Chapter 8

SUBSTANTIVE PROCEDURES: NON-CURRENT

ASSETS
 1. TANGIBLE NON-CURRENT ASSETS
• 1.1 Tangible non-current assets: the information subject to audit
• A note should disclose;
• The basis used to revalue the assets
• the basis used to revalue the assets
• the date when the assets were revalued
• whether an independent value’r was involved in the revaluation, and
• the nature of any cost index that was used as a basis for calculating replacement cost
• the carrying amount of each class of assets that would have been reported if the assets had been reported using the cost
method (and so if the assets had been valued at cost minus accumulated depreciation)
• the revaluation surplus, and any movements in this surplus during the financial period.
• Basis used for depreciation of each class of assets
 1. TANGIBLE NON-CURRENT ASSETS
1.2 Principal risks of misstatement
• Completeness – assets have not been included.
• Existence – assets do not exist (sold or scrapped).
• Accuracy, valuation and assertion – assets have been incorrectly recorded at
inappropriate amounts and resulting valuation or allocation adjustment
• Rights and obligations – reporting entity does not actually own the asset
• Classification – assets have been recorded in the improper accounts.
• Presentation – assets have not been correctly presented.
 1. TANGIBLE NON-CURRENT ASSETS
1.3 Substantive procedures for tangible non-current assets
• Completeness (no understatement)
• Existence (no overstatement)
• Accuracy, valuation and allocation
• Rights and obligations
• Classification
• Presentation
 1. TANGIBLE NON-CURRENT ASSETS
Completeness
• Obtain or prepare a schedule of tangible non-current assets, showing cost or valuation,
depreciation and carrying amount.
• Reconcile this list with the corresponding opening balances (see the notes below on
substantive tests for additions and disposals).
• Select a sample of assets that physically exist (and whose existence has been verified,
possibly by means of inspection by the auditor) and trace these assets to the asset
register.
• Obtain or prepare a reconciliation of ledger balances for tangible non-current assets with
the asset register and investigate any differences.
 1. TANGIBLE NON-CURRENT ASSETS
Existence
• Select a sample of assets from the non-current asset register and physically inspect them
(usage and condition).
• Establish and investigate the reasons for any assets in the sample that are not found by the
auditor.
Accuracy, valuation and allocation
• At cost
• Land and buildings: Confirm the figures for cost with the purchase contract for the asset and the invoices for
associated costs (such as professional fees). Check that the purchase expenditure is analyzed reasonably between
land, buildings and equipment.
• Equipment and vehicles: Check the cost in the financial statements against the purchase invoices for the assets.
• Review the allocation of total expenditure on non-current assets between capital and revenue amounts.
 1. TANGIBLE NON-CURRENT ASSETS
• At valuation
• Verify amounts in the financial statements with the valuer’s report.
• Consider the reasonableness of the valuation.
• Check that valuations are regularly updated.
• Check the accounting for the rise or fall in value on revaluation.
• Depreciation and impairment
• Review depreciation rates for reasonableness, its estimated useful life and residual value.
• Ensure that the consistent depreciation methods are in use.
• Review gains or losses on the sale disposal (accumulated depreciation and impairment)
• Consider the possibility that assets are obsolete or suffering impairment.
• Check the depreciation calculations for accuracy through audit software.
1. TANGIBLE NON-CURRENT ASSETS
• Ensure that fully-depreciated assets are not subject to further depreciation.
• Perform analytical procedures to verify the total charge for depreciation.
• Confirm that the entity has adequate insurance for its assets.
Rights and Obligations (ownership)
• Land and buildings: Verify legal title to the assets by inspecting appropriate documents.
• Vehicles: Examine vehicle registration documents or similar documentation giving evidence of title.
• Other assets: Examine invoices or other documents transferring title.
• Ensure that documents are in the name of the entity (the client company).
• Review legal documents, bank documents and other documents for evidence of any loans that are secured
by charges on assets.
1. TANGIBLE NON-CURRENT ASSETS

