Auditing &

Investigations II

Audit of Non-current assets

Key issues

 Audit procedures for assessing management

assertions on NCA.

 Key areas when testing tangible non-current

assets are:

• Confirmation of ownership

• Inspection of non-current assets

• Valuation by third parties

• Adequacy of depreciation rates

 Introduction

 The audit of non-current assets must be

approached in a structured orderly way.

 It is useful here to focus on the financial

statement assertions that underlie the
reporting of non-current assets in the
financial statements.

 It is essential that the auditor has good

understanding of requirements of IAS 16
 Audit objective on NCA
 Ownership

is the asset clearly vested in the enterprise which enjoys the

rights and privileges of ownership.

 Existence

The assets exist at the date of the balance sheet.

 Valuation

The assets are stated at a value which is consistent with the

assumptions and conventions adopted for preparing the
financial statements.
 Presentation

The assets are presented in accordance with best practice and

with due regard for the legal requirements in force at the
time.
 Audit objective of tangible non-
current assets
Financial Statement Audit Objective
Assertion
Existence and occurrence Additions represent assets
acquired in the year and disposal
represents assets sold or scrapped
in the year
– Recorded assets represent those
in use at the year end
Completeness - All additions and disposals that
occurred in the year have
been recorded
– Balances represent assets in use
at the year
Accuracy, classification and – Non-current assets are correctly
valuation stated at cost less
accumulated depreciation
– Additions and disposals are
correctly recorded
 Risk based Approach
Financial Statement Audit objective
Assertion

Assertions relating to Assertions relating to

presentation presentation
and disclosure (occurrence and disclosure (occurrence
and rights and rights
and obligations, and obligations,
completeness, completeness,
classification and classification and
understandability, understandability,
accuracy and valuation) accuracy and valuation)
The audit of tangible non-
current assets

 Classifying tangible non-

current assets:

• Leasehold land and buildings.

• Freehold land and buildings.
• Plant and machinery.
• Other assets (motor vehicles,
aircraft, fixtures and fittings
etc).
Internal controls

 considerthe internal controls

over non-current assets:

 Controlsshould exist over the

recording of non-current
assets, the authorisation of
capital expenditure, the
custody of the assets, and
general managerial supervision.
Controls over recording

Controls over recording should be based

around an asset register, which provides
details as follows.
 Serial number of each non-current asset
owned.
 Description and manufacturer’s name.
 Gross cost or valuation.
 Depreciation charged annually.
 Accumulated depreciation to date.
 Net book value.
 Location of the asset
Control over Authorisation

Controls over authorisation are

particularly important in view of the
large costs associated with non-
current assets. Attention should be
on:
 capital budgets.

 directors’ minutes.

 capital expenditure proposals.

 Control over custody
 The non-current assets of the company
should not be susceptible to misuse and
should be protected from the risk of loss by
theft, premature obsolescence or
destruction.
 Custodial controls include the following:
• Physical controls over access to and use of the
assets.
• Adequate insurance and safe custody for
‘portable’ assets (eg, physical investments,
motor cars, notebook computers, furniture and
fittings).
• Adequate insurance cover to provide against
the risk of destruction
Audit procedure
Completeness
 Obtain or prepare a summary of tangible non-current
assets showing how the following reconcile with the
opening position.
– Gross book value
– Accumulated depreciation
– Net book value
 Compare non-current assets in the general ledger with
the non-current assets register and obtain
explanations for differences.
For a sample of assets which physically exist, agree
that they are recorded in the non-current asset
register.
o If a non-current asset register is not kept, obtain a
schedule showing the original costs and present
depreciated value of major non-current assets.
o Reconcile the schedule of non-current assets with the
general ledger.
Audit procedure
Existence
 Confirm that the company physically inspects all
items in the non-current asset register each year.
 Inspect assets, concentrating on high value items
and additions in-year. Confirm that items
inspected:
– Exist
– Are in use
– Are in good condition
– Have correct serial numbers
 Review records of income-yielding assets.
 Reconcile opening and closing vehicles by
numbers as well as amounts.
Audit procedure
Valuation
 Verify valuation to valuation certificate.
 Consider reasonableness of valuation, reviewing
• Experience of valuer
• Scope of work
• Methods and assumptions used
• Valuation bases are in line with accounting
standards

 Reperform calculation of revaluation surplus.

 Inspect draft accounts to check that client has
recognised revaluation losses or gains
 Review insurance policies
Audit Procedure
Presentation

The tests include the following:

 Comparing historical cost with market value in

order to establish the validity of write-offs or
write backs.

 Verifying the fair value of investments by

consulting stock exchange market values.

 Verifying the analysis of total balance sheet

value between quoted and unquoted
investments.
Intangible Non-current Assets

Example of INCA

 Goodwill

 Research and development

costs

 Other Intangibles
Intangible Non- Current Assets

Assertion

 Existence– the assets exits and

pertain to the entity.

 Valuation
– the assets are
measured at the appropriate
amount.
Audit Procedures

Goodwill
 Agree the consideration to sales
agreement by inspection.
 Consider whether asset valuation is
reasonable.
 Agree that the calculation is correct
by recalculation.
 Review the impairment review and
discuss with management.
 Ensure valuation of goodwill is
reasonable.
Audit Procedures
Research and Development Costs
 Confirm that capitalised development
costs conform to IAS 38 criteria by
inspecting details of projects and
discussions with technical managers.
 Confirm feasibility and viability by
inspection of budgets.
 Recalculate amortisation calculation
to ensure it commences with
production / is reasonable.
 Inspect invoices to verify expenditure
incurred on R&D projects.
Audit Procedures

Other intangibles
 Agree purchased intangibles to
purchase documentation agreement
by inspection.
 Inspect specialist valuation of
intangibles and ensure it is
reasonable.
 Review amortisation calculations
and ensure they are correct by
recalculation.
 End

Thank you