Chapter 12.pptx

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K AT H E AR N

AC C A F 8 C H AP T E R

1 2

Auditing

non-current

assets

and

intangible

assets

(2)

Tests

of

detail

 Over the next 5 lectures we will look at tests of detail

for various different Financial Statement items:

 Non current assets and intangibles  Inventory

 Receivables  Cash and Bank

 Liabilities, capital and directors emoluments

 Today: NCA and intangibles

(3)

Learning

objectives

 Understand the process of auditing PPE

 Describe audit procedures to test PPE

balances and understand how the procedures address the financial statement assertions.

 Understand the process of auditing intangible assets.

 Describe audit procedures to test

intangible asset balances and understand how the procedures address the financial statement assertions.

(4)

Financial

statement

assertions:

NCA

 If we want to design audit procedures to test the NCA balance, we first need to consider the relevant assertions.

 Existence and occurrence  Completeness

 Rights and obligations

 Accuracy, classification and valuation  Assertions relating to presentation and

disclosure

(5)

Tangible

NCAs

(6)

Designing

appropriate

audit

procedures

 We need to make sure that all of these assertions

are

addressed in our audit procedures.

 Auditing tangible noncurrent assets requires the

auditor to obtain sufficient appropriate evidence over many areas:

 existing assets  additions

 disposals and the related profit/loss in the statement of

profit or loss

 depreciation (which of course affects both the statement of

financial position and the statement of profit or loss)

 revaluations

 related disclosures (the property, plant and equipment

note, depreciation policies, useful economic lives, revaluations and assets held under finance leases).

(7)

Illustration:

Jasmine

Ltd

 Jasmine Ltd is a small manufacturing company

making garden furniture.

 They have one building split into offices, a small workshop and a depot for

deliveries.

 You work for Hazelhurst LLP, and are a member of the statutory audit team for Jasmine Ltd. This year you have been asked to audit their PPE.

 Explain the process and procedures that

you will follow in order to complete the audit of Jasmine’s PPE balance.

(8)

Start

by

getting

the

information

required

 Obtain a copy of the SFP and PPE note.

 Also obtain a breakdown of PPE – often referred to as the NCA register, or Fixed Asset register

 Obtain a copy of depreciation policies.

 Enquire about key facts about PPE during the year.

(9)

SFP

Extract

Statement of financial position for Jasmine Ltd for the year ended 31 December 2013

Non current assets

Property, plant and equipment £200,91 0

Current Assets X

Equity X

Liabilities X

(10)

PPE

Note

Land and

buildings machineryPlant and vehiclesMotor Fixturesand fittings

Total

Cost b/f 100,00

0 65,000 43,000 31,000 239,000 Additions 21,00

0 6,000 2,000 29,000 Disposals (35,000

) (1,400) (36,400) Revaluation s 30,00 0 30,00 0

Cost C/f 130,00

0 51,000 49,000 31,600 261,600

A D b/f 18,00

0 38,860 17,630 12,000 86,490 Disposals (29,000

) (29,000)

Charge 2,00 0 11,20 0 6,80 0 3,20 0 23,20 0 Revaluation s (20,000

) (20,000)

A D c/f 0 21,06

0 24,430 15,200 60,690

0 CA b/f 82,00

0 26,14 0 25,37 0 19,00 0 152,5 10

CA c/f 130,00

0 29,940 24,570 16,400 200,910 Wednesday, October 0

(11)

Fixed

asset

register

Item Serial

number Cost Dep’nAcc. purchaseDate of Location

Desk 0001 £500 (£250) 1 Jan 2008 Room 301 Chair 0002 £100 (£50) 1 Jan 2008 Room 301

… … … … …

Lorry 3186 £600 16 Dec

2013 Depot 1

£261,600 £60,690

(12)

Depreciation

policy

 From the disclosure note in last year’s financial

statements you see that Jasmine’s policy is to depreciate:

 Land and buildings over 50 years on a straight

line basis

 Plant and machinery over 8 years on a

straight line basis

 Motor vehicles based on reducing balance of

25% of

the carrying amount.