Classification
• Ensure that the non-current assets have been classified in the appropriate account.
Presentation
• Review the disclosures in the financial statements and ensure they are correct and
clear.
• Ensure the schedule of tangible non-current assets agrees to the figures in the
financial statements.
 1. TANGIBLE NON-CURRENT ASSETS
1.4 Substantive procedures: additions and disposals
Additions
• Obtain/prepare a schedule of additions for the period.
• Check the authorisation of the expenditure to purchase these additions.
• Confirm that the total additions reconcile with the movement between the opening and closing balances in the note to the
financial statements.
• Inspect a purchase invoice or other document as evidence of the cost of any addition, and confirm that these documents are in
the company name.
• Verify the existence of the acquired non-current assets, by means of physical inspection where appropriate.
• Check that the entries in the accounting records are correct, confirming the allocation of total expenditure between capital and
revenue expenditure.
 1. TANGIBLE NON-CURRENT ASSETS
Disposals
• Obtain/prepare a schedule of disposals for the period.
• Check the authorization of the disposals.
• Verify that the cost and related accumulated depreciation have been removed from the accounting records.
• Verify the calculation of the figure for the gain or loss on disposal, and verify that this figure has been correctly
recorded in the ledger.
• Discuss with management (including non-financial management) the possibility of unrecorded disposals of
assets.
• Note: In case if entity’s own non-current assets rather than buy them from an outside suppliers, substantive
procedures will focus on confirming that internal costs (materials, labour, other direct expenses and overheads)
have been properly accounted for as capital expenditures.
2. INTANGIBLE NON-CURRENT ASSETS
• 2.1 Substantive procedures of intangible assets
• Emphasis will be on existence and valuation
• Intangible assets that can be recognized in the statement of financial positions are:
• Purchased goodwill
• Intangibles having a readily ascertainable market value
• Development costs (IAS 38)
2. INTANGIBLE NON-CURRENT ASSETS
2.2 Tests of detail for purchased goodwill
• Confirm that a business was acquired and confirm the consideration paid for the business
acquired.
• Check the existence of purchased goodwill as well as to confirm its valuation.
• Review the reasonableness of the valuation placed on the net assets acquired.
• Check the calculation of the purchased goodwill
• The difference between the consideration paid and the fair value of the net assets acquired.
• Review for the possibility of an impairment having arisen.
• Ensure that any impairment loss has been correctly calculated and recorded in the ledger.
2. INTANGIBLE NON-CURRENT ASSETS
2.2 Tests of detail for other intangibles
(excluding development costs)
• The auditor should confirm the existence, the cost and the client entity’s legal rights to the
acquired assets.
• Checking purchase documentation.
• Check the amortisation calculations for accuracy, using the entity’s stated policy.
• Consider the possibility that the assets are suffering impairment.
• Discuss with the directors of the company
• Ensure that any impairment has been correctly dealt with in the ledger
2. INTANGIBLE NON-CURRENT ASSETS
2.4 Test of details for development costs
• IAS 38 states that an intangible asset arising from development shall be recognized if,
and only if, an entity can demonstrate all of the following:
• The technical feasibility of completing the intangible asset so that it will be available for use or sale.
• Its intention to complete the intangible asset and use or sell it.
• Its ability to use or sell the intangible asset.
• How the intangible asset will generate probable future economic benefits.
• The entity can demonstrate the existence of a market for the output of the intangible asset or the
intangible asset itself
• If it is to be used internally, the usefulness of the intangible asset.
• The availability of adequate technical, financial and other resources.
• Its ability to measure reliably the expenditure attributable to the intangible asset during its development.
2. INTANGIBLE NON-CURRENT ASSETS
• Audit Test
• Discuss the development of the project with management to assess the feasibility of the
project and product:
• Review projections and forecasts for using resources and generating future economic benefits.
• Assess production and marketing plans and whether a market (or use) actually
exists.
• Consider funding requirements to completion.
• Whether the entity will actually be able to use or sell the asset.
• Discuss management’s intention to complete the asset and either use or sell it.
2. INTANGIBLE NON-CURRENT ASSETS
• inspect development contracts and records supporting and safeguarding patents.
• Test controls around the documentation and safekeeping of scientists notes, discoveries
and conclusions.
• Test a sample of development costs for appropriate capitalisation.
• Obtain written representation from management as to their commitment to complete the
project and either use or sell the asset(s).