Substantive Audit Procedures for PPE - Valuation and Allocation

Valuation and Allocation

Audit Objective

To ensure that PPE is recorded at an appropriate amount and depreciation is correctly calculated.

Audit Procedures

The auditor may:

• Inspect invoices and purchase documentation for PPE additions.
• Check whether directly attributable costs have been included appropriately.
• Recalculate depreciation.
• Check the depreciation method, useful life and residual value.
• Review the gain or loss on disposal.
• Inspect valuation reports for revalued assets.
• Evaluate the competence, capability and objectivity of an external valuer.
• Check for signs of impairment, such as damaged or obsolete equipment.

Depreciation Example

A machine costs RM100,000. Its residual value is RM10,000 and its useful life is five years.

Using the straight-line method:

$$\text{Annual Depreciation} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}}$$

$$= \frac{\text{RM100,000} - \text{RM10,000}}{5} = \text{RM18,000 per year}$$

The auditor should recalculate the depreciation and compare it with the amount recorded by the client.