Non Current Assest

Question 1

Friday

Answer 1

Sure, let’s break down the key concepts related to non-current assets and their audit information, and then I’ll provide a practical example to illustrate these concepts.

1. Cost: The initial purchase price of the asset plus any additional costs necessary to bring the asset to its intended use.
2. Accumulated Depreciation and Impairment Losses: The total amount of depreciation and impairment losses that have been charged against the asset since it was acquired.
3. Net Carrying Amount: The cost of the asset minus accumulated depreciation and impairment losses.
4. Revaluation: Adjusting the book value of an asset to reflect its current market value.
5. Disposals: Removing an asset from the books when it is sold, scrapped, or otherwise disposed of.
6. Depreciation: The systematic allocation of the cost of an asset over its useful life.
7. Impairment Losses: Reductions in the recoverable amount of an asset below its carrying amount.
8. Reversal of Impairment Losses: When the recoverable amount of an asset increases after an impairment loss has been recognized.

Let’s consider a company, ABC Ltd., which has the following non-current assets:

• Land and Buildings
• Plant, Equipment, Fixtures and Fittings, and Motor Vehicles

• Basis of Revaluation: Market value
• Date of Revaluation: 31 December Year 2
• Independent Valuer: Yes, XYZ Valuers Ltd.
• Carrying Amount Using Cost Method: Rs. 10,000,000 for Land and Buildings, Rs. 5,000,000 for Plant, Equipment, Fixtures, and Fittings
• Revaluation Surplus: Rs. 1,000,000, with no movements during the financial period

1. Physical Inspection: Verify the existence of the assets by visiting the locations.
2. Review of Documentation: Check purchase invoices, revaluation reports, and disposal records.
3. Depreciation and Impairment Testing: Ensure depreciation is calculated correctly and impairment tests are conducted.
4. Revaluation Verification: Confirm the basis of revaluation and the involvement of an independent valuer.
5. Disclosure Check: Verify that all required disclosures are made in the financial statements.

By following these steps, auditors can ensure that the information related to non-current assets is accurate and complete, providing a true and fair view of the company’s financial position.

Feel free to ask if you have any more questions or need further clarification!

Let’s break down the principal risks of misstatement for tangible non-current assets and how auditors can address these risks through substantive testing.

1. Completeness Assertion:
   
   • Risk: Assets owned by the reporting entity may not be included in the financial statements.
   • Example: A company owns a piece of machinery that is not recorded in the asset register.
   • Audit Procedure: Review asset purchase records and physically inspect assets to ensure all owned assets are recorded.
2. Existence Assertion:
   
   • Risk: Assets reported in the financial statements may not actually exist.
   • Example: An asset listed in the financial statements has been sold or scrapped but is still recorded.
   • Audit Procedure: Conduct physical verification of assets to confirm their existence.
3. Accuracy, Valuation, and Allocation Assertion:
   
   • Risk: Assets may be incorrectly recorded at inappropriate amounts, and valuation or allocation adjustments may be inaccurately recorded.
   • Example: An asset is recorded at an incorrect value due to an error in depreciation calculation.
   • Audit Procedure: Verify the accuracy of asset valuations, depreciation calculations, and impairment assessments.
4. Rights and Obligations Assertion:
   
   • Risk: The reporting entity may not actually own the assets included in the financial statements.
   • Example: An asset is recorded in the financial statements, but the company does not hold legal title to it.
   • Audit Procedure: Review ownership documents, such as titles and purchase agreements, to confirm ownership.
5. Classification Assertion:
   
   • Risk: Assets may be recorded in improper accounts.
   • Example: A vehicle used for administrative purposes is incorrectly classified as a production asset.
   • Audit Procedure: Review the classification of assets to ensure they are recorded in the correct accounts.
6. Presentation Assertion:
   
   • Risk: Assets may not be correctly presented and disclosed in the financial statements.
   • Example: The financial statements do not include required disclosures about revalued assets.
   • Audit Procedure: Check that all required disclosures are made in accordance with accounting standards.

