Non Current Asset Part 2

Question 1

Depreciation and impairment
Right
Intangible non current assets

Answer 1

To ensure the accuracy and appropriateness of depreciation and impairment of tangible non-current assets, auditors can perform the following steps:

1. Review Depreciation Rates:
   
   • Action: Assess the reasonableness of depreciation rates considering the nature of the asset, its estimated useful life, and residual value.
   • Purpose: Ensure that depreciation rates reflect the actual usage and wear and tear of the assets.
   • Example: Verify that machinery used in a factory is depreciated at a higher rate compared to office furniture due to its intensive use.
2. Ensure Consistent Depreciation Methods:
   
   • Action: Check that the same depreciation methods are applied consistently across similar types of assets.
   • Purpose: Maintain consistency in financial reporting.
   • Example: Confirm that all vehicles are depreciated using the straight-line method.
3. Review Gains or Losses on Disposal:
   
   • Action: Examine the gains or losses on the sale or disposal of assets, including accumulated depreciation and impairment at the time of disposal.
   • Purpose: Ensure that disposals are accurately recorded and any resulting gains or losses are correctly calculated.
   • Example: Verify the calculation of the gain on the sale of an old delivery truck.
4. Check Depreciation Calculations:
   
   • Action: Verify the accuracy of depreciation calculations using the entity’s stated policy. Audit software can be used to check these calculations in an IT system.
   • Purpose: Ensure that depreciation is calculated correctly.
   • Example: Use audit software to recalculate the depreciation expense for a fleet of vehicles.
5. Ensure Fully-Depreciated Assets Are Not Depreciated Further:
   
   • Action: Confirm that assets which have been fully depreciated are not subject to further depreciation.
   • Purpose: Prevent overstatement of depreciation expense.
   • Example: Verify that an office computer, fully depreciated after five years, is no longer being depreciated.
6. Perform Substantive Analytical Procedures:
   
   • Action: Verify the total charge for depreciation by performing analytical procedures, such as comparing the ratio of depreciation to total asset value with previous years.
   • Purpose: Identify any unusual trends or discrepancies.
   • Example: Compare the depreciation ratio for the current year with the previous three years to identify any significant changes.

1. Understand Management’s Process:
   
   • Action: Obtain an understanding of the management process related to identifying, estimating, and recording impairment for fixed assets to determine whether it is consistent with IAS 36 requirements.
   • Purpose: Ensure that the impairment process is robust and compliant with accounting standards.
   • Example: Review the procedures management uses to assess the recoverable amount of assets.
2. Obtain Management’s Calculation:
   
   • Action: Obtain management’s calculation for writing down fixed assets to their recoverable value and check the reasonableness of methods and assumptions (e.g., discount rate, future cash flows).
   • Purpose: Verify the accuracy and appropriateness of impairment calculations.
   • Example: Assess the assumptions used in calculating the impairment of a manufacturing plant.
3. Test Operating Effectiveness of Controls:
   
   • Action: Test the operating effectiveness of controls over the recording of impairment.
   • Purpose: Ensure that controls are functioning as intended to prevent and detect errors in impairment recording.
   • Example: Verify that the approval process for impairment adjustments is followed correctly.
4. Recalculate Impairment Working:
   
   • Action: Recalculate the impairment working to confirm the accuracy of the impairment amount.
   • Purpose: Ensure that the impairment amount is correctly calculated.
   • Example: Recalculate the impairment loss for a piece of equipment based on updated market conditions.

