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Chapter 5

The document outlines the audit objectives and procedures for fixed assets. It discusses contrasting fixed assets with current assets, focusing on current period changes rather than balances. The audit program involves understanding internal controls over fixed assets, assessing control risk, and designing substantive tests. Substantive tests include verifying additions and retirements of fixed assets, physical inspections, analyzing repair expenses, and verifying depreciation expense and accumulated depreciation.

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74 views8 pages

Chapter 5

The document outlines the audit objectives and procedures for fixed assets. It discusses contrasting fixed assets with current assets, focusing on current period changes rather than balances. The audit program involves understanding internal controls over fixed assets, assessing control risk, and designing substantive tests. Substantive tests include verifying additions and retirements of fixed assets, physical inspections, analyzing repair expenses, and verifying depreciation expense and accumulated depreciation.

Uploaded by

ዝምታ ተሻለ
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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5

Audit of Fixed Assets


…
 Audit objectives
-Same as audit objectives for receivables and sales
transactions
 Contrast with audit of current assets
• Higher balance sheet amounts effected with relatively
fewer transactions
• Relatively little change from year to year (lesser turn
over)
- Thus the emphasis is on current period changes (acquisitions and
retirements) rather than the balance in the accounts.
Audit program for fixed assets
A. Consider internal control for Fixed assets
1. Obtain an understanding of internal control. Focus
areas are:
 Reconciliation of physical inventories with plant ledgers
 Authorization of disposal
 Revenue and capital expenditures
2. Assess control risk and design additional tests of
control
3. Perform additional tests of control.

4. Reassess control risk and design substantive tests


…
B. Substantive tests
5. Obtain a summary analyses of changes in
property owned and reconcile to ledger

6. Vouch additions to property during the year.


Documents such as contracts, deeds, invoices, cancelled
checks are useful to vouch additions. Auditors examine:

 Additions to construction in progress


 Actual acquisition costs Vs Authorized amounts
 Purchases made on an installment plan

7. Make physical inspections of major


acquisitions of plant and equipment
…
8. Analyze repair and maintenance expense accounts-
 Comparing the amount of operating expense reported for the
current year with amounts reported for the preceding year is
helpful to uncover capital expenditures treated as repair and
maintenance expense.

9. Investigate the status of property not in use

10. Verify retirements of property during the year.


 Investigation of Major additions to plant and equipment,
Product lines that have been discontinued, reduction in
insurance coverage may be investigated to verify
retirements.
…
11. Verify legal ownership of property plant and equipment.
 Property tax bills, deed, receipts for mortgage payments, and
fire insurance policies are considered evidence of ownership.
12. Review rental revenue from fixed assets leased to
others
13. Examine lease agreements on fixed assets leased to
and from others-
 Auditors examine if a lease is operating and capital and has
been accounted for by the client accordingly.

14. Perform analytical procedures for fixed assets


15. Evaluate financial statement presentation for fixed
assets and related revenue and expense accounts
Depreciation and accumulated
depreciation
Audit program for depreciation and
accumulated depreciation are outlined as
follows
1. Review the depreciation policies set forth in
company manuals or other directives and
determine if they are acceptable.
2. Obtain or prepare a summary analysis of
accumulated depreciation.
3. Verify the provisions for depreciation
…
4. Verify deductions from accumulated
depreciation for assets retired
5. Review most recent reports on depreciation
made by agents from revenue authorities
6. Perform analytical procedures

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