation, they may be limited.
¯ If a summary lead schedule is used as the primary workpaper, it should contain the following columns for each property and related accumulated depreciation account.
¯¯ Prior year-end general ledger property balance.
¯¯ Current year additions to property.
¯¯ Current year retirements of property.
¯¯ Other adjustments (a column just in case there were transfers between property accounts).
¯¯ Current year-end general ledger property balance.
¯¯ Adjustment column(s) (this can be one column or separate debit and credit columns).
¯¯ As adjusted current year general ledger property balance.
¯¯ A column with a brief description of the depreciation method and life.
¯¯ Prior year-end general ledger depreciation allowance balance.
¯¯ Additions to the allowance account for current year depreciation.
¯¯ Reductions to the account for current year retirements, sales, disposals, etc.
¯¯ Other adjustments (a column just in case there were transfers between allowance accounts).
¯¯ Current year-end general ledger allowance balance.
¯¯ Adjustment column(s).
¯¯ As adjusted current year general ledger allowance balance.
G 2. If you are responsible for the preparation of the company’s federal income tax return, obtain the following information:
a. For additions: date acquired, detailed description of the asset, its cost, useful life, and depreciation method for tax return.
b. For retirements: date retired, depreciation through retirement date, proceeds (if any) from sale of the asset, and original acquisition date of the property.
Practical Consideration:
¯ If a copy of the detailed property records is used as the primary audit schedule, a significant portion of this material may already be captured or can be easily added to the detailed records.
A, B,[C]
3. For current year additions to property, perform the following procedures:
a. Inquire of the owner/manager if there are any major additions (purchased or constructed by the company or capitalizable leases) that are omitted from the workpapers obtained in Steps 1 or 2. Relate these facts to additions you observed during the inventory observations or plant tours.
b. If repairs and maintenance accounts have material balances, obtain an analysis of transactions in the account. Scan the analysis to determine if additional vouching of repairs and maintenance is necessary. If so:
(1) Examine significant invoices for repairs and maintenance expenses. Document the items tested.
(2) Determine if the expenses contain significant components that should be capitalized as current year additions to property, plant, or equipment.
Practical Consideration:
¯ SAS No. 96, Audit Documentation, requires documentation of substantive tests of details involving inspection of documents to
include identification of the items tested. The authors believe items tested can be identified by listing the items; by including a detail schedule in the workpapers, such as a detailed analysis of repairs and maintenance expense, on which the items are identified; or by documenting in the workpapers the source and selection criteria. For example:
¯¯ For tests of significant items, documentation may describe the auditor’s scope and the source of the items (for example, all disbursements greater than $5,000 from the 20X2 repairs and maintenance expense detail).
¯¯ For haphazard or random samples, documentation should include the identifying characteristics of the items (for example, the specific invoice numbers, check numbers, property numbers, etc.).
¯¯ For systematic samples, documentation may indicate the source, starting point, and sampling interval (for example, a selection of additions from the detailed property records for the period 1/1/X2 to 12/31/X2, starting with item number 2150 and selecting every 10th item thereafter).
. SAS No. 96 is effective for audits of financial statements for periods beginning on or after May 15, 2002, with early application permitted.
c. Scan the workpapers obtained in Steps 1 and 2 to determine if additional procedures are warranted. Additional procedures normally are not warranted unless there are significant additions.
C 4. For current year retirements, perform the following procedures:
a. Inquire of the owner/manager if there are any major retirements, sales of property, abandonments, or damages to property not reflected on the workpapers obtained in Steps 1 and 2. Relate these facts to retirements, abandonments, etc., you noted during the inventory observation or plant tours.
b. Scan revenue accounts for significant proceeds from the sale of assets. Determine if the related cost and accumulated depreciation of the assets sold are reflected in the retirement
workpapers obtained in Steps 1 and 2.
c. Inquire if any major sales of fixed assets were sale/leaseback transactions. If so, determine the propriety of accounting for them.
d. Scan the workpapers obtained in Steps 1 and 2 to determine if additional procedures are warranted. Additional procedures normally are not warranted unless there are significant retirements.
D 5. Test the adequacy of current year depreciation by performing the following procedures.
a. Inquire of the owner/manager if there has been any change in depreciation lives or methods, and if there are significant amounts of fully depreciated assets.
b. Scan the workpapers obtained in Steps 1 and 2 to determine if useful lives of assets are reasonable, if depreciation methods are in accordance with GAAP and consistent, and if depreciation expense for the year appears reasonable.
c. Perform analytical procedures, if practical, to test the reasonableness of the current year depreciation. (A predictive test based on prior year methods and ratios may be effective.)
d. If considered necessary, recompute depreciation expense on selected assets.
e. Cross-reference current year depreciation charged to the various allowance accounts to depreciation reflected in the expense accounts.
Practical Considerations:
¯ If the auditor’s firm has tax return preparation responsibility, and depreciation for tax purposes is computed using a different method than for financial statement purposes, additional procedures may be necessary for recording deferred income taxes.
¯ Testing depreciation calculations on selected assets should be
considered when (1) depreciation expense is not reasonable in relation to prior periods (after considering current year activity), (2) asset additions are material, or (3) unusual items are identified when scanning the schedules.
¯ When differences between depreciation calculated using tax depreciation methods vs. GAAP are not material, consider using tax depreciation for the financial statements to avoid duplicate book and tax records.
¯ When an analytical procedure is used as the principal substantive test of a significant financial statement assertion, SAS No. 56, Analytical Procedures, as amended by SAS No. 96, Audit Documentation, requires the auditor to document (1) the expectation and the factors considered in its development (unless readily determinable from the work performed), (2) the results of the comparison between the expectation and recorded amounts, and (3) any additional procedures performed in response to significant unexpected differences and the results of those procedures. SAS No. 96 is effective for audits of financial statements for periods beginning on or after May 15, 2002, with early application permitted.
E 6. Using information obtained in the above procedures, evaluate whether the remaining useful lives of assets are reasonable and if the net carrying values of property are recoverable in the ordinary course of business.
Practical Considerations:
¯ This evaluation does not have to be complex, nor does documentation have to be elaborate. A note or a simple “OK” reference by this step is adequate to document the evaluation.
¯ According to SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the following conditions may indicate that an asset has been impaired:
¯¯ A significant decline in the market price of the asset. (This applies particularly to assets that are held for sale or expected to be sold in the foreseeable future.)
¯¯ A significant adverse change in the extent or manner of the
asset’s use (for example, a significant decline in the use of a machine).
¯¯ A significant adverse physical change in an asset (for example, physical damage).
¯¯ A significant adverse change in legal factors or in the business climate that affects the value of the asset or an adverse assessment or action by a regulator (for example, a machine suddenly becomes obsolete, or changes in environmental regulations significantly restrict the use of a particular machine or plant). (The additional procedures section of AP-1 includes audit procedures for environmental remediation liabilities.)
¯¯ Significant cost overruns beyond the amount originally expected to be needed to acquire or build the asset.
¯¯ A current period operating or cash flow loss combined with a history of operating or cash flow losses associated with the use of a long-lived asset.
¯¯ Budgets or prospective financial information showing continuing losses associated with an asset (for example, a plant site that is expected to generate significant operating losses for the foreseeable future).
¯¯ It is more likely than not that an asset will be sold or disposed of significantly before the end of its estimated useful life.
SFAS No. 144 supersedes SFAS No. 121 and portions of APB Opinion No. 30, and is effective for financial statements for fiscal years beginning after December 15, 2001, with early application encouraged.
¯ Auditors should be aware of inconsistent approaches to writedowns. Inconsistency may indicate an attempt by management to manipulate earnings.
F, [A],[B]
7. Determine the following based on inquiry of the owner/manager and the results of procedures performed in other areas (i.e., review of minutes, items noted during inventory observations, confirmation procedures in liabilities and reading
lease agreements):
a. Whether idle property and property held for sale is appropriately identified and valued.
b. Whether encumbrances and liens related to property have been identified. Conversely, whether property currently pledged as collateral on a loan has not been sold or damaged.
c. Whether significant amounts of property held for investment purposes are properly identified.
d. Whether significant capitalizable leases exist that are not reflected in the schedules obtained in Steps 1 and 2. (If so, propose adjustments to record such capital leases.)
e. Whether the company has any legal obligations associated with the retirement of long-lived assets that should be recognized in accordance with Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations.
Practical Consideration:
¯ SFAS No. 143 is effective for financial statements for fiscal years beginning after June 15, 2002, with early application encouraged. The additional procedures section of AP-9 includes procedures for testing asset retirement obligations.
F 8. Obtain or prepare workpapers showing the proper classification of idle property, property held for sale, and capital leases.
