AUDIT OF PPE

Question 1

Why do auditors verify equipment differently compared to other assets?

Answer 1

Fewer acquisitions

Material amounts

Long-term use

Question 2

What happens when equipment is disposed of during an audit?

Answer 2

Need to verify any gain or loss

Question 3

What are the six audit categories for equipment?

Answer 3

1) Perform substantive analytical procedures

2) Verify current year acquisitions

3) Verify current year disposals

4) Verify ending balance in the asset account

5) Verify depreciation expense

6) Verify ending balance in accumulated depreciation

Question 4

What does performing substantive analytical procedures involve in equipment audits?

Answer 4

Analyzing financial data to identify any unusual trends

Question 5

What is the primary focus of equipment audits?

Answer 5

Current year purchases, disposals, and depreciation

Question 6

How does the disposal of an asset impact the income statement?

Answer 6

The income statement is affected until the asset is fully depreciated.

Question 7

What are the seven balance-related audit objectives for testing equipment balances?

Answer 7

1) Existence
2) Completeness
3) Accuracy
4) Classification
5) Cutoff
6) Detail Tie-In
7) Rights and Obligations

Question 8

What does the “Existence” objective involve in equipment audits?

Answer 8

Ensuring that the equipment listed actually exists

Question 9

What is the “Completeness” objective in equipment audits?

Answer 9

Ensuring all equipment that should be recorded is included

Question 10

What is the “Accuracy” objective in equipment audits?

Answer 10

Ensuring the amounts recorded are correct

Question 11

What does the “Classification” objective refer to in equipment audits?

Answer 11

Ensuring the equipment is properly categorized

Question 12

What is the “Cutoff” objective in equipment audits?

Answer 12

Ensuring transactions are recorded in the correct accounting period

Question 13

What does the “Detail Tie-In” objective involve?

Answer 13

Ensuring that the details in the records match the totals in the general ledger

Question 14

What is the “Rights and Obligations” objective in equipment audits?

Answer 14

Ensuring the company has ownership rights to the equipment

Question 15

How is “Realizable Value” addressed in equipment audits?

Answer 15

It is addressed when verifying ending balances, not directly linked to current acquisitions.

Question 16

What factors influence audit tests and sample size?

Answer 16

Performance materiality, inherent risk, and assessed control risk.

Question 17

What is the starting point for verifying current year acquisitions of property, plant, and equipment (PP&E)?

Answer 17

Acquisition Schedule
(from PPE master file)

Question 18

What are the common audit tests performed on PP&E additions?

Answer 18

Examine Vendors’ Invoices

Testing Approach
(Large and Unusual Transactions)

Extent of Testing
(Higher control risk or material amounts may require more extensive testing)

Question 19

What are the key considerations when testing PP&E acquisitions?

Answer 19

Accounting Standards Compliance

Capitalization Policies

Classification of Transactions

Internal Controls

Potential Misstatements

Right to Record Equipment

Question 20

Why is it important to examine vendors’ invoices in the audit of equipment additions?

Answer 20

To validate transactions and ensure recorded amounts match actual costs, preventing misstatements.

Question 21

What are potential misstatements auditors should be aware of when testing PP&E acquisitions?

Answer 21

1) Misclassification of expenses
2) Tax avoidance
3) Incorrect capitalization of costs.

Question 22

How does the client’s capitalization policy affect the audit of equipment acquisitions?

Answer 22

Auditors must verify consistent application of the policy

Question 23

Why is it important to verify the client’s right to record equipment as an asset?

Answer 23

To ensure proper financial reporting based on lease type and compliance with accounting standards.

Question 24

What are common issues with equipment disposals in an audit?

Answer 24

Internal control deficiencies

Overstated net book value due to unrecorded disposals

Question 25

Why is proper tracking and authorization important for equipment disposals?

Answer 25

It reduces misstatement risks

Question 26

What are the auditor’s objectives for equipment disposals?

Answer 26

1. existing disposal are “recorded”
2. disposal “accurately” recorded

Question 27

What is involved in detail tie-in tests for equipment disposals?

