AUDIT OF PROPERTY, PLANT, AND EQUIPMENT

INTERNAL CONTROL MEASURES

1. Additions and dispositions of fixed assets should be properly authorized and approved by the board of directors or
executive committee or person to whom authority has been delegated.

2. A clearly defined and sound policy for differentiation of capital and revenue expenditures should be established.

3. Cost of constructed fixed assets should be controlled through work orders.

4. Fixed assets controlling account should be supported by detailed plant records.

5. Physical inspection of fixed assets should be conducted and investigated.

SUBSTANTIVE AUDIT OF PROPERTY, PLANT AND EQUIPMENT

Existence: Recorded property, plant and equipment exist Rights and obligations: Property, plant and equipment are
owned by the entity
1. Physically inspect the assets for a sample of property,
plant and equipment recorded in the plant ledger. 7. Determine whether liens or mortgages have been
placed on property, plant and equipment by examining
2. Physically inspect the assets and examine supporting bank confirmations and reading minutes of the board
documentation for additions to property, plant and of directors’ meetings.
equipment.
Valuation and allocation: Property, plant and equipment
3. Verify that existing retirements and disposals are are valued in accordance with GAAP
recorded and properly valued.
8. Verify accuracy of recorded property, plant and
equipment.
Completeness: All property, plant and equipment are
recorded 9. Verify depreciation.

4. Perform analytical procedures.

Presentation and disclosure: Property, plant and
5. Analyze repairs and maintenance for expenditures that equipment are classified and disclosed in accordance with
should have been capitalized. GAAP

6. Examine lease and loan agreements to identify any 10. Review financial statements and perform analytical
liabilities that should be recorded. procedures to determine whether accounts are
classified and disclosed in the financial statements in
accordance with GAAP.

MCQ - THEORIES

1. For internal control purposes, which of the following sets of functions does not violate the principle of segregation
of duties?

A. property records function and general ledger function

B. computing depreciation or amortization and journalizing depreciation and amortization
C. physical inventory taking and property record keeping
D. property records function and property custodial function

2. Which of the following may be a plausible explanation why the ratio of depreciation over the total cost of
property, plant and equipment during the current year decreased compared to the previous year?

A. The estimated average remaining life of the assets was revised to a shorter period.
B. Some assets still in use had been fully depreciated at the end of the previous year.
C. There is considerable decrease in the estimated scrap value of the assets.
D. Repairs and maintenance expense were heavily incurred during the year.

3. Physical examination of a sample of assets and ensuring that these assets are included in the property, plant and
equipment subsidiary ledger tests the audit objective of

A. completeness.
B. cutoff.
C. valuation of measurement.
D. ownership.
4. Which of the following audit procedures would test the validity audit objective for property, plant and equipment?

A. Recalculating depreciation expense for a sample of property, plant and equipment.

B. Vouching property additions to vendors’ invoices and ensuring they were properly authorized and put into
service.
C. Examining title documents for a sample of property, plant and equipment.
D. Physically examining a sample of assets and ensuring they are included in the schedule of property, plant
and equipment.

5. It is ordinarily not necessary to examine supporting documentation for each addition to long-lived assets, but it is
customary to verify

I. all large transactions

II. all unusual transactions.
III. a sample of typical additions

A. I only
B. I and II
C. III only
D. I, II and III

6. Which of the following is not a valid statement regarding audit of long-lived assets?

A. The auditor normally applies similar audit procedures in the audit of current assets and non-current
assets.
B. The primary record for each classification of long-lived asset is generally a fixed asset master file.
C. The emphasis on the audit of long-lived operating assets is on verification of transactions during the
reporting period.
D. Omission of recorded acquisition of long-lived asset affects the measurement of profit of the current and
future reporting periods.

7. Which of the following is the least likely test relating to the audit of long-lived operating assets?

A. Observation of current year disposals.

B. Verification of current year additions.
C. Recalculation of depreciation and amortization expense.
D. Performing analytical procedures.

8. A major consideration in verifying the ending balances of long-lived assets is the possibility of existing legal
encumbrances. Tests to identify possible legal encumbrances would satisfy the audit objective of

A. completeness.
B. cutoff.
C. presentation and disclosure.
D. existence and validity.

9. The auditor normally does not need to test the accuracy or classification of fixed assets in prior periods. This is
because

A. the beginning balances and classifications are not considered significant.

B. the beginning balances rarely contain misstatements.
C. affect the statement of financial position only.
D. they are verified in previous audits.

