Assessing Fixed-Asset Control Risk
When auditing a company’s assets, don’t forget to take a look at asset control risk features the company has in place. During your audit you can perform tests of internal controls to limit the number of transaction you sample and test, or test every transaction. For many accounts with few transactions, it’s more efficient to forgo control testing in favor of looking at the complete population of transactions.
When you assess a client’s fixed-asset control risk, remember that control risk is directly affected by asset acquisition and disposal internal controls set in place by the business.
In many businesses, property, plant, and equipment (PP&E) consists of just a few high-value assets. If that’s the case for your client, it’s probably more efficient for you to bypass the tests of controls and just assess control risk as high. By doing so, you’d use substantive analytical procedures instead of sampling. Using substantive analytical procedures means that you compare what’s on your client’s books to what you expect to be on the books.
Here are some examples of PP&E substantive analytical tests:
Trend analysis: Compare prior-year balances in both PP&E and depreciation expense with what you see in the current year. Then consider whether any large increases or decreases are to be expected based on your other audit work, such as inspecting the client’s work environment and interviewing management. (For example, did the managers talk about buying new equipment to increase sales?)
Ratio analysis: Compare the ratio of insurance expense for the PP&E being insured to the prior-year ratio. Taking into consideration any normal year-to-year increase in rates, has the ratio of expense to asset stayed consistent?
Reasonability: Is any change up or down in the PP&E and depreciation balances within the expected ranges? A good procedure is to compare what the company budgeted to spend on PP&E with what it actually spent.