Question

What procedures would an auditor use to verify the completeness, ownership, and valuation audit objectives for property, plant and equipment?

Answer 1

The auditor should adopt the following audit procedures to ensure the completeness, ownership and valuation objectives of property, plant and equipment (PPE):

Substantive Procedures:

1. Existence and Ownership: Auditor should verify the existence of the PPE by verifying the underlying documents and other records. The auditor should also verify the PPE physically to ensure the existence and condition of the PPE. However the primary responsibility of physical verification of PPE lies with the management. Even then, auditor should perform this audit procedure since the PPE forms substantial part of the financial statements and the inherent risk of misstatement associated with the PPE. Further the auditor should asses whetherthe physical verification method adopted by management to verify its PPE is appropriate and whether the frequency at which the management conducts such physical verification is reasonable. Further the auditor should satify himself with the competency of person who is physically verifying the PPE (whether an employee of the entity or third party expert)

2. Valuation: Auditor should ensure proper cut off date for transactions to be considered for computing the figures of PPE has been adopted. This is important for proper valuation of PPE. The Auditor should also assess the accouting policies adopted by the management, including the policies adopted to obtain the valuation of PPE and assess their appropriateness. For example, auditor should consider the appropriateness of the cost formuala, depreciation method or valuation model and its relevance to a particular PPE. Further the auditor should also assess whether component based capitalisation is properly followed where significant components of an asset with visibly distinguished usage and life has to be recognised as separate PPE

3. Completeness: The auditor should assess the policy of entity in identifying the expenditure to be capitalised. While doing so the auditor should levy special focus on areas like capitalisation of finance costs and any possible omissions of capitalisation of PPE under finance lease or hire purchase, etc