By performing these steps, auditors can gather sufficient and appropriate evidence to support the accuracy and appropriateness of depreciation and impairment of 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 verify the ownership of tangible non-current assets, auditors can perform the following steps:

1. Land and Buildings:
   
   • Action: Verify legal title to the assets by inspecting appropriate documents such as legal documents of ownership or lease agreements.
   • Purpose: Ensure that the entity has legal ownership or rights to use the land and buildings.
   • Example: Review the deed or title document for a piece of land owned by the company.
2. Vehicles:
   
   • Action: Examine vehicle registration documents or similar documentation giving evidence of title.
   • Purpose: Confirm that the vehicles are owned by the entity.
   • Example: Check the registration certificate of a company-owned delivery truck.
3. Other Assets:
   
   • Action: Examine invoices or other documents transferring title.
   • Purpose: Verify ownership of other tangible non-current assets.
   • Example: Review the purchase invoice for office equipment.
4. Ensure Documents Are in the Entity’s Name:
   
   • Action: Ensure that all ownership documents are in the name of the entity (the client company).
   • Purpose: Confirm that the assets are legally owned by the entity.
   • Example: Verify that the title deed for a building is in the company’s name.
5. Review Legal and Bank Documents:
   
   • Action: Review legal documents, bank documents, and other documents for evidence of any loans that are secured by charges on assets.
   • Purpose: Identify any encumbrances or liens on the assets.
   • Example: Check loan agreements to see if any assets are pledged as collateral.

1. Ensure Proper Classification:
   
   • Action: Ensure that the non-current assets have been classified in the appropriate account.
   • Purpose: Maintain accurate financial reporting.
   • Example: Verify that machinery used in production is classified under “Plant and Equipment” rather than “Office Equipment.”

1. Review Disclosures:
   
   • Action: Review the disclosures in the financial statements to ensure they are correct and clear.
   • Purpose: Ensure compliance with accounting standards and provide transparent information to users of the financial statements.
   • Example: Check that the notes to the financial statements include all required information about revalued assets.
2. Agree Schedule to Financial Statements:
   
   • Action: Ensure the schedule of tangible non-current assets agrees with the figures in the financial statements.
   • Purpose: Confirm that the detailed asset schedule is accurately reflected in the financial statements.
   • Example: Match the total net carrying amount of tangible non-current assets in the schedule with the amount reported in the statement of financial position.

By performing these steps, auditors can gather sufficient and appropriate evidence to support the rights and obligations, classification, and presentation 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!

Auditors focus on substantive testing of additions and disposals of tangible non-current assets to ensure accuracy and completeness in the financial statements. Here are the typical substantive procedures:

1. Obtain/Prepare a Schedule of Additions:
   
   • Action: Create or obtain a detailed schedule listing all additions for the period.
   • Purpose: Ensure all new assets acquired during the period are accounted for.
   • Example: List all new machinery purchased during the year.
2. Check Authorisation of Expenditure:
   
   • Action: Verify that the expenditure for the additions was properly authorised.
   • Purpose: Ensure that all purchases were approved according to company policy.
   • Example: Confirm that the purchase of a new vehicle was approved by the relevant manager.
3. Reconcile Total Additions:
   
   • Action: Confirm that the total additions reconcile with the movement between the opening and closing balances in the financial statements.
   • Purpose: Ensure consistency and accuracy in the financial records.
   • Example: Match the total cost of new assets with the increase in the asset account.
4. Inspect Purchase Invoices:
   
   • Action: Inspect purchase invoices or other documents as evidence of the cost of any addition.
   • Purpose: Verify the cost and ensure the documents are in the company name.
   • Example: Check the invoice for a new piece of equipment to confirm the purchase price.
5. Verify Existence of Acquired Assets:
   
   • Action: Physically inspect the acquired non-current assets where appropriate.
   • Purpose: Confirm that the assets exist and are in use.
   • Example: Inspect a newly acquired machine in the factory.
6. Check Accounting Entries:
   
   • Action: Verify that the entries in the accounting records are correct, confirming the allocation of total expenditure between capital and revenue expenditure.
   • Purpose: Ensure proper classification of expenditures.
   • Example: Confirm that the cost of a new building is capitalised, while repair costs are expensed.

