Substantive procedures for disposal of assets

Sorry Sarah – I cannot respond to this request since it would simply open floodgates to similar.

Please work through the guidance at the sticky post at the top of this forum “How to score marks in AA – essential guidance”. If you need more help to assist in assessing answer points consider a study buddy (look for one on the student AA forum or in your workplace). Beyond that you would most likely have to enrol on a course that includes a marked mock – I don’t know anyone anywhere offering a marked-mock only service.

To comment on the original and say right or wrong amounts to the same thing. What I will say, which is more generic, is that you have to think about the “direction” of the tracing (from what to what) and where samples could possibly come from.

So for existence of assets – you would start with what is held out to exist in the draft financial statements – that must be agreed to a general ledger a/c balance which is then supported with sufficient appropriate audit evidence (e.g. bank balance agreed to bank reconciliation/statement or trade receivables agreed to a listing extracted from the receivables ledger … ) The bank doesn’t need a sample because it’s one a/c (or if it was 6 a/cs all would be agreed – so not a sample). Trade receivables need a sample – which would be selected from the a/cs listed for external confirmation.

For completeness of liabilities – you can’t start with the financial statements because you’re looking for something that, if it’s understated, isn’t there. So you would start with GRNs (for example) showing goods have been received (i.e. obligation to pay) and trace to purchase invoices and then trade payable/accrual (as we discussed before) which should then be included in the balance per the financial statements.

If you think about the postings that you would expect to find in ledger a/cs (assumed FA knowledge) what Dr/Cr entries would you have in a disposal a/c? The only entries from books of prime entry would be Cr Cash (if proceeds received in cash) or Cr Receivables (if sold on credit). Selecting these entries from the disposal a/c and agreeing too the cashbook/sales invoice is testing for overstatement. The other entries in the disposal a/c (Dr Cost/Cr Accumulated depreciation of assets transferred) would come from journal entries – that means the client must have a schedule of disposals (in order to prepare the journal). The amounts on the journal should be agreed to the cost/accumulated depreciation as recorded in an up-to-date asset register.

Testing for completeness of recording assets that have been disposed of is related to the test for existence. To test for existence the sample of individual assets will be selected from “book” (i.e. the register) to “physical” – if an asset can’t be found it must be written out of the books (whether sold or scrapped or stolen!)

That’s the point – an asset disposed of no longer exists.
If you’re looking for understatement/omission you’re looking for something that “isn’t there” – i.e. hasn’t been recorded. Either an asset exists or it doesn’t – if it doesn’t – it’s been disposed of – and must be written out of the books. So the auditor will start with where existence is documented – i.e. in the asset register (the cost and accumulated depreciation columns of which must agree to the ledger a/cs and the financial statements).

The disposal of an asset is a transaction – see page 83 for all the assertions that may be relevant to a transaction. So occurrence and completeness of recording disposals are among the relevant assertions.
For the balance that is PPE in the SoFP the relevant assertions are at the top of page 84 – these include existence.

The auditor doesn’t find evidence to support every assertion in a vacuum that is independent of anything else.

For example, test of controls relevant to the completeness of recording sales transactions provides evidence concerning the occurrence and completeness of recording trade receivables – however, this is not sufficient evidence of the existence of receivables at the reporting date – if the debt has been paid it no longer exists.

If testing the existence of assets shows that assets they no longer exist and they have not been recorded as disposals, there is a potential problem (!)

You’re welcome Sarah! Take comfort that you are taking steps to understand it – too many students will not be told that it cannot be learnt by rote and then wonder why they fail.