 Fixtures and fittings over 10 years on a

straight line

basis

(13)

Find

out

key

facts

 It would be sensible to make enquiries of the company about any significant movements on PPE during the year.

Jasmine Ltd

 Having spoken with the FC of Jasmine, you learn:

 Land and buildings were revalued on the 31

December 2013.

 P&M had several small disposals and additions at

various

intervals in the year.

 For MVs, one new lorry was purchased on 16th

December 2013.

 F&F additions and disposals were to do with a re-fit

of a

director’s office in March 2013.

(14)

Check

that

all

the

balances

agree

 Procedure: Verify that the balance in the FSs correlates to the balance in the PPE note, and to the fixed asset register.

Jasmine Ltd

 The SFP shows a balance of £200,910. This correlates to the total balance in the PPE

note, and the total in the fixed asset register (taking cost less accumulated depreciation).

 NB: If these balances didn’t agree we

would need to

reconcile any differences.

(15)

What

next?

 Now we are happy that the breakdowns we have correlate to what is in the financial

statements, and so it’s time to start our

audit procedures on each of the PPE items.

 The PPE note is a good place to start – it can

be used as a lead schedule to make sure that

everything required is tested.

 Remember we don’t need to test immaterial balances (here we are going to assume

everything is material!).

(16)

Balances

b/f

 Procedure: Agree opening balances to prior year

audited financial statements.

Land and building s Plant and machiner y Motor vehicle s Fixtures and fittings Total

Costb/f 100,00

0 65,000 43,000 31,000 239,000

Additions 21,00

0 6,000 2,000 29,000 Disposals (35,000 ) (1,400 ) (36,400 ) Revaluation

s 30,000 30,000

Cost C/f 130,00

0 51,000 49,000 31,600 261,600

A Db/f 18,00 0 38,86 0 17,63 0 12,00 0 86,49 0 Disposals (29,000 ) (29,000 ) Charge 2,00

0 11,200 6,800 3,200 23,200 Revaluation s (20,000 ) (20,000 )

A Dc/f 0 21,06

0 24,430 15,200 60,690

0

CA b/f 82,00 0 26,14 0 25,37 0 19,00 0 152,5 10 CA c/f 130,00

0 29,94 0 24,57 0 16,40 0 200,91 0

(17)

Balances

b/f

(existing

NCA)

What are the FS assertions to do with these

balances?

 Valuation

(18)

Auditing

existing

assets

Existence, occurrence, completeness

 Procedures:

 For a sample of NCA from the fixed asset

register, physically inspect the asset to ensure that it exists, is in use and is in good working condition.

 Select a sample of assets visible at the client's

premises and inspect the asset register to ensure they are included.

Rights and obligations

 Procedure: For a sample of NCA from the

fixed asset register (concentrating on high value assets), obtain documentation

confirming proof of ownership by Jasmine.

(19)

Auditing

existing

assets

(continued)

Valuation

 Procedure: Inspect assets for condition and usage to identify signs of impairment

Rights and obligations

 Procedure: For leased assets, inspect the

lease document to assess whether the lease is an operating or finance lease and

appropriately treated

(20)

Illustration:

Existing

assets

Jasmine Ltd

 _For _Jasmine, _when _testing _assets _for _existence, _you

would target the higher value items, so head office

(easy!) and plant and machinery, although you would

still choose one or two items of MV and F&F.

 When inspecting the P&M you would look for

machines that

aren’t being used / look broken / dusty.

 _You _would _consider _inspecting _the _title _deeds _of

the head office.

 NB: If some of these procedures had been

performed in the prior year, these may not be

necessary.

