Non-current assets

Completeness, Rights and obligations, Existence, Valuation, Disclosure

Activity 4: Campey Ltd

Below is a schedule of non-current assets at Campey Ltd.

Set out, in a manner suitable for inclusion in the audit plan, the audit procedures to be undertaken for each
assertion in order to ensure that non-current assets are fairly stated in the financial statements. You have
already verified the opening balances to the prior year audit file.

Note. Depreciation rates are 2% straight line for buildings, 25% diminishing balance for vehicles and 15%
straight line for fittings.

Audit Procedures

Completeness

1. Select a sample of visible assets and inspect relevant entry in asset register to confirm the latter is
complete.
2. Obtain a schedule of movements in NCA for the year, cast it and ensure the total agrees to the figure
in FS and general ledger.
3. Compare non-current assets balance on general ledger with non-current asset register and reconcile
any differences.
4. Obtain a list of PPE additions during the year and inspect the NCA register to ensure that they have
been recorded (U).
5. Review any sensitive items within SPL, such as repairs and renewals, to ensure that items which should
have been capitalised throughout the year have not been expensed instead.
Rights and obligations

1. Select a sample of items from asset register and inspect their source ownership docs (invoices &
lease agreements) to ensure asset belong to the company.
2. Review title deeds for land and buildings to confirm ownership. (Purchase invoices/agreements)
3. Review vehicle registration documents for a sample of company vehicles to confirm ownership.
4. Review lease documentation to establish any finance lease obligations regarding NCAs.

Existence

1. Select a sample of assets from the NCA register and physically trace those assets.
2. Inspect the assets to ensure that they exist, are in good order and are obviously being used by the
company.
3. Obtain a list of PPE disposals during the year and inspect the NCA register to ensure that they have
been removed (O).

Valuation

1. As assets have not been revalued during the year, testing should start with additions. Inspect NCA
additions (new vehicles and fittings) to supplier invoices to ensure that the asset amounts included at
cost in the register have been recorded correctly.
2. Recalculate the depreciation charges for a sample of assets to ensure mathematical accuracy.
3. Perform a reasonable test on the depreciation and investigate significant differences (AP – O/U).
4. Review the bases for depreciation to ensure that it is still reasonable and in line with the accounting
standards.
5. Risk that properties were overstated due to poor conditions.
Physically Inspect the NCA’s conditions to ensure if they are in good conditions or if any impairment
need to be carried out.
6. Consider whether they are any obsolete or unused NCAs by asking management, inspecting board
minutes and looking at NCAs in the factory. Obsolete NCAs should be written down to estimated
disposal values.
7. Inspect the valuer report to confirm the property revaluation amount in FS. (Consider using external
property expert to determine whether they are overvalued.)
Presentation and Disclosure

1. Inspect the FS to confirm that PPE has been presented appropriately and related disclosures are
accurate and complete as per relevant IAS/IFRS.
2. Inspect the FS to ensure that PPE has been properly classified as NCA and not CA.

General Procedures

1. Compare current year’s PPE bal with last year’s bal and investigate significant fluctuation to identify
additions or disposals (AP – O/U).
2. Compare current year’s PPE expenditure with the capital expenditure budget and investigate
significant differences. (Help ensure that PPE are accurately recorded and determine if any
deviations from budget are appropriately authorised)
3. Cast asset register to confirm mathematical accuracy.

Errors may have occurred in relation to cut-off and the amounts recorded. Additions and disposals may have
been recorded in the wrong period.
Additions
Failure to record the new asset at all. (Check that additions are included in the nominal ledger and NCA
register) C
Vouch additions to NCAs to purchase invoices or lease agreements. R
Useful lives of new asset may be inappropriately estimated, leading to incorrect dep amount. V
Additions costs may have been inappropriately capitalised instead of being expensed. P&D
Over budget – some expenditure was not approved, leading to potential fraud concern. G
(Investigate budget overspend and obtain evidence that additional expenditure was authorised at an
appropriate level.) G

Disposal
The asset may not have been correctly removed from register and accounting records. (Check the cost and
accumulated depreciation of disposed asset at the date of disposal and check that this has been properly
deducted in the register and nominal ledger.) E
Not disclosed correctly in FS. P&D
(Inspect sales agreements for disposed PPE and match the proceeds to the figure recorded in FS and consider
whether disposal proceeds are reasonable.) A
Profit or loss on disposal – misstated / Risk that disposals have not been correctly dealt with, leading to
incorrect gain or loss. (Recalculate profit or loss on disposal using sales proceeds from contractual agreements
to agree to amount disclosed.) A
(Check that profit or loss on disposal has been correctly treated in the nominal ledger.) A
(Inspect depreciation workings to ensure adjustments have been made for the disposal of the property.) A

