AWP 9

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Open Balances Case Example: Property, Plant, and Equipment (PPE)

Context

ABC Manufacturing Company has significant investments in PPE, including manufacturing facilities, machinery, and equipment. Accurate recording and valuation of these assets are essential for financial reporting and capital investment planning.

Audit Objective

To verify that the opening balances for PPE at the start of the fiscal year are accurately and completely recorded, carried forward from the previous year’s closing balances, and properly adjusted for any subsequent transactions or changes.

Types of Audit Evidence and Documentation for Open Balances

1. Review of Prior Year Audit Documentation

• Case: Auditors review the prior year’s audit documentation related to PPE, including the audit opinion, reconciliation schedules, and any adjustments made.

• Documentation: Summarize the review, noting the prior year’s closing balances for PPE and any significant audit findings or adjustments that affected those balances.

2. Reconciliation of Opening Balances to Prior Year Closing Balances

• Case: Perform a reconciliation of the current year’s opening balances for PPE to the prior year’s audited closing balances, adjusting for any known transactions (e.g., acquisitions, disposals, depreciation).

• Documentation: Prepare a reconciliation statement that details the opening balances, adjustments made, and the reconciled amounts. Document any discrepancies identified and resolved.

3. Inquiries of Management

• Case: Inquire of management about any significant transactions affecting PPE since the last audit period and how these have been accounted for in the opening balances.

• Documentation: Document the inquiries made and management’s responses, including any relevant supporting documentation provided by management.

4. Review of Supporting Documentation for Transactions

• Case: Review supporting documentation for significant PPE transactions occurring between the last audit date and the current year’s opening balance date.

• Documentation: List the transactions reviewed, the nature of the documentation examined (e.g., purchase agreements, disposal records, depreciation schedules), and the conclusions drawn regarding their impact on the opening balances.

5. Evaluation of Depreciation and Amortization Methods

• Case: Evaluate the methods used for depreciating or amortizing PPE to ensure they are consistent with the prior year and compliant with applicable accounting standards.

• Documentation: Prepare a memo that assesses the depreciation methods, useful lives, and residual values used, noting any changes from the prior year and their appropriateness.

6. Management Representations

• Case: Obtain written representations from management confirming the accuracy and completeness of the opening balances for PPE.

• Documentation: Include the representation letter, specifically noting sections related to the accuracy and completeness of open balances for PPE.

Conclusion

For open balances, particularly related to PPE, auditors gather and document a range of evidence to verify that these balances are accurately carried forward from the prior year and properly adjusted for any subsequent transactions. This comprehensive approach ensures that the opening balances provide a reliable basis for the current year’s financial reporting. Through detailed documentation, auditors substantiate their findings and conclusions, reinforcing the credibility of the financial statements and providing stakeholders with assurance about the integrity of the financial reporting process.