(21)

Additions

 What are the FS assertions to do

with additions? Land and building s Plant and machiner y Motor vehicle s Fixtures and fittings Total

Costb/f 100,00

0 65,000 43,000 31,000 239,000

Additions 21,00

0 6,000 2,000 29,000

Disposals (35,000 ) (1,400 ) (36,400 ) Revaluation

s 30,000 30,000

Cost C/f 130,00

0 51,000 49,000 31,600 261,600

0 11,200 6,800 3,200 23,200 Revaluation s (20,000 ) (20,000 )

A Dc/f 0 21,06

0 24,430 15,200 60,690

0 CA b/f 82,00

0 26,14 0 25,37 0 19,00 0 152,5 10

CA c/f 130,00 0 29,94 0 24,57 0 16,40 0 200,91 0

(22)

Additions:

FS

assertions

with

additions?

 Accuracy, classification and valuation

(23)

Auditing

additions

Existence and occurrence

 Procedure: For a sample of additions (concentrating

on high value items) from the fixed asset register,

physically inspect the asset to ensure that it exists, is

in use and is in good working condition.

Rights and obligations

 Procedure: For a sample of additions from the fixed

asset register (concentrating on high value assets),

obtain documentation confirming proof of

ownership by Jasmine, such as a purchase invoice /

title deeds.

Completeness

 Procedure: Review the repairs and maintenance

account in the general ledger for items of a capital

nature.

(24)

Auditing

additions

(continued)

Accuracy, classification and valuation

Procedures

 Review capitalisation of expenditure by

reviewing invoices.

 Verify that costs capitalised meet the criteria for

capitalisation under IAS 16 and should not be expensed (such as repairs and maintenance)

 Inspect NCA accounts for a sample of

purchases to ensure that they have been properly allocated.

 If assets have been constructed by the client,

obtain an analysis of the costs incurred, cast for arithmetical accuracy and agree a sample of

costs to supporting documentation (e.g. payroll, material invoices).

(25)

Illustration:

Additions

Jasmine Ltd

 We would physically inspect the new MV addition

(lorry) and confirm from the log book the date of purchase, and that ownership is with Jasmine (i.e. it is not leased).

 When inspecting the P&M you would look for

machines

that aren’t being used / look broken / dusty.

 You would consider inspecting the title deeds of

the head office.

 NB: If this had been performed in the prior year, this

may not be necessary.

(26)

Disposals

with disposals? Land and building s Plant and machiner y Motor vehicle s Fixtures and fittings Total

Costb/f 100,00

0 65,000 43,000 31,000 239,000 Additions 21,00

0 6,000 2,000 29,000

Disposals (35,000 ) (1,400 ) (36,400 ) Revaluation

s 30,000 30,000

Cost C/f 130,00

0 51,000 49,000 31,600 261,600

0 11,200 6,800 3,200 23,200 Revaluation s (20,000 ) (20,000 )

A Dc/f 0 21,06

0 24,430 15,200 60,690

0 CA b/f 82,00

0 26,14 0 25,37 0 19,00 0 152,5 10

CA c/f 130,00 0 29,94 0 24,57 0 16,40 0 200,91 0

(27)

Disposals:

FS

assertions

with

disposals?

 Completeness

 Existence and occurrence

(28)

Auditing

disposals

Completeness

 Already tested with balances b/f when for a sample of NCA from the fixed asset register, physically inspect the assets - if the item was disposed it should have been removed from the NCA register.

Existence and occurrence

 Procedure: Verify the sale / disposal occurred by inspecting sale / scrap documentation to supporting documents (e.g., transfer of title deeds)

(29)

Auditing

disposals

(continued)

Accuracy, classification and valuation

Procedure:

 Verify proceeds received to documentation and bank statement.

 Recalculate the profit or loss on disposal and verify this has been recorded in the appropriate section of the P&L.

 If the asset was used as security, ensure that this has been released to supporting

correspondence.

 Verify that both the cost and corresponding accumulated depreciation have been

removed from the PPE balance.

