Question

What audit procedures would you use for the measurement and completeness of depreciation expense objective?

Answer 1

Depreciation and amortization generally constitute an entity’s significant part of overall expenses and have direct impact on the profit/loss of the entity, hence auditors need to verify and ensure that such expenditure is appropriate, accurately calculated and has been accounted as per applicable provisions of the relevant statues, to the extent applicable on the respective industry and as per generally accepted accounting principles.

Below are the audit procedures that should be used for auditing the measurement and completeness assertion for depreciation:

• Obtain an understanding of entity’s accounting policy and process of charging depreciation.
• Select the sample of assets from the fixed assets register, on materiality considerations and verify the rates of depreciation, depreciation calculation.
• Obtain the list of all the components identified by the management
• Ensure the components of each item of property, plant and equipment that are to be depreciated separately have been properly identified.
• Ensure that most appropriate depreciation method for each separately depreciable component has been used.
• Ensure depreciation is charged on the assets from the date when it is ready to use.
• Ensure depreciation on revalued amount has been properly accounted from revaluation reserve.
• Perform analytical procedures to obtain audit evidence as to overall reasonableness of depreciation. Check the arithmetic accuracy of records and perform independent calculations.
• Ensure that the depreciation has been charges as per useful lives of Property, Plant and Equipment
• Ensure that residual values have been properly verified as that impacts the computation of depreciation
• Ensure that the depreciation has been computed prospectively whenever there is any change in useful lives of the asset
• Obtain the fixed assets register maintained by the entity. There is always a risk that an entity could capitalize expense of revenue nature to increase its profit or charge capital expenditure directly in income and expense statement to reduce its profit. To address this risk the auditor may choose to check the nature of asset from fixed assets register and further, there is always a risk that fake asset has been capitalized in the books and to mitigate this risk, auditors should physically verify the fixed assets at least the ones that are material in value.

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