Audit Work Program – Property and Equipment Subsidiary/Department: Date:
AUDIT OBJECTIVES: To determine whether:
4. 5. 6.
Property, plant and equipment represent all tangible assets owned or held under capital lease that are used in the entity's operations or are under construction, and they are properly recorded at cost on a consistent basis. Additions to property, plant and equipment during the audit period are proper capital charges and represent all actual physical property installed or constructed. The costs and related accumulated depreciation, depletion and amortization amounts applicable to all retirements, abandonment, property no longer in service and dispositions have been properly removed from the accounts. Accumulated depreciation, depletion and amortization accounts are reasonable, considering the expected useful lives of the property units and expected net salvage values. The recorded net investment in property, plant and equipment can reasonably be expected to be realized. Property, plant and equipment and the related accumulated depreciation, depletion and amortization accounts are properly described and classified and adequate disclosures (including disclosure of liens and encumbrances) with respect to these amounts have been made.
AUDIT PROCEDURES: Procedures
1) ANALYTICAL PROCEDURES—GENERAL a.
Compare the balance of each significant property, plant and equipment account with the comparable balance for the preceding period. Consider the reasonableness of differences in light of budgeted capital expenditures, recent acquisitions or dispositions of assets or businesses, new product lines, anticipated plant closings, discontinuance of products, etc. Compare the balance of each significant accumulated depreciation, depletion and amortization account with the comparable balance for the preceding period. Consider the reasonableness of differences in light of current period additions/disposals of property and current period provisions for depreciation expense. Compute the ratio of accumulated depreciation to the related asset accounts for each category of property, plant and equipment. Compare the computed ratio with the similar ratio for the preceding period. Investigate significant or unusual variations. Assess the reasonableness of the net book value of property, based on the remaining depreciable lives and estimated net salvage values. Compare the balance of each significant maintenance and repairs account with the budgeted amount and the balance for the preceding audit
period. Investigate significant fluctuations for possible amounts expensed that should have been capitalized or amounts capitalized that should have been expensed. 4) TESTS OF EXISTENCE a. Tour the client's plant facilities and observe the type and condition of property in place. Note any excess, unusable or idle facilities. Obtain an understanding of the client's policies, procedures and controls for performing physical inventories of property (e.g., frequency or criteria for determining the need for a physical inventory). Determine whether a physical inventory of property should be taken for one or more categories of property. Consider the following: Significant categories of property that have been moved from one location to another during the audit period. Significant categories of property that are readily moveable, saleable and have a high unit value. Significant categories of property that are so poorly guarded that theft, destruction or other physical loss might not be noticed and recorded by management.
Observe the taking of physical inventories of selected property categories, noting the adequacy of the client's procedures and the condition of the property items. Prepare a summary memorandum describing the basis for selecting locations observed, the procedures followed during the observations and the principal observations. 1. Conclude as to the effectiveness of the methods of inventory-taking and the measure of reliance that may be placed on the client's representations about the quantities and physical condition of the property items
Review the reconciliation of the physical inventory to the general ledger balances for property, plant and equipment. Determine whether reconciling items have been properly accounted for.
4) TESTS OF PROPERTY ADDITIONS a. Discuss with appropriate client personnel the approval process as it relates to additions to property, including construction in progress. Obtain documentation of the various approval levels, including authorization for cost overruns on construction in progress.
Have the client prepare a schedule listing selected additions to the major categories of property during the current period. Scope:( ) 1. Scan the supporting subsidiary ledgers or other similar records to ensure that all additions over the listing scope are properly included on the schedule. Note that the descriptions indicated for property additions appear to describe items that are properly capitalizable under the client's accounting policies and relate to the client's business. Examine critical forms and documents () supporting the amounts of individual additions and note approval by the appropriate levels of authority. Scope:() A. For any real estate additions, examine the deed, title abstract, title insurance policy, tax bills and other documents evidencing ownership. B. Determine that the total cost of any plant and equipment purchased on an installment plan or held under capital lease agreements is reflected in the asset accounts and that the unpaid obligations are accrued as liabilities. C. Determine whether old equipment traded in or replaced by the new units has been removed from the accounts. D. Cross-reference transfers from construction in progress to the analysis for that account. 4. Have the client prepare a schedule of property transfers during the period. A. Determine the reason for significant transfers from property classifications other than construction in progress. Determine whether the resulting classification is proper and whether the depreciation method and key assumptions (e.g., economic useful life, salvage value, etc.) are appropriate, considering the property's new use. B. Trace significant amounts transferred to detail property records to determine whether both the cost and accumulated depreciation, depletion or amortization have been properly removed from the original classification and included in the new classification. Consider recomputing the amount of accumulated depreciation,
depletion or amortization transferred. 5. Relate property additions observed during the physical inventory observation to the schedule, by description. Physically observe other significant additions, noting that the physical characteristics appear to be consistent with descriptions in the authorizing documentation and with the classification in the accounts.
Inquire of appropriate client personnel as to the existence of significant commitments for the purchase of property items as of the balance sheet date. Consider the need to disclose such commitments in the financial statements. Determine the propriety of significant increases in property not arising from the acquisition of physical assets by reviewing supporting documentation and/or through discussion with appropriate personnel.