(30)

Illustration:

Disposals

Jasmine Ltd

 There has been no depreciation removed on the disposals to do with F&F – this

should be determined and the PPE note updated to reflect.

 We should verify that the depreciation on MVs disposed of is complete and only relates to the disposed of item.

(31)

Revaluation

 What are the FS assertions to do with

the revaluation? Land and building s Plant and machiner y Motor vehicle s Fixtures and fittings Total

Costb/f 100,00

0 65,000 43,000 31,000 239,000 Additions 21,00

0 6,000 2,000 29,000 Disposals (35,000 ) (1,400 ) (36,400 ) Revaluation

s 30,000 30,000

Cost C/f 130,00

0 51,000 49,000 31,600 261,600

0 11,200 6,800 3,200 23,200

Revaluation s (20,000 ) (20,000 )

A Dc/f 0 21,06

0 24,430 15,200 60,690

0 CA b/f 82,00

0 26,14 0 25,37 0 19,00 0 152,5 10

CA c/f 130,00 0 29,94 0 24,57 0 16,40 0 200,91 0

(32)

Revaluation:

FS

assertion

the

revaluation?

 Valuation

(33)

Auditing

revaluations

Valuation

Procedures:

 For revalued assets, inspect the valuer's report

and agree the amount stated

 Consider reasonableness of valuation, reviewing:

 Experience / qualification of valuer  Scope of work

 Methods / assumptions used

 Valuation bases are in line with accounting standards

 Re-calculate the balance required in the

revaluation reserve and ensure that this agrees.

 Verify that the acc. dep’n on the revalued

asset has been removed.

(34)

Illustration:

Revaluation

Jasmine Ltd

 We would obtain a copy of the valuation report

stating that the building is worth £120,000.

 We must consider who has compiled the report and determine whether they have sufficient knowledge and experience to complete the valuation.

 Ultimately, if we are dissatisfied with the report, we

may decide to consult our own auditor’s expert.

(35)

Depreciation

charge

for

the

year

the depreciation charge? Land and building s Plant and machiner y Motor vehicle s Fixtures and fittings Tota l Costb/ f 100,00 0 65,00 0 43,00 0 31,00 0 239,00 0 Addition s 21,00 0 6,00 0 2,00 0 29,00 0 Disposal s (35,000 ) (1,400 ) (36,400 ) Revaluatio ns 30,00 0 30,00 0 CostC/

f 130,000 51,000 49,000 31,600 261,600

ADb/ f 18,00 0 38,86 0 17,63 0 12,00 0 86,49 0 Disposal s (29,000 ) (29,000 ) Charg e 2,00 0 11,20 0 6,80 0 3,20 0 23,20 0 Revaluatio ns (20,000 ) (20,000 )

AD c/f 0 21,06

0 24,430 15,200 60,690 0 CAb/ f 82,00 0 26,14 0 25,37 0 19,00 0 152,5 10 CAc/

f 130,000 29,940 24,570 16,400 200,910

(36)

Depreciation:

FS

assertions

the

depreciation charge?

 Valuation  Allocation

 Completeness

(37)

Auditing

depreciation

 Review the capital expenditure budgets for the next few years to assess the appropriateness of the useful economic lives in light of plans to replace assets.

 Review profits and losses on disposal of

assets disposed of in the year, to assess the reasonableness of the depreciation policies (if depreciation policies are reasonable, there should not be a significant profit or loss).

 Recalculate the depreciation charge for a sample of

assets.

(38)

Auditing

depreciation

(continued)

 Review the disclosure of the depreciation charges

and policies in the draft financial statements and compare to the prior year to ensure consistency.

 Re-perform depreciation calculation for revalued

assets to ensure the charge is based on the new carrying value (not applicable for Jasmine since depreciation on revalued amount begins next year).

 Perform a proof in total calculation for the

depreciation charged for each category of

assets, discuss with management if significant fluctuations arise.

