Question

For tangible non-current assets, identify FIVE risks of misstatement in the financial statements. For each risk given, identify the financial statement assertion which it affects, and describe a test which could be undertaken to gather evidence in relation to that risk/related assertion. (You should present your answer in two columns headed “risk/related assertion”, and “test”).

Answer 1

Answer.

Audit Fixed Assets

Introduction

Fixed assets usually represent the biggest amount comparing to the other assets on the balance sheets of the company. As auditors, we usually audit fixed assets by testing the various audit assertions such as existence, completeness, rights and obligations, and valuation.

Fixed assets are the non-current assets that have a useful life for more than one accounting period. Fixed assets may include lands, buildings, furniture and fixtures, and equipment, which we will test in the audit of fixed assets. The intangible asset is also a fixed asset.

Like many other financial statements line items, we usually perform the test of controls on the fixed assets in the audit work. This is due to we can obtain sufficient appropriate audit evidence through test of control to support our assessment in the control risk when we assessed it as low.

However, for the client that has only a few high-value fixed assets, we usually do not perform the test of controls. In this case, we just tick the control risk as high and go directly to substantive tests as it is usually more efficient this way.

Audit Assertions for Fixed Assets

The audit assertions for fixed assets are included in the table below:

Audit assertions for fixed assets
Existence	Fixed assets reported on the balance sheet really exist at the reporting date.
Completeness	Fixed assets recorded include all relevant transactions that have taken place during the accounting period.
Rights and obligations	The company has ownership rights for the assets as of the reporting date.
Valuation	The recorded balances of fixed assets truly reflect their actual economic value.
Presentation and disclosure	The fixed asset balance is reflected on the balance sheet in the non-current section and adequate disclosure has been made in the note to financial statements.

Following tests are performed to test above misstatements:

Preliminary Analytical Procedures

As auditors, we have the responsibility to perform preliminary analytical procedures in the planning stage of the audit. It helps us to identify key risk areas in the audit. In this case, trend and ratio analysis are the two procedures that we usually use in the preliminary analytical procedures for the audit of fixed assets.

Trend Analysis

An example of trend analysis here is comparing both fixed assets on the balance sheet and the depreciation expenses in the current period to the prior period. As a result, it will alert us that there may be a potential misstatement if there’s a big fluctuation between the balance of the two periods.

In this case, we may need to take note to inquiry with the client’s management for the explanation of the major fluctuation as well as inspecting the supporting document, to confirm the management’s explanation.

Ratio Analysis

The common ratio used in analyzing the fixed assets is the insurance expense to fixed assets that are insured. We perform the analysis by comparing the ration in the current year to the prior year. In a normal case, the ratio should be around the same and if there’s an increase in rate from year-to-year, it should be consistent.

Any irregular fluctuation may be the result of misstatement that we need to take into consideration and pay close attention when performing the audit of fixed assets.

Test of Controls on Fixed Assets

There might be many internal controlaspects on the fixed assets, including sufficient security arrangement over the assets, properly maintaining of the assets, and regular review of the depreciation.

However, the common tests of controls on fixed assets that we perform usually cover three aspects, including fixed assets tagging, segregation of duties, and procurement procedures of the assets.

Fixed Assets Tagging

The client performs this control procedure by attaching a unique identifying tag to each piece of the assets such as office furniture and equipment. Tagging the fixed assets helps the client to keep tabs on all its tagged items and assist in adjusting the balance sheet for addition and disposal. Moreover, it also helps to prevent the misappropriated use of assets for personal gain.

We usually perform this test of control by checking and verifying whether the fixed assets list containing the tag number is matched with the tag number on the fixed asset. This helps to examine whether the client has handled its assets in an effective and efficient manner. If this control procedure is working effectively, the chances are high that transactions are properly recorded and any mistake is caught and corrected on time.

Segregation of Duties over Assets

Segregation of duties simply means that no single individual handles all or most of the transactions involved in fixed assets alone, including recording, authorization, purchase, and payment. In this case, segregation of duties plays an important role in helping to prevent fraud that could occur on fixed assets.

In the test of control here we need to make sure that segregation of duties over the fixed assets exists and is working properly.

Below are some examples of segregation of duties:

• The client’s staff that request for the fixed asset is not the same person who approves for it
• The person who maintains fixed assets records is not the one who records the items in the general ledger or remove from it
• The person who maintains custody of fixed assets is not the one in the accounting function.

Procurement Procedures and Disposal of Fixed Assets

Procurement procedures of fixed assets are the process of purchasing which usually starts from requesting in purchase to finding quotes and then to the approval the purchase and payment. The control procedure here is to make sure that each purchase of the assets has been reviewed, authorized and approved by different levels of authorized persons.

Some items with a high value might need approval from the board of directors before they can be purchased. Similarly, control over the disposal of fixed assets is also about the authorization which exists in the disposal process.

We perform the test of control here to evaluate whether authorizations over acquisitions of fixed assets exist and are effective while each disposal of the assets is approved by the appropriate level of authorized personnel and the proceeds are accounted for.

Substantive Analytical Procedures for Fixed Assets

The analytical procedure is the audit procedure that we use in all stages of the audit by looking at the trend, ratio, and the relationship between data, etc. Similarly, we usually use substantive analytical procedures for fixed assets to gather audit evidence before performing the test of details.

Reasonableness test is the common substantive analytical procedure that we use to in the audit of fixed assets. The fixed assets balances and depreciation expenses have a close relationship. Hence, any change up or down in both of them should be within our expectations.

We also usually compare fixed assets that the client purchased during the year to the budgeted plan for the year in order to check the reasonableness of the spending. Either actual spending on fixed assets is much bigger or much smaller than the budgeted plan, we may need to inquiry the management for the reasons behind.