Assertion - Execution - Audit of PP&E

Question 1

Provide the flow chart process of PP&E

Answer 1

Phase 1 - PP&E is received (see purchase & payable)
Phase 2 - PP&E is used ( depreciation is recorded)
Phase 3 - PP&E assessed for indicators of impairment
Phase 4 - PP&E is recognized

• Process can vary based on the entity.

Question 2

Explain the risk of PP&E

Answer 2

The risk with PP&E is there can be overstatement. Tied into the purchase system for approval
- One of the largest assets in B/S
Ex. Desk, computer, other office equipment

Question 3

Provide the assertions for PP&E

Answer 3

Assertions:
Existence - PP&E recorded does not exist

Right and Obligation - The entity does not have the legal right to PP&E, not controlled by the entity

Completeness - PP&E owned by the entity is not recorded

Accuracy, Valuation, Allocation - Not measured at correct amount

Classification - PP&E is not classified in the appropriate B/S account

Presentation - Appropriate disclosure for PP&E have not been made

Question 4

Provide 4 examples of procedures to be used for the assertions

Answer 4

Audit procedures
1. Select a sample of an asset from the PP&E registered and physically verify
2. Select a sample of assets from the client premises and agree these to the PP&E registered completeness
3. Select a sample of an asset from the PP&E to register a check title by reference to the deed (right and obligation)
4. Inspect the physical condition of PP&E and consider impairment (accuracy, valuation, allocation)

Question 5

What are some risks specific to the audit of PP&E

Answer 5

1. Controls issue around safeguarding PP&E for fraud - Existence - Sample of PP&E item from listing and physically inspect that item exists. Agree with serial # of asset tracking code from listing to serial # code PP&E item to ensure the item exists
2. There is an indication of impairment such as a change in use, damage & obsolete PP&E - Accuracy, valuation, allocation - Obtain management impairment test for item reasonability. Reperform impairment test to determine whether impairment should be recorded
3. Change in policies to a depreciation policy in the year Accumulated depreciation - Accruacy, valuation, allocation - Sample of the item on PP&E listing, recalculate deviation expense based on stated depreciation policy, compare client calculation of depreciation whether it’s reasonable