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Fundamentals of Auditing

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Fundamentals of Auditing ­ACC 311
VU
Lesson 31
TESTING THE NON-CURRENT ASSETS
Control objectives
The control objectives are to ensure that:
(i)
Non current assets are correctly recorded, adequately secured and properly maintained
(ii)  Acquisitions and disposals of non current assets are properly authorized
(iii)  Acquisitions and disposals of non current assets are for the most favorable price possible
(iv)  Non current assets are properly recorded, appropriately depreciated, and written down where necessary.
Control Procedures over Non Current Assets:
(i)
Annual capital expenditure budgets should be prepared by someone directly responsible to the board of
directors.
(ii)  Such budgets should, if acceptable, be agreed by the board and put in the minutes.
(iii)  Applications for authority to incur capital expenditure should be submitted to the board for approval
and should contain reasons for the expenditure, estimated cost, and any non current assets replaced.
(iv)  A document should show what is to be acquired and be signed as authorized by the board or an
authorized official.
(v)  Non current assets manufactured or constructed by the company itself should be separately identifiable
in the company's costing records and should reflect direct costs plus relevant overhead but not
include any profit. This might apply where, for example, a building company constructs its own office
block.
(vi)  Disposal of non current assets should be authorized and any proceeds from sale should be related to the
authority.
(vii) A register of non current assets should be maintained for each major group of assets. The register
should identify each item within that group and contain details of cost and depreciation.
(viii) A physical inspection of non current assets should be carried out periodically and checked to the non
current asset register. Any discrepancies should be noted and investigated.
(ix)  Assets should be properly maintained and adequately insured.
(x)  Depreciation rates should be authorized and a written statement of policy produced.
(xi)  Depreciation should be reviewed annually to assess the need for changes in the light of profits or losses
on disposal, new technology etc.
(xii) The calculation of depreciation should be checked for accuracy.
(xiii) Non current assets should be reviewed for the need for any write-down.
TESTS OF CONTROLS
(i)
Check authorization of purchase to board minutes, capital expenditure budgets and capital expenditure
form.
(ii)  Check authorization for disposals of significant assets.
(iii)  Confirm existence of non current asset register which adequately identifies assets and comments on
their current condition. Ensure register reconciles to nominal ledger.
(iv)  Test evidence of reconciliation of register to physical checks of existence and condition of assets.
(v)  Check authorization of depreciation rates, and particularly changes in rates.
(vi)  Examine evidence of checking of correct calculations of depreciation.
CONCLUSION
The testing of controls is established whether they are working effectively. So, by this stage, the auditor will
know whether a systems approach is to be used - focusing on the accounting systems supplemented by a
reduced amount of substantive testing, or a verification approach with full substantive testing.
103
Table of Contents:
  1. AN INTRODUCTION
  2. AUDITORSí REPORT
  3. Advantages and Disadvantages of Auditing
  4. OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS
  5. What is Reasonable Assurance
  6. LEGAL CONSIDERATION REGARDING AUDITING
  7. Appointment, Duties, Rights and Liabilities of Auditor
  8. LIABILITIES OF AN AUDITOR
  9. BOOKS OF ACCOUNT & FINANCIAL STATEMENTS
  10. Contents of Balance Sheet
  11. ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
  12. Business Operations
  13. Risk Assessment Procedures & Sources of Information
  14. Measurement and Review of the Entityís Financial Performance
  15. Definition & Components of Internal Control
  16. Auditing ASSIGNMENT
  17. Benefits of Internal Control to the entity
  18. Flow Charts and Internal Control Questionnaires
  19. Construction of an ICQ
  20. Audit evidence through Audit Procedures
  21. SUBSTANTIVE PROCEDURES
  22. Concept of Audit Evidence
  23. SUFFICIENT APPROPRIATE AUDIT EVIDENCE AND TESTING THE SALES SYSTEM
  24. Control Procedures over Sales and Debtors
  25. Control Procedures over Purchases and Payables
  26. TESTING THE PURCHASES SYSTEM
  27. TESTING THE PAYROLL SYSTEM
  28. TESTING THE CASH SYSTEM
  29. Controls over Banking of Receipts
  30. Control Procedures over Inventory
  31. TESTING THE NON-CURRENT ASSETS
  32. VERIFICATION APPROACH OF AUDIT
  33. VERIFICATION OF ASSETS
  34. LETTER OF REPRESENTATION VERIFICATION OF LIABILITIES
  35. VERIFICATION OF EQUITY
  36. VERIFICATION OF BANK BALANCES
  37. VERIFICATION OF STOCK-IN-TRADE AND STORE & SPARES
  38. AUDIT SAMPLING
  39. STATISTICAL SAMPLING
  40. CONSIDERING THE WORK OF INTERNAL AUDITING
  41. AUDIT PLANNING
  42. PLANNING AN AUDIT OF FINANCIAL STATEMENTS
  43. Audits of Small Entities
  44. AUDITORíS REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIALSTATEMENTS
  45. MODIFIED AUDITORíS REPORT