Question

Discuss common controls, tests of controls and substantive tests of transactions for property, plant and equipment.

Answer 1

Common Controls:-

During the audit, One should obtain knowledge of its client, their organisation & the internal controls along with the inherent risks. For the purpose of audit of property, plant & equipments, one should have the below common controls :-

a) Effective control over the expenditure incurred on property, plant & equipments which may be achieved using the capital budgeting technique. Capital budgeting includes the selection process of the best of all possible options. It also includes whether to inhouse the project or to outsource. This technique inclues NPV method, IRR method, Payback period & discounted payback period method, etc.

b) Obtaining an understanding of internal controls over property, plant & equipment

c) Information controls can be obtained to ensure whether reliable information is available towards depreciation, historical cost, preparing tax returns, disposal of assets, sale of assets, etc.

d) Asset Safeguarding is to be ensured whether proper measures are in place to secure the assets against the external hazard. This includes insurance of the assets.

Test of Controls:-

While designing test of controls one should check the following :-

a) Existence of assets should be checked whether the assets being shown into books is actually available & in the name of the client or the organisation. This may include checking of title deeds, agreements & other ownership documents.

b) Valuation of the assets should be checked during such audit. For this purpose valuer can be appointed if needed else the fair value estimation should be made.

c) Rights to the property - Check whether the client has rights to the property being shown into accounts.

d) Depreciation Method:- One should ensure whether the method of depreciation used is in accordance with law applicable to the organisation. Assets have been depreciated in the proper method. One should check the date of put to use of the assets. Date of purchase should be check with the invoice.

e) Impairment of assets should be taken care of.

f) Carrying cost of the assets should be properly verified with the fixed asset register. Impact of depreciation should be verified.

Substantive test of transactions:- Substantive test is carried out after the application of common controls & the test of controls. This includes :-

a) Examination of related records & physical verification. The auditor should normally verify the records with reference to the documentary evidence and by evaluation of internal controls. Physical verification of property, plant & equipments is the primary responsibility of the management.

b) Auditor should ensure that the entity has capitalised the assets as per the component approach, whereby a component or part of an asset which is significant in value compared to the total value of asset or useful life of which is different from that of the asset, has to be capitalised separately.

c) Auditor should ensure the appropriateness of the accounting policies, including policies for determining which costs are capitalised.