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The subject matter for discussion on audit readiness this week is Property, Plant and
Equipment (PPE). This item falls within the scope of IAS 16. This standard is applicable in
accounting for property, plant and equipment, which it defines as tangible items that:
Are held for use in the production or supply of goods or services, for rental to
others, or for administrative purposes
Property, plant and equipment classified as held for sale in accordance with IFRS 5 Non-
current Assets Held for Sale and Discontinued Operations;
Mineral rights and mineral reserves such as oil, natural gas and similar non-
regenerative resources.
Within the business cycles selected for testing during a particular period, the principal
business activities and the sub processes are tested. The objectives for testing the sub
processes are:
Recorded fixed asset acquisitions represent fixed assets acquired by the organization.
The recognition criteria for property, plant and equipment are derived from the general
principles for asset recognition reflected in the Conceptual Framework for Financial
Reporting. An item of property, plant and equipment is to be recognised as an asset if, and
only if:
It is probable that future economic benefits associated with the asset will flow to
the entity; and
Depreciation, as defined in IAS 16:6, is the systematic allocation of the depreciable amount
of an asset (i.e. the cost of the asset, or other amount substituted for cost, less its residual
value) over its useful life. In order to comply with the requirements of IAS 16 relating to
depreciation, it is necessary to identify:
The parts (components) of each item of property, plant and equipment that are to be
depreciated separately;
The length of time during which each separately depreciable component will be
commercially useful to the entity; and
Fixed assets reflect the existing business circumstances and economic conditions in
accordance with the accounting policies being used.
Financial information is not presented in a misleading way and all information that is
necessary for fair presentation and compliance with professional standards or legal
requirements is disclosed.
Only valid changes are made to the fixed asset register and/or master file.
All valid changes to the fixed asset register and/or master file are input and processed.
Changes to the fixed asset register and/or master file are accurate.
Changes to the fixed asset register and/or master file are processed timely.
External Auditors would always request to examine documents to support the assertions
that the above objectives are reasonably met. Processes that do not leave a visible trail are
tested via observation or re-performance.
Where internal controls are strong, Auditors may reduce the planned level of substantive
assurance. This is usually the case and that is why it is desirable for entities to ensure that
internal controls are very in design and also very efficient and effective in operation.
Impairment Review
Indemnities by governments for items of property, plant and equipment that are
expropriated (e.g. compulsory purchase of land to be used for public purposes);
The Standard emphasises that impairments or losses of items of property, plant and
equipment, related claims for or payments of compensation from third parties, and any
subsequent purchase or construction of replacement assets are separate economic events
Compensation from third parties for items of property, plant and equipment that
were impaired, lost or given up should be included in determining profit or loss
when it becomes receivable; and
Violation of these rule may result to audit reversals which may taint the competence of the
accounting function.
Derecognition
The Auditors may also test the application of the de-recognition policy. IAS 16 requires
that the carrying amount of an item of property, plant and equipment should be
derecognised:
On disposal; or
When no future economic benefits are expected from its use or disposal.
The reality is that certain organizations still include in the carrying amount of their PPE, the
value of PPE of on which future economic benefits are reasonably not expected from their
use or disposal. Their documentation and available facts do not support this assertion.
No
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