1. Auditing & Investigations II
Audit of Non-current assets

2. Key issues
Audit procedures for assessing management assertions on NCA.
Key areas when testing tangible non-current assets are:
Confirmation of ownership
Inspection of non-current assets
Valuation by third parties
Adequacy of depreciation rates

3. Introduction
The audit of non-current assets must be approached in a structured orderly way.
It is useful here to focus on the financial statement assertions that underlie the reporting of non-current assets in the financial statements.
It is essential that the auditor has good understanding of requirements of IAS 16

4. Audit objective on NCA Ownership
is the asset clearly vested in the enterprise which enjoys the rights and privileges of ownership.
Existence
The assets exist at the date of the balance sheet.
Valuation
The assets are stated at a value which is consistent with the assumptions and conventions adopted for preparing the financial statements.
Presentation
The assets are presented in accordance with best practice and with due regard for the legal requirements in force at the time.

5. Audit objective of tangible non-current assets
Financial Statement Assertion
Audit Objective
Existence and occurrence
Additions represent assets acquired in the year and disposal
represents assets sold or scrapped in the year
– Recorded assets represent those in use at the year end
Completeness
- All additions and disposals that occurred in the year have
been recorded
– Balances represent assets in use at the year
Accuracy, classification and valuation
– Non-current assets are correctly stated at cost less
accumulated depreciation
– Additions and disposals are correctly recorded

6. Risk based Approach Financial Statement Assertion Audit objective
Assertions relating to presentation
and disclosure (occurrence and rights
and obligations, completeness,
classification and understandability,
accuracy and valuation)

7. The audit of tangible non-current assets
Classifying tangible non- current assets:
Leasehold land and buildings.
Freehold land and buildings.
Plant and machinery.
Other assets (motor vehicles, aircraft, fixtures and fittings etc).

8. Internal controls
consider the internal controls over non-current assets:
Controls should exist over the recording of non-current assets, the authorisation of capital expenditure, the custody of the assets, and general managerial supervision.

9. Controls over recording
Controls over recording should be based around an asset register, which provides details as follows.
Serial number of each non-current asset owned.
Description and manufacturer’s name.
Gross cost or valuation.
Depreciation charged annually.
Accumulated depreciation to date.
Net book value.
Location of the asset

10. Control over Authorisation
Controls over authorisation are particularly important in view of the large costs associated with non- current assets. Attention should be on:
capital budgets.
directors’ minutes.
capital expenditure proposals.

11. Control over custody
The non-current assets of the company should not be susceptible to misuse and should be protected from the risk of loss by theft, premature obsolescence or destruction.
Custodial controls include the following:
Physical controls over access to and use of the assets.
Adequate insurance and safe custody for ‘portable’ assets (eg, physical investments, motor cars, notebook computers, furniture and fittings).
Adequate insurance cover to provide against the risk of destruction

12. Audit procedure Completeness
Obtain or prepare a summary of tangible non-current assets showing how the following reconcile with the opening position.
– Gross book value
– Accumulated depreciation
– Net book value
Compare non-current assets in the general ledger with the non-current assets register and obtain explanations for differences.
For a sample of assets which physically exist, agree that they are recorded in the non-current asset register.
If a non-current asset register is not kept, obtain a schedule showing the original costs and present depreciated value of major non-current assets.
Reconcile the schedule of non-current assets with the general ledger.

13. Audit procedure
Existence
Confirm that the company physically inspects all items in the non-current asset register each year.
Inspect assets, concentrating on high value items and additions in-year. Confirm that items inspected:
– Exist
– Are in use
– Are in good condition
– Have correct serial numbers
Review records of income-yielding assets.
Reconcile opening and closing vehicles by numbers as well as amounts.

14. Audit procedure Valuation Verify valuation to valuation certificate.
Consider reasonableness of valuation, reviewing
Experience of valuer
Scope of work
Methods and assumptions used
Valuation bases are in line with accounting standards
Reperform calculation of revaluation surplus.
Inspect draft accounts to check that client has recognised revaluation losses or gains
Review insurance policies

15. Audit Procedure Presentation The tests include the following:
Comparing historical cost with market value in order to establish the validity of write-offs or write backs.
Verifying the fair value of investments by consulting stock exchange market values.
Verifying the analysis of total balance sheet value between quoted and unquoted investments.

16. Intangible Non-current Assets
Example of INCA
Goodwill
Research and development costs
Other Intangibles

17. Intangible Non- Current Assets
Assertion
Existence – the assets exits and pertain to the entity.
Valuation – the assets are measured at the appropriate amount.

18. Audit Procedures Goodwill
Agree the consideration to sales agreement by inspection.
Consider whether asset valuation is reasonable.
Agree that the calculation is correct by recalculation.
Review the impairment review and discuss with management.
Ensure valuation of goodwill is reasonable.

19. Audit Procedures Research and Development Costs
Confirm that capitalised development costs conform to IAS 38 criteria by inspecting details of projects and discussions with technical managers.
Confirm feasibility and viability by inspection of budgets.
Recalculate amortisation calculation to ensure it commences with production / is reasonable.
Inspect invoices to verify expenditure incurred on R&D projects.

20. Audit Procedures Other intangibles
Agree purchased intangibles to purchase documentation agreement by inspection.
Inspect specialist valuation of intangibles and ensure it is reasonable.
Review amortisation calculations and ensure they are correct by recalculation.

21. End
Thank you