PROPERTY, PLANT, AND EQUIPMENT
I. Major controls
1. Maintenance of subsidiary ledger consisting of a separate record for each unit of
2. System of authorization requiring executive approval for all plant and equipment
acquisitions. Serially numbered capital work orders can be used to record authorizations.
3. Authoritative written statement of company policy distinguishing between capital and
4. All purchases of plant and equipment should be made through purchasing department and
subjected to standard routines for receiving, inspection, and payment.
5. Periodic physical inventory should be taken and compared to accounts.
6. System of retirement procedures, including prenumbered retirement work orders properly
7. Capital budget.
II. Audit Objective – Determine:
1. Control – Adequate internal controls exist for property, plant, and equipment items.
2. Existence, Rights – Fixed assets actually exist and are owned by the company.
3. Valuation – Basis upon which the property accounts are stated is proper, conforms with
generally accepted accounting principles, and has been consistently followed (cost basis).
4. Valuation – Additions during the year are proper capital charges.
5. Valuation – Costs relating to allowance of depreciation applicable to retirements or sales
have been removed from the accounts and that gains or losses from sales have been
properly computed and recorded.
6. Completeness – Depreciation charged to income is adequate and has been computed on
an acceptable consistent basis.
7. Presentation and Disclosure – Proper disclosure is made of liens, depreciation expense,
accumulated depreciation, and PP&E items.
III. Audit Procedures
A. Review and evaluate internal control for property, plant and equipment.
1. Obtain and understanding of internal control for property, plant and equipment.
2. Assess control risks for assertions about property, plant and equipment.
3. Perform additional tests of controls for those controls on which auditor plans to
reduce assessed level of control risks.
4. Reassess control risk and design substantive tests.
B. Substantive tests.
1. Reconcile plant ledger balance to control account.
2. Examine titles, tax bills, purchase invoices and lease agreements to verify
3. Inspect selected property items and trace to account records.
a. Trace postings from ledger accounts to journals.
b. Trace entries in journal to original documents. Select additions from
account records to verify physical existence.
4. Trace retirements and disposals to cash receipts.
5. Review proper authorization for additions and retirements.
6. Analyze repair and maintenance accounts (note large items).
7. Review account policies for tools and patterns
8. Review rental income from fixed assets.
9. Review insurance coverage
a. Good way to detect assets not recorded.
b. May indicate disposals.
10. Evaluate balance sheet presentation (APB #12).
a. Valuation should be stated.
b. Property note in current use should be listed separately.
c. Depreciable and non-depreciable assets should be listed separately.
11. Review depreciation policies for reasonableness and test computations.