12 Non-current assets

Question 1

Key areas when testing tangible non-current assets are:

Answer 1

 Confirmation of ownership  Inspection of non-current assets  Valuation by third parties  Adequacy of depreciation rates

Question 2

What are the objectives for tangible non-current assets for Existence and occurrence

Answer 2

– Additions represent assets acquired in the year and disposal represents assets sold or scrapped in the year – Recorded assets represent those in use at the year end

Question 3

What are the objectives for tangible non-current assets for Completeness

Answer 3

– All additions and disposals that occurred in the year have been recorded – Balances represent assets in use at the year end

Question 4

What are the objectives for tangible non-current assets for Rights and obligations

Answer 4

– The entity has rights to the assets purchased and those recorded at the year end

Question 5

What are the objectives for tangible non-current assets for Accuracy, valuation and allocation

Answer 5

– Non-current assets are correctly stated at cost less accumulated depreciation – Additions and disposals are correctly recorded

Question 6

What are the objectives for tangible non-current assets for Classification

Answer 6

– Tangible assets have been recorded in the correct accounts, and expenses which are not of a capital nature are taken to profit or loss

Question 7

What are the objectives for tangible non-current assets for

Presentation (occurrence and rights and obligations, completeness, Classification, accuracy, valuation and allocation)

Answer 7

– Disclosures relating to cost, additions and disposals, depreciation policies, useful lives and assets held under finance leases are adequate and in accordance with accounting standards

Question 8

Define a non-current asset register

Answer 8

The non-current asset register is a very important aspect of the internal control system. It enables assets to be identified, and comparisons between the general ledger, non-current asset register and the assets themselves provide evidence that the assets are completely recorded

Question 9

What is another significant control is?

Answer 9

Another significant control is procedures over acquisitions and disposals, that acquisitions are properly authorised, disposals are authorised and proceeds accounted for. The controls and tests outlined in Chapter 10 (Section 6) are often considered and performed during the audit of non-current assets, as this is where the main issue of capitalisation occurs

Question 10

Other significant aspects are whether:

Answer 10

 Security arrangements over non-current assets are sufficient.  Non-current assets are maintained properly.  Depreciation is reviewed every year.  All income is collected from income-yielding assets.

Question 11

Define and explain completeness for Non-current assets

Answer 11

 Obtain or prepare a summary of tangible non-current assets showing how the following reconcile with the opening position. – Gross book value – Accumulated depreciation – Net book value  Compare non-current assets in the general ledger with the non-current assets register and obtain explanations for differences.  For a sample of assets which physically exist, agree that they are recorded in the non-current asset register.  If a non-current asset register is not kept, obtain a schedule showing the original costs and present depreciated value of major non-current assets.  Reconcile the schedule of non-current assets with the general ledger.

Question 12

Define and explain existence

Answer 12

 Confirm that the company physically inspects all items in the non-current asset register each year.  Inspect assets, concentrating on high value items and additions in-year. Confirm that items inspected: – Exist – Are in use – Are in good condition – Have correct serial numbers  Review records of income-yielding assets.  Reconcile opening and closing vehicles by numbers as well as amounts.

Question 13

Define and explain VALUATION

Answer 13

 Verify valuation to valuation certificate
Consider reasonableness of valuation, reviewing: – Experience of valuer – Scope of work – Methods and assumptions used – Valuation bases are in line with accounting standards.
 Reperform calculation of revaluation surplus.  Confirm whether valuations of all assets that have been revalued have been updated regularly (full valuation every five years and an interim valuation in year three generally) by asking the Finance Director and inspecting the previous financial statements.  Inspect draft accounts to check that client has recognised revaluation losses in the statement of profit or loss unless there is a credit balance in respect of that asset in equity, in which case it should be debited to equity to cancel the credit. All revaluation gains should be credited to equity.  Review insurance policies in force for all categories of tangible non-current assets and consider the adequacy of their insured values and check expiry date

Question 14

Define and explain VALUATION - DEPRECIATION for Non-current assets

Answer 14

 Review depreciation rates applied in relation to: – Asset lives – Residual values – Replacement policy – Past experience of gains and losses on disposal – Consistency with prior years and accounting policy – Possible obsolescence  Review non-current assets register to ensure that depreciation has been charged on all assets with a limited useful life.  For revalued assets, ensure that the charge for depreciation is based on the revalued amount by recalculating it for a sample of revalued assets.  Reperform calculation of depreciation rates to ensure it is correct.  Compare ratios of depreciation to non-current assets (by category) with: – Previous years – Depreciation policy rates  Scrutinise draft accounts to ensure that depreciation policies and rates are disclosed in the accounts.

Question 15

Define and explain RIGHTS AND OBLIGATIONs for Non-current assets

Answer 15

 Verify title to land and buildings by inspection of: – Title deeds – Land registry certificates – Leases  Obtain a certificate from solicitors/bankers: – Stating purpose for which the deeds are being held (custody only) – Stating deeds are free from mortgage or lien  Inspect registration documents for vehicles held, confirming that they are in client’s name.  Confirm all vehicles are used for the client’s business.  Examine documents of title for other assets (including purchase invoices, architects’ certificates, contracts, hire purchase or lease agreements).  Review for evidence of charges in statutory books and by company search

Question 16

Define and explain ADDITIONS for Non-current assets

Answer 16

These tests are to confirm rights and obligations, valuation and completeness.  Verify additions by inspection of architects’ certificates, solicitors’ completion statements, suppliers’ invoices etc.  Review capitalisation of expenditure by examining for non-current assets additions and items in relevant expense categories (repairs, motor expenses, sundry expenses) to ensure that: – Capital/revenue distinction is correctly drawn – Capitalisation is in line with consistently applied company policy  Inspect non-current asset accounts for a sample of purchases to ensure they have been properly allocated.  Ensure that appropriate claims have been made for grants, and grants received and receivable have been received, by inspecting claims documentations and bank statements.  Verify that additions have been recorded by scrutinising the non-current asset register and general ledger.

Question 17

Define and explain self constructed assets for Non-current assets

Answer 17

These tests are to confirm valuation and completeness. CONSTRUCTED  Verify material and labour costs and overheads to invoices, wage records etc. ASSETS  Ensure expenditure has been analysed correctly and properly charged to capital.  Expenditure should be capitalised if it: – Enhances the economic benefits of the asset in excess of its previously assessed standard of performance – Replaces or restores a component of the asset that has been treated separately for depreciation purposes, and depreciated over its useful economic life – Relates to a major inspection or overhaul that restores the economic benefits of the asset that have been consumed by the entity, and have already been reflected in depreciation  Review costs to ensure that no profit element has been included.  Review accounts to ensure that finance costs have been capitalised or not capitalised on a consistent basis, and costs capitalised in period do not exceed total finance costs for period.

Question 18

Define and explain DISPOSALS for Non-current assets

Answer 18

These tests are to confirm rights and obligations, completeness, occurrence and accuracy.  Verify disposals with supporting documentation, checking transfer of title, sales price and dates of completion and payment.  Recalculate profit or loss on disposal.  Consider whether proceeds are reasonable.  If the asset was used as security, ensure release from security has been correctly made.

Question 19

Define and explain CLASSIFICATION for Non-current assets

Answer 19

 Review non-current asset disclosures in the financial statements to ensure they meet IAS 16 criteria.  For a sample of fully depreciated assets, inspect the register to ensure no further depreciation is charged.

Question 20

AUDIT PLAN: OTHER NON-CURRENT ASSETS of goodwill

Answer 20

 Agree the consideration to sales agreement by inspection.  Consider whether asset valuation is reasonable.  Agree that the calculation is correct by recalculation.  Review the impairment review and discuss with management.  Ensure valuation of goodwill is reasonable / there has been no impairment not adjusted through discussion with management.

Question 21

AUDIT PLAN: OTHER NON-CURRENT ASSETS: Research and development (R&D) costs

Answer 21

 Confirm that capitalised development costs conform to IAS 38 criteria by inspecting details of projects and discussions with technical managers.  Confirm feasibility and viability by inspection of budgets.  Recalculate amortisation calculation to ensure it commences with production / is reasonable.  Inspect invoices to verify expenditure incurred on R&D projects.

Question 22

AUDIT PLAN: OTHER NON-CURRENT ASSETS: Other intangibles

Answer 22

 Agree purchased intangibles to purchase documentation agreement by inspection.  Inspect specialist valuation of intangibles and ensure it is reasonable.  Review amortisation calculations and ensure they are correct by recalculation.

Question 23

Key areas when testing tangible non-current assets are:

Answer 23

– Confirmation of ownership – Inspection of non-current assets – Valuation by third parties – Adequacy of depreciation rate