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The depreciation on fixed assets should be charged as and when the asset is purchased irrespective of whether the asset is been put to use or not. Tests required to ensure that depreciation is not misstated:
Tests required to ensure that depreciation is not misstated:
The auditor should check the accounting standards and see whether the company is following the standards and depreciating the assets based on the standards. Moreover, the auditor should test the history of the asset and on what rate of depreciation, they are charging. on the other hand, the auditor should check whether depreciation is charged on all fixed assets and evaluate the book value of the fixed asset and whether the depreciation expenses is charged to profit and loss account.
The compant should start Depreciation when the asset be ready to be used in its location
1. IAS 16 Property Plant and Equipment parag. 55- Depreciation of an asset begins when it is available for use, ie when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with IFRS 5 and the date that the asset is derecognised. Therefore, depreciation does not cease when the asset becomes idle or is retired from active use unless the asset is fully depreciated. However, under usage methods of depreciation the depreciation charge can be zero while there is no production.
2. Auditor will test the reasonabless of the calculation of depreciation after testing the addition and deletion of fixed assets and/or testing the existence of fixed asset through physical count (if this was already conducted in previous years or period, check only the existence of its addition and deletion). Ensure also that the method of depreciating the fixed asset is in accordance with the company policies and the method should be reviewed atleast each financial year end. Methods of depreciating fixed asset is enumerated in IAS 16 parag. 60.
As per IAS 16, a company should start depreciating its fixed assets from the time the asset is available for use. An auditor can assess management's judegements about the method of depreciation and it's estimations of the asset's useful life to determine whether they are reasonable and sufficiently justified. The depreciation method should reflect the pattern in which benefits are received from the asset. An auditor can perform recalculations of depreciation of a sample of the fixed assets. The auditor should also check whether the required disclosures have been made in the FS such as the depreciation methods and rates used.
Hi,
There are two things which are clearly mentioned in the IAS-16 Property Plant & Equipment.
According to that, depreciation on asset should start when the asset is Available for use.
For example; Company purchased an asset on 01.12.2016 and on the same date asset is Available for use.
The asset was actually Put to use on 31.01.2017. Reporting Date is 31.12.2016.
Now, in this case, As per IAS-16 PPE, the depreciation on the asset purchased should start on 01.12.2016 and proportionate depreciation should be considered in the financial statement dated 31.12.2016.
As far as misstatement is concerned, the auditor should consider the Depreciation policies of the company and see whether the same is in the line with existing reporting framework I,e IFRS. In case the company has excluded depreciation on the asset based on the above example and the same is the material amount, then it should be reported by the auditor.
Thanks
The applicable standard for property palnt & equipment is IAS.As per the standard deprication of an asset beigns when the asset is available for use.
Audit Procdeures
Deprication policy to be checked for consistency application
Independnet calculation of deprication for selected assets
Analytical procedres
Check journal entries related to deprication & PPE
depreciation will start when the Assets start production OR Start running position.But Mostely Depreciation start According to the company policy and procedure.
To ensure at Auditors for Depreciation the company policy and procedure will be follow showing company Articles what type Depreciation took at All Assets.
The company should start depreciating its fixed assets when it is ready to use but the company policy plays vital role on the commencement of depreciation. A firm can start on the next day or next month after the date of purchase as per the depreciation policy that were exercise consistently for the same class and in previous years.
To test the correctness of the depreciation, an auditor should recalculate the depreciation or conduct an analytical procedure by considering the beginning & ending balances as well as the purchases, disposals and impairment during the year.
In the case of reducing the assets of the company:
1: When selling an asset.
2: When low value decay tool.
3: original arrival reduction scrapping.
The tools used to correct the calculation and use of the company for depreciation:
1: Obtain an actual inventory of assets.
2: Obtaining the asset register indicating the date of commencement of the operation of the original or benefit from it and the date of acquisition and the historical cost of it.
3: Obtain a statement explaining the way the assets work each asset on its own, such as the catalog of the machines to ascertain whether the original Umrah calculated by the hour or the date and make sure of the productive age, which calculates the depreciation.
4: Make sure that the original works and was used originally from Aida.
5: Make sure that the original is already in the inventory record and prefer to attend the imposition of the Office of the Chartered Accountant at the time of inventory.
There are many other ways by type of origin (such as biological assets and others)
Depreciation should start when the asset is immediately put to use.
Tests
Review depreciation rates applied in relation to
1. Asset lives
2 Replacement policy
Past experience of gains or losses on disposal
3 for revalued assets, ensure that the charge for depreciation is based on the revalued amount.
4. Compare ratios of depreciation to non_ current assets by category with, previous years and depreciation policy rates
5 Ensure no further depreciation has been provided on fully depreciated assets?