ATC F8 materials FF8 AA (Int)Session22 j08

OVERVIEW

Objective

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To determine areas of risk in intangible and tangible assets and investments.

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To obtain appropriate audit evidence.

Sources of evidence

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¾ Fixed asset register ¾ Risks

¾ Procedures ¾ IAS 16 TANGIBLE FIXED

ASSETS

INTANGIBLE

ASSTETS INVESTMENTS

¾ Examples ¾ Risks ¾ Procedures ¾ Evidence ¾ IAS 38

¾ Sources ¾ Risks ¾ Procedures

C A P E R

IAS 16 & 38 ¾¾ Accounting treatments Disclosures Risks

1

INTANGIBLE ASSETS

1.1

Examples

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Goodwill

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Development costs

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Patents and trademarks

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Brands

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Copyrights

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Know-how

1.2

Risks

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Completeness (e.g. of capitalised development expenses)

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Reasonableness of useful economic life (UEL)

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Overvaluation (i.e. in excess of expected discounted future benefits).

1.3

Procedures

1.3.1

Analytical

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Compare valuation with prior year.

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Review related income (e.g. for patents).

1.3.2

Other

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Examine documents (e.g. certificate of registration of patent/trademark).

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Check calculation of amortisation (in accordance with stated accounting policy).

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Discuss with management (e.g. UEL).

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Check calculations (i.e. reperform).

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Vouch allocation of costs for internally-generated assets (e.g. overheads to developments).

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Assess reasonableness of discounted future cash flows in management’s calculation of value in use (i.e. impairment test).

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Obtain management representation (eg on expected useful life, cash flow assumptions).

1.4

Evidence

Solution

1.4.1 Criteria

1.4.2 Evidence sought

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1.5

Research and development costs [IAS 38 “Intangible Assets”]

1.5.1

Accounting treatment

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Research expenditure – recognise as an expense in the period in which incurred (not as an asset in a subsequent period).

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Development expenditure – recognise as an intangible asset if, and only if, the above criteria are met.

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Amount recognised as an asset should not exceed the amount that is probable of being recovered from related future economic benefits, after deducting further costs.

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Carry intangible asset at cost less accumulated amortisation (unless revalued).

1.5.2

Key disclosures

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Useful lives or amortisation rates used.

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Amortisation methods used.

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Gross carrying amount and accumulated amortisation at the beginning and end of the period.

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Line item(s) of the statement of comprehensive income in which amortisation is included.

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Aggregate amount of research and development recognised as an expense.

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A reconciliation of the balance of unamortised development costs at the beginning and end of the period.

2

TANGIBLE NON-CURRENT ASSETS (ALSO CALLED

FIXED ASSETS)

2.1

Sources of evidence

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See Session 15 Example 1

2.2

Fixed asset register

Example 2

List the information you would expect to find in a tangible fixed asset register.

Solution

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2.3

Risks

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Recorded fixed assets may not represent capital expenditure.

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Non-current assets (e.g. property, plant and equipment) will be overstated if they do not exist (e.g. have been sold) or are not in good condition.

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Fixed assets may be misappropriated, sold or scrapped without authorisation.

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Possession does not necessarily indicate ownership (e.g. rented assets).

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Obsolete and idle assets may not be written down to a realistic valuation.

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Assets may not be depreciated or depreciated over unrealistic lives.

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Encumbered assets (i.e. charged as security for bank loans) require disclosure.

2.4

Audit procedures

An audit program is set out in Appendix 3 and must be studied .

2.5

IAS 16 “Property, plant and equipment”

2.5.1

Accounting treatment

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Initial measurement at cost – includes purchase price, import duties etc and directly attributable costs of bringing the asset to working condition.

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Subsequent expenditure – add to carrying amount when it is probable that future economic benefits will exceed those originally assessed. Otherwise expense in period incurred.

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Measurement subsequent to initial recognition:

‰ Cost method – carry at cost less any accumulated depreciation and impairment losses;

‰ Revalued method – carry at a revalued amount (i.e. fair value less subsequent accumulated depreciation and impairment losses).