(39)

Illustration:

Depreciation

Jasmine Ltd

 We would do a proof in total of the depreciation

charge for the year to determine reasonableness.

Land and buildings:

 Needs to be depreciated up to disposal on 31

December 2013 based on original cost (£100k) over useful life (50 years) =

£2,000 – therefore appears reasonable.

(40)

Illustration:

Depreciation

(continued)

Jasmine Ltd

Plant and machinery

 Consider timing of additions and disposals:

happened

throughout the year, assume 6 months average

£

£7,251

 Since stated depreciation in the note is £11,200, there

is a difference of £3,949 – if material this may need further work.

Assets held all year

£3,75 0

Additions (6 months)

£1,31 3

Disposals (6 months)

£2,18 8

Wednesday, October 0 7, 2020

=

(41)

Illustration:

Depreciation

Jasmine

Ltd

 Motor vehicles:

 Charge per the PPE note is £6,800. Difference

£457 – if

material, investigate further.

£

Existing MVs = £25,370 X 25% _£6,343

Additions (since December = ½ month)

Negligible amount

-£6,343

(42)

Illustration:

Depreciation

(continued)

Jasmine Ltd

Fixtures and fittings

 Consider timing of additions and disposals:

happened in March

£

 Since stated depreciation in the note is £3,200,

there is a difference of £855 – if material this may need further work.

(43)

Intangible

assets

(44)

Intangible

assets:

FS

assertions

 What are the FS assertions in respect of

intangible assets?

 Existence

 Not so much does the asset physically exist but does

it meet the IAS 38 recognition criteria?

 Valuation

 Are the intangibles recorded at the correct amount?

 Is the amortisation appropriately calculated /

classified?

(45)

Auditing

intangibles

 Let’s think about the different ways of obtaining an

intangible asset.

 Purchased intangibles (e.g. licences, patents)

 Goodwill (from a business combination)  Research and development

(meeting the capitalisation criteria)  Internally generated intangibles

(e.g. a brand)

(46)

Auditing

intangibles

(continued)

Purchased intangibles

 Agree the purchase price to supporting

purchase documentation in order to verify the cost of the asset (valuation)

 Review the purchase documentation to

ensure that the company has acquired the rights of use of the asset (rights and

obligations)

(47)

Auditing

intangibles

(continued)

Goodwill

 Verify the consideration offered to the acquisition

documentation (if required, recalculate PVs, and verify

market values of share prices).  Confirm the valuation of NCI

to either expert’s

report, or re-calculate based on NA.

 Review the NA of the sub at acquisition, where fair values have been determined, confirm these to an expert’s report (and consider experience, competency etc.).

£

Consideration X Add NCI X Less 100%of

NA

of S at acq’n

(X)

Goodwill X

(48)

Auditing

intangibles

(continued)

Research and development

 Inspect detailed listings of project costings, and confirm that those items of expenditure capitalised meet the IAS 38 criteria (existence)

 Confirm viability of project by inspecting budgets  Discuss projects progression with project managers

 Confirm that items that have been treated as revenue expenditure do not require

capitalisation (completeness).

(49)

Auditing

intangibles

(continued)

Amortisation

 Determine whether assets useful life is

reasonable by reviewing supporting

documentation (e.g. length of time a license is valid for, or the projected sales of a patented item).

 For items that are considered to have an indefinite

useful life, confirm that an impairment review has been performed.

 Re-perform the impairment review, considering

how the fair value and value in use of the item has been determined.

 Otherwise similar to auditing depreciation of

PPE.

(50)

Summary

of

learning

objectives

You should now be able to:

 Understand the process of auditing PPE  Describe audit procedures to test PPE

balances and understand how the procedures address the financial statement assertions.

 Understand the process of auditing intangible assets.

 Describe audit procedures to test

intangible asset balances and understand how the procedures address the financial statement assertions.

(51)