Efficient Tests of Balances Series—No. 22: Modifying the Audit Plan for Fixed Assets | AccountingWEB

Efficient Tests of Balances Series—No. 22: Modifying the Audit Plan for Fixed Assets


Illustrative tests of balances procedures for fixed assets follow. Boxed comments following the procedures reflect the opportunities for modifying the procedures to apply the most cost-beneficial audit strategy as a result of performing risk assessment procedures. Parenthetical references pertain to the acronym for financial statement assertions discussed in a previous blog.
 A.       Review the results of the applicable sections of the
            Internal Control Deficiency Worksheet, the Risk of
Material Misstatements Form, the Linking Working
Paper and the Small Audits Analytical Proce dures
Program and determine the impact on tests
            of balances. (E, C, O, R, and V)          
The assessed level of risk of misstatement will usually be high for fixed assets in small to medium-sized entities. Unless a person of authority provides entity-level controls over fixed assets, the risk of accounting error or theft is usually high.
B.         Obtain a schedule of fixed assets showing cost,
            accumulated depreciation, and amortization by 
            beginning balance, additions, retirements, and   
            ending balances. Foot (if client’s IT system hasn’t
been tested) and tie to the general ledger.
(E, C, O, V, and D)                                                     
The auditor is required to have an understanding of the impact of the client’s IT system on its internal control. For out-of-the-box accounting software systems, the auditor should document an understanding of the basic features of the system and circumstances that could be indicators of error or fraud. For accounting software that provides users with source codes (developmental or modification capability), auditing standards require tests of the processes and controls over these systems.
C.        Obtain detailed schedules of additions and
            disposals, and ----
1.   Foot and tie to fixed assets schedule (if not
      generated from accounting software that is
      out-of-the-box and/or tested). (C)                         
            2.   Vouch major additions to vendors’ invoices,
                  construction cost records, titles or deeds,
                  or contracts to determine that fixed assets
                 are properly recorded. (E and V)                           
The calculated lower limit for individually significant items at the financial statement classification level (which is based on the assessed level of risk) should ordinarily be used to select transactions and balances for support tests.
            3.   Physically inspect ________ assets and/or
                  examine tax bills, deeds, licenses, etc. (E)
The number of assets selected for inspection will depend on the nature of the assets, the assessed level of risk and the results of related tests performed in the prior year’s audit.   
            4.   Determine that the capitalization policy is
                  consistently applied. (V and D)                              
The review of the capitalization limit should include the property and equipment accounts and the repairs, maintenance, supplies and small tools accounts and other related expense accounts.
D.        Obtain or prepare a schedule of gains and losses
            on sales of fixed assets. Foot and tie to the general
            ledger. Trace major amounts to supporting docu-
            ments and records and review for reasonableness.
            (E, V, and D)                                                              
E.         Review repairs and maintenance, supplies, small
            tools, and other expense accounts for any assets
            that should be capitalized. (C) and (V)
This procedure should ordinarily be performed when the auditor reads, or scans, the general ledger during engagement planning.   
F.         Determine the carrying amount of assets pledged
            on notes or other indebtedness. (Ob and (D)                
G.        Determine the cost of any significant fully-
            depreciated assets being carried in the accounts,
            and determine if disclosure is appropriate. (D)  
H.        Determine that any impairment of the carrying amounts of fixed
            assets have been properly recognized. (V)                    
I.          When any events or changes in circumstances
have occurred indicating that the carrying amount
of a long-lived asset may not be recoverable:
            1.   Determine if an impairment loss should be recog-
                  nized. [An impairment loss should be recognized
                  if the carrying amount of an asset exceeds
                  estimated future cash flows (undiscounted and
                  without interest charges) or if the value of the
      asset isn’t recoverable through future cash flows].
                  a. Review the estimate of future cash flows for
                        mathematical accuracy and, through discussion
                        with management and review of any supporting
                        documentation, determine that assumptions
                        used are reasonable.                                        
            2.   If an impairment loss should be recognized, test
                  the calculation of the loss. (Impairment loss is
                  measured as the amount by which the asset’s
                  carrying amount exceeds its fair value.)                   
                  a.   Test the fair value used in the calculation by
                        determining the level of input and assessing
the reasonableness of the valuation process.
                  b.   If the fair value is based on a level three
unobservable input such as the present value
                        of estimated future cash flows, test for mathe-
                        matical accuracy and ensure that the assumptions
                        used in the present value calculation, including
                        the discount rate, are reasonable.                     
J.          Inquire about any significant expansion plans. (D)         
K.        Review rental income and expense accounts to deter-
            mine that leased and subleased assets are properly
            recorded. (D)                                                              
L.         Read client’s depreciation schedules for consistency
            of methods and reasonableness. Test a selection of
            ________ computations. Agree schedule to general     
            ledger. (V and D)                                                        
When reasonableness test of depreciation are performed with acceptable results, detailed tests of depreciation calculation may not be necessary. When reviewing depreciation schedules, however, the auditor may decide to corroborate the reasonableness tests with five to ten calculations of depreciation amounts.
M.        Review lease agreements to determine if leases meet
            criteria for capitalization. (E, R, and V)             
N.        Gather and document information for report disclosure
            and tax return preparation. (D)                         
O.        Consider and compute any capitalized interest. (V)       
P.         Additional Procedures:
Efficient substantive procedures for fixed assets and other account classifications resulting from audit program modifications 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.


