Property, Plant and Equipment
Objectives:
A. To determine that the property exists and is owned by the Business Unit.
B. To determine that additions to property are authentic, recorded at cost and properly
distinguished from maintenance and repairs expense.
C. To determine that retirements of property together with the proceeds from salvage
and related cost to remove are properly recognized.
D. To determine that a proper amount of depreciation expense is allocated based on the
asset cost, estimated life and salvage, and that the use of acceptable methods
consistently applied.
A. Verify that property exists.
1. Obtain an understanding of the business unit's policies concerning capitalization of
assets and related depreciation methods and depreciable lives. Inquire and document
the asset tagging procedures (if applicable).
2. Obtain the following schedules:
a. Summary schedule of property, plant and equipment, and related depreciation (by
major asset classification) including the following:
 Beginning and ending asset balances at cost for the period under review.
 Asset additions at cost.
 Asset retirements and dispositions.
 Other changes.
 Depreciation method and life.
 Beginning and ending balances of the
allowances for depreciation.
b. Additions to the allowances for depreciation accompanied by an analysis of amounts
expensed, absorbed in inventory and capitalized.
c. Additions at cost showing description, date acquired, transaction reference (purchase
order number, check number, work order number, etc.,) estimated useful life and
cost for all material additions.
d. Retirements and dispositions showing the description, date of acquisition, date of
retirement or disposition, cost, accumulated depreciation, net carrying value,
proceeds of disposition, and gain or loss on disposition.
e. Analysis of maintenance expense showing each transaction of material value for the
period.
3. Ensure opening balances per the summary schedules are accurate by reconciling to
appropriate audit work papers or reports.
4. Trace amounts per the summary schedule to the general ledger, the detailed asset
records and to the schedules of additions and retirements and dispositions. Ensure
clerical accuracy.
5. Review the reconciliation’s for the prior period. Agree the balance to the G/L. Agree
reconciliation to subsidiary ledger.
6. Review the periodic cycle count approach to ensure all assets are counted at least once
every three years.
7. Review the cycle audit documentation to determine that counts are actually occurring.
1. Perform flux analysis of fixed assets and depreciation accounts. Investigate any
significant changes.
2. Review lease agreements for new leases and determine whether leased assets
which should have been capitalized, have been capitalized, and that related
depreciation is being determined using an appropriate method and life.
B. Verify accuracy and validity of additions.
1. Perform the following tests of selected additions:
a. Determine the addition has been authorized by reference to evidence of approval by
appropriate responsible personnel in accordance with prescribed policies.
b. Examine such supporting documents as purchase contracts, paid checks, vendors'
invoices, purchase orders, receiving reports, work orders, engineers' reports, etc.
c. Trace transactions to appropriate entries in the detailed records.
d. For construction in progress, examine supporting work orders, documentation in
support of costs incurred such as contractors invoices, reports and correspondence
from engineers and/or architects regarding completion and trace transfers from the
construction in progress to other property accounts.
e. Physically inspect selected major additions.
f. Inquire about related dispositions.
g. Determine whether additions conform with the company's capitalization policy, and
that capitalization is done on a timely basis.
2. Review maintenance expense and examine supporting documentation for selected
transactions to determine that the amounts have been properly classified.
3. Review a sample of five recent Appropriation Requests for proper approval.
4. Review construction in progress items in excess of six months old.
5. Review job overrun report and obtain explanations of all significant jobs that are
overrun. Verify updated Appropriation Request is on file as appropriate for overrun jobs
when overrun by the less of 10% or $50K.
C. Verify accuracy of dispositions
1. Perform the following tests of dispositions:
a. Determine disposition has been properly authorized.
b. Examine such supporting documents as bills of sale, contracts, delivery memoranda,
etc.
c. Trace retirements to the detailed property records.
d. Determine that deductions from the asset accounts and related accumulated
depreciation are correct.
e. Determine that gain or loss on disposition has been correctly classified and recorded.
2. For fully depreciated assets, determine whether the assets are still used and not retired
from service.
3. Determine that assets retired from service, if material, have been removed from the
property, plant and equipment accounts and related accumulated depreciation accounts
and are carried at amounts which are not in excess of realizable value.
D. Verify accuracy and timeliness of depreciation expense
1. Review provisions for depreciation and amortization and:
a. Determine whether the methods and depreciable lives used in the current year are
consistent with the preceding year and are reasonable.
b. Test computations of depreciation and amortization.
c. Ascertain that obsolescence, if any, is being properly recognized by adjustments of
depreciable lives.
d. Trace additions to the depreciation allowances to the applicable general ledger
expense accounts.
2. Review the following relationships for the current and preceding year and obtain
explanations for significant fluctuations:
a. Dispositions of property and equipment to replacements.
b. Accumulated depreciation to plant and equipment balances at cost.
c. Current year depreciation and amortization to plant and equipment balances at cost.