Chapter 18

Substantive Test of
Property, Plant and
Equipment
Abu, Mary Joy V.
Dimaano, Genie G.
Mando, Mharianne U.
Wee, Jhon Rexane
Property, plant and equipment (PPE) are one
of the most significant portions of an entity’s
non-current assets, hence, before acquiring a
property, plant and equipment, they should be
carefully planned and analyzed.
When planning for audit of the PPE, the auditor should
consider the amounts for this PPE is material to the
statement of financial position and expect that the
amount balances do not necessarily change
significantly from year to year. The auditor normally
assesses control risk at a maximum level and performs
extensive substantive tests which emphasize the
review of significant additions and disposals and
analytical procedures to test the provisions for
depreciation and depletion.
In conjunction with the audit of PPE, the auditors also
obtain evidence about the related accounts of
depreciation expense, accumulated depreciation, lease
(rent) expense, impairment loss (if any) and repairs and
maintenance expense.
 Audit Objectives
Assertion Category Account Balances Audit Objectives

All PPE on the statement of Financial Position (including assets

Existence
leased under financed lease) exist.

All PPE owned or leased under finance lease by the entity at the
Completeness
reporting date is included on the statement of financial position.

PPE is carried at the appropriate amount taking into account the

Valuation and Allocation requirements of PAS 16 Property, Plant and Equipment and PAS 36
Impairment of Assets.

The entity owns, or has legal right to, all the PPE on the statement of
Rights and Obligation
Financial Position at the reporting date.

PPE and related accounts are properly classified, described and

disclosed in the financial statements, including notes, in accordance
Presentation and with PFRSs.
Disclosure
Liens, pledges, security interests and restrictions to PPE are
identified and properly disclosed.
 Audit of Property, Plant and Equipment
Primary Substantive Procedures
1. Obtaining a summary analysis of changes in property owned
and reconcile the ledgers;
2. Vouching for additions and disposals (including retirements) of
PPE during the year;
3. Physical inspection of major acquisition of PPE during the year;
4. Examining proof of ownership of PPE;
5. Analyzing lease, repair and maintenance expense accounts;
6. Testing for accuracy and reasonableness for provision on
depreciation or depletion;
7. Investigating current and potential impairments of PPE;
8. Performing analytical procedures to check for reasonableness
of PPE and related expense reported in the financial
statements and;
9. Evaluating financial statement presentation and disclosures for
an item of PPE including its related revenue and expense.
 Reconciliation of Subsidiary Ledger
with General Ledger
Primary Audit Objective: VALUATION AND ALLOCATION
COMPLETENESS

1. A description of the asset or asset classifications;

2. Cost of each asset or asset classification, including the opening
balance at the beginning of the year, additions and disposals,
retirements and the balance at the end of the year;
3. Accumulated depreciation, showing:
a. Balance at the beginning of the year;
b. Debits to accumulated depreciation due to transfers,
derecognition and reversals;
c. Depreciated book value before the current year’s depreciation, if
provision is based on the declining balance
d. Depreciation of depletion rate for each asset classification;
e. Depreciation or depletion expenses for the year; and
f. Balance at the end of the year.
 Examination of Additions and Disposals
(including retirements)
Primary Audit Objectives: Existence or Occurrence Valuation
Rights