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Revaluations:

‰ Land and buildings – fair value is usually market value (normally appraised by professionally qualified valuers).

‰ Plant and equipment – if no evidence of market value (e.g. because of specialised nature) value at depreciated replacement cost.

‰ Accumulated depreciation – at the date of the revaluation is either

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restated proportionately

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eliminated.

‰ Increase should be credited directly to equity under heading “revaluation surplus” – may be transferred directly to retained earnings when realised.

‰ Decrease should be recognised as an expense.

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Depreciation

‰ Allocated on a systematic basis over useful life.

‰ Method should reflect consumption of economic benefits. ‰ Charge for each period should be expensed.

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Retirements and disposals

‰ Statement of financial position – Eliminate on disposal or when permanently withdrawn from use and no future economic benefits are expected.

‰ Statement of comprehensive income – Recognise gain or loss (difference between estimated net disposal proceeds and carrying amount).

3

INVESTMENTS

Investments may be separately classified as a non-current asset or available (held) for sale (eg under IFRS 5). Carrying value may be at cost (subject to impairment) or fair value (with changes through profit or loss) depending on how classified under IAS 39.

3.1

Sources of evidence

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Share certificate (= document of title) shows registered holder and denomination of shares. May be held by bank or solicitor.

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Purchase contract notes and paid cheques, supported by authority for purchase.

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Sold contract notes (to provide evidence of disposals).

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Income received (verified by reference to published reference guides).

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Published reference guide to verify that all bonus issues (also called “scrip” issues) have been accounted for and all rights issues have been taken up.

3.2

Risks

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Non-current asset investments may be overstated if not written down for impairment.

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Asset investments may not be stated at cost/fair value (as appropriate).

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Investments sold may not be removed from accounting records.

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Investment income due may not be received/recorded.

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Investments may be misappropriated/sold without authority.

3.3

Audit procedures

3.3.1

Listed investments

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Compare historic cost with market value to establish validity of depreciation write off/write back.

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Agree market value (e.g. with Stock Exchange Official List).

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Where there is a disclosure requirement, confirm analysis of total statement of financial position value between investments listed on “recognised” and “unrecognised” stock exchanges.

3.3.2

Unlisted

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Confirm management’s valuation of unlisted investments (e.g. to latest available financial statements).

3.3.3

All

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For investments classified as current, examine cash book receipt (if any) after the end of the reporting period.

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Analytically review investment income with prior years’ income and expected yields.

FOCUS

You should now be able to:

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establish critical aspects of the audit of non-current assets and investments;

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identify sources of evidence for intangible assets (including development costs), non-current assets and investments;

EXAMPLE SOLUTION

Solution 1 — Development expenditure

Criteria to be demonstrated

Evidence sought

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Technical feasibility (of

completion)

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“Blueprint” _{Discussion with client’s technicians (e.g. engineer)}

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Working prototype

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Beta test feedback from users and action taken

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Intention to complete and

use (e.g. in manufacture of new products or process) or sell the intangible asset

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Planning permission sought for new/expanding factory

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Authorisation of necessary capital expenditure

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Action taken on testing feedback

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Advertisements (e.g. to recruit staff, promote product)

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Ability to use or sell the

intangible asset

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Applications made for copyright, trademarks, licenses etc

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Dedicated sales manager, establishing of sales

network

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Advanced orders

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Auditor tests/uses item

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How probable future

economic benefits are to be generated (including existence of a market or internal use)

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Results of market research (by client or consultant)

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Expected selling price per market research

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Selling prices of comparable products (if any)

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Client’s profit forecasts

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Analysis of potential competitor products

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Adequate technical, financial

and other resources exist/are available to complete project and use or sell the intangible asset

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Business plan

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Cash flow forecasts

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Negotiations with bank for new/increased loan/overdraft facilities

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Attributable expenditure can

be measured reliably

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Clearly defined product/process evidenced by documented project specification

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Separate ledger a/cs e.g. for materials, wages and

Solution 2 — Fixed asset register

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Identification number (e.g. registration/serial number)

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Description and manufacturer’s name

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Gross cost or valuation

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Estimated useful life

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Depreciation method/annual charge

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Depreciation provision