Wednesday, January 15, 2014

Audit of Fixed Assets: Construction-in-Progress 2

In previous post we discussed on certain matters to take note for the audit of construction-in-progress. We will continue to discuss on the following matters:

c) Billing status and capitalisation status
e) Intended use of construction-in-progress
f) Impairment assessment of construction-in-progress
g) Useful life of this asset upon completion

Explanation of (c) billing status and capitalisation status: it is important to request management to ensure that the amount capitalised per book represents the actual completion status. To illustrate, management may capitalise the construction in progress based on the billing received to date. However, the billing received may not be updated near year-end or supplier may raised the billing earlier than the actual completion status. As a result, it is important for auditor to obtain the budget for the entire project and compare the budget completion status % against the amount capitalised as at year-end for reasonableness.

Explanation on (e) - it is definitely important to understand the intended usage of construction-in-progress for documentation and understand company's strategy

Explanation on (f) - for long standing construction-in-progress that takes prolonged period/ longer than budgeted time to complete is a indication that the company may be experiencing some liquidity issue or the project is abandaoned due to commercial reason.

Explanation of (g) - it is always good to start discussing with client on the useful life of the project upon the completion of construction-in-progress such that there is no surprises at year-end or in the next financial year.

 

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