## Auditing PPE: Depreciation and Impairment

Depreciation represents the cost of using a PPE asset over its useful life. Without correctly charging depreciation, profit/loss is misstated and PPE is overstated on the balance sheet.

### Why This Matters

If depreciation is not charged (or charged incorrectly), assets appear overvalued and profits appear inflated — a direct threat to the true and fair view.

### Audit Procedures

#### 1. Completeness of Depreciation

Verify depreciation is charged on all PPE items
Exception: Non-depreciable assets like freehold land do not require depreciation

#### 2. Appropriateness of Method

Assess whether the depreciation method reflects the pattern of consumption of future economic benefits:

Method	When Appropriate
Straight Line Method (SLM)	Uniform benefit over life
Diminishing Value Method (DVM)	Higher usage in earlier years
Units of Production	Benefit tied to output/usage

#### 3. Impairment Assessment (AS 28)

Verify management has performed an impairment review as required by AS 28 – Impairment of Assets
Confirm any impaired assets are written down to their recoverable amount (higher of value in use or net selling price)
Impairment loss = Carrying amount − Recoverable amount

### Key Distinction

Depreciation = systematic allocation of cost over useful life (expected)
Impairment = sudden, unexpected reduction in value (event-driven)

Both must be checked; one does not substitute for the other.

Worked example

### Example 1

Q (Exam style): Mr. Vaayu is auditing the PPE schedule of a manufacturing company. During review, he finds that freehold land worth ₹50 lakhs has been depreciated at 5% p.a. What should he do?

A: Mr. Vaayu should raise an audit query. Freehold land is a non-depreciable asset — it has an indefinite useful life and therefore depreciation should not be charged on it. The depreciation charged (₹2.5 lakhs) should be reversed, as it would otherwise understate profit and understate the PPE balance. He should recommend correction before signing off.

### Example 2

Q: During audit of Beta Ltd., the auditor notes the company switched from SLM to WDV for all machinery without disclosing the change. What is the audit concern?

A: This is a change in accounting policy/estimate that must be disclosed prominently per AS 1 (Disclosure of Accounting Policies) and AS 6 (Depreciation Accounting). The auditor must verify: (1) whether the change is justified, (2) the financial impact has been computed and disclosed, and (3) the change is consistently applied. Failure to disclose would result in a qualified/emphasis-of-matter paragraph.

⚠️ Common exam mistakes

Forgetting that freehold land is NON-depreciable — candidates often apply depreciation to all land including freehold
Confusing depreciation (planned, systematic) with impairment (unexpected event-driven loss) — both must be verified separately
Not linking method selection to the 'pattern of economic benefits' test — any method is permissible only if it reflects consumption pattern
Overlooking AS 28 impairment review as a separate and mandatory audit step beyond depreciation verification

Bare-Act text Para 9 · AS 28 – Impairment of Assets · click to expand

An entity shall assess at each reporting date whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset.

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Auditing PPE – Depreciation and Impairment

Worked example

⚠️ Common exam mistakes