This blog

by Larry Perry, CPA, CPA Firm Support Services, LLC - Larry has over 40 years experience as a CPA practitioner, author of accounting and auditing manuals, author and presenter of live staff training seminars and author of webcast and self-study CPE programs.  He is co-founder of CPA Firm Support Services, LLC (www.cpafirmsupport.com), an organization providing resources, training and consulting to smaller CPA firms.  Larry writes a weekly blog on AccountingWEB.com focusing on small audits, reviews and compilations.  He is currently developing documentation manuals and handbooks for small audits, reviews and compilations and related electronic practice aids.

More from this blog

Bloggers crew

Steve Knowles has spent 25 years in business and practice in the UK, but he also worked in the states and the years haven't dulled his way of seeing an alternative view to everyone else, and every day is a new adventure.


Joel M. Ungar, CPA is a lifelong resident of the Detroit area and a graduate of The University of Michigan. He is a principal with Silberstein Ungar, PLLC, a Top 15 auditor of SEC public reporting companies.


Allan Boress, CPA, with over 25 years as a practitioner and consultant to the accounting profession. Mr. Boress is the author of 12 published books in 6 different languages, including a best-seller, The "I-Hate-Selling" Book.


Larry Perry, CPA, CPA Firm Support Services, LLC, is the author of accounting and auditing manuals, author and presenter of live staff training seminars, and author of webcast and self-study CPE programs. He blogs about small audits, reviews, and compilations.

Sandra Wiley, COO and Shareholder, is ranked by Accounting Today as one of the 100 Most Influential People in Accounting as a result of her prominent role as an industry expert on HR and training as well as influence as a management and planning consultant. She is also a founding member of The CPA Consultant's Alliance. Sandra is a certified Kolbe™ trainer who advises firms on building balanced teams, managing employee conflict and hiring staff.

Maria Calabrese, CIR, Human Resources manager for Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC in Cranford, New Jersey, Maria's topics revolve around the world of: Mentoring, Performance management, and The "Y Generation," a.k.a. "The whY generation".


William Brighenti is a CPA, Certified QuickBooks ProAdvisor, and Certified [Business] Valuation Analyst, operating an accounting, tax, and QuickBooks consulting firm in Hartford, Connecticut, Accountants CPA Hartford.


Ken Garen, CPA, is the co-founder and President of Universal Business Computing Company (www.ubcc.com), a software development firm of high-volume, high-productivity accounting and payroll technology.


Eva Rosenberg, MBA, EA, is the publisher of TaxMama.com, and author of the weekly syndicated Ask TaxMama column. She provides answers to tax questions from taxpayers and tax professionals worldwide.


Amy Vetter, CPA, CITP is the CPA Programs Leader for Intacct Corporation responsible for leading the CPA/BPO Partners nationally.

Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
Scott H. Cytron, ABC, is president of Cytron and Company, known for helping companies and organizations improve their bottom line through a hybrid of strategic public relations, communications, marketing programs and top-notch client service. An accredited consultant, Scott works with companies, organizations and individuals in professional services (accounting, finance, medical, legal, engineering), high-tech and B2B/B2C product/service sales.

Rita Keller is a nationally known CPA firm management consultant, speaker, author, mentor and blogger. She has over 30 years hands-on experience in CPA firm management, marketing, technology and administrative operations.

Stacy Kildal is the mom of two fantastic kids, an Advanced Certified QuickBooks ProAdvisor, Certified Enterprise Solutions ProAdvisor, Sleeter Group Certified Consultant, a nationally recognized member of the Intuit Trainer and Writer Network, and co-host of RadioFree QuickBooks.
Michael Alter's blog specializes in providing practical advice to those who seek greater profitability and practice management tactics that enhance deeper client relationships.

Sally Glick, CMO, Principal, Marketer of the Year in 2003 and AAM Hall of Famer in 2007, leads a lively discussion of the constantly expanding roles of marketing and the professional marketers that drive this initiative in accounting firms of all sizes.


The IMA Young Professionals Blog features the insights of IMA’s Young Professionals Committee. Committee members share advice and experiences on careers, continuing education, work/life balance, and other issues affecting young accounting and finance professionals.


FEI Financial Reporting Blog provides highlights from SEC, PCAOB, FASB, IASB, and other regulatory news, including reporting under Sarbanes-Oxley Sect 404. It is written by Edith Orenstein, Director of Technical Policy Analysis at FEI.


Sue Anderson has 30 years of experience in continuing education for accountants. Currently she is the program director for online CPE provider CPE Link.


Jim Fahey is COO of Apple Growth Partners, a regional CPA firm in Ohio. His focus is on the effective and efficient use of technology within the firm by all team members.

Caleb Newquist is the Editor-in-Chief of Sift Media US, overseeing content for both AccountingWEB and Going Concern.

Leita Hart-Fanta, CPA, CGFM, and CGAP is the author of "The Yellow Book Interpreted" and owner of Yellowbook-CPE.com a website devoted to training for governmental auditors.


AccountingWEB is more than just a U.S. team of journalists and financial and technology experts - we have an international side, too! Members of our British team who publish AccountingWEB.co.uk share their ideas, insights, and perspectives from across the pond.