1. Slide 13- 1 © The McGraw-Hill Companies, Inc., 2006 Property, Plant, and Equipment; Depreciation and Depletion l At the same time, we also look at:  Gain or Loss on Disposition  Repair & Maintenance (Why?)

2. Slide 13- 2 © The McGraw-Hill Companies, Inc., 2006 Controls Over PP&E l Use of a plant and equipment (capital budget) l Maintenance of a subsidiary ledger l A system of authorizations l Analysis of variances from budgeted expenditures l A statement of policy distinguishing between capital and revenue expenditures l A requirement that purchases of plant and equipment are subjected to normal purchasing procedures l Periodic physical inventories l A system of retirement authorization and documentation

3. Slide 13- 3 © The McGraw-Hill Companies, Inc., 2006 Objectives for the Substantive Tests of PP&E l Determine Existence of recorded PP&E. l Establish Completeness of recorded PP&E. l Establish that client has Rights to recorded PP&E. l Establish clerical accuracy of schedules of PP&E. l Determine that Valuation or allocation of the cost of PP&E is in accordance with GAAP. l Determine that Presentation and disclosure of PP&E are appropriate.

4. Slide 13- 4 © The McGraw-Hill Companies, Inc., 2006 Most Likely Misstatements PP&E and Related Accounts l Inaccurate recording of acquisitions l Inconsistent capitalization threshold l Failure to capitalize betterments l Failure to capitalize capital leases l Failure to record retirements l Improper reporting of unusual transactions

5. Slide 13- 5 © The McGraw-Hill Companies, Inc., 2006 Audit Approach Current vs Noncurrent Accounts

6. Slide 13- 6 © The McGraw-Hill Companies, Inc., 2006 Substantive Tests of PP&E and Related Accounts l Obtain a summary analysis of changes in property owned and reconcile to ledgers

7. Slide 13- 7 © The McGraw-Hill Companies, Inc., 2006 Substantive Tests of PP&E and Related Accounts l Obtain a summary analysis of changes in property owned and reconcile to ledgers l Vouch additions during the year

8. Slide 13- 8 © The McGraw-Hill Companies, Inc., 2006 Substantive Tests of PP&E and Related Accounts l Obtain a summary analysis of changes in property owned and reconcile to ledgers l Vouch additions during the year l Make physical inspection of major acquisitions & existing PP&E

9. Slide 13- 9 © The McGraw-Hill Companies, Inc., 2006 Substantive Tests of PP&E and Related Accounts l Obtain a summary analysis of changes in property owned and reconcile to ledgers l Vouch additions during the year l Make physical inspection of major acquisitions & existing PP&E l Analyze repair & maintenance expense accounts

10. Slide 13- 10 © The McGraw-Hill Companies, Inc., 2006 Substantive Tests of PP&E and Related Accounts l Obtain a summary analysis of changes in property owned and reconcile to ledgers l Vouch additions during the year l Make physical inspection of major acquisitions & existing PP&E l Analyze repair and maintenance expense accounts l Examine evidence of legal ownership

11. Slide 13- 11 © The McGraw-Hill Companies, Inc., 2006 Substantive Tests of PP&E and Related Accounts l Obtain a summary analysis of changes in property owned and reconcile to ledgers l Vouch additions during the year l Make physical inspection of major acquisitions & existing PP&E l Analyze repair and maintenance expense accounts l Examine evidence of legal ownership l Investigate the status of property not in use

12. Slide 13- 12 © The McGraw-Hill Companies, Inc., 2006 Substantive Tests of PP&E and Related Accounts l Obtain a summary analysis of changes in property owned and reconcile to ledgers l Vouch additions during the year l Make physical inspection of major acquisitions & existing PP&E l Analyze repair and maintenance expense accounts l Test the client’s provision for depreciation l Examine evidence of legal ownership l Investigate the status of property not in use l Investigate retirements of PP&E during the year

13. Slide 13- 13 © The McGraw-Hill Companies, Inc., 2006 Substantive Tests of PP&E and Related Accounts l Obtain a summary analysis of changes in property owned and reconcile to ledgers l Vouch additions during the year l Make physical inspection of major acquisitions & existing PP&E l Analyze repair and maintenance expense accounts l Examine evidence of legal ownership l Investigate the status of property not in use l Investigate retirements of property during the year l Examine lease agreements

14. Slide 13- 14 © The McGraw-Hill Companies, Inc., 2006 Substantive Tests of PP&E and Related Accounts l Obtain a summary analysis of changes in property owned and reconcile to ledgers l Vouch additions during the year l Make physical inspection of major acquisitions & existing PP&E l Analyze repair and maintenance expense accounts l Examine evidence of legal ownership l Investigate the status of property not in use l Investigate retirements of property during the year l Examine lease agreements l Perform analytical procedures l Test the client’s provision for depreciation l Review rental revenue, impairment & intangible assets

15. Slide 13- 15 © The McGraw-Hill Companies, Inc., 2006 Audit of Intangibles l Assets with definite useful lives are audited similar to property, plant and equipment. l Assets with indefinite useful lives (e.g., goodwill) must be tested for impairment. l Auditors generally rely on business valuation specialists to value goodwill for tests of impairment.

16. Slide 13- 16 © The McGraw-Hill Companies, Inc., 2006 Substantive Tests of PP&E and Related Accounts l Obtain a summary analysis of changes in property owned and reconcile to ledgers l Vouch additions during the year l Make physical inspection of major acquisitions & existing PP&E l Analyze repair and maintenance expense accounts l Examine evidence of legal ownership l Investigate the status of property not in use l Investigate retirements of property during the year l Examine lease agreements l Perform analytical procedures l Test the client’s provision for depreciation l Review rental revenue, impairment & intangible assets l Evaluate F.S. presentation and disclosure

17. Slide 13- 17 © The McGraw-Hill Companies, Inc., 2006 Additional Tests – 1st Year Audit Determine if we can rely on work of prior auditor for the beginning balance of PP&E and Accumulated Depreciation accounts, but must do some testing. If not, must perform substantive tests for transactions occurring in prior years which could materially impact the F.S. currently being audited. Use analytical procedures to assess risks, esp. for completeness assertion for young organization.