PPE

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PPE Audit Case Example: ABC Manufacturing Company

Context

ABC Manufacturing Company holds significant PPE, including manufacturing equipment, buildings, and land. These assets are essential for its operations and subject to various accounting treatments such as depreciation, impairment, and revaluation.

Audit Objective

To obtain reasonable assurance that PPE recorded in ABC Manufacturing Company’s financial statements exist, are owned by the company, are complete, accurately valued, and properly presented and disclosed in accordance with the applicable financial reporting framework.

Types of Audit Evidence and Documentation for PPE Assertions

1. Existence

• Case: Verify that PPE items listed in the accounting records physically exist.

• Documentation: Document physical verification procedures, such as inspection of selected PPE items and reconciliation with asset registers.

2. Rights and Obligations

• Case: Confirm that the company has legal title to or a right to use the PPE.

• Documentation: Summarize the review of purchase documents, deeds, lease agreements, and other relevant legal documents that evidence ownership or rights to use the assets.

3. Completeness

• Case: Ensure that all PPE owned or controlled by the company is recorded in the financial statements.

• Documentation: Outline procedures for testing completeness, such as reconciling the detailed PPE listing with insurance records and examining capital expenditure documents for assets not yet recorded.

4. Valuation and Allocation

• Case: Assess the appropriateness of the valuation of PPE, including the correctness of depreciation, amortization, impairment charges, and any revaluation adjustments.

• Documentation: Document the assessment of valuation methods, useful lives, residual values, and any impairment testing performed, noting the basis for conclusions reached on the recoverability and valuation of PPE assets.

5. Presentation and Disclosure

• Case: Review the financial statements to ensure that PPE is correctly classified, described, and disclosed, including the disclosure of accounting policies, carrying amounts, and movements during the period.

• Documentation: Note the evaluation of PPE disclosures, including compliance with the financial reporting framework, adequacy of the disclosures related to depreciation methods, rate, impairment reviews, and commitments for PPE acquisitions.

6. Assessment of Internal Controls over PPE

• Case: Evaluate the design and implementation of internal controls over the acquisition, disposal, depreciation, and maintenance of PPE.

• Documentation: Document the review of internal controls related to PPE, including controls over the authorization of transactions, safeguarding of assets, and accuracy of the related financial information.

7. Inquiries and Analytical Procedures

• Case: Perform inquiries with management regarding significant PPE transactions during the period and apply analytical procedures to identify unusual or unexpected balances or transactions related to PPE.

• Documentation: Summarize inquiries and the results of analytical procedures, highlighting any significant transactions, trends, or variances that required further investigation.

8. Communication with Management and Those Charged with Governance

• Case: Discuss findings related to the audit of PPE with management and those charged with governance, especially any issues regarding the existence, valuation, or disclosure of PPE.

• Documentation: Prepare a summary of communications regarding PPE, including management’s responses to findings and any adjustments or disclosures resulting from the audit.

Conclusion

The audit of PPE is a vital component of the financial statement audit, ensuring that the significant assets necessary for the company’s operations are properly accounted for and disclosed. By documenting the audit procedures and findings related to each PPE assertion, auditors provide a basis for their opinion on the financial statements. This thorough approach enhances the reliability of the financial information provided to stakeholders, supporting informed decision-making.