ADDITIONS
1. For acquisitions of property (e.g land, building), the auditor
should verify the occurrence and the cost of the addition by
examining the capital expenditure authorization and
purchase agreement, contract deeds, cancelled checks or
other documentation. The auditor should also ensure that
all costs of acquisition are included in the PPE account;
2. For other additions to PPE, verify the occurrence and
valuation by tracing the description and amount to
purchase orders, capital expenditure authorizations,
contracts, architects’ certificates, legal correspondence,
supplier’s invoices, cancelled checks or other appropriate
documentation;
3. For cost incurred related to PPE (e.g., land improvements,
building improvements, major repairs, etc), the auditor
should examine supporting invoices and check whether the
acquisition represents capital expenditure based on
capitalization policy of the entity;
4. For PPE under construction:
a. Check that additions are properly approved in the
accordance with the entity’s authorization;
b. Verify the change in Constitution in Progress (CIP)
account by examining contractor’s progress billings,
labor charges, and other supporting documentation for
additions;
c. Check that all costs incurred up to the reporting date
and any withholding payments (e.g., amounts withheld
from payments to contractors pending satisfactory
completion of construction) have been properly
recorded;
5. For assets leased under finance lease, the auditor
ensure the capitalized amount is in accordance with
PAS 17 Leases by performing the following:
a. Obtain a copy of the lease contract and examine
the terms to verify that the lease meets the
criteria for finance lease;
b. Recompute the present value of the minimum
lease payments;
c. Review the fair values of the asset leased; and
d. Check whether the capitalized value is the lower
of the fair value of the leased asset and the
present value of the minimum lease payments.
d. Test calculations of capitalized borrowing cost (e.g.,
interest) to determine if the appropriate rates,
amounts and capitalization periods have been used,
and whether these are in the accordance with the
entity’s capitalization policy;
e. Review and calculate the allocation of overhead
charges attributable to construction;
f. Compare the total cost of self-constructed equipment
with bids of estimated purchase prices for similar
equipment from outside supplier, savings on
construction should not be recognized; and
g. Trace transfers from the CIP account to the property
accounts observing propriety of classification.
DISPOSLAS/RETIREMENTS
1. Inquire of executives and supervisors of PPE retirements or
disposals during the year;
2. For new additions, determine status of old assets whether this
represent a replacement of old asset;
3. When verifying PPE acquisitions, check for any trade-in credits
received and them check that the related asset trade-ins are
recorded in the disposals for the year;
4. Analyze miscellaneous revenue account for cash proceeds from
sale of PPE;
5. If company’s product lines are discontinued, investigate
disposition of plant facilities;
6. Consider whether property exists for all property taxes paid, and
if not, determine whether the property was sold and included in
the disposals for the year;
7. Examine retirement work orders or other source documents for
proper authorization; and
8. Investigate any reduction in insurance coverage as this may
indicate the retirement of PPE.
 Physical Inspection of Major Additions of
Plant and Equipment
Primary Audit Objectives: Existence and Completeness

1. Inspect the item of plant and equipment and trace it to the

property, plant, and equipment ledger. This type of
procedure provides evidence of completeness of recorded
asset.
2. Select items of plant and equipment from the ledger to the
physical asset. This type of procedure provides evidence of
existence and condition of the assets. However, this
procedure does not provide evidence regarding the
ownership of the asset. To verify the ownership of an item
of PPE, the auditor performs the next procedure below.
 Examine Evidence of Legal Ownership
of PPE
Primary Audit Objectives: Rights and Obligation

Aside from physical inspection to verify the existence

and condition of the equipment, the auditor examines
proof of legal ownership, for example, deeds of property
(real estate) and vehicle registration documents. The
auditor should also inquire the management of any
restriction of this item of plant and equipment as they
may be used as collateral for loan.
 Analyze Lease, Repair and
Maintenance Expense Accounts
Primary Audit Objectives: Valuation and Allocation
Completeness Classification

To ensure that all capital expenditure should not been included

in these expense accounts. For lease expense, the auditor will
normally examine the term of the lease contract to determine if
the lease is appropriately classified as operating lease,
otherwise this should be classified as an asset and
depreciated. For the repairs and maintenance expense
account, auditor should obtain the companies written policy
regarding the capitalization of expenditures incurred in relation
to the PPE as basis in determining the appropriateness of the
classification of the accounts.
 Test the Provision for
Depreciation or Depletion
Primary Audit Objectives: Valuation and Allocation and
Accuracy

The auditor’s objective is to obtain sufficient appropriate

evidence about whether:
a. Depreciation or depletion recognized in the financial
statements are reasonable; and
b. Related disclosures required in the financial
statements are adequate.
1. Review the depreciation policies set forth in the
company manuals and determine if it is applied
consistently.
2. Obtain or prepare a summary analysis of accumulated
depreciation for the major property classifications as
shown by the general ledger control accounts, listing
beginning balances, provisions for depreciation during
the year, disposals, retirements and ending balances.
a. compare beginning balances with the audited
amounts in the last year’s working papers; and
b. Determine that at the totals of accumulated
depreciation recorded in the plant and equipment
subsidiary records agree with the applicable
general ledger controlling accounts.
3. Test of provisions of depreciation
a. Assess the reasonableness of the depreciation methods
and rates used to calculate the depreciation provision by
comparing it with the methods and rates used in the prior
years and investigate any variances;
b. For assets acquired or disposed during the year, check
whether depreciation was provided based on the
accounting policy of the company;
c. Check the computation of depreciation by performing
independent recalculations; and
d. Compare credits to accumulated depreciation for the year
with the debits to depreciation expense.
4. Test deductions from accumulated depreciation for assets
retired.
a. Trade deductions to the working paper analyzing
retirements of assets during the year; and
b. Test accuracy of accumulated depreciation to date of
retirement
5. Perform analytical procedures for depreciation.
a. Compute the ratio of depreciation expense to total
cost of plant and compare with the prior years; and
b. Compare the percentage relationships between
accumulated depreciation and the related property
accounts with those in prior years. Inquire with
management any significant variations from the
normal depreciation.
 Examine impairments of PPE
Primary Audit Objectives: Valuation and Allocation

