1. Fixed Assets (Capital Assets)
CAS 500 – Audit Evidence
CAS 520 Analytical Procedures

2. The Nature of Capital Assets
Typically capital assets are used in manufacturing
Operational use and normal life of greater than one year

3. Tracking Capital Assets
Large organizations
The source of information for
Small organizations may have a manual listing of such assets

4. Audit Emphasis for Manufacturing Asset Additions
Emphasis is on auditing
For tax purposes
Amortization and accumulated amortization

5. Categories of Audit Tests for Capital Assets
Audit emphasis is the verification of:
Current-year acquisitions
Current-year disposals
The ending balance in the asset account
Amortization expense
The ending balance in accumulated amortization
For tax purposes

6. Analytical Procedures for Capital Assets
Compare amortization expense divided by gross manufacturing equipment cost with previous years
Compare accumulated amortization divided by gross manufacturing equipment cost with previous years
Compare monthly or annual repairs and maintenance, supplies expense, small tools expense, and similar accounts with previous years
Compare gross manufacturing cost divided by some measure of production with previous years

7. Verification of Asset Balances
Relevant internal controls over existing assets
Audit tests
Agree last years ending balances
How about asset additions and disposals?

8. Verification of Current Year Acquisitions
Important because
Starting point is normally a continuity schedule prepared by the client
An important technique is examination of

9. Verification of Current Year Disposals
The most important internal control over disposals is the existence of a formal method to inform management
The most important audit procedures are
Vouch disposal to

10. Verification of Amortization Expense and Accumulated Amortization
Primary audit objectives involve determining whether the client is:
Accumulated Amortization
Debits are normally tested as a part of
Credits are verified as part of

11. Financial Statement Presentation of Fixed Assets
On the balance sheet: On the income statement: In the notes:

12. Audit of Prepaid Expenses
Prepaid expenses arise from the concept of matching expenses with revenues
Prepaid insurance is a common expense
Look at the file of insurance policies in force

13. Problem 13-32 Page 460 UTE Corporation
Your are doing the audit of UTE Corporation for the year ended December 31, The following schedule fore the property, plant, and equipment and related allowance for depreciation has been prepared by the client. You have compared the opening balances with your prior year’s audit documentation.
UTE Corporation
Analysis of Property, Plant, and Equipment and Related Allowance for Depreciation Accounts
Year Ended December 31, 2015
Description
Final 12/31/14
Additions
Retirements
Per Books 12/31/15
Assets
Land
$ 225,000
$ 50,000
$ 275,000
Buildings
1,200,000
175,000
1,375,000
Machinery and Equipment
3,850,000
404,000
260,000
3,994,000
$5,275,000
$629,000
$ 260,000
$5,644,000
Allowance for Depreciation
Building
$ 600,000
$ 51,500
$ 651,500
1,732,500
392,200
2,124,700
$2,332,500
$443,700
$2,776,200

14. The following information is found during your audit:
All equipment is deprecated on the straight-line basis (no salvage value is taken into consideration) based on the following estimated lives: buildings, 25 years; all other items , 10 years. The corporation’s policy is to take one-half year’s depreciation on all asset acquisitions and disposals during the year.
On April 1, the corporation entered into a 10-year lease contract for a die-casting machine with annual rentals of $50,000, payable in advance every April 1. The lease is cancellable by either party (60 days’ written notice is required), and there is no option to renew the lease or buy the equipment at the end of the lease. The estimated useful life of the machine is 10 years with no salvage value. The corporation recorded the die-casting machine in the machinery and equipment account at $404,000, the present value at the date of the lease, and $20,200, applicable to the machine, has been included in depreciation expense for the year.
The corporation completed the construction of a wing on the plant building on June 30. The useful life of the building was not extended by this addition. The lowest construction bid received was $175,000, the amount recorded in the building account. Company personnel were use to construct the addition at a cost of $160,000 (materials, $75,000; labour $55,000; and overhead, $30,000).
On August 18, $50,000 was paid for paving and fencing a portion of land owned by the corporation and used as a parking lot for employees. The expenditure was charged to the land account.
The amount shown in the machinery and equipment asset retirement column represents cash received on September 5, upon disposal of a machine acquire in July 2012 for $480,000. The bookkeeper recorded depreciation expense of $35,000 on this machine in 2015.
Crux City donated land and building appraised at $100,000 and $400,000 respectively, to the UTE Corporation for a plant. On September 1, the corporation began operating the plant. Because no costs were involved, the bookkeeper made no entry for the foregoing transaction.
REQUIRED
In addition to inquiry of the client, explain how you would have found each of these six items during the audit.