Refurbishment / Expansion / Repairs

Transaction not recorded appropriately in line with accounting standards - complex nature. (Confirm that all
transactions are recorded in FS appropriately.) P&D
Consist both capital and revenue expenditure. Risk that repairs were incorrectly capitalised instead of being
expensed. (Obtain and Review breakdown of costs and agree to invoices to assess the nature of costs. If capital,
confirm that it has been included within the asset register and repairs are expensed in the income statement.)
P&D
(Physical verification of some of the capitalised items should also be made.) E
(Examine if all costs that are included in asset register meet criteria for capitalisation as PPE.) P&D
Depreciation amount not calculated correctly due to useful life not being updated. (Review asset register to
ensure its updated.) V
(Obtain evidences of the criticism of the bingo hall premises and the results of any inspections which may
have been performed during the year.)
Revaluation
Is a subjective measure and may not have been carried out correctly or recorded appropriately.

Depreciation
Expect higher or lower amount due to reason. Possible misstatement. Write calculations.
e.g. dep seems inappropriately low compared to prior year and the increased value of NCA, indicating a
possible misstatement.
Inappropriate depreciation policy used.
(Recalculate a sample of depreciation charges to see if this is in line with expectation/ ensure mathematical
accuracy)
(Review depreciation rates to ensure they are reasonable and are in line with accounting policies in FS.)
Significant profit or loss on sales may indicate that useful lives are not estimated reliably.
If there are losses on sales of NCA, it could be an indication that depreciation rates are inadequate.
If there are profits on sales of NCA or a significant proportion of NCAs are fully written off, it could be an
indication that depreciation rates are too high.
The auditor should consider whether the useful lives of existing NCAs are realistic by asking the company’s
senior management and looking at the condition of the NCAs.

Bank Loan / Finance agreement/Finance lease asset

(During the audit, team should confirm that the loan finance has been received via bank statement.)
Failure to record loan and loan repayments.
Incorrect disclosure of loan terms and interest.
Incorrect classification of asset under NCA. P&D
Not recorded or disclosed appropriately in the FS. P&D
Incorrect classification of the finance agreement within liabilities, , i.e. split between current and non-current
liabilities may not be recorded in compliance with the accounting standards.
(The split between current and non-current liabilities and the disclosures for the loan should be reviewed to
ensure compliance with relevant accounting standards.)
Interest element of the loan should be included under finance cost. (Review income statement to ensure it
has been accounted for appropriately.)
Incorrect calculation of interest / finance liability/dep charge.
Going concern risks if company fails to comply with terms of loan.
Manipulation of FS to meet loan covenants.
(Bank loan agreement should be checked for any covenants and guarantees. Ensure company has not broken
any of these and that if required, they are disclosed in the financial statements.)
Capital Repayment
Represents almost 12% of the net profit figure.
Risk that if profits do not continue to increase, the company may be unable to pay back the loan, the
outstanding liabilities (including tax) or be in a position to make payments to the shareholders.
(Undertake analytical review of liquidity ratios i.e. gearing or interest cover to determine the impact of this
loan on the company and the company ability to pay back the loan in the future.)
(Cash flow projections should also be reviewed to supplement the analytical review and to ensure the
company will still be in a position to pay tax liabilities and other current liabilities.)

Leases
A lease is a contract which conveys the right to use an asset for a period of time in exchange for consideration.

Audit risks for leases

The auditor must test leased items to verify that they are correctly accounted for in line with IFRS 16. This
might include the following issues:

- Recognition of an asset as a right-of-use asset when it does not qualify (such as short-term or low
value leases, or any that do not satisfy the criteria from IFRS 16, such as control or identification)
- Non-recognition of a leased asset which should be classified as a right-of-use asset
- Material misstatement in the accounting treatment of a right-of-use asset (such as incorrect calculation
of any lease assets or liabilities, or the amount to be charged in depreciation)
- Incorrect classification between current and non-current lease liabilities. (Split)

Q. A company maintains NCA but there are no checking procedures other than recon with nominal ledger.
Consequences are:

- Equipment recorded in the register may not exist or may have been stolen
- Acquisitions or disposals may not be recorded
- Equipment may be fully written down but still in use
- Equipment may be impaired and consequently overvalued
- Depreciation charges on the equipment may not be appropriate

Recommendations

- Periodic recon of physical equipment to the ledger to ensure completeness

- Periodic recon of entries in the register to physical equipment to ensure the items exist and are in
good condition
- Differences are reported and investigated
- Monitoring of procedures to ensure checks are undertaken