Audit of tangible non-current assets

A logistics company shows 120 trucks on its asset register. On a visit to the depot, the auditor counts 104. Eight of the missing ones were sold in the year but never removed, and eight cannot be explained. Meanwhile, five trucks in the yard are not on the register at all.

Property, plant and equipment is often the largest asset on the statement of financial position, and the register and the physical assets rarely agree perfectly. The auditor's job is to test existence, completeness, ownership, valuation and disclosure.

This topic covers the information in the accounts for tangible non-current assets, the principal risks, the substantive procedures for each assertion, the procedures for additions and disposals, and a worked example of self-constructed assets. The previous topics covered substantive procedures and analytical procedures, and the next covers intangible assets.

Key terms in plain English

Syllabus check

This topic is in syllabus area C, audit evidence and substantive procedures (25% of marks). It covers:

• substantive procedures for non-current assets
• the assertions applied to non-current assets
• audit of additions, disposals and depreciation

CAMA 2020 and tangible assets

The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. The sections below apply to this topic.

The rules in more depth

The information subject to audit

The statement of financial position figure is supported by a note that usually shows, for each class (land and buildings; plant, equipment, fixtures and fittings; motor vehicles):

• cost at the start, additions, acquisitions through business combinations, assets classified as held for sale and disposals, leading to cost at the end
• accumulated depreciation and impairment at the start, the charge for the year, amounts classified as held for sale, disposals, impairment losses and reversals, leading to accumulated depreciation at the end
• the net carrying amount at both dates

If assets are carried at a valuation, the note must disclose the basis, the date, whether an independent valuer was used and any cost index used, the carrying amount of each class that would have been shown under the cost model, and the revaluation surplus and its movements. The basis of depreciation for each class must be disclosed. The gain or loss on disposal is proceeds less carrying amount.

Where non-current assets are a significant part of the statement, these disclosures are extensive and give a good deal of audit evidence.

Principal risks of misstatement

Substantive procedures by assertion

Completeness (no understatement).

• Obtain or prepare a schedule of tangible non-current assets showing cost or valuation, depreciation and carrying amount.
• Reconcile the schedule to the opening balances and to the additions and disposals.
• Select a sample of assets that physically exist, verified by inspection, and trace them to the asset register.
• Obtain or prepare a reconciliation of the ledger balances with the asset register, and investigate differences.

Existence (no overstatement).

• Select a sample of assets from the register and inspect them physically, noting whether each is in use and its condition. For an IT register, audit software can select the sample.
• Investigate the reasons for any asset in the sample that cannot be found.

Valuation at cost.

• Land and buildings: agree the cost to the purchase contract and to invoices for associated costs, such as professional fees, and check that the expenditure is reasonably split between land, buildings and equipment.
• Equipment and vehicles: check the cost to the purchase invoices.
• Review the allocation of total spending between capital and revenue.

Valuation at a revalued amount. Verify amounts to the valuer's report; consider the reasonableness of the valuation; check that valuations are regularly updated; and check the accounting for the rise or fall in value.

Depreciation and impairment.

• Review rates for reasonableness in view of the nature of the asset, its estimated life and residual value.
• Ensure that methods are consistent.
• Review gains or losses on disposal, and the accumulated depreciation and impairment at disposal.
• Consider whether assets are obsolete or impaired, which may need discussion with the directors.
• Check the calculations using the entity's stated policy; audit software can be used on an IT system.
• Ensure that fully depreciated assets are not depreciated further.
• Do analytical procedures on the total charge, such as the ratio of depreciation to total asset value compared with previous years.
• Confirm that the assets are adequately insured.

Rights and obligations (ownership).

• Land and buildings: inspect legal documents of ownership or lease agreements.
• Vehicles: examine registration documents or similar evidence of title.
• Other assets: examine invoices or other documents transferring title.
• Ensure that documents are in the name of the entity.
• Review legal and bank documents for evidence of loans secured by charges on assets.

Presentation and disclosure. Review the disclosures for accuracy and clarity, and make sure the schedule agrees with the financial statements.

Additions and disposals

For efficiency, auditors pay particular attention to additions and disposals. With the depreciation charge, they account for most of the change between the opening and closing balances.

Additions:

• obtain or prepare a schedule of additions;
• check the authorisation of the expenditure;
• reconcile the total additions to the movement in the note;
• inspect a purchase invoice or other document for the cost of each addition and see that it is in the company's name;
• verify the existence of the assets, by physical inspection where appropriate; and
• check the accounting entries, including the split between capital and revenue.

Disposals:

• obtain or prepare a schedule of disposals;
• check the authorisation;
• check that the cost and accumulated depreciation were removed from the records;
• check the calculation of the gain or loss and its recording in the ledger; and
• discuss with management, including non-financial managers, whether there may be unrecorded disposals.

The procedures must reflect the circumstances. If the entity builds assets itself, the tests focus on whether internal costs, such as materials, labour, other direct costs and overheads, have been properly capitalised.

Example: Construction Co

In the year to 30 June Year 6, Construction Co bought freehold land for ₦500,000 and built a distribution centre on it, using sub-contractors and its own labour, at a cost of ₦200,000. It was finished by the end of April. The objectives and procedures are:

Further points on tangible assets

Land is not depreciated, but buildings are. Components with different lives, such as the roof and the engine of a vehicle, are depreciated separately under IAS 16. A change in depreciation method or in estimated life is a change in estimate, applied from the date of the change. Repairs that keep an asset in working order are expenses, while improvements that increase benefits are capital.

The auditor looks for repairs and maintenance wrongly capitalised, and for assets used as security. Government and donor-funded assets may carry conditions. Borrowing costs on qualifying assets are capitalised under IAS 23, so the auditor checks interest on loans used to build the asset. An asset held for sale is measured at the lower of carrying amount and fair value less costs to sell, and is no longer depreciated.

Revalued assets need extra care. The auditor assesses the competence, objectivity and independence of the valuer, the method and the assumptions used, and whether valuations of a class are done at the same time. A downward revaluation is charged against any earlier surplus for that asset and then to profit or loss. Depreciation after a revaluation is based on the revalued amount.

Where the client holds assets at several sites, the auditor chooses sites to visit on the basis of the value of assets there and the risk, and may rotate the sites visited from year to year. Where assets are held by others, for example vehicles leased out, written confirmation from the third party is sought.

Worked examples

1. This is completeness.
2. She selects generators on the floor and traces them to the register. Starting from the register would test existence.

1. Repainting maintains the existing benefit, so it is an expense and not capital.
2. Assets and profit are overstated, and the auditor proposes an adjustment.

1. Carrying amount is ₦2.5 million, so the gain is ₦0.5 million.
2. The auditor checks that the sale was authorised, that cost and depreciation were removed and that the proceeds were banked.

1. The company may not own them: a rights assertion risk.
2. The auditor asks for the explanation and supporting transfer documents, and considers disclosure of a related party.

How to score full marks

• Organise by assertion: completeness, existence, valuation, rights, disclosure.
• State the direction for completeness and existence tests.
• Cover additions, disposals and depreciation.
• For self-built assets add tests of the costs capitalised.

Common mistakes in the exam

• Testing completeness from the register.
• Forgetting title documents in the entity's name.
• Omitting capital and revenue analysis.
• Not mentioning unrecorded disposals.

Quick revision

• Register to floor: existence. Floor to register: completeness.
• Cost to invoices; depreciation by policy; impairment review.
• Title documents in the company's name; charges.
• Additions and disposals get most attention.

Practice questions

Questions 1 to 10 are multiple choice. Questions 11 to 13 are written. Try each before opening the answer.

Model answers

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