Sharon Cheuk Choy Sheung, 2007, All Rights Reserved. Participation does not warrant reproduction.

Audit programme Property, Plant & Equipment (Fixed assets: Land & buildings, Machinery & equipment, Furniture & fittings, Motor vehicles, etc) Audit objective/ Possible misstatement Test of controls Validity Audit procedure Hint Comments

Authorisation Completeness.

For large capital items, ensure that items were purchased: (a) according to capital budgeting procedures (b) according to technical specifications approved by the engineering department Ensure that asset purchase/disposal transactions are authorised. Review monthly reconciliation of PPE subsidiary ledger to the general ledger. Ensure the periodic comparison of the detailed records in the PPE subsidiary ledger with existing physical assets.

You may need to ask the client for evidence of the procedures that were followed. To save time, just select the large purchase/ disposal transactions. Just reconcile the year end balance to the general ledger. Ask client whether this procedure was done.

Students should have first requested a detailed PPE listing.

Authorised via minutes of BOD meeting. No exceptions noted.

Analytical Procedures Misstatement in PPE & depreciation. Misstatement in depreciation expense & accumulated depreciation. Expensing amounts that should be capitalised. Substantive procedures Accuracy. Accuracy & valuation.

Compare prior year balances in PPE with current year. Compute the ratio of depreciation charge to the related PPE account, and compare with prior year. Compare repairs & maintenance expense with previous years.

No exceptions noted. No prior year figures will be given. Ensure that you know how to compute the ratios. You will do this as a test in Income Statement later. No need to do anything now. No exceptions noted. NBV for Tools on lead schedule does not cross-cast. Depreciation rate for Renovation per lead schedule is 5%, but on detailed schedule it is 10%.

Cast the PPE lead schedule. Trace the total to the general ledger. Obtained detailed schedules for additions & disposals of PPE & agree amounts to the PPE lead schedule.

 Sharon Cheuk Choy Sheung, 2007, All Rights Reserved. Participation does not warrant reproduction.

 Sharon Cheuk Choy Sheung, 2007, All Rights Reserved. Participation does not warrant reproduction.

Substantive procedures (Contd.) Valuation. Test depreciation calculations for a sample of PPE.

Validity.

Vouch additions & disposals to supplier invoices or other supporting documents. Verify the existence of a sample of PPE by examining them physically.

Assume that the clients depreciation policy is to depreciate an asset for a full year in the year of acquisition. Assume that supplier invoices & disposal supporting documents are vouched. It is best to select large PPE items. Select the largest item. You will do this as a test in Income Statement later. No need to do anything now. I assume you know how to do this. No need to do.

Office equipment acquisition of Olympic CT208 on 16.10.2006 not depreciated during the year. Should have incurred a depreciation of RM149.85.

Completeness. Classification.

Physically examine a sample of PPE and trace them to the PPE detailed schedules. Review the repairs & maintenance account to uncover items that should be capitalised. Review purchase/disposal transactions before & after the balance sheet date for proper cut-off. For land, buildings, shoplots, etc examine the title deeds for proof of ownership. For motor vehicles, heavy equipment, etc examine registration cards for proof of ownership. Examine loan agreements for PPE pledged as security for loans.

Cut-off. Ownership.

No land, buildings or shoplots. Registration card should have been stamped Dituntut hakmilik oleh SCB because machinery is pledged as security. One security agreement with SCB. No security agreement with ABMB because on clean basis.

Disclosure.

Ask for security agreements. You have to do this together with Longterm liabilities.

 Sharon Cheuk Choy Sheung, 2007, All Rights Reserved. Participation does not warrant reproduction.

Audit programme Long-term liabilities (Term loans, Revolving Credit Facility, Bonds, Notes, etc) Audit objective/ Possible misstatement Test of controls Validity & authorisation. Audit procedure Hint Comments

Ensure that all long term borrowings are authorised by reviewing the following: (a) minutes of the Board of Directors meetings approving the said borrowing (b) signed loan agreements Ensure that a borrowings subsidiary ledger is maintained & regularly reconciled to the general ledger. Confirm outstanding balances of loans, including accrued interest payable. Ensure that long term debt is classified into 2 portions: current liability & non-current liability.

Completeness. Valuation. Classification.

To save time, just review the minutes and agreements for the loan with Standard Chartered Bank Malaysia. Ask the client. This will be taught in another lecture. Dont need to do this now. Ask for the loans repayment schedule from the client.

