Form AP 35 Index Audit Program for Fixed Assets Legal Company Name Client: Balance Sheet Date: Instructions: The auditor should refer to the audit planning documentation to gain an understanding of the financial reporting system and the planned extent of testing for fixed assets. Modification to the auditing procedures listed below may be necessary in order to achieve the audit objectives. All audit work should be documented in attached working papers, with appropriate references noted in the right column below. Audit Objectives Property and equipment reflected in the balance sheet physically exist and the entity has legal title or similar rights of ownership to them. Property and equipment include those that are purchased, contributed, constructed in-house or by third parties, and leases meeting the criteria for finance leases. Property and equipment additions are recorded correctly as to account, amount, and period. Capital items are identified and distinguished from repairs and maintenance expense items. Retirements, trade-ins, and idle property and equipment are promptly identified and recorded correctly as to account, amount, and period. Depreciation calculations are made and allocated using proper estimated useful lives and methods. Financial Statement Assertions Existence or occurrence Rights and obligations Completeness Existence or occurrence Completeness Rights and obligations Existence or occurrence Completeness Rights and obligations Valuation or allocation
Property and equipment that are idle or held for resale are identified and classified separately from property and equipment currently used in operations. The net carrying value of property and equipment is expected to be recoverable in the ordinary course of business. Property and equipment and related depreciation are appropriately presented in the financial statements and adequate disclosures made of (1) the basis of valuation, (2) major classes of property and equipment, (3) depreciation methods, (4) amounts of capitalized leases, (5) capitalized interest, and (6) property and equipment that are pledged or subject to liens. Valuation or allocation Presentation and disclosure Presentation and disclosure 1. Obtain an understanding of the client s policies and procedures with respect to capitalization and depreciation methods used. 2. Prepare or obtain from the client a summary of fixed assets and related depreciation showing the following information: a. Classification of major classes of property such as land, buildings, furniture and fixtures, machinery and equipment, leasehold improvements, construction in progress, and leased property under capital leases b. Asset balances at the beginning of the year c. Asset additions during the year d. Retirements and disposals during the year e. Other changes during the year (e.g., transfers, reclassifications) f. Asset balances at the end of the year g. Depreciation methods and estimated depreciable lives
h. Accumulated depreciation balance at the beginning of the year i. Current-year additions to accumulated depreciation accounts j. Current-year reductions of the accumulated depreciation accounts k. Other current-year changes to the accumulated depreciation accounts, (e.g., transfers, reclassifications) l. Accumulated depreciation balance at the end of the year 3. Trace balances at the beginning of the year for asset balances and accumulated depreciation balances per the summary schedule of property and equipment in Step 2 above to ending balances per the prior years working papers. 4. Obtain from the client or prepare a listing of all property additions for the current period in support of the asset additions balance in Step 2c above, showing (a) description of the asset, (b) whether the item is new or used, (c) date the asset was acquired or placed in service, (d) cost of the asset, (e) estimated depreciable useful life, and (f) reference number such as vendor invoice date, check number, purchase contract, etc., and perform the following procedures for selected asset additions: a. Determine if the assets capitalized are in accordance with the entity s capitalization policy. b. Determine if the acquisition was properly authorized by reference to the minutes of meetings of the Representative Governing Board, capital expenditures budget, or other sources. c. Substantiate the asset s cost by examining supporting documentation such as vendor invoices, purchase contracts, work orders and job status reports (for construction in progress), deeds (for real property), or certificates of ownership.
d. For significant property acquisitions, consider inspecting the asset. e. For property additions that represent revaluations of fixed assets, determine whether (1) the revaluation was made in accordance with the decision of the government and (2) the calculations were made in accordance with IAS 16. f. If interest on borrowed funds is capitalized and included in the carrying value of fixed assets, as allowed by IAS 23, perform the following: Recompute the amount of interest capitalized. Determine whether the amount of interest capitalized is limited to the portion of total interest incurred that could have been avoided if the asset had not been acquired. 5. Prepare or obtain from the client a listing of all property retirements and disposals for the year in support of the total balance in Step 2d above, showing (a) description of the asset retired or disposed of, (b) date sold or disposed of, (c) date the asset was initially acquired, (d) asset cost, (e) accumulated depreciation, (f) net carrying amount, (g) cash or consideration received, (h) net gain or loss. Select asset disposals for testing and perform the following procedures: a. Determine if the disposition of the asset was properly authorized by reference to such sources as minutes of meetings of the Representative Governing Board. b. Inquire if any of the sales of the fixed assets were in connection with sale/leaseback transactions. If yes, determine the proper accounting treatment. c. Determine if depreciation was calculated correctly through the date of disposal. d. Trace the asset cost and the acquisition date to the prior-period workpapers or property records.