Answer 27

1) Footing the schedule

2) Tracing totals in the schedule to the general ledger

3) Comparing cost and depreciation with the property master file

Question 28

How do auditors search for unrecorded disposals?

Answer 28

1) Review replacements

2) Analyze financial data for gains/losses on disposals

3) Review changes in plant and product lines

4) Make inquiries with management and personnel

Question 29

What are the specific procedures for auditing sales or disposals without replacement?

Answer 29

1) Examine sales invoice

2) Compare records with the property master file

3) Recomputed gain/loss on the disposal

Question 30

What should auditors check for in trade-ins?

Answer 30

1) Ensure new asset is correctly recorded

2) Eliminate old asset from records

Question 31

What are the two main goals of auditors when checking the ending balance of equipment accounts?

Answer 31

1) Existence: Ensure all equipment listed actually exists.
2) Completeness: Ensure all equipment owned is listed in the records.

Question 32

What is the purpose of the detail tie-in objective in equipment audits?

Answer 32

To ensure the master file matches the general ledger.

Question 33

How do auditors test for the existence of equipment?

Answer 33

By checking a sample from the master file against the actual equipment or requiring a full physical inventory.

Question 34

What is done during the sample examination for existence?

Answer 34

Auditors physically inspect a sample of equipment and trace it back to the master file

Question 35

How do auditors test for the completeness of equipment?

Answer 35

By checking if all major equipment items found in the physical inspection are recorded in the master file.

Question 36

When do auditors usually trust the accuracy and classification of equipment?

Answer 36

From previous audits, unless the equipment is no longer in use.

Question 37

What might need to be done if the equipment is no longer used?

Answer 37

Written down as NRV or classified separately as non - operating equipment

Question 38

What do auditors check for in presentation and disclosure objectives?

Answer 38

Ensure the equipment is correctly presented and disclosed in financial statements, including any legal encumbrances.

Question 39

What methods do auditors use to check for legal encumbrances on equipment?

Answer 39

1) Reading loan agreements
2) Sending loan confirmation
3) Discussing with the client

Question 40

How should equipment be listed and disclosed in financial statements?

Answer 40

At its gross cost, separated from other fixed assets, with leased property and any liens disclosed in the footnotes.

Question 41

What is the main goal for auditing depreciation expense?

Answer 41

Accuracy – ensuring correct and consistent calculation of depreciation.

Question 42

What are the four key factors auditors focus on for depreciation expense?

Answer 42

Useful life
Depreciation method
Salvage value
Depreciation policy.

Question 43

What is a substantive analytical procedure for auditing depreciation?

Answer 43

Calculating depreciation by multiplying the undepreciated fixed assets by the depreciation rate for the year

Adjustment for new acquisitions and disposals.

Question 44

When might auditors need to perform more detailed tests for depreciation expense?

Answer 44

If the substantive analytical procedure isn’t effective or indicates a possible misstatement.

Question 45

What do detailed tests for depreciation expense involve?

Answer 45

Recomputing

Detailed Calculation

Question 46

How do auditors check debits to accumulated depreciation?

Answer 46

By auditing asset disposals to ensure the related accumulated depreciation is removed.

Question 47

How do auditors verify credits to accumulated depreciation?

Answer 47

By auditing depreciation expense, which increases accumulated depreciation each period.

Question 48

What is the main objective for auditing accumulated depreciation?

Answer 48

1. Consistency
2. Accuracy

Question 49

How do auditors ensure consistency with the general ledger?

Answer 49

Acc dep in master file = general ledger

name : test footing

Question 50

What factors can lead to asset impairment?

Answer 50

decreased customer demand

unexpected physical wear

changes in company
operations

other unforeseen changes.

Question 51

What do auditors do to assess for impairment?

Answer 51

Check if the net book value (cost minus accumulated depreciation) is higher than the realizable value (amount expected to recover from using or selling the asset).

Question 52

What happens if the net book value exceeds the realizable value?

Answer 52

An impairment adjustment is necessary to ensure accurate financial reporting.