Depreciation expenses are one of the major expenses that reporting in the income statement. Those expenses are the costs that the entity charged to fixed assets used for operation during the periods.
This is because accounting standard allows the entity not to records the expenses that they incurred for purchasing capital assets at the time of purchasing.
But they could allocate those expenses systematically over the period that they are using.
During the audit of financial statements, auditors should make sure that the audit procedures that they prepare are addressing the risks of material misstatements that cause by depreciation expenses and other related items such as fixed assets.
Understanding about depreciation:
Before performing detail testing on the depreciation expenses, auditors should consider reviewing and assessing the control over the fixed assets and depreciation. This will help auditors test the depreciation expenses more efficiently.
The following are the key procedures that auditor should perform during their testing on depreciation expenses:
- Review Depreciation Rate: Auditors should assess the reasonableness of depreciation that the entity provided to the group or class of assets. The rate should be consistent to the capacity that fixed assets could contribute to the inflow of economic. Audits should also assess the deprecation rate against the rate provided by the tax authority as well as their understanding. Professional skepticism should also be applied during this testing by considering whether the depreciation rate could help management could get the expenses that they want. In some situationss, management may want to larges expenses or else.
- Recalculate the depreciation expenses: This is normally done by auditors to recalculate the depreciation expenses prepared by accountants in their depreciation schedule. Once auditors completed their calculations, then auditors should compare their results to client results. The difference should clearly investigate.
- Review the accumulated depreciation: The auditor should also review the accumulated depreciation that reports in the balance sheet. These amounts are mater to the net book value of fixed assets. If they are not included the expenses incurred during the period correctly, then the net book value of fixed assets will also incorrectly stated.
- Reconcile the depreciation expenses: Depreciation expenses that recording the income statements should be reconciled with the expenses calculated in the depreciation schedule. The auditor should reconcile this, and if they are not reconciled, the explanation should be obtained from management.
- Test the reasonableness: This procedure is linked to the recalculation procedure. For example, auditors perform depreciation expenses recalculation for a few months and then they project the expenses into the whole years based on their own figure. Once auditors did the whole year projection, then auditors could compare their own calculation with accountant figures. This comparison is expected to have different. But, the auditor could set the acceptable threshold.