1. Evaluate the appropriateness of the valuation model

and assumptions used;
2. Assess the reasonableness of management’s
estimates; and
3. Evaluate the accuracy, completeness and the
relevance of the important data on which the
estimates or measurements are based.
 Perform Analytical Procedures for PPE
Primary Audit Objectives: Existence/Occurrence, Rights
and Obligations, Completeness, Valuation and Allocation

Among the ratios and trends commonly used by auditors

for this purpose are the following:
1. Ratio Analysis
a. Total cost of plant assets divided by annual output in
pesos, pounds or other units.
b. Total cost of plant assets divided by cost of goods
sold.
c. Total depreciation expense divided by total cost of
PPE.
2. Trend Analysis
a. Comparison of repairs and maintenance expense on
a monthly basis and from year to year.
b. Comparison of acquisitions for the current year with
prior years.
c. Comparison of retirements for the current year with
prior years.
 Evaluate Financial Statement Presentation
and Disclosures for Plant Assets and for
related Revenue and Expenses
Primary Audit Objectives: Presentation and Disclosures
1. Basis for measuring carrying amount;
2. Depreciation method(s) used;
3. Useful lives or depreciation rates used;
4. Gross carrying amount and accumulated depreciation and
impairment losses at the beginning and end of the period;
5. Reconciliation of the carrying amount at the beginning and
the end of the period;
6. Restrictions are title;
7. Expenditures to construct PPE during the period;
8. Commitments to acquire PPE; and
9. Compensation from third parties for items of PPE that were
impaired, lost or given up that is included in profit or loss.
 Lapsing Schedule

O Is a worksheet containing specific

accounting data about fixed assets such as
the original purchase cost, useful life,
accumulated depreciation, additions, sales
of assets, and so on. Lapsing schedule is
ordinarily provided by the audit client and
may slightly differ from one entity to another.
 Audit Objective/Possible
Audit Procedure
Misstatement
Analytical Procedure
Misstatement in PPE & Compare prior year balances
Depreciation in PPE with current year.
Misstatement in depreciation Compute the ration of
expense & Accumulated depreciation charge to the
Depreciation related PPE account, and
compare with prior year.
Expensing amounts that Compare repairs &
should be capitalized maintenance expense with
previous years.
Substantive Procedures
Accuracy Cast the PPE lead schedule.
Valuation and allocation Obtained detailed schedules
for additions
& disposals of PPE & agree
amounts to the PPE lead
schedule.
Comments
No exceptions noted.
No significant differences
noted.
No exceptions noted. No
significant difference from
previous period.
No exceptions noted.
NBV for tools on lead
schedule does not cross cast.
Depreciation rate for
renovation per lead schedule
is 6% but 11% on detailed
schedule.
 Innova on 16.10.2016–
not depreciated during
the year. Should have
incurred depreciation
of P59,000

Existence Vouch addition & disposals to supplier No exception noted.

invoices or other supporting documents.

Verify the existence of a sample of PPE

by examining them physically.

Completeness Physically examines a sample of PPE No exceptions noted.

and trace them to the PPE detailed
schedules.

Classification Review the “repairs & maintenance” No exceptions noted.

accounts to uncover items that should
be capitalized.
 For land, buildings, etc.
--examine the title deeds for proof of ownership.
Rights and Obligations For motor vehicles, heavy equipment, etc.
--examine registration cards for proof of
ownership
No exception noted on land and buildings.
Registration card should have been
stamped pledged because machinery is
pledged as security.

Presentation and One security agreement with SGV

Examine loan agreements for PPE pledged as
disclosure Company.
security for loans

Review purchase/disposal transactions before

Cut-off No exceptions noted.
& after the reporting date for proper cut-off.
Assertion Category Primary Audit Procedure
Existence and Occurance  Reconciliation of general
ledger with sub ledger
 Examination of addition
and disposal (including
retirements)
 Physical inspection of
major additions of PPE
 Perform analytical
procedures for PPE and its
related accounts (lease
expense, depreciation,
repairs and maintenance,
property taxes, property
insurance, etc.)