F 9. Summarize in the workpapers the information needed to prepare any required financial statement disclosures.
* 10. Consider the need to apply one or more additional procedures. The decision to apply additional procedures should be based on a consideration of whether information obtained or misstatements detected by performing substantive tests or from other sources during the audit alter your judgment about the need to obtain a further understanding of control activities, the assessed level of risk of material misstatements (whether caused by error or fraud), and on an evaluation of whether the basic procedures have
been sufficient to achieve the audit objectives. Attach audit program sheets to document additional procedures.
Practical Considerations:
¯ Certain common additional procedures relating to the following topics are illustrated following this program:
¯¯ Significant property additions.
¯¯ Significant property dispositions.
¯¯ Significant leases.
¯¯ Additional procedures in response to fraud risk assessment.
¯ Practitioners may refer to PPC’s Guide to Fraud Investigations for more extensive fraud detection procedures if it is suspected that the financial statements are materially misstated due to fraud.
* 11. Consider whether procedures performed are adequate to respond to identified fraud risk factors. If fraud risk factors or other conditions are identified that require an additional audit response, consider those risk factors or conditions and the auditor’s response in connection with the performance of Step 11 in AP-1b.
Practical Consideration:
¯ Specific responses to identified fraud risk factors are addressed in individual audit programs. In connection with evaluation and other completion procedures in AP-1b, the auditor considers the need to perform additional procedures based on the results of procedures performed in the individual audit programs and the cumulative knowledge gained from performing those procedures.
* 12. Consider whether the results of audit procedures indicate reportable conditions in internal control and, if so, add to the memo of points for the communication of reportable conditions. (See section 1504 for examples of reportable conditions, and see CX-18 for a worksheet that can be used to document the points as they are encountered during the audit.)
CONCLUSION
We have performed procedures sufficient to achieve the audit objectives for property and its related depreciation allowance
accounts, and the results of these procedures are adequately documented in the accompanying workpapers. (If you are unable to conclude on any objective, prepare a memo documenting your reason.)
Additional Audit Procedures for PropertyInstructions: Additional procedures will occasionally be necessary on some small business engagements. The following listing, although not all-inclusive, represents common additional procedures and their related objectives.
Significant Property Additions
A, B Identify significant current year additions to property. Document the items selected and perform the following procedures:
a. Test the cost by examining supporting documents such as purchase orders, paid checks, vendors’ invoices, purchase contracts, receiving reports, etc.
b. For construction in progress, examine appropriate supporting documents such as work orders, job status reports, etc. Determine that labor, materials, interim construction interest, and other appropriate direct and indirect costs are included in the cost of the asset.
c. For purchases of significant amounts of real property, examine the deed or title certificate evidencing ownership.
d. Consider physically inspecting all or selected major additions not noted during the inventory observation.
Significant Property Dispositions
C Identify significant current year dispositions. Document the items selected and perform the following procedures.
a. Vouch proceeds from sales of property to remittance advices or notes receivable.
b. Recompute depreciation through the date of sale.
c. Trace the original cost and acquisition date of the asset to prior period property records.
d. Recompute the gain or loss and cross-reference the amount to the revenue/expense accounts.
e. Determine that the disposition was properly authorized and did not include assets pledged on existing debt.
f. For significant sales of real estate (land or buildings), determine that the gain or loss was recognized in accordance with SFAS No. 66.
Significant Leases
A, B, F If a significant portion of the facilities or equipment is leased, review new leases and determine whether they meet the criteria for capital leases. Determine that the appropriate asset, related depreciation, and related obligation have been properly recorded. Include abstracts or copies of significant lease agreements in the current or permanent workpaper files.
Practical Considerations:
¯ If the capital leases are not significant, avoid the temptation to spend the time to capitalize them, as it may confuse the client and normally does not result in a material GAAP departure. Also, the review for capital leases may be performed during the notes payable and long-term debt audit. See audit program AP-10.
¯ In some jurisdictions, holders of long-term leases may be responsible for environmental remediation liabilities. See the additional procedures section of AP-1 for audit procedures relating to environmental remediation liabilities.
Additional Procedures in Response to Fraud Risk Assessment
A, C If the auditor, based on his or her consideration of fraud risk factors, decides to modify procedures related to fixed assets, the following procedures should also be considered:
a. Perform a physical count to determine if any fixed assets are missing.
b. Examine documentation supporting capital expenditures, paying particular attention to delivery addresses.
c. Consider the business purpose of fixed assets additions.
