Current and Fixed Assets in Engagement Planning (CIA Part 2): A Complete Guide
Introduction
In CIA Part 2 (Practice of Internal Auditing), engagement planning covers how internal auditors set objectives, scope, criteria and work programs for each engagement. A common application is planning engagements over current assets (cash, receivables, inventory, prepaid items, short-term investments) and fixed assets (property, plant and equipment, or PP&E). The exam expects you to know the typical risks, the assertions that matter most, and the procedures that address each risk.
Why It Is Important
Current and fixed assets are often the largest balances on the statement of financial position. They are also exposed to theft, misstatement, obsolescence and poor capital decisions.
Planning these engagements well matters because:
• Risk-based planning (IIA Global Internal Audit Standards): Internal auditors must understand the activity under review, assess risks and design procedures to address them. Asset areas are classic examples.
• Safeguarding of assets is a core internal control objective in COSO, and internal audit is expected to evaluate it.
• Fraud risk: Cash and inventory are highly susceptible to misappropriation. Fixed assets are susceptible to misclassification, fictitious additions and unrecorded disposals.
• Efficiency: Choosing the right assertion and procedure avoids wasted effort and gives management assurance where it counts.
• Exam weight: Questions on matching a risk or assertion to an audit procedure appear frequently in Part 2.
What It Is
Planning an asset engagement means identifying, for each asset class:
• its risks,
• the relevant assertions,
• the key controls,
• the procedures that give sufficient, reliable, relevant and useful information.
Key assertions
• Existence/Occurrence: The asset actually exists and transactions really occurred.
• Completeness: All assets and transactions that should be recorded are recorded.
• Rights and Obligations: The organization owns or controls the asset.
• Valuation/Allocation: The asset is recorded at the proper amount, considering depreciation, impairment, allowances and lower of cost or net realizable value.
• Presentation and Disclosure: The asset is properly classified and disclosed.
• Cutoff/Accuracy: Transactions are recorded in the correct period and amount.
How It Works: Current Assets
1. Cash
• Risks: theft, lapping, kiting, unauthorized disbursements, inadequate segregation of duties.
• Key controls:
- Separation of custody, recording and reconciliation.
- Prompt deposits and lockboxes.
- Independent bank reconciliations.
- Dual signatures and positive pay.
• Procedures:
- Obtain bank confirmations (existence).
- Review or reperform bank reconciliations.
- Obtain cutoff bank statements.
- Prepare an interbank transfer schedule to detect kiting.
- Perform surprise cash counts.
- Compare deposit slips to remittance records to detect lapping.
2. Accounts Receivable
• Risks: fictitious sales, lapping, uncollectible balances, improper write-offs, cutoff errors.
• Procedures:
- Use positive confirmations for existence. They are stronger evidence and suit large balances or high risk.
- Use negative confirmations only when the balances are many and small, control risk is low, and recipients are expected to read them.
- Analyze an aged trial balance to test valuation and the adequacy of the allowance for doubtful accounts.
- Review subsequent cash receipts.
- Perform sales cutoff tests around period end.
- Review the approval of credit memos and write-offs.
3. Inventory
• Risks: theft, obsolescence, shrinkage, overvaluation, cutoff errors, consigned goods.
• Procedures:
- Observe the physical count. This is the primary existence test.
- Perform test counts in two directions: records to floor (existence) and floor to records (completeness).
- Review count tags and their sequence.
- Perform receiving and shipping cutoff tests.
- Calculate turnover ratios and review slow-moving reports (obsolescence and valuation).
- Test pricing against invoices and apply lower of cost or net realizable value.
- Confirm inventory held by third parties.
• Planning considerations: perpetual versus periodic systems, count instructions, use of specialists for specialized goods, and access controls over storerooms.
4. Prepaids and Short-Term Investments
• Recalculate amortization of prepaid items.
• Confirm investments with custodians or physically inspect securities.
• Verify market values for valuation.
How It Works: Fixed Assets (PP&E)
• Risks:
- Unauthorized acquisitions.
- Capitalizing expenses (overstating assets) or expensing capital items (understating assets).
- Unrecorded disposals or retirements.
- Theft of portable assets.
- Incorrect depreciation.
- Impairment that has not been recognized.
- Poor capital budgeting decisions.
• Key controls:
- Capital expenditure authorization and budgets.
- A fixed asset subsidiary ledger reconciled to the general ledger.
- Asset tagging and periodic physical inventories.
