Profit Loss on sale of PPE

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Profit or Loss on Sale of Fixed Assets Audit Case Example: ABC Manufacturing Company

Context

When ABC Manufacturing Company sells fixed assets, such as machinery, equipment, or buildings, it may realize a gain or loss depending on the difference between the sale proceeds and the carrying amount of the asset at the time of sale. Accurately accounting for these transactions is essential for presenting the company’s financial performance and position.

Audit Objective

To obtain reasonable assurance that profits or losses from the sale of fixed assets are correctly recognized, measured, and disclosed in ABC Manufacturing Company’s financial statements in accordance with the applicable financial reporting framework.

Types of Audit Evidence and Documentation for Profit or Loss on Sale of Fixed Assets Assertions

1. Occurrence

• Case: Verify that the sales of fixed assets actually occurred and relate to the company’s assets.

• Documentation: Document the inspection of sales agreements, transfer documents, and receipts of sale proceeds to substantiate the occurrence of the asset sale transactions.

2. Completeness

• Case: Ensure that all sales of fixed assets during the period are recorded in the financial statements.

• Documentation: Outline procedures for identifying and testing all transactions related to the disposal of fixed assets, such as reconciling the list of disposed assets with the fixed asset register and accounting records.

3. Accuracy

• Case: Assess the accuracy of the calculation of the gain or loss on sale, including the correct determination of the carrying amount of the sold asset and allocation of sale proceeds.

• Documentation: Document specific testing procedures and recalculations performed to verify the accuracy of the gain or loss recorded, highlighting any adjustments made to correct errors in calculation.

4. Valuation and Allocation

• Case: Evaluate the appropriate valuation of the sold asset up to the point of sale, including adjustments for depreciation or impairment.

• Documentation: Document the review of the asset’s carrying amount prior to sale, including depreciation calculations and any impairment reviews conducted, to ensure the asset was correctly valued.

5. Presentation and Disclosure

• Case: Review the financial statements to ensure that the profit or loss on the sale of fixed assets is correctly presented and adequately disclosed, including the nature and financial impact of significant disposals.

• Documentation: Evaluate the presentation and disclosure of profits or losses from asset sales, verifying that disclosures comply with the financial reporting framework and provide clear information on the impact of disposals on the company’s financial performance and position.

Additional Considerations

• Internal Controls Evaluation: Assess the design and effectiveness of internal controls over the disposal of fixed assets, including authorization, recording, and review of sales transactions.

• Tax Implications: Consider the tax implications of the asset sale, including any tax liabilities arising from the gain or loss on sale, and document the company’s compliance with tax reporting and payment obligations.

• Inquiries of Management: Perform inquiries with management regarding the rationale for asset disposals, the process for determining sale prices, and any subsequent reinvestment or strategic shifts related to the disposals.

• Communication with Those Charged with Governance: Discuss significant findings or issues identified during the audit of profits or losses on the sale of fixed assets with management and those charged with governance, focusing on the accuracy of calculations, adequacy of disclosures, and any material impacts on the financial statements.

Conclusion

The audit of profit or loss on the sale of fixed assets is critical for ensuring that these transactions are accurately recognized, measured, and disclosed in the financial statements. Documenting the audit procedures and findings related to each relevant assertion provides a basis for the auditor’s opinion, enhancing the reliability and transparency of financial reporting related to asset disposals.