Question

You are working on the financial report audit for a wholesaling company the year ended 30 June 2020. You are currently considering the audit approach for the property, plant and equipment account. The balance of the property, plant and equipment account was $325,000 at 30 June 2019. The balance at 30 June 2020 is $410,000. The materiality threshold for this client is $50,000.

You note that all property, plant and equipment has been valued based on fair value estimates. The fair value of the property, plant and equipment is heavily affected by changes in economic conditions. You note that the internal controls for this account are weak.

Required:

Explain why the internal controls are likely to be weak for the property, plant and equipment account.

Comment on whether a lower assessed level of control risk approach, or a predominantly substantive approach be more appropriate for this account.

Identify the main assertion that is likely to be at-risk for this account for this client. Explain why it is at risk.

Identify an audit procedure that would provide evidence for this assertion.

Answer 1

Following may be the reasons for the weakness of internal controls of property, plant and equipment:

a. No proper documentation

b. Lack of control on authorization

c. Inadequate procedure by management

d. Job roles not clearly defined

Now since the internal controls are weak, so a predominantly substantive approach should be more appropriate for this account as more detailed checking would be required in this account.

The main assertion that is likely to be at risk for this account are:

Valuation: The most important risk which lies here is that the company has recorded balances of fixed assets which truly reflect their actual economic value.

Existence of the Fixed Asset: The risk which lies here is whether the fixed asset is even in existence or not as there may be chances of fraud.

Rights and Obligation: There is a risk regarding the ownership of the fixed asset by the company that whether company is the real owner of the fixed asset.

Audit procedure required for evidence:

First Substantive Analytical Procedure should be performed for gathering audit evidence before performing test of details and then test of Details should be performed to ensure that:

1. Vouch the documents of the property plant and equipment

2. Check and verify to ensure that the additions have been properly recorded in fixed asset register and general ledger.

3. To ensure the conditions of capitalization is met.