Module 7 - Acquisitions/Payment Cycle for PPE Flashcards
Use this card to understand the transactions that affect PPE:
The main account record for PPE is:
Fixed asset master file
Includes a detailed record for each acquisition; sent to general ledger
- Cost
- Current depreciation
- Accumulated Depreciation
To help the audit of PPE, auditors can separate tests into these classifications:
- 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
Understanding PPE Controls:
Describe these controls
- Approval of significant capital expenditures
- Formal capitalization policy
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)
Understanding PPE Controls:
Management review of capital vs expense
- Describe this control
- What audit objective does this satisfy?
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
What controls may management put into place to review capital vs expense classification?
- Reviewing new additions to capitalizations
- Review actual to budget for repairs/maintenance expense (look for unusual understatement)
Understanding PPE Controls:
Describe these controls
- Monitoring timing/capitalization of CWIP
- Restricted access to PPE
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
Understanding PPE Controls:
Describe these controls
- Review of depreciation expense
- Physical count/verification of PPE
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
What is the issue with analytical procedures for PPE?
- PPE is rather stagnant so cannot be annualized
- Performed analytical procedures should focus more on expense accounts (depreciation) rather than balances (assets/acc. depr)
What are some analytical procedures that can be performed for acquisitions/payment cycle: PPE?
the third procedure is best procedure; provides assurance against understatement of expenses
When auditing the ending balance in the PPE accounts, the auditor’s objectives include:
determining:
- All recorded PPE physically exists on BS date (existence)
- All PPE owned is recorded (completeness)
The (typical) first substantive test for PPE:
- 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
What is a rollforward schedule?
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…
What are the differences between:
- PPE Asset Rollforward Schedule
- PPE Accumulated Depreciation Rollforward schedule
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
What should the auditor focus on when verifying the beginning balance of assets of PPE?
Verify Beg Balance:
- Beginning Balance should agree to Prior year balance sheet
- May even want to agree with prior year workpapers
What should the auditor focus on when verifying current year acquisitions?
- 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,
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?
Current acquisitions agree with master file (or roll forward)
- Foot the acquisition schedule
- Trace individual acquisitions to master file
- 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>
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?
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
What should the auditor be concerned with when gathering evidence for classification and cutoff for PPE acquisitions?
Classification: Current year acquisitions are listed as correctly classfied
- Examine vendor’s invoices for details of items in manufacturing/related accounts
- Examine lease/rent expense for capitalization policy
Cutoff: Acquisitions are included in correct period
- Review transactions near the balance sheet date
- Review in progress projects that have NOT been recorded
What steps should the auditor take to verify current year disposals of PPE?
- 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
What steps should the auditor take to verify the ending balance of PPE accounts?
- 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)
What steps should the auditor take to verify depreciation expense?
Most important objective is accuracy:
- Ensure consistent depreciation policy/capitalization policy
- Recalculation of depreciation expense
What steps should the auditor take to verify the ending balance of accumulated depreciation?
- Verify accumulated depreciation of disposed assets has been reversed
- Acc. Depr. in rollforward agrees with general ledger and balance sheet
What are the general steps for verifying prepaid accounts?
What transaction related audit objectives are satisfied by these tests?
- 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
Use this card as a review of how prepaid accounts behave/are recorded:
What are some analytical procedures that can be used as a substantive test for prepaid accounts?
What are some recalculations?
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