1. Obtain/Prepare a Schedule of Disposals:
   
   • Action: Create or obtain a detailed schedule listing all disposals for the period.
   • Purpose: Ensure all assets sold or disposed of during the period are accounted for.
   • Example: List all vehicles sold during the year.
2. Check Authorisation of Disposals:
   
   • Action: Verify that the disposals were properly authorised.
   • Purpose: Ensure that all disposals were approved according to company policy.
   • Example: Confirm that the sale of an old machine was approved by the relevant manager.
3. Verify Removal from Accounting Records:
   
   • Action: Verify that the cost and related accumulated depreciation have been removed from the accounting records.
   • Purpose: Ensure that disposed assets are no longer recorded in the financial statements.
   • Example: Check that the cost and accumulated depreciation of a sold vehicle are removed from the asset register.
4. Verify Gain or Loss on Disposal:
   
   • Action: Verify the calculation of the figure for the gain or loss on disposal and ensure it is correctly recorded in the ledger.
   • Purpose: Ensure accurate reporting of gains or losses from disposals.
   • Example: Confirm the calculation of the gain on the sale of a piece of equipment.
5. Discuss Unrecorded Disposals:
   
   • Action: Discuss with management (including non-financial management) the possibility of unrecorded disposals of assets.
   • Purpose: Identify any disposals that may not have been recorded.
   • Example: Ask department heads if any assets were disposed of without proper documentation.

• Self-Constructed Assets:
  
  • Action: Focus on confirming that internal costs (materials, labour, other direct expenses, and overheads) have been properly accounted for as capital expenditure.
  • Purpose: Ensure accurate recording of self-constructed assets.
  • Example: Verify the costs associated with constructing a new building in-house.

By performing these substantive procedures, auditors can gather sufficient and appropriate evidence to support the accuracy and completeness of additions and disposals of 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 valuation and accuracy of purchased goodwill, auditors can perform the following detailed tests:

1. Inspect the Purchase Agreement:
   
   • Action: Check the amount of consideration, number of shares acquired, and acquisition date.
   • Purpose: Verify the terms of the acquisition.
   • Example: Confirm that the purchase price and number of shares acquired match the agreement.
2. Inspect the Bank Statement:
   
   • Action: Ensure that the amount has been transferred.
   • Purpose: Verify the payment for the acquisition.
   • Example: Check the bank statement to confirm the transfer of funds for the purchase.
3. Inspect the CDC Statement:
   
   • Action: Ensure that the shares exist and are in the name of the company.
   • Purpose: Verify the ownership of shares.
   • Example: Check the Central Depository Company (CDC) statement to confirm the shares are registered in the company’s name.
4. Obtain Valuation Report:
   
   • Action: Obtain the valuation report from management and match the amount.
   • Purpose: Verify the valuation of goodwill.
   • Example: Compare the valuation report with the recorded amount of goodwill.
5. Evaluate Management Expert:
   
   • Action: Evaluate the competency, capability, and objectivity/independence of the management expert.
   • Purpose: Ensure the reliability of the expert’s work.
   • Example: Assess the qualifications and independence of the valuer.
6. Evaluate Adequacy of Expert Work:
   
   • Action: Ensure the relevance and reasonableness of the expert’s findings, assumptions, and methodology used. Verify the relevance, completeness, and accuracy of source data.
   • Purpose: Confirm the accuracy and appropriateness of the valuation.
   • Example: Review the assumptions used in the valuation, such as discount rates and future cash flows.
7. Consider Using Auditor 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 management expert’s valuation.
8. Ensure Carrying Amount and Fair Value:
   
   • Action: Ensure that the carrying amount and fair value of remaining assets are approximately the same by inquiring with management or engaging an expert.
   • Purpose: Verify the accuracy of asset valuations.
   • Example: Confirm that the fair value of a subsidiary’s assets matches the carrying amount.
9. Ensure Fair Value of NCI:
   
   • Action: Ensure that the fair value of non-controlling interest (NCI) is calculated correctly and accurately using an appropriate rate.
   • Purpose: Verify the accuracy of NCI valuation.
   • Example: Check the calculation of NCI based on the fair value of the subsidiary.
10. Understand Management Process for Impairment:
    
    • Action: Understand the management process for recording impairment of goodwill, if any.
    • Purpose: Ensure compliance with impairment testing requirements.
    • Example: Review the procedures management uses to assess goodwill impairment.
11. Test Operating Effectiveness of Controls:
    
