Feedback to Text PAQ 10.34 Substantive testing of PPE

Required

• What is the key assertion at risk for the PPE additions? Why is it at risk? Explain.
• Identify the relevant substantive tests of details that would be appropriate to address the assertion at risk identified in (a) above.
• How would your answers to the previous questions change if the PPE additions have been manufactured in-house by Flinder’s engineers and toolmakers, rather than purchased?

(a) An increase in PPE acquisitions suggests that the risk would be related to overstatement of PPE – existence and valuation and allocation assertions. The analytical procedures have detected a fluctuation which could be explained by the large investment in a new manufacturing process. The auditor needs to consider if the increase is consistent with this investment. It is possible, for example, that old equipment is being disposed of and the overall balance of PPE is not excessive. The acquisitions need to be assessed for their appropriate valuation in the accounts. Are the acquisition costs to be treated as capital, or are there costs associated with the acquisitions that should be expensed? Is any part of the cost of purchase to be written off as an impairment charge to recognise the recoverable value?
Another assertion that is at risk when there are increased PPE acquisitions is rights and obligations. Are the new acquisitions being purchased or are they being acquired under lease or other forms of finance? Are there additional disclosures required to recognise these financing arrangements?

(b) Substantive tests of details that would be appropriate include:

• Recalculation of new depreciation charges, consideration of underlying assumptions of useful life, residual value etc (V&A)
• Inspect authorisations for acquisitions (R&O)
• Examine cash payments, invoices for new acquisitions (V&A)
• Compare actual costs with authorised costs (E, V&A)
• Inspect assets (E) and vouch entries in fixed asset register (E)
• Test mathematical accuracy of fixed asset register (V&A)
• Review documents relating to finance for fixed asset acquisitions (R&O, V&A), evidence of ownership (R&O) and review financial report disclosures (C&U)
• Consider likelihood of continued production using new assets (V&A)

(c) If the PPE additions have been manufactured in-house the auditor should focus on the process of assigning costs to the assets. Therefore, instead of reviewing documents relating to evidence of ownership of the asset or its purchase, the auditor would focus on testing the data and assumptions supporting the manufacturing cost allocations. The auditor would still be concerned with gathering evidence to support the existence and valuation and allocation assertions.