Substantive testing involves detailed examination of financial records and transactions to gather evidence that the assertions related to tangible non-current assets are valid. Here are some common substantive tests:

• Physical Inspection: Verify the existence and condition of assets by visiting their locations.
• Review of Documentation: Examine purchase invoices, revaluation reports, and disposal records to confirm accuracy and ownership.
• Depreciation and Impairment Testing: Ensure depreciation is calculated correctly and impairment tests are conducted.
• Revaluation Verification: Confirm the basis of revaluation and the involvement of an independent valuer.
• Disclosure Check: Verify that all required disclosures are made in the financial statements.

By performing these substantive tests, auditors can obtain sufficient and appropriate evidence to support the validity of the assertions related to tangible non-current assets, ensuring that the financial statements provide a true and fair view of the company’s financial position.

If you have any more questions or need further clarification, feel free to ask!

To ensure the completeness of tangible non-current assets in the financial statements, auditors can perform the following substantive tests:

1. Obtain or Prepare a Schedule of Tangible Non-Current Assets:
   
   • Action: Create or obtain a detailed schedule that lists all tangible non-current assets, including their cost or valuation, accumulated depreciation, and net carrying amount.
   • Purpose: This schedule provides a comprehensive overview of the assets and their financial details, which is essential for verifying completeness.
2. Reconcile with Opening Balances:
   
   • Action: Compare the schedule of tangible non-current assets with the opening balances from the previous period. This involves checking for any additions, disposals, or adjustments made during the period.
   • Purpose: Ensures that all changes to the asset balances are accurately recorded and that no assets are omitted.
3. Select a Sample of Physically Existing Assets:
   
   • Action: Choose a sample of assets that physically exist and have been verified through inspection. Trace these assets back to the asset register to confirm they are recorded.
   • Purpose: Verifies that all physically existing assets are included in the asset register, supporting the completeness assertion.
4. Reconcile Ledger Balances with the Asset Register:
   
   • Action: Prepare a reconciliation of the ledger balances for tangible non-current assets with the asset register. Investigate and resolve any discrepancies found.
   • Purpose: Ensures that the asset balances in the general ledger match the detailed records in the asset register, confirming the accuracy and completeness of the records.

Let’s consider a hypothetical company, XYZ Ltd., which has the following tangible non-current assets:

• Land and Buildings
• Machinery
• Office Equipment

1. Schedule of Tangible Non-Current Assets:
   
   • Land and Buildings: Cost Rs. 10,000,000, Accumulated Depreciation Rs. 2,000,000, Net Carrying Amount Rs. 8,000,000
   • Machinery: Cost Rs. 5,000,000, Accumulated Depreciation Rs. 1,500,000, Net Carrying Amount Rs. 3,500,000
   • Office Equipment: Cost Rs. 1,000,000, Accumulated Depreciation Rs. 400,000, Net Carrying Amount Rs. 600,000
2. Reconciliation with Opening Balances:
   
   • Compare the above schedule with the opening balances from the previous period.
   • Check for any additions (e.g., new machinery purchased), disposals (e.g., old office equipment sold), and adjustments (e.g., revaluation of land).
3. Sample of Physically Existing Assets:
   
   • Select a sample of assets, such as a specific piece of machinery and office equipment.
   • Verify their physical existence through inspection and trace them back to the asset register.
4. Reconciliation of Ledger Balances:
   
   • Reconcile the ledger balances for land and buildings, machinery, and office equipment with the asset register.
   • Investigate any differences, such as discrepancies in depreciation calculations or missing assets.

By performing these steps, auditors can gather sufficient evidence to support the completeness assertion for tangible non-current assets, ensuring that all assets owned by the company are accurately recorded in the financial statements.

If you have any more questions or need further clarification, feel free to ask!

To verify the existence of tangible non-current assets, auditors can perform the following steps:

1. Select a Sample of Assets:
   
   • Action: Choose a sample of assets from the non-current asset register.
   • Purpose: Ensure the selected assets are representative of the entire population.
2. Physical Inspection:
   
   • Action: Physically inspect the selected assets.
   • Purpose: Confirm that the assets exist, are in use, and note their condition.
   • Example: Inspect a piece of machinery listed in the asset register to verify its existence and operational status.
3. Use of Audit Software:
   
   • Action: Utilize audit software to assist in selecting a sample from an IT-based asset register.
   • Purpose: Ensure a systematic and unbiased selection process.