10. A change in the estimated useful life of a long-lived asset is an accounting change that

A. affects the depreciation or amortization in the current year and future years and requires disclosures in
the notes to the financial statements in the current year.
B. requires restatement of comparative prior year financial statements and disclosures in the notes to the
financial statements in the current year.
C. affects the depreciation or amortization in the current year and future years but does not require
disclosures in the notes to the financial statements in the current year.
D. requires restatement of comparative prior year financial statements but does not require disclosures in
the notes to the financial statements in the current year.
PROBLEM NO. 1 Payment for external driveways, parking
bays and safety lighting 540,000
White Company commenced operations on 1 July 201A.
Payment for safety inspection on building 30,000
During the following year, the company acquired a tract of
Payment for equipment 640,000
land, demolished the building on the land and built a new
Payment of freight and insurance costs on
factory. Equipment was acquired for the factory and, in
delivery of equipment 56,000
March 202B, the plant was ready to commence operation.
Payment of installation costs on equipment 120,000
Payment for safety equipment surrounding
During this period, the following inflows and outflows
equipment 110,000
occurred:
Payment for removal of safety fence 20,000
While searching for a suitable block of land, Payment for new fence surrounding the
White Company placed an option to buy factory 80,000
with three real estate agents at a cost of Payment for advertisements in the local
P1,000 each. One of these blocks of paper about the forthcoming factory and
land was later acquired. its benefits to the local community 5,000
Payment of option fees P 3,000 Payment for opening ceremony 60,000
Receipt of loan from bank 4,000,000
Payment to settlement agent for title QUESTIONS:
search, stamp duties and settlement
Determine the cost of the following:
fees 100,000
Payment for property taxes in arrears on 1. Land
building and land 50,000 a. P1,151,000 c. P1,693,000
Payment for land 1,000,000 b. P1,153,000 d. P1,773,000
Payment for demolition of current building
2. Land improvements
on land 120,000
a. P674,000 c. P540,000
Proceeds from sale of material from old
b. P620,000 d. Nil
building 55,000
Payment to architect 230,000 3. Building
Payment to council for approval of building a. P3,519,000 c. P2,899,000
construction 120,000 b. P3,439,000 d. P2,845,000
Payment for safety fence around
construction site 34,000 4. Equipment
Payment to construction contractor for a. P926,000 c. P816,000
factory building 2,400,000 b. P870,000 d. P760,000

PROBLEM NO. 2
You were engaged in making your second annual examination of Indigo Company. The Machinery and Accumulated
Depreciation accounts are shown below:
Machinery
01/01 Balance P 500,000 09/01 Sale of machine
No. 3 P 10,000
06/01 Machine No. 23 150,000 12/31 Balance 644,000
09/01 Dismantling of
Machine No. 3 4,000 .
P 654,000 P 654,000

Accumulated Depreciation
12/31 Balance P 344,400 01/01 Balance P 280,000
. 12/31 Depreciation 64,400
P 344,400 P 344,400

Your examination disclosed the following information: e. Included in charges to Repairs and Maintenance
account was an invoice for installation of Machine No.
a. The following adjusted balances appeared on
23, in the amount of P35,000.
December 31, 201A working papers:
Machinery – P500,000; Accumulated Depreciation –
QUESTIONS:
P 280,000.
Based on the information presented above and the result
b. The company has depreciated all items of machinery at
of your audit, answer the following:
10% per annum. The oldest item owned is seven
years old as of December 31, 202B. 1. How much is the loss on the sale of Machine no. 3?
a. P38,000 c. P42,000
c. It is the company’s policy to take full year’s
b. P37,333 d. P 0
depreciation in the year of acquisition and none in the
year of disposition. 2. The adjusting entry to correct the entry made in
recording sale of Machine no. 3 will include a debit to
d. Machine No. 3, which was purchased on March 1,
a. Loss on sale of machinery P42,000
201B-4 (i.e. 4 years ago), at a cost of P80,000, was
b. Accumulated depreciation P32,000
sold on September 1, 202B for P10,000 cash.
c. Both a and b
d. No adjusting entry is necessary.
3. How much is the adjusted balance of the Machinery PROBLEM NO. 3
account as of December 31, 2020?
In the audit of the books of Yellow Corporation for the
a. P644,000 c. P605,000
year 2020, the following items and information appeared
b. P296,500 d. P609,000
in the Production Machine account of the client:
4. How much is the total depreciation expense on
Date Particulars Debit Credit
machinery for 2020?
01/01 Balance–Machine 1, 2,
a. P64,400 c. P50,000
3, and 4 at P180,000 P 720,000
b. P60,500 d. P58,125
each
5. How much is the balance of the Accumulated 02/28 Machine 5 396,000
Depreciation account as of December 31, 2020? Machine 1 P 6,000
a. P308,500 c. P344,000 09/01 Machine 6 192,000
b. P301,458 d. P340,500 12/01 Machine 7 432,000
6. Property, plant and equipment is typically judged to be
The Accumulated Depreciation account contained no
one of the accounts least susceptible to fraud because
entries for the year 2020. The balance on January 1, 2020
a. The amounts recorded on the balance sheet for
per your audit, was as follows:
most companies are immaterial.
b. The depreciated values are always smaller than Machine 1 P168,750
cost. Machine 2 78,750
c. Internal control is inherently effective regarding Machine 3 67,500
this account. Machine 4 45,000
d. The inherent risk is usually low.
Based on your further inquiry and verification, you noted
7. When few property and equipment transactions occur the following:
during the year the continuing auditor usually obtains 1. Machine 5 was purchased for cash; it replaced Machine
an understanding of internal control and performs 1, which was sold on this date for P6,000.
a. Tests of controls 2. Machine 2 was destroyed by the thickness of engine oil
b. Analytical procedures to verify current year used leading to explosion on December 1, 2020.
additions to property and equipment Machine 7 was to replace Machine 2.
c. A thorough examination of the balances at the 3. Machine 3 was traded in for Machine 6 at an allowance
beginning of the year. of P24,000; the difference was paid in cash and
d. Extensive tests of current year property and charged to Production Machine account.
equipment transactions. 4. Depreciation rate is recognized at 25% per annum.
8. Which of the following combinations of procedures is
an auditor most likely to perform to obtain evidence QUESTIONS:
about fixed asset addition? Based on the above and the result of your audit, answer
a. Inspecting documents and physically examining the following:
assets.
b. Recomputing calculations and obtaining written 1. The adjusting entry to correct the entry made on the
management representations. sale of Machine 1 will include a
c. Observing operating activities and comparing a. Debit to Accumulated Depreciation P176,250
balances to prior period balances. b. Debit to Cash P6,000
d. Confirming ownership and corroborating c. Credit to Production Machine P180,000
transactions through inquiries of client personnel. d. Credit to Gain on Sale of Machine P5,250