- A written capitalization policy.
- Disposal approval procedures.
- Insurance coverage reviews.
• Procedures by assertion:
- Existence: Select items from the ledger and physically inspect them (ledger to asset).
- Completeness: Select assets on the floor and trace them to the ledger (asset to ledger). Also review repairs and maintenance expense for items that should have been capitalized.
- Rights: Examine deeds, titles, purchase contracts, property tax bills and lease agreements.
- Valuation: Vouch additions to invoices, recalculate depreciation, evaluate useful lives and residual values, and assess impairment indicators.
- Disposals: Review miscellaneous income for sale proceeds, examine retirement work orders, check insurance policy changes, and compare current-year additions with possible replacement of old assets.
- Analytical procedures: Compare depreciation expense to the asset base, compare repairs expense year over year, and compare budget to actual capital spending.
• Operational and value-for-money angle: Evaluate capital budgeting (NPV, payback), utilization of idle assets, maintenance programs, and lease-versus-buy decisions.
Planning Steps Applied
1. Understand the process, systems and prior audit results.
2. Assess inherent risk and fraud risk for each asset class.
3. Set engagement objectives, such as verifying existence or evaluating safeguarding controls.
4. Define scope, including locations, period and materiality thresholds.
5. Identify key controls and decide whether to rely on them.
6. Develop the work program, linking each procedure to an assertion.
7. Allocate resources and consider specialists such as appraisers or engineers.
Directional Testing: The Core Logic
• To test for overstatement (existence), start from the records and vouch back to the source document or physical asset.
• To test for understatement (completeness), start from the source or physical item and trace forward to the records.
• Assets are usually most at risk of overstatement, so existence and valuation tests tend to dominate.
Exam Tips: Answering Questions on Current and Fixed Assets in Engagement Planning
1. Identify the assertion first. Read the question and ask whether it concerns existence, completeness, valuation, rights or cutoff. Then pick the procedure that matches that assertion.
2. Remember the direction of testing. Ledger to asset tests existence; asset to ledger tests completeness. This is the most frequently tested trap.
3. Prefer the strongest evidence. The reliability ranking runs from highest to lowest:
- Physical examination and recalculation by the auditor.
- External evidence sent directly to the auditor, such as confirmations.
- External documents held by the client.
- Internal documents.
- Inquiry.
4. Know the fraud red flags.
- Lapping points to comparing deposit details with remittance advices.
- Kiting points to the interbank transfer schedule.
- Fictitious receivables point to positive confirmations.
- Inventory theft points to segregating custody from recordkeeping.
5. Match the best procedure to unrecorded disposals. Examine miscellaneous revenue, insurance changes and retirement work orders. Physically inspecting recorded items alone also finds missing assets, but tracing disposals is usually the best answer.
6. Check for improperly capitalized or expensed items. If the risk is that expenses were capitalized, vouch additions. If the risk is that capital items were expensed, analyze repairs and maintenance.
7. Treat inventory observation as mandatory logic. When existence of inventory is in question, observing the count is almost always the correct answer.
8. Watch for EXCEPT, NOT and LEAST wording. These questions often include one procedure aimed at the wrong assertion.
9. Separate the planning stage from fieldwork. Planning answers involve understanding the activity, risk assessment, preliminary surveys, analytical review and setting objectives. They do not involve executing detailed tests.
10. Use analytical procedures in planning. Ratios such as inventory turnover, days sales outstanding and depreciation divided by gross PP&E help flag areas for focus.
11. Think control first. When asked which control best prevents a loss, choose segregation of duties, authorization or physical safeguards over detective after-the-fact reviews, unless the question asks about detection.
12. Eliminate distractors. Remove options that test the wrong assertion, test the wrong direction, or rely on weak evidence such as inquiry alone.
Quick Review Example
Question: An internal auditor wants to determine whether all equipment purchased during the year was recorded. What is the best procedure?
Answer: Select purchase invoices or receiving reports and trace them to the fixed asset ledger. This is a completeness test running from source to records. Vouching ledger entries to invoices would test existence instead, so it is a distractor.
Summary
Planning engagements over current and fixed assets means:
• linking risks to assertions, controls and procedures,
• applying the correct direction of testing,
• choosing the most reliable evidence.
Master the assertion–procedure matrix, the main fraud schemes (lapping, kiting, fictitious assets) and directional logic, and you will handle most CIA Part 2 questions on this topic with confidence.