Practical Consideration:
¯ Practitioners may refer to PPC’s Guide to Fraud Investigations for more extensive fraud detection procedures if it is suspected that the financial statements are materially misstated due to fraud.
Additional Audit Procedures for PropertyBeginning Balance in Initial AuditCompany Balance Sheet Date
Audit Objectives
Audit Procedures for Consideration
N/APerformed by
Workpaper Index
Instructions: Additional procedures will be necessary in an initial audit. These procedures are applied to opening balances and
differ depending whether you are relying on your review of a predecessor’s work or placing no reliance on a predecessor’s audit. (Section 1803 discusses considerations when replacing a predecessor auditor, including a discussion of what the term reliance means when used in this program.) These procedures may be applied in conjunction with the basic procedures applied to the ending balance. The asterisks preceding the procedures indicate that they are an intermediate step in achieving audit objectives for the ending balance.
* 1. If a predecessor’s audit of the prior period’s financial statements is to be relied on:
a. Review the predecessor’s workpapers or detailed property records, inquire of the predecessor, and consider the adequacy of the predecessor’s approach for:
(1) Significant additions.
(2) Significant retirements.
(3) Review of repairs and maintenance accounts.
(4) Inspection of title for real property and minutes for acquisition approval.
(5) Consideration of capital leases and capitalized interest on constructed assets.
(6) Consideration of depreciation methods and lives and reasonableness of accumulated depreciation.
(7) Consideration of the existence of encumbrances and liens, pledged property, and fully depreciated assets.
Practical Considerations:
¯ If the predecessor has maintained detailed property records, early arrangements should be made to obtain a copy.
¯ Since the opening balances for property accounts normally have been accumulated over several years, it may be necessary to
supplement review of the predecessor’s workpapers by discussion with the predecessor and the owner/manager about past policies and transactions.
b. Inquire about and scan records of gain or loss on retirements for the past few years and any depreciation rates changed as a result of IRS agent examination; consider reasonableness and consistency of depreciation policies.
* 2. If no reliance on a predecessor is planned or possible:
a. Obtain or prepare detailed schedules of opening balances of real property, equipment, and machinery owned, foot schedules, and trace totals to general ledger accounts; the information should include a description, the age, and the current estimate of useful life.
Practical Consideration:
¯ See the practical considerations for basic procedures 1 and 2.
b. During the inventory observation or plant tour, relate significant items on property and equipment schedules to items observed.
Practical Considerations:
¯ A complete inventory of property and equipment is not usually necessary because adequate records are normally maintained for preparation of the company’s income tax returns, and fixed assets are generally not readily susceptible to theft.
¯ Normally it is sufficient to relate the observations during the inventory observation or plant tour to the property and equipment records by the following steps.
¯¯ List the larger items of machinery or equipment observed (note the condition of equipment) and trace to the records.
¯¯ Before the inventory observation or plant tour, prepare a list of significant items and locate those items.
c. Identify all significant items included in schedules of
property and equipment. Document the items selected and perform the following procedures:
(1) Test the cost by examining supporting documents such as purchase orders, paid checks, vendors’ invoices, purchase contracts, receiving reports, etc.
(2) For significant real property, examine the deed or title certificate evidencing ownership.
(3) Support authorization by reference to minutes of meetings of the board of directors, capital asset budget, or evidence of approval by appropriate, responsible personnel as applicable.
d. Identify significant retirements for the last three to five years. Document the items selected and perform the following procedures:
(1) Vouch proceeds from sales to remittance advices or notes receivable.
(2) Recompute depreciation through the date of sale.
(3) Trace the original cost and acquisition date of the asset to prior period records.
(4) Recompute the gain or loss, trace to revenue or expense accounts of the period of retirement, and consider the implications of gain or loss for the reasonableness and consistency of depreciation policies.
e. Scan repairs and maintenance accounts and property records for the past three to five years and consider whether:
(1) Capitalization policies are reasonable.
(2) Significant items have been expensed.
(3) Minor items have been accumulated and capitalized.
f. Inspect lease agreements for significant items and consider whether the items should have been capitalized.
g. Consider whether any idle property, property held for sale, or fully depreciated assets identified as a result of performing basic procedure 7 should have been classified differently in prior periods.
Practical Consideration:
¯ See the practical considerations for basic procedure 6.
