Cost and authorization

Significant plant and machinery acquired during the year is vouched to supporting documentation such as supplier’s invoices, cash books, approved budgets, local purchase orders etc. The auditor should ensure that the related expenditure such as carriage inwards, installation charges have been included as appropriate.

Valuation

Valued at depreciated historic costs. Auditor’s responsibility is to ensure that the accounting policy for depreciation is appropriate. For example if the diminution in value of an asset is related largely to time it would not be appropriate to use a reducing balance method but rather straight-line method should be used. The auditor has to ensure that the accounting policy is in accordance with IAS 16. He has to consider whether the useful lives of the assets are appropriate and he has to check that the calculations are correctly made.

Existence

This should normally be checked by physical inspection, however a problem arises. Items of plant and machinery can be mobile, numerous, portable and valuable. It becomes difficult therefore for the auditor to be assured that the value attached to plant and machinery represents plant and machinery that actually exists at the balance sheet date. We shall therefore digress a little and consider a record that is crucial in ensuring the existence of fixed assets under this category and this is the fixed assets register.

The fixed asset register is an important independent register which auditors invariably encourage their clients to maintain. For it to be a truly independent register the person maintaining it must have no responsibility for:

a) Ordering or authorising the purchase of fixed assets.

b) The custody of the fixed assets.

c) Authorising the disposal of fixed assets.

d) Maintaining general ledger accounts.

e) Custody of readily realisable assets.

If the register is properly maintained then it has the following advantages for the auditor:

a) The internal control over fixed assets is strengthened and there is an independent record of all fixed assets showing particularly their location. This record can be independently checked to the assets themselves on a periodic basis.

b) Accurate depreciation records can be maintained for every asset.

c) it assists the auditor in checking the completeness and existence of the assets, it would be almost impossible to do this from the general ledger.

d) it provides a good record for tax purposes in calculations of wear and tear.

The register can usefully contain the following information:

i. Fixed asset number.

ii. Fixed asset location and responsibility for custody.

iii. Nature and description of the asset.

iv. The cost and the date of purchase.

v. the estimated useful life and the residual value.

vi. The accounting policy for depreciation.

vii. The accumulated depreciation and net book value.

viii. The gain or loss on disposal.

ix. Capital allowances.

When the fixed register is reconciled to the general ledger the auditor can check the asset for physical existence by reference to the numbers and locations recorded.

Beneficial ownership

For plant and machinery usually implied and unless there is clear evidence to the contrary, proof of purchase and possession will suffice as evidence of ownership.