 In this presentation, we will take a look at the auditing process related to property, plant and equipment, P, P and E, also known or sometimes called fixed assets or depreciable assets. When considering the audit process for property, plant and equipment, those depreciable assets, those things like land, things like equipment, things like buildings, these are going to be things that will typically be significant. They're going to be large amounts on the financial statements. So they're going to be something that's going to warrant our concern. Of course, as the auditor, they will, in other words, be material factors that we need to consider. Now there are characteristics of property plants and equipment that can make them easier in some situations such as an audit where it's a recurring engagement. Normally that's the case. So normally we have an engagement, hopefully, that we've been auditing the same client for some time now, and therefore it's a recurring engagement. And we can rely to some degree with regards to property, plant and equipment on prior year types of transactions, because these of course are long lived type of assets from prior year. So auditor can focus on additions and retirements in the current year. Therefore amounts from prior periods will have been subject to audit procedures in the prior years. In other words, property, plant and equipment, things that last for many, many years, we're going to have a schedule of the property, plant and equipment. The things that have been purchased in the past are things that were subject to some degree to audits in the past. And therefore we don't have to really audit the purchasing process. Again, as we would in say new engagements, we can therefore focus on the types of transactions that are new, the types of transactions that happened during the time period. Those include additions that happened during the time period, things that that were deleted or things that went away, sales that happened or the disposals that happened for property, plant and equipment and the calculation of depreciation related to property, plant and equipment. So although then property, plant and equipment is a very significant account on the financial statements, we may be able to limit the amount of testing and can be quite complex by the way, because of course we're talking about, we could have a lot of different types of property, plant and equipment. We could have a very large schedule of property, plant and equipment that represents different types of assets that are there. We have different types of depreciation methods that may be used and we may have different types of depreciation methods. We almost certainly will between the book value and the tax depreciation. Of course tax depreciation schedules will differ from some degree. We may have differences between tax depreciation of different countries and different states as well. So it can be a complex system. However, the amount of transactions related to property, plant and equipment in the current year somewhat limited. In other words, we're not buying property and plant and equipment every day as we are with other types of things, which is not a daily kind of process. And therefore we can audit a lot of the transactions, maybe all of the transactions related to things like purchases and disposals of property, plant and equipment a lot more easily that where there's no way we can audit all the transactions for some other type of accounts. So if we have a new engagement, however, auditor must verify assets that make up the beginning balance in property, plant and equipment because they have not been subject to audit in prior years. In other words, new engagements if we're taking on a new client that we didn't audit last year going to be much more complex with regards to property, plants and equipment because we can't rely on prior year audits for the beginning balances and therefore simply test for the most part or focus most of our testing on the addition, subtractions, calculations such as depreciation as we would in a recurring audit. We have to get that schedule. We have to do more testing for the beginning balance items. And that of course can take more time. Transaction types. What types of transactions do we have for property, plant and equipment? We have the acquisition of capital assets for cash or other form of compensation. So we have the purchases of property, plant and equipment. Again, there's going to be less of them. So notice when we consider the auditing of the transactions of purchases for smaller companies, we could probably audit basically all the purchases of property, plant and equipment to some degree in terms of substantive testing. If we're talking about larger clients, publicly traded businesses, then again, still the amount of transactions related to purchases of property, plants and equipment are going to be less than other types of transactions. So we can audit a higher significant portion of them. And of course, the purchase of property, plant and equipment is much more likely to be material or a relevant factor, however, because we're purchasing larger items, larger items that will be capitalized. We may be paying cash for them. We may be paying in some other way. We may be financing the property, plant and equipment. If we are, then it's a bit more complex because we have to consider of course, the financing option with the purchase process as well and the valuation of the property, plants and equipment with relation to that disposition of capital assets through sale, exchange, retirement or abandonment. So the property, plants and equipment may be leaving the organization. That's another type of transaction that can happen. That could happen through the sale. They might sell property, plants and equipment. Remember, property, plants and equipment is not a normal sale within the normal type of business processes. We're not selling inventory. We're selling some type of equipment like a forklift or something. That's going to be more of an unusual type of a transaction. We could exchange it, which could be a little bit more complex because we have that exchange process happening instead of just basically selling it for cash. We could retire it, meaning we basically retired it and in essence disposed of it or we could abandon it, which would be a similar type of process. Notice that the retirement and abandonment items are things that we're concerned with as an auditor that may have happened and yet not have been recorded. In other words, if someone just abandoned the property, plants and equipment or are no longer using it, it may still be on the books and may be fully depreciated. So the book value of it, asset, the amount minus the accumulated depreciation might be zero, but we still have the asset on the books and we may have the accumulated depreciation on the books and we should have both of them removed typically. So that's one of the things that could cause some concern, although from a dollar point standpoint might not be a material misstatement. Depreciation of capital assets over their useful economic life. So then we're going to have of course the depreciation process. We're going to have to calculate the depreciation. That's going to be one of the transactions the company does. We're going to be needing to test that calculation. Notice that they only record depreciation periodically. It's usually an adjusting entry at the end of a period such as a month. So there's not going to be too many of those calculations as well. Those types of transactions. So it should be easier for us to audit given the number of them leasing of capital assets. So it's possible to have capital leases and the capital leases of course result in a capital asset and they're going to be a bit more complex. So when we see the capital lease, we might want to look into that because the valuation process is going to be a bit more complex to consider. Factors to consider with regard to inherent risk for property plants and equipment. Equipment. Remember our process here. We want to consider inherent risk, control risk, and then set detection risk related to substantive testing inherent risks. You can think of those risk factors as if you took away the internal control. How inherently risky are these items? If we are the company, sometimes it's useful to be able to compare inherent risk factors to different areas. If we had inherent risk related to cash, for example, obviously that's going to be much more inherently risky because it's more liquid. People are more easily to basically want to steal cash or be able to steal cash and be able to use the cash. If we think about property plants and equipment, it's probably more difficult to basically steal a forklift or something like that, a large piece of equipment or building. And it's going to be less easy for someone to basically spend or consume the forklift personally. So notice when we think the inherent risk, those are the types of things we want to consider. Doesn't mean there's not still inherent risk with the forklifts, but the inherent risk factors, of course, will be different. We want to consider what the inherent risk factors will be with regard to property plants and equipment. Consider the internal controls then that the company has put into place. And then how can we do substantive tests being related to it? So the complexity of the accounting issues is going to be one thing that we might want to consider with regard to inherent risk. It basically depends on the type of transactions involved with property plants and equipment. But because they're larger dollar amounts, they could be material. And if we have some types of transactions related to them, they can be more complex such as a transaction like a capital lease. It could be a little bit more difficult for us to consider difficulty to auditing transactions. So we want to consider the factor of inherent risk. How easy is it going to be for us to audit basically the transactions related to property plants and equipment? Do we have the documentation?