Auditing Property Plant and Equipment

The video introduces the topic of auditing Property, Plant, and Equipment (PPE), clarifying that it refers to non-current assets on a balance sheet, not personal protective equipment. The speaker outlines the content to be covered: common processes, internal controls, tests of controls, and substantive testing related to PPE.

The acquisition process for PPE starts with a purchase request and requires quotes. An approval process follows, with different levels of authority depending on the spending amount. As spending increases, so do the layers of approval. This approval process serves as a key internal control to prevent misuse of funds. A centralized purchasing department typically handles ordering, and accounting is notified upon receipt of goods.

Testing internal controls involves identifying and verifying their operation. For PPE purchases, auditors select a sample of acquisitions and vouch back to approval documentation, ensuring the approver had the appropriate level of authority. For disposals or write-offs of PPE, auditors look for evidence of approval and proper removal from the fixed asset register, as well as adherence to segregation of duties in preparation and approval processes.

Substantive procedures begin with assertions. For the existence of PPE, auditors physically inspect a sample of assets from the fixed asset register. For accuracy, valuation, and allocation, auditors examine additions by tracing acquisitions to the fixed asset register and recalculating acquisition costs, ensuring proper inclusion of costs. They also recalculate and re-estimate depreciation, considering the 'MAD' (Method, Assumptions, Data) approach to evaluate accounting policy choices and underlying data accuracy.

For PPE disposals, auditors check that items are removed from the fixed asset register and recalculate the gain or loss on sale, verifying alignment with journal entries. Completeness, although less of a concern for overstatement, is tested by physically observing PPE and confirming its presence on the fixed asset register. Analytical procedures, such as reviewing large cash expenditures and comparing depreciation expense changes to fixed asset changes, can also assess completeness.

To address rights and obligations, auditors examine purchase contracts to confirm ownership and carefully distinguish between owned and leased PPE, as leases have different accounting treatments. Regarding depreciation expense, occurrence is covered by testing asset existence, and accuracy is addressed during the accumulated depreciation review. Cut-off is also considered by verifying the timing of depreciation entries. The video concludes by mentioning the possibility of relying on internal auditors' work if it meets auditing standards.