Question 1
a. Audit Procedure for accuracy of the summary of property plant & equipment
It is important to gather audit evidence by an auditor so that he can verify the reliability of the accounting records. The accounts to be focused on are depreciation expense, repair expense, finance charges on financially leased asset and rent on operating leases. For verifying the summary of Property, Plant & Equipment an auditor shall require to carry following steps -:
Step I -: Inspection
This would involve investigating each and every documents or records. These documents or records could be either in paper form or in electronic form or in any other media form. Examination of these records helps to determine the ownership of these assets and also
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Step IV
The auditor should review repairs and maintenance expenses to determine the propriety and consistency of the charges to this expense. Rental expenses are reviewed to ensure that such rents relate to assets under operating leases and that all assets acquired under finance leases are properly accounted for as additions to property, plant and equipment. (Abdolmohammadi et al. 2010).
c. Depreciation Rates
In respect of the depreciation charge, the auditor should be concerned with the reasonableness, consistency and accuracy of the depreciation methods used and the related balance of accumulated depreciation. Reasonableness can be tested by considering factors such as the past history of the entity in estimating useful lives of assets and the efforts of management to maintain ongoing review of rates used. Consistency can be checked by reviewing depreciation schedules. Accuracy is verified through recalculation, and this can be done on a selective basis
How to treat the items for depreciation
For claiming depreciation deduction following requirements should be met -:
1. It should be owned by the person, business claiming
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Evaluation
Two methods of depreciation are used straight line and reducing balance method. Assessing the useful life (UL) and residual value (RV) of an asset is extremely subjective. It will only be known for certain after the asset is sold or scrapped, and this is too late for the purpose of computing annual depreciation. Hence, it is required that the estimates should be reviewed at the end of each reporting period. If either changes significantly, then that change should be accounted for over the remaining estimated useful economic life.
Depreciation Expense is based on the value of the asset and the underlying depreciation assumptions. Now, if based on consequence of these assumptions too less or too much depreciation expense is charged then once it is charged to the Profit and Loss Account, it cannot be retrospectively adjusted in future years. If too much depreciation is expensed the value of the asset is later re-valued upwards and the restated depreciation expense is expensed for second time through PnL again. If too less depreciation is expensed the value of the asset is later re-valued downwards and the restated depreciation expense is expensed for second time through PnL
...and the useful life of the machine should be calculated. Then, depending on the method used, the total cost of the machine is considered as a long term asset and depreciated over the life expectancy of the asset.
The audit committee must certify that the company’s auditors are independent. The audit committee must approve all professional services provided to the company by its independent auditors and ensure that auditors do not provide to the company any of the specifically prohibited services identified by SOX, such as bookkeeping services. The audit committee must receive and analyze key items of information from the independent auditors. These items of information include auditors’ analysis of critical accounting policies adopted by the
... value, however, depreciation affects such values as operating profit and value of the company’s assets. If the depreciation is ignored, the Net Income calculations will be erroneous.
Spare parts should be assessed carefully in respect to their nature, their functions and their future use. Failure to do this, it would lead to a company experiencing significant losses. For example, a company that is responsible for maintenance of a solar power unit needs to assess the nature and use of the spare parts for profit maximization. There has been a discussion as to whether spare parts should be classified as property assets or inventories and this has led to many critical mistakes being made by many companies. Another issue is whether regarding how they should depreciate (Teixeira, Lopes & Figueiredo, 2017). This point of depreciation is determined by the decision made in classifying the spare parts.
Depreciation helps match the expense of using long lived assets with the revenues the assets helped to produce> what means is that Delta ns Singapore pole Air line depreciates one of its airplanes, it is trying to match the cost of air flight to the revenue that air craft helped to produce. Because air crafts can be an item used for more than one income statement period, Delta and Singapore Airlines don't recognize the air crafts entire cost as an expense immediately. Instead, the companies record them as assets on the balance sheet. Then, in each year of the assets useful life, the companies should recognize a portion of the Item's costs as an expense.
The method of depreciation the company uses is the straight-line method. The straight-line method is the most common method of calculating deprecation; therefore, it makes logical sense that this is the method that Lowe's Home Improvement uses.
In addition, the auditors did not perform sufficient substantiate procedures for the valuation of the assets (10). Because the auditors only inquired to management about the value and only recalculated the amortization schedule, it was likely that the assets could have been materially misstated. The client could have set too high of a value on the assets and used an inappropriate useful life. The auditor should have recalculated how the client determined the value of the assets and the useful life.
According to the article authored by Mark Rupert, what are the seven best practices in the roles and responsibilities of an internal audit function?
The responsibility for record keeping for an asset should be separate from the physical custody of the asset.” Chapter 7 Financial Accounting. (n.d.).
...ciates its assets on a straight line basis. Both IAS 16 and GAAP, depreciates assets over its expected useful life.
Depreciation on building has been worked out @ 10% p.a. The depreciation on plant and
The fundamental duty of an external financial auditor is to form and express an opinion on whether the reporting entity’s financial statements are prepared in accordance with the relevant financial reporting framework. In discharging this duty, the auditor must exercise “reasonable skill, care and caution” (Lopes, J. in Kingston Cotton Mill Co 1896) as reflected in current legal and professional requirements.
For-profit organizations depreciation is important because it reduces the taxes that a corporation pays. But in organizations that do not pay taxes, the importance of depreciation expense to decision making is reduced. So the only importance of depreciation expense in a nonprofit context is restricted to making a determination about the extent to which facilities have been depreciated. In this scenario it is very important to have preventive maintenance procedures to reduce the risk of collapsing public infrastructure. Without proper maintenance of facilities, public funds in excess of projections will have to be used to replace prematurely deteriorated facilities or to fund above-normal maintenance repairs. Information about the amount of deferred maintenance can be more important to a nonprofit manager than depreciation expense
No matter auditors work with technology or not, the most important thing in process of auditing is evidence. The basic framework for the auditor understands of evidence and its use to support the auditor's opinion on the financial statement. In reaching an opinion on the financial statements, the evidence gathered from the audit procedure is used to determine the fairness of the financial statements and the type of audit report to be issued. The characters of paper audit evidence are:
Assets are those things that are owned by an organization which have future economic value that are measurable and expressed in terms of monetary value. Basically assets are those resources which are acquired by a company through various transactions. (accounting coach, 2016)