Question

Assume you have been hired to audit a manufacturing company. Discuss the relationship between the audit of property, plant, and equipment accounts and the audit of repair and maintenance accounts. How would you organize the audit to take this relationship into account? 

Answer 1

Audit of Property, Plant and Equipment(PPE) is Closely linked to to the Audit of Repair and Maintenance. Due to depreciation and wear & tear of PPE, they require repair and maintenance on an ongoing basis.

Now, Repair may be categorized into two types, one that is Capital Expenditure such that it increases the useful life or production capacity of PPE and another that is treated as Revenue Expenses, which is charged toStatement of Profit and as it is incurred to maintain the useful life or production capacity.

Audit of PPE may involve steps such as:

a. Physical Verification of the PPE.

b. Verification of the Calculation of Depreciation.

c. Capitalisation of new PPE.

d. Vouching for the new PPE.

e. Other thing such as verification of Adjustment relating to any Grant or subsidy against cost, salvage etc.

Audit of Repair and Maintenance involves:

a. Vouching for the source documents and vouchers.

b. Ledger Scrutiny relating to Repair and Maintenance Expenses such that none of Revenue Expenses are classified as Capital Expenses and vice versa.

It is due to above point that the Audit of both of them is quite interlinked to each other. Appropriate Classification of expense as Capital or Revenue can be done only when relationship is established between Repair and Maintenance and related PPE.