1. Property, Plant, and Equipment: Depreciation and Depletion Chapter 13

2. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 13-2 Audit Approach—Current Accounts Versus Noncurrent Account Cash Securities Accounts Receivable Inventories Accrued Liabilities Accounts Payable Short-Term Notes Property, Plant & Equipment Intangible Assets Long-Term Liabilities Owner’s Equity Accounts High turnover accounts Audit approach— audit the balance Low turnover accounts Audit approach— audit the changes in the accounts

3. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 13-3 Controls Over Plant and Equipment  Use of a plant and equipment (capital budget)  Maintenance of a subsidiary ledger  A system of authorizations  Analysis of variances from budgeted expenditures  A statement of policy distinguishing between capital and revenue expenditures  A requirement that purchases of plant and equipment are subjected to normal purchasing procedures  Periodic physical inventories  A system of retirement authorization and documentation

4. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 13-4 Objectives for the Audit of Property, Plant and Equipment 1. Use the understanding of the client and its environment to consider inherent risk, including fraud risks, related to property, plant, and equipment. 2. Obtain an understanding of internal control over property, plant, and equipment. 3. Assess the risks of material misstatement and design tests of controls and substantive procedures that: a. Substantiate the existence of property, plant, and equipment b. Establish the completeness of recorded property, plant, and equipment c. Verify the cutoff of transactions affecting property, plant, and equipment d. Determine that the client has rights to recorded property, plant, and equipment e. Establish the proper valuation or allocation of property, plant, and equipment and the accuracy of transactions affecting property, plant, and equipment f. Determine that the presentation and disclosure of property, plant, and equipment are appropriate

5. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 13-5

6. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 13-6 Substantive Tests of Property, Plant, and Equipment

7. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 13-7 Impairment of Long-Lived Assets  Long-lived assets must be reviewed for impairment whenever events or changes in circumstances indicate that carrying value may not be recoverable  Test involves projecting future cash flows  If impairment is indicated by cash flows asset must be written down to fair value  May require the use of a valuation specialist

8. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 13-8

9. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 13-9 Audit of Intangibles  Assets with definite useful lives are audited similar to property, plant and equipment  Assets with indefinite useful lives (e.g., goodwill) must be tested for impairment  Auditors generally rely on business valuation specialists to value goodwill for tests of impairment