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Hello Dear Sir,
I hope you are doing well.
I have a doubt in the following question.1. Which TWO of the following audit procedures would test for OVERSTATEMENT of Lancaster Co’s non-current assets?
A.Agree disposals recorded in the non-current asset register to cash book and sales invoice
B.Physically inspect a sample of assets selected from the non-current asset register
C.Inspect a sample of assets found at a location and agree to the non-current asset register
D.Inspect the condition of assets held to determine the need for any impairment
The correct answers are B and D.Tutorial note: The “direction” of testing for overstatement is from what is recognised in the financial statements to source documents or assets. (From source documents or assets to the financial statements tests for understatement). Inspecting assets selected from the register confirms their existence– the carrying amount of assets in the statement of financial position would be overstated if assets included in the register do not, in fact, exist. If an asset is impaired but the impairment loss has not been recognised, the carrying amount will be overstated.
My doubt: Why is option A incorrect? Also, doesn’t overstatement relate to existence of PPE?
Also, I did not copy/paste the scenario since it didn’t seem necessary.
Short answer: Because the “direction” is wrong.
Yes PPE would be overstated if assets did not exist. But the starting point in A is a recording of NON-existence i.e. it has been disposed of. Suppose the SoFP shows PPE $23m – do the assets behind that amount all exist? $23m is a total that should be agreed “backwards” to its source … first stop the sum of the balances on non-current asset a/cs in the general ledger … these should agree to the details in the non-current asset register. For these to agree, a disposal recorded in the register must also be recorded in the ledger a/c – suppose the carrying amount of a disposal was $0.5m – that is an amount that is NOT included in the $23 – so A doesn’t test for what IS included in the $23m. B is the test for overstatement that would detect if assets do not exist.
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