1. Land and Buildings:
   
   • Action: Confirm the cost figures with the purchase contract and invoices for associated costs (e.g., professional fees).
   • Purpose: Ensure the purchase expenditure is reasonably allocated between land, buildings, and equipment.
   • Example: Verify that the cost of a newly acquired building is accurately recorded and includes all related expenses.
2. Equipment and Vehicles:
   
   • Action: Check the cost in the financial statements against the purchase invoices.
   • Purpose: Ensure the recorded cost is accurate.
   • Example: Match the cost of a new delivery truck with the purchase invoice.
3. Review Allocation:
   
   • Action: Review the allocation of total expenditure on non-current assets between capital and revenue amounts.
   • Purpose: Ensure proper classification of expenditures.
   • Example: Verify that the cost of major repairs is capitalized, while routine maintenance is expensed.

1. Obtain the Revaluation Report:
   
   • Action: Obtain the revaluation report for the assets.
   • Purpose: Ensure the revaluation is properly documented.
   • Example: Review the revaluation report for a piece of land to confirm its updated market value.
2. Match Balances:
   
   • Action: Match the balance in the revaluation report with the financial statements or general ledger.
   • Purpose: Ensure consistency between the revaluation report and financial records.
   • Example: Verify that the revalued amount of a building is correctly reflected in the financial statements.
3. Ensure Revaluation of Similar Class Assets:
   
   • Action: Ensure all assets of a similar class are revalued.
   • Purpose: Maintain consistency in asset valuation.
   • Example: Confirm that all office buildings are revalued, not just a select few.
4. Evaluate Management Expert:
   
   • Action: Evaluate the competence, capabilities, and objectivity of the management expert who performed the revaluation.
   • Purpose: Ensure the expert’s work is reliable.
   • Example: Assess the qualifications and independence of the valuer.
5. Understand Expert’s Work:
   
   • Action: Obtain an understanding of the expert’s work.
   • Purpose: Ensure the auditor can rely on the expert’s findings.
   • Example: Review the methodology used by the valuer in the revaluation process.
6. Evaluate Adequacy of Expert’s Work:
   
   • Action: Evaluate the adequacy of the expert’s work by ensuring:
     
     • Findings and conclusions are relevant and reasonable.
     • Assumptions are reasonable.
     • Source data is complete and accurate.
   • Purpose: Ensure the revaluation is based on sound and accurate information.
   • Example: Verify that the assumptions used in the revaluation of a factory are reasonable and supported by market data.
7. Consider Using Auditor’s Expert:
   
   • Action: Consider the need to use the auditor’s expert.
   • Purpose: Obtain additional assurance if necessary.
   • Example: Engage an independent valuer to verify the revaluation of a complex asset.

By following these steps, auditors can gather sufficient and appropriate evidence to support the accuracy, valuation, and allocation assertions for tangible non-current assets, ensuring that the financial statements provide a true and fair view of the company’s financial position.

If you have any more questions or need further clarification, feel free to ask!

| Land and Buildings (Rs.) | Plant, Equipment, Fixtures, and Fittings (Rs.) | Total (Rs.) |
|——————–|————————–|————————————————|————-|
| Cost | | | |
| At 31 December Year 1 | 10,000,000 | 5,000,000 | 15,000,000 |
| Additions | 1,000,000 | 500,000 | 1,500,000 |
| Acquisitions | 500,000 | 200,000 | 700,000 |
| Disposals | (200,000) | (100,000) | (300,000) |
| At 31 December Year 2 | 11,300,000 | 5,600,000 | 16,900,000 |
| Accumulated Depreciation and Impairment Losses | | | |
| At 31 December Year 1 | 2,000,000 | 1,000,000 | 3,000,000 |
| Depreciation | 300,000 | 200,000 | 500,000 |
| Disposals | (50,000) | (20,000) | (70,000) |
| Impairment Losses | 100,000 | 50,000 | 150,000 |
| Reversal of Impairment Losses | (20,000) | (10,000) | (30,000) |
| At 31 December Year 2 | 2,330,000 | 1,220,000 | 3,550,000 |
| Net Carrying Amount | | | |
| At 31 December Year 1 | 8,000,000 | 4,000,000 | 12,000,000 |
| At 31 December Year 2 | 8,970,000 | 4,380,000 | 13,350,000 |