5) TESTS OF PROPERTY DISPOSITIONS a. Have the client prepare a schedule listing selected items of property sold, retired, abandoned or otherwise disposed of during the current period. Include the following information: Scope:() 1. Cost or other basis. Accumulated depreciation, depletion or amortization. Net book value at date of removal from the accounts. Proceeds received, if any. Reason for removal from the accounts. Gain or loss on the disposition. Investment tax credit recapture. Scan supporting records to ensure that all dispositions over the listing scope are properly included on the schedule. Tie the cost totals to the summary analysis and the totals for accumulated depreciation, depletion and amortization, investment tax credit recapture and gain or loss to the applicable lead schedules or analysis schedules. For significant dispositions, review the supporting subsidiary records and determine whether the cost basis and accumulated depreciation, depletion or amortization were properly removed from the accounts. Recompute accumulated depreciation, depletion or amortization to the disposal date. Examine critical forms and documents ( )
supporting each disposition and note approval by the appropriate levels of authority. List any related-party sales for further investigation. Scope:( ) 5. Test the recorded gain or loss on dispositions by performing the following: Scope:( ) A. Compare the cost basis of the property with the subsidiary ledger or other supporting records. B. Recompute accumulated depreciation to the disposal date and recompute the gain or loss taking into consideration any sales proceeds and/or cost of disposal. C. Trace sales proceeds received to entries recorded in the cash receipts register or to the bank statement. 6. Review for unrecorded performing the following: dispositions by
A. Inquire of management and operating personnel as to whether plant assets have been sold, retired or abandoned during the year and determines whether noted dispositions were recorded. B. Review miscellaneous revenue accounts for proceeds from the sale of property items. C. Investigate reductions in future lease commitments to determine if property held under capital leases has reverted back to the lessor. D. Investigate reductions in insurance coverage to determine if these relate to property dispositions.
6) EVALUATION OF RECOVERABILITY a.
Through discussions with appropriate personnel, determine whether idle, under-utilized, poorly performing or obsolete property exists. Determine whether, and on what basis, the client has made appropriate write-downs for any such items and whether any additional write-downs should be recorded to state them at their net realizable value. 1. Relate your findings to any such items noted during the physical inventory observation. Examine support for write-downs taken and asset appraisals supporting remaining carrying values. Consider requesting the assistance of
the Firm's Appraisal and Valuation Group. 3. Review the client's operating plan, budget or sales forecast to determine whether the expected production and sales volume or other indication of property usage is sufficient to realize property investments through future operations. Review proceeds from any significant dispositions of property subsequent to the balance sheet date to determine whether the amount recovered equaled or exceeded the property's carrying value.
Consider whether repairs and maintenance expenditures are of such magnitude that an inquiry should be made as to the need for write downs of the related equipment or whether deferred maintenance has led to deterioration or shortened useful lives of property. Determine which executive outside the client's financial organization is the best source of information about the locations of significant assets and additions and retirements of such assets. Ask this executive to review the detailed analyses of additions and dispositions and the CAF listing of the entity's locations, and to comment on their completeness.
7) TESTS OF CONSTRUCTION IN PROGRESS a. Have the client prepare an analysis of activity in the construction-in-progress accounts, by project or appropriation, for the current period. Include the balances at the beginning and end of the period, additions, transfers and other dispositions. 1. Cross-reference the total activity to the summary analysis for the period. Review the description of additions overall, noting whether they represent capitalizable costs. Review appropriate approval documentation to ensure that additions are not made to unauthorized projects or to projects for which the approval limit has been exceeded. Select a sample of projects or appropriations for testing and have the client prepare a schedule detailing the charges for those selected. Scope:() A. Trace the charges to the construction-inprogress subsidiary ledger or similar record that accumulates charges and credits to individual projects or appropriations.
B. Inspect critical forms and documents () supporting a sample of charges to the project. Scope:() C. Review the total charges for the project to date for reasonableness by reference to contracts with contractors, published statistics on costs of construction, the client's prior experience with similar additions, insurance or appraisal reports, architect's certificates or other appropriate sources. D. Review the propriety of the methods used to capitalize interest costs during the construction period and determines whether they are consistent with the methods used in the prior period. Evaluate the propriety of the time period for which interest was capitalized and the interest rate used; recompute the amount capitalized. Ensure that capitalization does not result in asset carrying values in excess of the recoverable value of the property. E. Review the propriety of the methods used to capitalize overhead during the construction period and determine whether they are consistent with the methods used in the prior period. Evaluate the propriety of amounts capitalized. Ensure that only those costs directly attributable to the construction work are included. 5. For projects or appropriations completed during the year, determine whether there was a proper cutoff of the capitalization of interest and overhead and whether all related costs were transferred to the property accounts (note propriety of classification) and considered for depreciation on a timely basis. For significant projects or appropriations suspended, canceled or delayed during the period, review the related circumstances and evaluate the effect on realizability or recoverability of costs incurred. Physically observe significant projects or appropriations in process at the end of the period, noting that the physical characteristics appear to be consistent with the description in the authorizing documentation and that the estimated stage of completion appears reasonable. A. Review cash flow projections or budgets and, through discussions with appropriate
client personnel, determine whether the client has identified adequate resources to complete the project or appropriation. B. Consider whether the costs are realizable or recoverable. 8. For significant projects, confirm with outside contractor amounts due or progress payments made and other pertinent terms relative to the construction contract.
ANSWER INTERNAL CONTROL QUESTIONNAIRES (ICQ E-1)
10) SUPERVISION, REVIEW AND CONCLUSIONS a) b)
Conclude responsive to the audit objectives. Prepare points regarding internal controls and other business matters. Perform senior review and supervision. Clear senior review points. Clear manager review points.
c) d) e)