Module 7 - Acquisitions/Payment Cycle for PPE

Question 1

Use this card to understand the transactions that affect PPE:

Answer 1

Question 2

The main account record for PPE is:

Answer 2

Fixed asset master file

Includes a detailed record for each acquisition; sent to general ledger

• Cost
• Current depreciation
• Accumulated Depreciation

Question 3

To help the audit of PPE, auditors can separate tests into these classifications:

Answer 3

• Understand controls
• Perform Analytical Procedures
• Verify Current Year Acquisitions
• Verify Current Year Disposals
• Verify Ending balance in asset account
• Verify Depreciation Expense
• Verify Ending balance in Accumulated Depreciation

Question 4

Understanding PPE Controls:

Describe these controls

• Approval of significant capital expenditures
• Formal capitalization policy

Answer 4

Approval of significant capital expenditures:

• When someone initiates a purchase requisition there is appropriate authorization to verify cost;
• look for threshold values that require increasing degree of authorization

Formal Capitalization Policy

Explanation of

• types of costs that can be capitalized.
• threshold amounts
• classification of capitalizations (expected life)

Question 5

Understanding PPE Controls:

Management review of capital vs expense

• Describe this control
• What audit objective does this satisfy?

Answer 5

Management review of capital vs expense

• Perhaps most import financial reporting control for PPE
• Expenses that improve quality/quanitity of output of PPE can be capitalized
• Routine maintenance should be expensed
• Satisfies classification; looks for risk of overstatement of assets

Question 6

What controls may management put into place to review capital vs expense classification?

Answer 6

• Reviewing new additions to capitalizations
• Review actual to budget for repairs/maintenance expense (look for unusual understatement)

Question 7

Understanding PPE Controls:

Describe these controls

• Monitoring timing/capitalization of CWIP
• Restricted access to PPE

Answer 7

Monitoring timing/capitalization of CWIP

• Once construction can be used for intended use, it must be capitalized
• Accounting department should comunicate with project managers

Restricted access to PPE

PPE that is easily stolen should be restricted

Question 8

Understanding PPE Controls:

Describe these controls

• Review of depreciation expense
• Physical count/verification of PPE

Answer 8

Review of depreciation expense

• Someone/system should be in charge of calculating/recording depreciation
• Another should be in charge of reviewing amounts and calculations

Physical count/verification of PPE

• Employee that has duty to verify PPE additions
• Verifies existence of PPE

Question 9

What is the issue with analytical procedures for PPE?

Answer 9

• PPE is rather stagnant so cannot be annualized
• Performed analytical procedures should focus more on expense accounts (depreciation) rather than balances (assets/acc. depr)

Question 10

What are some analytical procedures that can be performed for acquisitions/payment cycle: PPE?

Answer 10

_{the third procedure is best procedure; provides assurance against understatement of expenses}

Question 11

When auditing the ending balance in the PPE accounts, the auditor’s objectives include:

Answer 11

determining:

1. All recorded PPE physically exists on BS date (existence)
2. All PPE owned is recorded (completeness)

Question 12

The (typical) first substantive test for PPE:

Answer 12

• Compare Rollforward schedule to balance sheet
• Compare master file to general ledger accounts

Concerns detail tie-in:

Ending balance of PPE categories as listed on Rollforward schedule agree with Balance sheet

PPE as listed in master files agrees with the general ledger

Question 13

What is a rollforward schedule?

Answer 13

Internal document (prepared by client) that explains changes by category of a particular account from last years ending balance to this year’s ending balance

Often have a rollforward schedule for:

• PPE Assets
• PPE Accumulated Depreciation
• etc…

Question 14

What are the differences between:

• PPE Asset Rollforward Schedule
• PPE Accumulated Depreciation Rollforward schedule

Answer 14

PPE Rollforward Schedule:

• Beg Bal of Asset Account
• Plus: Current Year Acquisitions
• Less: Current year disposals
• Ending balance

PPE Accumulated Depreciation Rollforward schedule

• Beg Balance of Acc. Depr.
• Plus: Current Year Depreciation Expense
• Less: Acc Depr. on disposed assets
• Ending Balance

Question 15

What should the auditor focus on when verifying the beginning balance of assets of PPE?

