Verification and Valuation of different items of Plant and Machinery

18/11/2023 0 By indiafreenotes

Verification and Valuation of plant and machinery are critical components of the audit process, particularly in ensuring the accuracy of a company’s financial statements. Plant and machinery are often significant assets for manufacturing and production-oriented businesses.

The verification and valuation of plant and machinery involve a combination of physical inspections, documentation reviews, assessment of costs, depreciation, impairment testing, and consideration of market values. Auditors play a crucial role in ensuring the accuracy and reliability of financial information related to these assets, providing stakeholders with confidence in the company’s financial statements. The choice of valuation method depends on factors such as the nature of the assets, the purpose of the valuation, and relevant accounting standards.

Verification of Plant and Machinery:

  • Physical Inspection:

Auditors conduct physical inspections of plant and machinery to confirm their existence and condition. This involves visiting the locations where these assets are situated and visually inspecting the equipment.

  • Asset Tagging and Identification:

Auditors check for asset tags or identification numbers on plant and machinery to ensure proper tagging and recording. This helps in tracking individual assets and avoiding duplication.

  • Serial Numbers and Descriptions:

Serial numbers and detailed descriptions of plant and machinery are verified to ensure they match the recorded information. Any discrepancies are investigated.

  • Asset Register Review:

The auditor reviews the company’s asset register, which should contain details of all plant and machinery, including acquisition dates, costs, and useful lives.

  • Documentation Review:

Supporting documents, such as purchase invoices, delivery receipts, and acceptance certificates, are examined to verify the acquisition of plant and machinery. The auditor checks for proper authorization for capitalization.

  • Leased or Financed Assets:

If certain plant and machinery are leased or financed, auditors verify lease agreements or financing documents to confirm the terms and conditions and ensure proper accounting treatment.

Valuation of Plant and Machinery:

  • Cost Assessment:

The auditor assesses the cost of plant and machinery, considering the original purchase price, any subsequent improvements, and any additional costs necessary to bring the assets to their current condition.

  • Depreciation Calculation:

The calculation of depreciation is reviewed to ensure that it is in accordance with accounting policies and that the chosen method, useful life, and residual value are appropriate.

  • Impairment Testing:

Auditors assess whether there are indications of impairment for plant and machinery. If indicators are present, impairment testing is performed to determine if the carrying amount exceeds recoverable amount.

  • Fair Value Assessment:

In certain situations, such as for financial reporting purposes or business combinations, the fair value of plant and machinery may need to be assessed. Auditors evaluate the appropriateness of fair value measurements.

  • Market Comparisons:

Auditors may compare the book value of plant and machinery to market values, especially if there have been significant changes in market conditions or technology that could impact the assets’ values.

  • Expert Valuation:

For specialized or unique machinery, auditors may engage external experts or appraisers to provide an independent valuation, particularly if market-based approaches are not suitable.

Other Considerations:

  • Maintenance and Repair Expenses:

The auditor reviews maintenance and repair expenses to ensure that routine maintenance costs are expensed while significant repairs or improvements are capitalized.

  • Capital Expenditure Authorization:

Auditors assess whether capital expenditures on plant and machinery are properly authorized by management and, if applicable, approved by the board or relevant authorities.

  • Disclosures:

The auditor reviews disclosures related to plant and machinery in the financial statements to ensure compliance with applicable accounting standards, including details about depreciation methods and useful lives.

  • Subsequent Events:

Any significant events occurring after the balance sheet date but before the financial statements are issued are considered to ensure that the values of plant and machinery are still accurate.

  • Management Representations:

Auditors obtain representations from management regarding the ownership, existence, and valuation of plant and machinery.