AUDIT PROGRAM PROPERTY, PLANT AND EQUIPMENT

OVERVIEW Test Account Detail Obtain or prepare a detailed analysis of account balances (1). Test balances for reasonableness, fluctuations and omissions (2). Test mathematical accuracy of the analysis (3). Examine documentation and reconcile detail records (4). Recompute or apply analytics to test depreciation (5). Compare charges or credits to income statement accounts (6). Perform procedures to test completeness of account balance (7). Additional Procedures Physically inspect assets (8). Review documentation for assets leased to others (9). Determine that lease disclosures conform with SFAS No.13 (10). Consider carrying values of assets (11). Identify fully depreciated assets (12). Review interest capitalization (13).

Obtain information for disclosure (14).

AUDIT PROGRAM PROPERTY, PLANT AND EQUIPMENT GUIDANCE The auditor should consider the nature of the account balance and the risks associated with transactions flowing through it. The steps in this area may also be applied to capitalized leases. When preparing this program the auditor should consider and design audit procedures that address relevant presentation and disclosure requirements. GUIDANCE-PROPERTY, PLANT AND EQUIPMENT AUDIT PROGRAM PROPERTY, PLANT AND EQUIPMENT Test Account Detail OBTAIN OR PREPARE A DETAILED ANALYSIS OF ACCOUNT BALANCES (1). 1. Obtain an understanding of the accounting policies relevant to property, plant and equipment and depreciation. Obtain or prepare an analysis of those accounts, including:

a. Description of accounts by classification. b. Balances at beginning of period. c. Additions and depreciation expense during the period. d. Disposals (e.g., assets sold, abandoned, written off) including related gain or loss and related adjustments to accumulated depreciation during the period. e. Balances at end of period. Trace the beginning and ending balances to the general ledger and previous audit's working papers. Done by Date ..../../.. GUIDANCE: When obtaining an understanding of accounting policies relevant to property, plant and equipment the auditor should judge their appropriateness in the light of generally accepted accounting principles and correlate them with knowledge obtained about the division's operations, the economic environment and activity in the accounts. This information is useful in addressing, among other things, the risks associated with the treatment of capitalized costs, depreciation charges and abandonments of property, plant and equipment.

TEST BALANCES FOR REASONABLENESS, FLUCTUATIONS AND OMISSIONS (2). 2. Review the balances for reasonableness, expected or unexpected fluctuations between periods and obvious omissions. Done by Date ..../../.. TEST MATHEMATICAL ACCURACY OF THE ANALYSIS (3). 3. Test mathematical accuracy of the analysis. Done by Date ..../../.. EXAMINE DOCUMENTATION AND RECONCILE DETAIL RECORDS (4). 4. a. Examine documentation (e.g., invoices, purchase agreements, titles, construction contracts, authorizations) that supports property, plant and equipment additions.

b. Examine documentation (e.g., bills of sale, authorizations) that supports asset disposals and related adjustments to accumulated depreciation. c. Reconcile the analysis to detailed records of property, plant and equipment. Done by Date ..../../.. GUIDANCE: When examining documentation to support property, plant and equipment additions the auditor should be particularly aware of the risks associated with capitalizing costs of self-constructed assets. In this regard, the auditor considers: a. The appropriateness of accounting policies followed; b. The appropriateness of capitalized costs, including overhead and other cost allocations requiring judgments and estimates; and c. Other issues, including economic lives used and the date assets were put into service. Steps 4.a. and b. require a decision on the extent of testing. The auditor should use judgment in determining the extent of tests considering

factors such as the adequacy of the division's procedures for recording fixed asset additions and retirements, the type and frequency of errors in prior periods, the complexity of transactions and the materiality of the amounts involved. When testing acquisitions the auditor should be alert for interdepartmental transfers and consider whether profit is included in asset costs so that their carrying values are questionable. RECOMPUTE OR APPLY ANALYTICS TO TEST DEPRECIATION (5). 5. Determine whether the depreciation practices followed by the company are in conformity with GAAP and consistent with the prior period. Such practices may include estimates of useful lives and salvage values, procedures for the depreciation of additions and retirements, and the accounting for fully depreciated assets. By recomputation or the application of analytical procedures, test calculation of current period's depreciation. Done by Date ..../../.. GUIDANCE: Analytical procedures may be an efficient and effective way of testing current-period depreciation. The reasonableness of depreciation expense should be judged in the light of the division's operations, established depreciation rates and activity in the asset accounts during the period.

Examples of analytical procedures include reviewing amounts compared with prior periods or independently estimating the expense by asset category.

COMPARE CHARGES OR CREDITS TO INCOME STATEMENT ACCOUNTS (6). 6. Compare amounts charged against (e.g., write-offs, loss on disposal) or credited to (e.g., gain on disposal) income with income statement accounts. Investigate significant differences.

Done by Date ..../../.. PERFORM PROCEDURES TO TEST COMPLETENESS OF ACCOUNT BALANCE (7). 7. Ascertain the completeness of property, plant and equipment by reviewing fluctuations in the repair and maintenance accounts and, where appropriate, examining charges to these accounts to determine whether amounts should be capitalized. Done by Date ..../../..

Additional Procedures PHYSICALLY INSPECT ASSETS (8). 8. Review the division's procedures for ascertaining the existence and ownership of recorded assets and consider the necessity of independently testing the physical existence of and, if appropriate, the title to property, plant and equipment, including construction in process. Done by Date GUIDANCE: In deciding whether to independently test the physical existence of and title to property, plant and equipment the auditor should consider: a. The susceptibility of the assets to loss, theft or destruction. b. The operation of the business that would provide evidence to indicate that assets still exist and continue to operate, such as continued sales of products produced by plant and equipment. c. Circumstances within the organization, such as decisions to modernize plant and equipment or to discontinue a product line. d. Whether the division's procedures are designed to adequately ensure the

existence and ownership of assets. Examples of these procedures include maintenance and periodic reconciliation of detailed records to control accounts, periodic physical inspection of assets, and maintenance of records of title such as deeds, purchase agreements and other documents that support the ownership of assets. By considering factors a. to d. the auditor assesses the risk that existence and ownership could be compromised because of the nature of the asset and unusual factors in the business. Other substantive tests may also provide evidence of ownership of assets, for example, identifying assets held as collateral for debt. In the light of these risks the auditor expects that the division would establish procedures, as appropriate, to ensure the existence and ownership of assets, and these procedures may be tested. Having considered these factors and tests of the division's procedures, if they are performed, the auditor assesses the risks to existence and ownership of assets. If these risks are other than low, independent tests of the physical existence of and title to assets should be performed.

DETERMINE THAT LEASE DISCLOSURES CONFORM WITH SFAS NO.13 (10). 10. a. Examine records of leased assets, lease agreements and other relevant data for leases capitalized during the period to

determine whether they were properly capitalized in conformity with SFAS No. 13 (as amended). b. Examine support for rentals under operating leases to determine whether leases should be capitalized in conformity with SFAS No.13 (as amended). Done by Date ..../../.. CONSIDER CARRYING VALUES OF ASSETS (11). 11. Consider whether adjustments should be made to reflect the inability to recover the carrying value of assets. Done by Date ..../../.. GUIDANCE: The auditor should consider whether the following factors, which may indicate unrecorded retirements or questionable carrying values, are present: a. Additions that replace existing property. b. Major changes to plant layout or product design.

c. Changes in insurance coverage. d. Idle or abandoned property, plant or equipment. e. Property held for sale. f. Excess capacity. The auditor should also consider developments in the division's business and industry and evidence from performing other audit procedures to determine whether the carrying values of assets have been impaired. IDENTIFY FULLY DEPRECIATED ASSETS (12). 12. Identify fully depreciated assets carried in the property records. Obtain assurance that such assets are still utilized (i.e., that they have not been discarded or abandoned). Consider whether this may indicate that depreciation rates may not be appropriate. Done by Date ..../../.. REVIEW INTEREST CAPITALIZATION (13). 13. a. Examine supporting documentation for interest capitalized during

the period in conformity with SFAS No. 34. b. Inquire of management regarding the existence of any capital projects that require a period of preparation before being ready for their intended use, for which interest has not been capitalized. If such projects exist, examine project authorizations, progress payments and other supporting data (including notes payable and long-term debt) to determine whether interest should be capitalized in conformity with SFAS No. 34. Done by Date ..../../..