Audit and Assurance

Questions: Your firm is the auditor of GreenBrown Ltd, a manufacturer. You have obtained a summary of the property, plant and equipment for the year ended 30 June 2015, which identifies cost and accumulated depreciation brought forward, additions and disposals in the year and depreciation charges. A review of the management letter from the previous years audit shows that there were some problems in relation to making a distinction between capital and revenue expenditure; some items were capitalised when they should have been expensed and other capital items were included in repairs and maintenance in the income statement. Another risk identified from prior years relates to depreciation calculations; there is a range of depreciation rates within categories and there has been concern that the rates applied to some assets have been too low. The depreciation policy disclosed in the financial report shows: buildings: 24% straight line plant and machinery: 510% straight line fixtures fittings and equipment: 520% straight line.Describe audit procedures to ensure: (a) the accuracy of the summary of property plant and equipment. (b) all items of a capital expenditure are included in additions for the year and that no revenue expenditure has been capitalized. (c) the depreciation rates are calculated appropriately. Answers: Audit procedures are effective to obtain the sufficient audit evidence through the observation, recalculation, analytical procedures etc or the combination of some of these. For the auditing of the different areas and processes of GreenBrown Ltd, the below audit procedures can be performed: (a) To ensure the accuracy of the summary of property, plant and equipment In order to ensure the accuracy of the summary of property, plant and equipment (PPE), firstly, the risk of material misstatement will be designed. The risk can be related to the undue pressure of showing higher earnings, inadequate accounting manual etc. After this, a test of control will be facilitated, which will enable to determine the effectiveness of controls on the recording and accounting of PPE. On the basis of this, the risk of material misstatement can also be revised, if the results of the test of control vary from the expectations (Gramling, et al, 2012). After the consideration of the risk of material misstatement and control test, a substantive procedure for PPE will be conducted. In order to perform the substantive procedure, the following steps will be taken: Gather the summary of the changes in PPE owned and analyse it by reconciling with the ledgers Ensure the addition in PPE during the year In order to ensure PPE accuracy in the firm, a physical inspection of the plant and equipment acquired during the year will be made (Johnstone, et al, 2015) The analysis of the repair and maintenance expense account to determine, whether all the expenses are written properly and if any capital item is written on the account then it should be recalculated to make its entry in balance sheet Also, investigate PPE that is not of use in the organisation in current that will enable to ensure that PPE summary includes those assets also Test the provision for the depreciation made by GreenBrown Ltd to ensure that accurate or depreciated value is shown in the summary of PPE (Vallabhaneni, 2015). Further, the potential impairments of PPE will also be identified, so that actual value and the related expenses can be identified. It will also enable to determine whether the impairments are shown correctly or not The retirement or disposal of PPE during the year will be investigated, which will ensure that the salvage value is recorded in the right account and total assets include only the PPE, which is existing in the business only The legal ownership of PPE will also be examined by getting the evidence from the ledgers and vouchers If the firm has lease agreements then further they will be analysed to determine the assets, which are leased to and from others in the firm (Gramling, et al, 2012) After analysing PPE accounts, depreciation, addition, separation, disposal, depreciation etc, an analytical procedure will be performed in which a comparison of summary of PPE will be conducted with the prior information, budgets etc to get an understating of the business and risk areas In this, the presentation of the financial statements and disclosure for PPE and related revenues and expenses will also be made to ensure the accuracy of summary of PPE The above auditing procedure will enable to identify the lacking in the areas and to improve them for eliminating the material misstatement. It will ensure the accuracy of the summary of properly, plant and equipment (Johnstone, et al, 2015). (b) To ensure all items of a capital expenditure are included in additions for the year and that no revenue expenditure has been capitalized In order to ensure that capital and revenue expenditures are properly written without having any issue, the analytical procedure will be used. In this, first, the repair and maintenance expenses account will be analyzed. In this, the items that are required to be capitalized will be identified and then the company policy in order to ensure consistency in the accounting of revenue and capital expenditure will be analyzed (Whittington, 2015). Along with this, the monthly amount in the account will also be analyzed that will be effective to identify the variations. This analysis will be month to month and between the corresponding months of two years. It will enable to identify any insignificant variance in the expenses recorded in the repair and maintenance account in the income statement and to ensure that no capital expenses are included in the repair and maintenance account in the income statement (King, 2011). The sampling procedure will also be effective to ensure that all items of the capital expenditure are included in additions for the year as through this, the auditor will collect some sample capital expenses and identify their entry to determine, whether it is right or not. On the basis of the results of these, the extent of risk in recording of the capital and revenue expenditures will be identified along with the consideration of organizational policies for recording such expenses (Gomez, 2012). Along with this, the disclosure of the revenue expenditure will also be verified by ensuring that revenue expenses related to the current year are in the income statement and related to future period are shown as assets in the balance sheet. It will also be ensured that revenue expenditures that incurred but not paid are shown as a liability in the balance sheet (Kan, 2013). This verification of disclosures will be effective to ensure that no revenue expenditures are capitalized. (c) To ensure that the depreciation rates are calculated appropriately Another risk in the auditing of GreenBrown Ltd is related to the depreciation calculation due to the use of lower rates for some of the assets. In order to ensure that the depreciation rates are calculated appropriately, the below auditing procedure will be used by the auditor: First of all, the approach of management to determine the estimate and transactions bearing on the estimates will be reviewed and on the basis of this, an individual estimate will be developed to compare the depreciation estimation by the management. The review of the depreciation policies will be conducted to determine whether the policies are effective to allocate the cost of PPE systematically over its life. In this, extra working shifts, accelerated production, obsolescence of machines due to technology advancement will also be considered (Whittington, 2015). A summary of the accumulated depreciation will be obtained for classifying the assets in different depreciation rate categories. It will be obtained through general ledger, beginning balances, depreciation provisions and ending balances. After this, the provision for depreciation will be tested by comparing the depreciation rates for different assets with the prior year rates to identify the variances. Along with this, depreciation provision calculation will be tested with some sample units to ensure that no excessive depreciation is determined by the fully depreciated assets (Gramling, et al, 2012). The accumulated depreciation account will also be analyzed to ensure that the depreciation is recorded accurately for the year. In this, it will also be ensured that the accumulated depreciation of retired assets has been deducted from the account (Bragg, 2012). The above audit procedure will be effective to determine the consistency in the calculation of depreciation on the assets and to ensure that depreciation rates used are calculated appropriately. The above audit procedure is quite effective to match the depreciation rates and the service life of the assets and to ensure that each asset is depreciated accurately. 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