Property, Plant, and Equipment; Depreciation and Depletion

1. Property, Plant, and Equipment; Depreciation and Depletion • At the same time, we also look at: • Gain or Loss on Disposition • Repair & Maintenance (Why?)

2. Controls Over PP&E • 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

3. Objectives for the Substantive Tests of PP&E • Determine Existence of recorded PP&E. • Establish Completeness of recorded PP&E. • Establish that client has Rights to recorded PP&E. • Establish clerical accuracy of schedules of PP&E. • Determine that Valuation or allocation of the cost of PP&E is in accordance with GAAP. • Determine that Presentation and disclosure of PP&E are appropriate.

4. Most Likely MisstatementsPP&E and Related Accounts • Inaccurate recording of acquisitions • Inconsistent capitalization threshold • Failure to capitalize betterments • Failure to capitalize capital leases • Failure to record retirements • Improper reporting of unusual transactions

5. Audit ApproachCurrent vs Noncurrent Accounts

6. Substantive Tests of PP&E and Related Accounts • Obtain a summary analysis of changes in property owned and reconcile to ledgers

7. Substantive Tests of PP&E and Related Accounts • Obtain a summary analysis of changes in property owned and reconcile to ledgers • Vouch additions during the year

8. Substantive Tests of PP&E and Related Accounts • Obtain a summary analysis of changes in property owned and reconcile to ledgers • Vouch additions during the year • Make physical inspection of major acquisitions & existing PP&E

9. Substantive Tests of PP&E and Related Accounts • Obtain a summary analysis of changes in property owned and reconcile to ledgers • Vouch additions during the year • Make physical inspection of major acquisitions & existing PP&E • Analyze repair & maintenance expense accounts

10. Substantive Tests of PP&E and Related Accounts • Obtain a summary analysis of changes in property owned and reconcile to ledgers • Vouch additions during the year • Make physical inspection of major acquisitions & existing PP&E • Analyze repair and maintenance expense accounts • Examine evidence of legal ownership

11. Substantive Tests of PP&E and Related Accounts • Obtain a summary analysis of changes in property owned and reconcile to ledgers • Vouch additions during the year • Make physical inspection of major acquisitions & existing PP&E • Analyze repair and maintenance expense accounts • Examine evidence of legal ownership • Investigate the status of property not in use

12. Substantive Tests of PP&E and Related Accounts • Obtain a summary analysis of changes in property owned and reconcile to ledgers • Vouch additions during the year • Make physical inspection of major acquisitions & existing PP&E • Analyze repair and maintenance expense accounts • Test the client’s provision for depreciation • Examine evidence of legal ownership • Investigate the status of property not in use • Investigate retirements of PP&E during the year

13. Substantive Tests of PP&E and Related Accounts • Obtain a summary analysis of changes in property owned and reconcile to ledgers • Vouch additions during the year • Make physical inspection of major acquisitions & existing PP&E • Analyze repair and maintenance expense accounts • Examine evidence of legal ownership • Investigate the status of property not in use • Investigate retirements of property during the year • Examine lease agreements

14. Substantive Tests of PP&E and Related Accounts • Obtain a summary analysis of changes in property owned and reconcile to ledgers • Vouch additions during the year • Make physical inspection of major acquisitions & existing PP&E • Analyze repair and maintenance expense accounts • Examine evidence of legal ownership • Investigate the status of property not in use • Investigate retirements of property during the year • Examine lease agreements • Perform analytical procedures • Test the client’s provision for depreciation • Review rental revenue, impairment & intangible assets

15. 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 .

16. Substantive Tests of PP&E and Related Accounts • Obtain a summary analysis of changes in property owned and reconcile to ledgers • Vouch additions during the year • Make physical inspection of major acquisitions & existing PP&E • Analyze repair and maintenance expense accounts • Examine evidence of legal ownership • Investigate the status of property not in use • Investigate retirements of property during the year • Examine lease agreements • Perform analytical procedures • Test the client’s provision for depreciation • Review rental revenue, impairment & intangible assets • Evaluate F.S. presentation and disclosure

17. Additional Tests – 1st Year Audit • Determine if we can rely on work of prior auditor for the beginning balance of PP&E and Accumulated Depreciation accounts, but must do some testing. • If not, must perform substantive tests for transactions occurring in prior years which could materially impact the F.S. currently being audited. • Use analytical procedures to assess risks, esp. for completeness assertion for young organization.