    • Action: Test the operating effectiveness of controls over recording of impairment.
    • Purpose: Ensure that controls are functioning as intended.
    • Example: Verify that the approval process for impairment adjustments is followed correctly.
12. Ensure Reasonableness of Assumptions:
    
    • Action: Ensure that assumptions used by management, such as discount rates and future cash flows, are reasonable.
    • Purpose: Verify the accuracy of impairment calculations.
    • Example: Assess the reasonableness of the discount rate used in the impairment test.
13. Perform Subsequent Event Procedures:
    
    • Action: Inspect subsequent interim financial statements and compare the projected results with the actual results.
    • Purpose: Identify any events that may impact the valuation of goodwill.
    • Example: Compare the projected cash flows with actual cash flows to identify any significant variances.
14. Obtain Written Representation from Management:
    
    • Action: Obtain written representation from management that assumptions are reasonable.
    • Purpose: Ensure management’s accountability for the assumptions used.
    • Example: Obtain a signed representation letter from management confirming the reasonableness of assumptions.

By performing these detailed tests, auditors can gather sufficient and appropriate evidence to support the valuation and accuracy of purchased goodwill, 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!

For other intangible assets, auditors perform tests similar to those for tangible non-current assets. Here are the key tests:

1. Confirm Existence, Cost, and Legal Rights:
   
   • Action: Inspect purchase documentation to confirm the existence, cost, and the client entity’s legal rights to the acquired assets.
   • Purpose: Ensure that the intangible assets are valid and owned by the entity.
   • Example: Review the purchase agreement for a patent to verify the cost and ownership.
2. Check Amortisation Calculations:
   
   • Action: Verify the accuracy of amortisation calculations using the entity’s stated policy.
   • Purpose: Ensure that amortisation is calculated correctly and consistently.
   • Example: Check the amortisation schedule for a trademark to confirm it aligns with the company’s policy.
3. Consider Impairment:
   
   • Action: Assess the possibility that the assets are suffering impairment and discuss this with the directors of the client company.
   • Purpose: Identify any potential impairment losses.
   • Example: Evaluate whether a customer relationship intangible asset has lost value due to a major client leaving.
4. Ensure Correct Ledger Entries for Impairment:
   
   • Action: Verify that any impairment has been correctly recorded in the ledger.
   • Purpose: Ensure accurate financial reporting.
   • Example: Check the ledger entries to confirm that an impairment loss on a software license is properly recorded.

Audit tests for development costs focus on assessing the feasibility and proper accounting of development projects. Here are the key tests:

1. Discuss Development Project:
   
   • Action: Discuss the development project with management, senior personnel, and key stakeholders to assess its feasibility.
   • Purpose: Understand the project’s potential for generating future economic benefits.
   • Example: Review projections and forecasts for a new product development project.
2. Inspect Development Contracts and Records:
   
   • Action: Inspect development contracts and records supporting and safeguarding patents.
   • Purpose: Verify the legal protection and documentation of the development work.
   • Example: Check the patent application documents for a new technology.
3. Test Controls Around Documentation:
   
   • Action: Test controls around the documentation and safekeeping of scientists’ notes, discoveries, and conclusions.
   • Purpose: Ensure that critical development information is properly documented and protected.
   • Example: Verify that lab notebooks are securely stored and regularly updated.
4. Test Sample of Development Costs for Capitalisation:
   
   • Action: Test a sample of development costs to ensure they are appropriately capitalised.
   • Purpose: Confirm that costs meeting the criteria for capitalisation are recorded as assets.
   • Example: Check that costs for prototype development are capitalised rather than expensed.
5. Obtain Written Representation from Management:
   
   • Action: Obtain written representation from management regarding their commitment to complete the project and either use or sell the asset(s).
   • Purpose: Ensure management’s intention and commitment to the project.
   • Example: Obtain a signed letter from management confirming their plans to complete and market a new software product.

By performing these detailed tests, auditors can gather sufficient and appropriate evidence to support the valuation and accuracy of other intangible assets and development costs, 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!