We and our partners share information on your use of this website to help improve your experience. The company may intend to overstate the value of fixed assets rather than understate. Substantive test of detail is another type of substantive procedures. Select a sample of fixed assets additions, Vouch the selected sample to the supporting documents, such as vendor invoices, purchase agreements, and titles, Check and verify to ensure that the additions have been properly recorded in fixed assets register and general ledger, Check and verify to ensure that they meet the condition to be capitalized, Vouch the selected sample of disposal to the supporting document, such as title transfer, fixed assets bill of sale, and sale receipt, Check and verify to ensure that the gain or loss on disposal reflects in the income statement, Check and verify to ensure that disposal of fixed assets have been removed from the balance sheet by reducing the assets account to zero. Substantive audit procedures are the audit processes or methods that auditors perform to detect material misstatement that could occur in financial statements. 3. Auditing (AUD3) Academic year. Although auditors might develop complicated techniques to test high-risk account balances, they use common techniques to test the accounts found at most companies. Either actual spending on fixed assets is much bigger or much smaller than the budgeted plan, we may need to inquiry the management for the reasons behind. 3. When we determine that the risk is low and the client has proper internal control on fixed assets and depreciation, we usually audit depreciation by performing substantive analytical procedures. Want to know how to audit investments? Fixed assets reflect the existing business circumstances and economic conditions in accordance with the accounting policies being used. In other words, the nature, timing, and extent of substantive audit procedure are directly influenced by the level of risk of material misstatement. Loading... Autoplay When autoplay is enabled, a suggested video will automatically play next. Fixed Assets are often referred to as Property, Plant and Equipment (PP&E) and the terms are used interchangeably. For example, the assets recorded may not exist at the reporting date which may be due to fraud or thief. Below are the a few substantive procedures to consider when auditing NCA’s (Non current assets). Asset audit is necessary to do once a year to update all the records of assets in a proper manner. Risk of Material Misstatement for Accounts Receivable, Risk of Material Misstatement for Inventory, Risk of Material Misstatement for Investments, Risk of Material Misstatement for Revenues, Risk of Material Misstatement for Tangible Asset. There is a variety of tests of details on fixed assets as they have many areas related to them, including fixed assets addition, disposal, existence and ownership, depreciation, repair and maintenance, impairment and cutoff. FREE Courses Blog. For entities with simple investment instruments, auditing is easy. The … This ensures audit assertion of rights and obligations . In this case, we may need to take note to inquiry with the client’s management for the explanation of the major fluctuation as well as inspecting the supporting document, to confirm the management’s explanation. This will ensure audit assertion of accuracy. Analytical procedure is the process of analyzing plausible relationships among data including both financial and non-financial data. University. Substantive procedures involve comparison between underlying accounting data to external evidence (corroborating information). Substantive Audit Procedures. Audit work on Land and Building: Obtain summary of all non-current assets under the categories shown in the balance sheet. It helps us to identify key risk areas in the audit. The control procedure here is to make sure that each purchase of the assets has been reviewed, authorized and approved by different levels of authorized persons. 1. Your main audit procedure might be to confirm balances. Likewise, audit procedures are performed in order to test various audit assertions related to different class of transactions and account balances. Examination of records and documents. There are two types of substantive procedures: 1. Below I provide a comprehensive look at how you can audit investments effectively and efficiently. In other words, it should not be shown along with buildings because building is a depreciable asset whereas land is a non-depreciable asset. The ending balance of each account is needed, as is a record of any disposed assets. Auditing – Study Notes Chapter 12 Substantive Procedures LLOO 11:: TTAANNGGIIBBLLEE NNOONN--CCUURRRREENNTT AASSSSEETTSS:: Obtain “Fixed Assets’ Schedule” and “Fixed Assets’ Register”. The intangible asset is also a fixed asset. Similarly, we usually use substantive analytical procedures for fixed assets to gather audit evidence before performing the test of details. Tailor the correct audit procedures to the testing of fixed assets is not only helps auditors to minimize the... Understanding Control:. Fixed assets are the non-current assets that have a useful life for more than one accounting period. These tests are needed as evidence to support the assertion that the financial records of an entity are complete, valid, and accurate. It is different to test of control. The client