Students will need to obtain the detailed listing of loans payables @ 31.12.2006. No exceptions noted.

1-2 years: total should be RM855,000 2-5 years: total should be RM1,440,000 N/A

Ensure that borrowings from holding company & subsidiaries & directors are disclosed separately.

 Sharon Cheuk Choy Sheung, 2007, All Rights Reserved. Participation does not warrant reproduction.

Analytical Procedures Misstatement of interest expense Substantive procedures Accuracy. Completeness. Cut-off.

Take the average monthly balance of loans & multiply that with the average interest rate for the year. Compare your calculation with the interest expense in the general ledger.

SCB: RM2.4m x 5.5% x 3/12 ABMB:(RM1,125,000 x 6/12 x 5%)+(RM937,500 x 6/12 x 5%) No exceptions. See the general ledger for this. Assume proper cut-off. No transactions after the year end will be given to you. None.

Obtain an analysis of long term borrowings and accrued interest payable. Cast the schedule and agree the totals to the general ledger. Review interest expense for payments to lenders not listed on the debt analysis schedule. Review loan transactions before and after the balance sheet date to ensure proper cut-off. Examine new loan agreements to ensure that they were recorded at the proper value. Recompute accrued interest payable.

Valuation.

Only 1 new loan, i.e. SCB. SCB date commenced 1.10.2005, hence interest accrued for 3 months @ 31.12.2005. 3/12 x 5% x 2.4m = 33K This is similar to the work done in Test of Controls. None. Restrictions: an agreement not to pledge assets for other borrowings (Clause 11.2)

Classification.

Examine the due dates on borrowings for proper classification between current & long-term borrowings. Review borrowings for related party transactions (e.g. directors, related companies, etc). Examine loan agreements for any restrictions that should be disclosed. Examples of restrictions are: an agreement not to pledge assets for other borrowings, limitations on how much dividends that can be issued.

Disclosure.

 Sharon Cheuk Choy Sheung, 2007, All Rights Reserved. Participation does not warrant reproduction.

Audit programme Shareholders equity (Share capital, Dividends, etc) Audit objective/ Possible misstatement Share capital Validity & completeness. Audit procedure Hint Comments

Verify share transactions to minutes of Board of Directors meetings or shareholders meetings. Trace the transfer of shares to the shareholder register. Reconcile the total number of shares outstanding to the general ledger. For disposals of shares, ensure that the relevant share certificates are cancelled. Account for & inspect any unissued share certificates in the share certificate book. Ensure that the value of the shares issued are correctly taken up in the financial statements. Trace the proceeds from the issue of new shares to supporting documents (e.g. cash receipt documents). Ensure proper disclosure in the financial statements, as follows: (a) No. of shares authorised. (b) No. of shares issued & fully paid. (c) Par value per share. (d) No. of shares outstanding at the beginning & the end of the period. Verify the amount disbursed with the amount authorised by the Board of Directors. Recompute the dividend by multiplying the number of shares outstanding on the record date by the amount/rate of dividend approved by the Board of Directors. This amount should agree to the dividend amount in the financial statements. Lecturer will explain. Assume the total agrees with the GL. You need to name Certificate No. that should be cancelled. Assume no unissued share certificates. Share cert No. 2 should be cancelled.

Valuation.

No issue of new shares. No exceptions noted.

Disclosure.

Dividends Validity, accuracy, valuation

 Sharon Cheuk Choy Sheung, 2007, All Rights Reserved. Participation does not warrant reproduction.

Audit programme Income Statement Audit objective/ Possible misstatement Over/understatement of expense accounts. Audit procedure Compare individual expenses with previous years. Hint Comments (a) Increase in legal expenses due to legal settlement during the year amounting to RM4.8m. This is due to a settlement for wrongful termination of a senior management staff. (b) Increase in repairs & maintenance due to wrong classification of electrical installation of RM1.8 m. Should have been capitalised. (a) See (b) above. (b) HP lease payments are wrongly classified into this account. Should have been capitalised. (c) Wrongful termination employee. Students should also ask whether this is full & final settlement of the sum any further contingent payments.

Accuracy, classification.

(a) Examine repair & maintenance account for items which may need to be capitalised. (b) Examine rent & lease account for leases which may need to be capitalised. (c) Examine legal fees for potential contingent liabilities, disputes, illegal acts, etc.