Question

Case Study: Property and Equipment - Substantive procedures

Your firm is auditing the financial statement of Newthorpe Manufacturing Ltd for the year ended 30 June 2015. You have been assigned to the audit of the company's property, plant and equipment, which includes freehold land and buildings, plant and machinery, fixtures and fittings and motor vehicles.

The freehold land and buildings were purchased 12 years earlier (in July 2003) for $2 million. At the date of purchase, a valuer estimated that both the land and the buildings each had a value of $1 million. Depreciation has been charged since 2003 on the building at 2% per year on cost. At 30 June 2015 the accumulated depreciation is $200,000 before the revaluation.

A qualified valuer who is not an employee of the company, valued the land and buildings at $5 million ($2.9 million for the land and $2.1 million for the buildings) These values will be incorporated into the financial statements as at 30 June 2015.

The partner in charge of the audit is concerned at the large increase in the value of the land and buildings since they were purchased. She has asked you to check the reliability and accuracy of the valuation. she suggest that ASA 620 Using the work of an Auditor's Expert (ISA 620) could help you when carrying out this work.

In addition, you have been asked to verify the existence and completeness of plant and machinery recorded in the company's computerised non-current asset register, which records the description of each non-current asset, the original cost, the depreciation charge and the accumulated depreciation

Required;

1. Describe the audit work your will carry out to check whether the valuer has provided an accurate and independent valuation of the land and buildings

2. Describe the audit work you will carry out to check the existence and completeness of plant and machinery, as recorded in the company's non-current asset register.

Answer 1

1. Work to be carried out to check whether valuer has provided an accurate and independent valuation

ISA 620 states that when the auditor intends to use the work of an expert, he should do the following:

1. Evaluate the adequacy of the expert’s work. So we should check to what extent the qualified valuer has performed calculations to derive at the stated figure.
2. Check the assumptions and methods used to perform the valuation and to check whether they are relevant as per current industry norms and reasonable.
3. Check the source data used by the expert (for example, current market value of similar land or location is used), and whether the data is accurate. Also check the relevance and completeness of the said data.
4. Check the workings performed the by the expert and reperform the calculations if feasible to do so.

2. Audit procedures to be performed to check existence and completeness of plant and machinery
   1. Obtain the register of plant and machinery showing separately the opening balance, sales and addition of plant and machinery
   2. Reconcile the amounts with General Ledger totals
   3. For all the additions, obtain the invoices and check whether there are any expenses (e.g. installation expenses) which are required to be capitalised.
   4. If the plant and machinery is manufactured, obtain a certification from the engineer responsible confirming the amounts to be capitalised
   5. For all the sales and disposals, check whether the profit or loss ascertained has been correctly taken to profit or loss
   6. Auditor should physically examine the items of plant and machinery atleast once in 3 years to ensure proper existence