performs this control procedure by attaching a unique identifying tag to each piece of the assets such as office furniture and equipment. Office of Inspector General Page 5 Audit of Fixed Assets Processes and Procedures AUDIT RESULTS Executive Summary We identified best practices as well as state statutes and administrative code applicable s to the management of tangible personal property (see Appendix I and Appendix II). Syllabus D4a) Explain the audit objectives and the audit procedures in relation to: Receivables: ii) other evidence in relation to receivables and prepayments, and iii) completeness and occurrence of sale. In this step, we ask client for Policy and SOPs regarding Fixed Assets. Auditing – Study Notes Chapter 12 Substantive Procedures b. Audit procedures are the methods that auditors use for obtaining audit evidence to form a basis for their opinion on financial statements. √ √ Test the mathematical accuracy of the fixed assets movement schedule. Lie Dharma Putra . Also, some items shown on the fixed assets register may not belong to the company as the company may not have the right and ownership to the assets. Audit of Freehold Property – Verification Procedure. Substantive testing or substantive procedure is the technique used by the auditor to obtain the audit evidence in order to support auditor opinion. During the audit of prepaid insurance, the auditor should keep in mind that the amount in insurance expense is based on: a. the beginning balance in prepaid insurance. The assets are purchased to run a business properly. Audit procedures & Evidence needed as follows. The following tips will help you to understand the concepts and write appropriate audit procedures. A description of the assets is needed, along with the balance in each account, and any additions or depreciation expense that occurred in the period. This may involve a lot of professional judgment; one way to do is to compare the client’s estimate with the industry standard. Tagging the fixed assets helps the client to keep tabs on all its tagged items and assist in adjusting the balance sheet for addition and disposal. By. Inaccurate computation of depreciation on Fixed Assets; Capital items are erroneously coded to an expense account. In order to conduct procedures like the ones mentioned above, substantive audit procedures will have to be conducted including bank confirmation, accounts receivable confirmations, observation of physical inventory counts, observation of fixed assets, confirmation of account payables, the examination of accounts receivable as well as confirmation of the debt. Substantive Procedures - Additions & Disposals. Audit procedures for Property Plant and Equipment can also be called as the audit procedures for Non-Current Assets or Fixed Assets. This is due to we can obtain sufficient appropriate audit evidence through test of control to support our assessment in the control risk when we assessed it as low. Examine the useful life and salvage value of fixed assets to ensure that the client’s estimate is appropriate. Auditors usually perform substantive audit procedures after tests of controls to obtain evidence about various audit assertions. Likewise, substantive analytical procedures are the audit procedures that auditors perform to obtain evidence about the reasonableness of amounts shown in the financial statements by using such plausible relationships among data. Previous Next. Perform recalculation on depreciation to see if our result is the same as the client’s figures. (xi) Depreciation should be reviewed annually to assess the need for changes in the light of profits or losses (x) Depreciation rates should be authorized and a written statement of policy produced. You're in the right place. If there is a significant difference between auditor’s expectation and the client’s record, further test is usually performed for investigation of the reasons behind such difference. Substantive testing is part of the substantive audit approach and it is performing at the execution stage of the audit. With the result of expected interest expenses, auditors then use them to compare with the client’s record. The auditor should, Auditors must decide when it is most appropriate to use which type of substantive procedures. An example of the test of fixed assets addition: The test of fixed assets disposal will ensure the rights and obligations, completeness, occurrence, and accuracy audit assertion. Likewise, auditors perform substantive audit procedures to obtain substantive evidence about account balances, classes of transactions, and disclosures of the client’s financial statements. Viewing 8 posts - 1 through 8 (of 8 total) The cutoff test is performed to ensure that all fixed assets transactions have been recorded in a correct accounting period. This ISA is effective for audits of financial statements for periods beginning on or after December 15, 2009. Select a sample of items in fixed assets register or listing, Perform physical inspection on the selected items to ensure their existence. Review for the indicator of impairment on the fixed assets. Other inherent risks that may occur related to fixed assets include the existence and ownership of the assets themselves. If it is not significantly different from the client’s record, no further test is required. Form this we obtain the general understanding of Client Working Pattern on Fixed Assets and we came to know who is responsible for what. Key assertions. √ √ Obtain the fixed assets register, and agree cost, accumulated depreciation and net book values to the fixed assets movement schedule. Basic procedures are: Inspect legal documents, confirming the length / type / cost of asset. The person who maintains custody of fixed assets is not the one in the accounting function. It is useful to note that the word “substantive analytical procedures” refers to analytical procedures that are performed as a substantive test. Substantive audit procedures are the audit processes or methods that auditors perform to detect material misstatement that could occur in financial statements. Want to know how to audit investments? As auditors, we have the responsibility to perform preliminary analytical procedures in the planning stage of the audit. Substantive Procedures for Property Plant and Equipment - Free download as Word Doc (.doc / .docx), PDF File (.pdf), Text File (.txt) or read online for free. c. During physical verification, also check for conditions and usage of asset for indications of impairment (Valuation). Section 404 of Sarbanes-Oxley states that companies must have adequate and effective internal controls for financial reporting and that these procedures must be regularly evaluated. Example of Audit Procedures. Substantive procedures for fixed assets. Published. Inspect minutes of a discussion with management regarding amortisation / non-amortisation and recalculate where necessary. Rhodes University. If the asset was used as security, make ensure that the release from security has been correctly made. Perform Analytics. Similarly, we usually use substantive analytical procedures for fixed assets to gather audit evidence before performing the test of details. Helpful? If there are some cases like this, you might need to discuss with management in order to reduce their carrying value to an appropriate amount. During physical verification, also select assets from the floor and trace them into fixed assets’ register (Completeness). For example, auditors usually perform substantive analytical procedures on interest expense of borrowings by multiply the average outstanding balance of borrowings with the average interest rate. In the above list of audit procedures, the last three procedures are tests of control; all the others are substantive procedures. For example, auditors usually perform test of detail on expenses by vouching expense transactions to supporting documents, such as invoice, purchase order, and receiving report (goods received note), to ensure the occurrence assertion. Fixed Asset Accounting Audit; Major Risk in Fixed Asset Accounting Audit. (xi) Depreciation should be reviewed annually to assess the need for changes in the light of profits or losses The auditor determines the nature timing and extent of substantive procedures relating to fixed assets after evaluating the effectiveness of internal controls. The moment the financial statements are produced, the assertions or the claims of management also exist, e.g., all items in the income statement are assured to be complete and accurate, etc. Efficient substantive procedures for fixed assets and other account classifications are discussed in my live and on-demand webcasts which can be accessed by clicking the applicable box on the left side of my home page, www.cpafirmsupport.com. Categories of substantive tests: COMPLETENESS Obtain/prepare summary of NCA showing gross book value; accumulated depreciation; net book value Compare non -current assets in the general ledger with the non-current assets register asset … Likewise, auditors perform substantive audit procedures to obtain substantive evidence about account balances, classes of transactions, and disclosures of the client’s financial statements. Likewise, auditors usually perform tests of details, instead of substantive analytical procedures, when there is a high risk of material misstatement on significant accounts or balances. Substantive Procedures for disposals during the year: Obtain list of all fixed asset disposed during the period and agree with fixed assets’ schedule and fixed assets register (Completeness and Occurrence). Auditor… At this stage the auditor will design substantive procedures to ensure that assurance has been gained over all relevant assertions. Acowtancy. Auditors usually perform substantive analytical procedures by building their expectations and compare them to the client’s record. Substantive procedures for revenue . Another example is that when performing audit of cash at banks, auditors usually perform direct bank confirmation to ensure the existence of cash balances at banks. For entities with simple investment instruments, auditing is easy. Therefore, you need to practise explaining the audit procedures as suggested above in order to perform well in the exam. The entity may have a process by which responsibility to safeguard the assets could be identified to specific personnel. Here the auditor carries out direct appraisal of figures in the FS. Examine the title documents or title deeds of the items to ensure they really belong to the client. The common ratio used in analyzing the fixed assets is the insurance expense to fixed assets that are insured. There are many substantive tests that an auditor can use. Fixed Asset Accounting Audit. the assets owned by the entity are safeguarded and any loss on damage/destruction of such assets are made good, through for example, insurance of assets, warranties, etc. Substantive analytical procedures are usually performed when the risk of material misstatement is low and there are adequate control procedures in place. This is first and very important aspect. These tests are needed as evidence to support the assertion that the financial records of an entity are complete, valid, and accurate. Discussion will include accounting issues, risk assessments and responsive procedures, and common fixed asset disclosures. Assertions. Check casting and compare the opening balance brought forward from previous year. The complexity of auditing investments varies. Additions. KnowledgeLeader has over 70 pieces of content focused on the fixed assets process. Though repair and maintenance account is an expense account, we usually examine this account in the audit of fixed assets to test the completeness and classification of audit assertions. If your company records its inventory as an asset and it undergoes an annual audit, then the auditors will be conducting an audit of your inventory. The purpose of verification is to ascertain the existence of assets. The audit assertions for fixed assets are included in the table below: Existence and valuation assertions are usually the most relevant assertions in the audit of fixed assets. In this case, we just tick the control risk as high and go directly to substantive tests as it is usually more efficient this way. 11 years ago. In a normal case, the ratio should be around the same and if there’s an increase in rate from year-to-year, it should be consistent. Auditors should obtain the key control on how the entity manages and control its fixed assets. If there is no track and record of assets, you might have to pay a huge amount of money. Substantive audit procedures are the audit processes or methods that auditors perform to detect material misstatement that could occur in financial statements. The tests of details of balances procedure for fixed assets which require the auditor to examine vendors' invoices of closely related accounts such as repairs and maintenance to uncover items that should be fixed assets would satisfy the audit objective of: a. accuracy. Check that cost and accumulated depreciation has been removed from books of accounts, and fixed assets’ register. Hence, any change up or down in both of them should be within our expectations. Management estimates, such as estimating useful lives and residual values and determining whether asset impairment has occurred, is very important in the valuation. Every procedure must state: the assertion tested; the audit procedure; the reason for the procedure. Substantive procedures include  Tests of detail of transactions and balances; and  Analytical procedures Per ISA 330.6 and 315.5 the auditor should design further audit procedures whose nature, timing and extent are responsive to the assessed risks of material misstatement at assertion level. Audit procedures fall into two groups: Substantive procedures. Substantive Procedures for additions during the year: For Purchased Fixed Assets: 1. Audit procedures are used to decide whether transactions were classified correctly in the accounting records. Auditing – Study Notes Chapter 12 Substantive Procedures b. Auditing fixed assets is extremely important to ensure that accounting for capital assets and depreciation is in compliance with management’s objectives. (ix) Assets should be properly maintained and adequately insured. Some items with a high value might need approval from the board of directors before they can be purchased. The audit provides an independent review of the District’s asset management processes and procedures for fixed assets (tangible personal property) including a comparison of the District’s procedures to industry best practices and applicable laws and codes in order to identify potential improvements. Fixed assets are primary resources for the business. Audit procedures are a vital part of Paper F8 and Paper FAU. During physical verification, also select assets from the floor and trace them into fixed assets’ register (Completeness). Fixed assets may include lands, buildings, furniture and fixtures, and equipment, which we will test in the audit of fixed assets. We perform the analysis by comparing the ration in the current year to the prior year. Below are some examples of segregation of duties: Procurement procedures of fixed assets are the process of purchasing which usually starts from requesting in purchase to finding quotes and then to the approval the purchase and payment. made good, through for example, insurance of assets, warranties, etc. In this case, the procedures that auditors perform usually depend on the associated risks that auditors face. Substantive audit procedures for some account balances and account transactions List the substantive audit procedures that may be performed by an auditor to verify Payroll From the payroll record: Select a sample of newly appointed staff and check their salaries with the appointment letter. Audit assertions, financial statement assertions, or management’s assertions, are the claims made by the management of the company on financial statements. Moreover, it also helps to prevent the misappropriated use of assets for personal gain. 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