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Hi
I would like to ask about fixed assets audit
Is it the duty of the auditor to ascertain that the entity no longer uses assets they fully depreciated?
Would that be part of audit substantial testing?
And that leads somehow to the issue of accounting estimates
Am i correct in thinking that if the entity fully depreciated an asset but still uses it, they should change their estimate ?
Thank you
Let’s go back to the accruals (or matching) accounting concept.
The idea of depreciation is that we spread the cost of an asset over those years that are expected to benefit from the use of that asset.
A company will estimate (on a generalised basis) the useful life of the assets that it acquires and write those assets off over that estimated period
In theory (and I stress the theoretical part of this!) a company should look at its assets individually and re-assess / re-estimate remaining useful life and depreciate according to these revised estimates
Where an asset is approaching the end of its original estimated life and management is determining the amount of depreciation for this, its estimated final year, it should be the case that management ask themselves whether that asset is going to continue to be used for at least one more year. If the answer is “Yes, it will continue for at least one more year” then that asset should be depreciated by 50% of its brought forward carrying vale.
The same exercise should happen at the end of next year and again 50% of its brought forward value should be depreciated
The same exercise should happen at the end of next year and again 50% of its brought forward value should be depreciated
The same exercise should happen at the end of next year and again 50% of its brought forward value should be depreciated
In theory, no asset that is still in use should be fully written off
Now ask “Is it worth all this trouble? Is it likely to be material?”
Probably the answer is “No”!
Incidentally, depreciation on the reducing balance basis solves the issue
A $10,000 asset depreciated at 30% reducing balance per annum gets below $1 only after 26 years
Evan at 50% reducing balance rate it takes 14 years to get to below $1
Thank you
I see the point…
so really, it is in the year of addition when the auditors should consider if management’s estimates are reasonable ?
assumption is then, should this be free of management’s bias, asset will be written off and disposed or scrapped either earlier or in line with the estimate ?
Well, yes, OK. But the company will have decided upon a depreciation rate for the various different classes of TNCA (25% straight line for motor vehicles, 50% straight line for the computer system, 2% straight line for buildings, 20% reducing balance for fixtures and fittings and so on)
So opportunities for management manipulation are pretty restricted
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