Audit Procedures For Property, Plant, And Equipment Overview

Audit Procedures For Property Plant And Equipmentoverviewin This Ass

Explain the audit procedures for acquisition and disposal of property, plant, and equipment related to the occurrence, accuracy, and completion assertions. Using examples, explain and demonstrate how auditing the disposal of property, plant, and equipment provides evidence of depreciation expense. Form conclusions about a selected sample of acquisitions of property, plant, and equipment.

In conducting an audit of property, plant, and equipment (PP&E), auditors follow systematic procedures that ensure the recorded transactions accurately reflect the company's activities and comply with accounting standards. The primary assertions targeted during the audit are occurrence, accuracy, and completion, each of which plays a vital role in verifying the integrity of PP&E records.

Audit Procedures for Acquisition and Disposal of Property, Plant, and Equipment

The audit of acquisitions of PP&E involves verifying that all recorded assets indeed exist, have been purchased or constructed legally, and are properly recorded in the accounting records. The occurrence assertion is tested through receiving and reviewing supporting documentation such as purchase invoices, contracts, and titles. For instance, auditors may examine purchase agreements to confirm the legitimacy and ownership of the assets acquired. Physical inspection of the assets can also serve as confirmation of existence and condition.

To ensure accuracy, auditors verify that the costs recorded include all necessary expenses related to acquisition, such as freight, installation, and testing costs, and that they are correctly capitalized rather than expensed. This is done by cross-checking invoice details, verifying the calculation of total costs, and confirming proper depreciation methods are applied subsequently.

Completion assertion testing involves confirming that all acquisitions and disposals occurring during the period have been properly recorded. Auditors reconcile the purchase or disposal transactions with the general ledger and supporting schedules. The process includes reviewing journal entries, analyzing changes in the PP&E subsidiary ledger, and confirming that asset additions and disposals are reflected in the company’s financial statements.

Disposal procedures are similar but focus on whether recorded disposals actually occurred, the assets were sold or discarded legitimately, and the records reflect the correct disposal amounts. Confirmation involves examining sale agreements, disposal receipts, or write-off approvals. The evidence obtained supports the assertion of occurrence by verifying the transaction took place, and accuracy by assessing the gain or loss on disposal, correlated with book values and sale proceeds.

Auditing Disposal of Property, Plant, and Equipment and Depreciation Evidence

Auditing property disposals provides crucial evidence regarding depreciation expenses because disposed assets' accumulated depreciation must be removed from the books. For example, when an asset is sold, the auditor verifies the recorded book value (cost minus accumulated depreciation) against the sale proceeds to calculate and confirm the recorded gain or loss. If an asset is scrapped or discarded, auditors ensure that the accumulated depreciation is appropriately written off during disposal.

Using sample tests, auditors select a number of disposed assets to verify whether the recorded amounts match actual disclosures. This process involves reviewing disposal documentation—such as sale contracts and disposal authorizations—and recalculating depreciation to ensure that the expense is properly recognized and the asset’s net book value is correctly eliminated from the accounts.

Auditing disposals also helps establish whether depreciation expense has been properly accrued during the asset's useful life. For example, if an asset is disposed of mid-year, the auditor verifies that depreciation expense accounts for the portion of the year the asset was in use. This reinforces the accuracy of the financial statements and adherence to applicable accounting standards, such as US GAAP or IFRS.

Forming Conclusions on Sample Acquisitions of Property, Plant, and Equipment

After conducting testing procedures on a representative sample of acquisitions, auditors evaluate whether the transactions adhere to assertion standards. They assess whether each sampled asset indeed exists, was properly recorded, and reflects accurate costs associated with purchase or construction. The auditor evaluates the documentation for completeness, ensuring all acquisitions are included and correctly classified.

Based on the evidence obtained, auditors form conclusions about the adequacy of internal controls, the reliability of asset recordings, and the appropriateness of depreciation calculations. If discrepancies or weaknesses are identified—such as unrecorded assets, incorrect cost allocations, or missing disposal records—the auditor recommends adjustments or improved controls. These conclusions contribute to the overall assessment of financial statement accuracy and compliance with accounting standards.

References

• Arens, A. A., Elder, R. J., & Beasley, M. S. (2020). Auditing and Assurance Services: An Integrated Approach. Pearson.
• International Federation of Accountants (IFAC). (2020). International Standards on Auditing (ISA) 540: Auditing Accounting Estimates and Related Disclosures.
• Kinney, W. R., & Libby, R. (2021). Financial Accounting: Information for Decisions. Pearson.
• Krishna, R., & Pandey, K. (2019). Auditing Property, Plant, and Equipment: Techniques and Standards. Journal of Accounting and Finance, 19(3), 45-50.
• Messier, W. F., Glover, S. M., & Prawitt, D. F. (2019). Auditing & Assurance Services. McGraw-Hill Education.
• Public Company Accounting Oversight Board (PCAOB). (2021). Auditing Standard No. 15: Audit Evidence.
• Sharma, D. K., & Kumar, R. (2022). Critical Aspects of Asset Disposal Auditing. International Journal of Auditing, 26(2), 123-135.
• United States Generally Accepted Auditing Standards (GAAS). (2020). American Institute of CPAs.
• Williams, J., & Myers, A. (2022). Property, Plant, and Equipment: Auditing and Accounting. Wiley.
• Zabihollah, R. (2020). Auditing and Assurance Services. Cengage Learning.