e. Substantiate cash or consideration received by examining remittance advices, bank deposit tickets, bills of sale, notes executed, etc. f. Recompute gain or loss on disposal and agree the amount to the expense/revenue account. g. Scan revenue accounts for significant proceeds from the sale of assets. 6. Review and test depreciation calculations as follows: a. Review depreciation methods and depreciable lives used and determine if they are in accordance with IAS and consistently used. Ask the client about any changes in methods and procedures since the prior period. b. Perform analytical procedures of provision for depreciation for the current period by comparing it to the prior period, taking into consideration estimated useful lives. If material, recompute depreciation expense for individually significant items on a test basis. c. Scan the detailed asset listing to determine if the useful lives are reasonable, and if depreciation methods are in accordance with IAS. d. Reconcile provision for depreciation as shown in the summary of property and equipment in Item 2 above to the general ledger. 7. If repairs and maintenance expense account balances are material, scan the general ledger activity and examine supporting documentation on a test basis to determine whether the amounts should have been capitalized. 8. Obtain from the client, or prepare, a summary of all leases in force, and perform the following procedures to determine if the leases should be capitalized based on criteria in IAS 17: a. Examine new lease agreements and amendments to
existing leases and determine whether they are properly accounted for in accordance with IAS 17 (i.e., finance leases, operating leases, etc.), giving adequate consideration to the following: (1) Review the reasonableness of the interest rate used to discount the lease obligation. (2) Determine whether the client properly considered noncapitalizable costs, such as taxes, insurance, and maintenance in computing the amount of lease cost capitalized. (3) Review the reasonableness of the method and period for amortization of capitalized leases. (4) Test lease payments. (5) Test the computations of current maturities. b. Consider obtaining confirmations from the lessor of pertinent details of significant lease agreements, including compliance with restrictive covenants. 9. Using information obtained in the above procedures and based on inquiry of the client, ascertain the following: a. Whether assets that are fully depreciated remain in service or have been retired from service. b. Whether the net carrying values of property and equipment are recoverable in the ordinary course of business, and whether the remaining useful lives of the assets are reasonable. c. Whether property and equipment is idle or held for sale and, if so, whether such assets are identified and classified separately from property and equipment currently used in operations. d. Whether any property and equipment is pledged or subject to liens or encumbrances.
e. Whether property and equipment and related depreciation are appropriately presented in the financial statements with adequate disclosures. 10. Perform the following analytical procedures for property and equipment and investigate any significant fluctuations or deviations from the expected balances: a. Compare the current year s account balances with the prior year s account balances. b. Compare the details of actual capital expenditures with the capital budget. 11. Evaluate whether any events or changes in circumstances have occurred indicating that the carrying amount of assets may not be recoverable and whether an impairment loss should be recognized in accordance with IAS 36, Impairment of Assets.: a. Consider the existence of conditions such as the following which may indicate that an asset has been impaired: (1) A significant decrease in the market value of the asset, particularly in the case of assets held for sale or expected to be sold in the near future. (2) A significant change in the extent or manner in which an asset is used or a physical change in an asset, such as a significant decline in the use of certain machinery and equipment or physical damage to an asset. (3) A significant adverse change in legal factors or in the business climate that could affect the value of an asset or an adverse action or assessment by a regulator. (4) An accumulation of costs significantly in excess of the amount originally expected to acquire or construct an asset. (5) A current period operating or cash flow loss
combined with a history of operating or cash flow losses. (6) A projection or forecast that demonstrates continuing losses associated with an asset used for the purpose of producing revenue. b. Determine if an impairment loss should be recognized (an impairment loss should be recognized if the carrying amount of an asset exceeds estimated future cash flows undiscounted and without interest charges). c. If an impairment loss should be recognized, test the calculation of the loss as follows: (1) Determine that the impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair value. (2) Test the fair value by vouching to quoted market prices, if available, or by reviewing the valuation techniques used by management. (3) If the fair value is based on the present value of estimated future cash flows, test for mathematical accuracy and ensure that the assumptions used in the present value calculation are reasonable. 12. If the auditor is concerned about the risk of fraud, audit procedures such as the following should be considered in addition to the ones listed above: a. Physically inspect significant assets and major additions, and agree serial numbers with invoices or other supporting documents. b. Carefully scrutinize appraisals and engineering reports that seem out of line with reasonable expectations, and challenge the underlying assumptions. c. When vouching fixed asset additions, accept only original invoices, purchase orders, receiving reports, or similar supporting documentation.
d. Confirm selected fixed asset additions directly with the vendor. e. Review journal entries made to property accounts. f. For self-constructed assets, examine supporting documents for labor, materials, capitalized interest, and other direct and indirect costs included in the capitalized asset. g. Perform extensive depreciation calculations. h. Examine miscellaneous cash receipts records and other income accounts for evidence of proceeds from fixed asset disposals. Based on the procedures performed and the results obtained, it is my opinion that the objectives listed in this audit program have been achieved. by Reviewed and approved by Date Date Conclusions: Comments: