Audit of Non-Current Assets Chapter 12

Tangible Non-Current Assets

• Audit objectives for tangible non-current assets:
  • Existence and occurrence: ensure additions represent assets acquired in the year and disposals represent assets sold or scrapped in the year
  • Completeness: ensure all additions and disposals that occurred in the year have been recorded
  • Rights and obligations: ensure the entity has rights to the assets purchased and those recorded at the year-end
  • Accuracy, valuation, and allocation: ensure non-current assets are correctly stated at cost less accumulated depreciation
  • Classification: ensure tangible assets are recorded in the correct accounts
  • Presentation: ensure disclosures relating to cost, additions, and disposals, depreciation policies, useful lives, and assets held under finance leases are adequate and in accordance with accounting standards

Audit Procedures for Tangible Non-Current Assets

• Substantive audit procedures to test the above audit objectives
• Examples of audit procedures include:
  • Verifying the existence of assets
  • Recalculating depreciation charges
  • Reviewing the non-current assets register
  • Verifying the classification of assets

Intangible Non-Current Assets

• Only purchased goodwill or intangibles with a readily ascertainable market value can be capitalized
• Research and development costs:
  • Research costs should be expensed
  • Development costs should be capitalized if they meet the PIRATE criteria
  • PIRATE criteria: probable future economic benefits, intention to complete and use/sell asset, resources adequate and available to complete and use/sell asset, ability to use/sell the asset, technical feasibility of completing asset for use/sale, and expenditure can be measured reliably
• Audit of amortization is similar to the audit of depreciation

Exam Link

• Questions on non-current assets are likely to come up in a scenario context and ask for audit procedures to test certain financial statement assertions
• Examples of exam questions include:
  • Testing the valuation assertion for non-current assets
  • Providing audit procedures for additions and disposals of plant and equipment
  • Providing substantive procedures for a revaluation of land and buildings and the valuation of work-in-progress

Answer to 2016 Specimen Exam (Sec A, Q7)

• Correct answer: A (1 and 2)
• Relevant audit procedures to test the valuation assertion for non-current assets:
  • Recalculate the depreciation charge for a sample of assets
  • Ensure disposals are correctly accounted for and recalculate gain/loss on disposal