9. Additions to equipment are sometimes understated. 2. The adjusting entry to correct the entry made on the
Which of the following accounts would be reviewed by destruction of Machine 2 will include a
the auditor to gain reasonable assurance that additions a. Debit to Accumulated Depreciation P120,000
are not understated? b. Debit to Loss on Destruction of Machine P101,250
a. Accounts payable c. Credit to Production Machine P101,250
b. Depreciation expense d. Credit to Cash P432,000
c. Gain on disposal of equipment 3. The adjusting entry to correct the entry made on
d. Repairs and maintenance expense trade-in of Machine 3 will include a
10. In violation of policy, Coat Company erroneously a. Debit to Accumulated Depreciation P67,500
capitalized the cost of painting its warehouse. An b. Debit to Loss on Exchange P58,500
auditor would most likely detect this when c. Credit to Production Machine P67,500
a. Discussing capitalization policies with controller. d. Credit to Cash P192,000
b. Examining maintenance expense accounts. 4. The total depreciation for the year ended December
c. Observing that the warehouse had been painted. 31, 2020 is
d. Examining construction work orders that support a. P237,000 c. P233,250
items capitalized during the year. b. P232,500 d. P236,250
5. The carrying amount of production machine as of
December 31, 2020 is
a. P1,024,500 c. P1,069,500
b. P1,029,000 d. P 990,750
 8. In testing for unrecorded retirements of equipment, an
auditor is most likely to
6. Determining that proper amounts of depreciation are
a. Select items of equipment from the accounting
expensed provides assurance about management’s
records and then locate them during the plant tour.
assertions of valuation and
b. Compare depreciation journal entries with similar
a. Presentation and disclosure. c. Completeness.
prior-year entries in search of fully depreciated
b. Rights and obligations. d. Existence.
equipment.
c. Inspect items of equipment observed during the
7. The auditor may conclude that depreciation charges
plant tour and then trace them to the equipment
are insufficient by noting
subsidiary ledger.
a. Insured values greatly in excess of book values.
d. Scan the general journal for unusual equipment
b. Large numbers of fully depreciated assets.
additions and excessive debits to repairs and
c. Continuous trade-in of relatively new assets.
maintenance expense.
d. Excessive recurring losses on assets retired.
9. A weakness in internal control over recording of
acquisitions of equipment may cause an auditor to
a. Select certain items of equipment from the
accounting records and locate them in the plant.
b. Inspect certain items of equipment in the plant
and trace those items to the accounting records.
c. Review the subsidiary ledger to ascertain whether
depreciation was taken on each item of
equipment during the year.
d. Trace additions to the “other assets” account to
search for equipment that is still on hand but no
longer being used.

10. The auditor is least likely to learn of retirements of

equipment through which of the following?
a. Review of the purchase return and allowance
account.
b. Review of depreciation.
c. Analysis of the debits to the accumulated
depreciation account.
d. Review of insurance policy.