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In: Accounting

Following is a list of substantive tests could be performed in auditing long-lived assets. Explain the...

Following is a list of substantive tests could be performed in auditing long-lived assets. Explain the meaning of the test, what is it used for, how it occurred, what acceptable level should be achieved, and what assertions could be addressed through the test.

a. Test current period additions

b. Test current period deletions

c. Test depreciation expense

d. Test capitalisation of natural resources

e. Test asset impairment

f. Test lease asset

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Answer:-

a.Test current period additions:-

Current Period Additions mean purchases made in the current year/financial year to any block of assets.It simply means additions to the existing value of assets under a particular block.This test is used to check the additions in the block,whether the asset has been properly classified,capitalization of that assets in books is accurate,whether the asset purchased needs to be expensed off or capitalized,etc.It occurs when an entity purchases assets in a financial year.Additions to any assets is an important aspect in auditing and acceptable level depends on the judgement of auditor and differs from case to case. However, it is recommended to vouch and verify sample from assets additions during the year to achive a comfort level.Assertions to be considered in assets additions testing are:- Occurence, Accuracy, Completeness, Classification,Existence,etc.

b.Test Current period deletions:-

Current period deletions mean assets discarded in the current year/financial year from any block of assets.It simply means deletions from the existing value of assets under a particular block.This test is used to check the amount of deletions from the block, proper recording of profit or loss on sale of that asset, whether asset is sold at a reasonable price,etc.It occurs when an entity sells an asset in a financial year.Deletions to any assets is an important aspect in auditing and acceptable level depends on the judgement of auditor and differs from case to case. However, it is recommended to vouch and verify sample from assets deletions during the year to achive a comfort level.If the number of deletions is low, it is advised to test 100%.Assertions to be considered in asset deletions testing are:- Occurence, Accuracy, Completeness, Classification,Existence,etc.

c.Test Depreciation Expense:-

Depreciation refers to normal wear and tear of an asset due to its use.Depreciation rates differ from asset's block to block and ploicy differs from organization to organization.Testing Depreciation Expense means to test if the asset is being properly depreciated or not.It occurs every year/half year/quarter when the entity passes the depreciation entry depending on the Company's policy.Depreciation of an asset needs to be checked 100% as its impact is directly on the profit and loss of the company and Fixed Assets Valuation.Assertions to be considered in Testing Depreciation Expense are:-Accuracy, Valuation, Existence, Classification, Rights & Obligations, Valuation, Presentation etc.

d.Test Capitalisation of Natural Resources:-

Examples of natural resources are oil and gas, thermal power, minerals etc. Natural resources are capitalized at accquisition cost. While testing the capitalisation of natural resources we need to check all the costs incurred while acquiring the same.It occurs when an entity accquires natural resources and the same is amortised using depletion method i.e, expensed off as it is used.Acceptable level while auditing the capitaisation of natural resources is 100%.i.e, to test all the transactions incurred while accquiring the same.Assertions to be considered in Testing of Capitalisation of Natural Resources are:- Valuation, Existence, Rights and Obligations, Accuracy, Presentation, etc.

e.Test Asset Impairment:-

Impairment occurs when the carrying amount i.e., the amount in books is more than the recoverable i.e., realisable amount.While testing impairment, we need to check the cash flows, projected income statements, projected balance sheets, discounting rates,etc.It is used to get an assuarance that assets are not overstated in the balance sheet.It occures every year at the year end.However, one can do the same before year end as well.All Assets needs to be tested for impairment at year end.Assertions to be considered while testing of Asset Impaiment are:-Presentation and disclosure,Valuation, Accuracy, Completeness,etc.

f.Test Lease Asset:-

A lease can be defined as a contract in which one party agrees to sell the right to use an asset usually land or building to another party for a specific period of time in return of consideration.While testing leases, an auditor needs to take check the lease agreements, its period, amount of consideration, terms and conditions of lease,Classification and presentation of lease in the financials etc.It is used to test the classification and presentation of lease assets in the financial statements.It is usually tested at the year end.Assertions to be considered while Testing Lease Assets are:-Classification,Presentation and Disclosure, Cut off, Occurence, Accuracy,Completeness,etc.


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