Answer 15

Verify Beg Balance:

• Beginning Balance should agree to Prior year balance sheet
• May even want to agree with prior year workpapers

Question 16

What should the auditor focus on when verifying current year acquisitions?

Answer 16

• Acquisitions are the main driver for change in PPE balance (acquisitions > disposals)
• 7 out of 8 balance related objectives
  
  • Detail tie in; Existence; Accuracy; Classification; Cutoff; Completeness; Rights,

Question 17

What should the auditor be concerned with when gathering evidence for detail tie-in for PPE acquisitions?

What steps should be taken to gather such evidence?

Answer 17

Current acquisitions agree with master file (or roll forward)

1. Foot the acquisition schedule
2. Trace individual acquisitions to master file
3. Trace the total to the general ledger

Trace each and agree to:

master file > Roll Forward > general ledger > balance sheet

_{This substantiates population; auditor can then <strong>select population</strong>}

Question 18

What should the auditor be concerned with when gathering evidence for existence and accuracy for PPE acquisitions?

What steps should auditor perform to gather such evidence?

Answer 18

Current acquisitions exist:

1) Examine documents
* Vendor’s invoice, receiving reports, authorization form, purchase order, loan agreement, cash disbursements
2) Physically examine assets

Acquisition lisitings are accurate:

1) Examine vendor’s invoices

Question 19

What should the auditor be concerned with when gathering evidence for classification and cutoff for PPE acquisitions?

Answer 19

Classification: Current year acquisitions are listed as correctly classfied

1. Examine vendor’s invoices for details of items in manufacturing/related accounts
2. Examine lease/rent expense for capitalization policy

Cutoff: Acquisitions are included in correct period

1. Review transactions near the balance sheet date
2. Review in progress projects that have NOT been recorded

Question 20

What steps should the auditor take to verify current year disposals of PPE?

Answer 20

• Make inquiries about possibility of any disposals
• Trace disposals to master file
• Review whether newly acquired assets replace old ones
• Analyze gains/losses on disposal
• Review documents for deletion of equipment
• Ensure they client removed accumulated depreciation for disposals

Question 21

What steps should the auditor take to verify the ending balance of PPE accounts?

Answer 21

• Ensure mathematical accuracy of of rollforward schedule
• Agree ending balance of roll forward schedule to balance on current year balance sheet
• Physically verify assets (auditor should select older assets that have not been tested in a while)

Question 22

What steps should the auditor take to verify depreciation expense?

Answer 22

Most important objective is accuracy:

• Ensure consistent depreciation policy/capitalization policy
• Recalculation of depreciation expense

Question 23

What steps should the auditor take to verify the ending balance of accumulated depreciation?

Answer 23

• Verify accumulated depreciation of disposed assets has been reversed
• Acc. Depr. in rollforward agrees with general ledger and balance sheet

Question 24

What are the general steps for verifying prepaid accounts?

What transaction related audit objectives are satisfied by these tests?

Answer 24

• Rely heavily on controls (prepaids are often immaterial)
• Supplement controls testing with analytical procedures, inspection, and recalculations

Objectives:

Existence and completeness: Policies exist and are listed

Rights: Client has rights to any prepaids listed

Question 25

Use this card as a review of how prepaid accounts behave/are recorded:

Answer 25

Question 26

What are some analytical procedures that can be used as a substantive test for prepaid accounts?

What are some recalculations?

Answer 26

Analytical procedures:

• Compare total in prepaid account to prior year (average of PY) totals
• Compute ratio of prepaid account to related expense; compare with prior years

Recalculations (better approach):

Look at third party documents/agreements for expense details; calculate total realizable expense