Investment property is defined by the International Financial Reporting Standards (IFRS) as property (land or a building or part of a building) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for use in the production or supply of goods or services or for administrative purposes.
IFRS requires investment property to be recognized as an asset when it is probable that the future economic benefits that are associated with the property will flow to the entity, and the cost of the property can be reliably measured. The recognition criteria for investment property are similar to those for property, plant, and equipment (PPE).
Measurement of Investment Property
The initial measurement of investment property is based on its cost, which is the fair value of the property at the time of acquisition, including transaction costs. Subsequent measurement of investment property depends on the nature of the property and the entity’s accounting policy.
Under IFRS, investment property is measured either at cost or fair value, and any revaluation of the investment property is reflected in the statement of financial position. The choice between cost and fair value depends on the entity’s accounting policy.
Disclosure of Investment Property
IFRS requires entities to provide adequate disclosure about their investment property in their financial statements. The disclosure should include information about the carrying amount of investment property, any impairment losses recognized during the period, and the method of valuation used to measure investment property.
Audit Risks for Investment Property
- Misclassification of property as investment property: Misclassification of property can result in incorrect recognition and measurement of the investment property.
- Valuation of investment property: Incorrect valuation of investment property can result in over or under-statement of the property’s value, which can impact the financial statements.
- Revaluation of investment property: Investment property may be revalued, which requires auditors to obtain sufficient appropriate audit evidence to support the revaluation.
- Disclosures: Auditors must ensure that the financial statements provide adequate disclosure about investment property, including the method used to measure the property.
- Subsequent events: Auditors must assess the impact of subsequent events on the carrying amount of investment property, such as impairment losses, sale, or disposal of the property.
- Changes in accounting policies: Auditors must be aware of any changes in accounting policies for investment property and assess the impact on the financial statements.
- Impairment of investment property: Auditors must assess whether there is any indication of impairment of investment property and, if so, ensure that the impairment loss is recognized in the financial statements.
- Transfer of property from PPE to investment property: Auditors must assess whether the transfer of property from PPE to investment property is in accordance with IFRS.
- Unusual transactions: Auditors must be aware of any unusual transactions related to investment property and assess their impact on the financial statements.
- Misapplication of IFRS: Auditors must ensure that the entity has applied IFRS correctly in the recognition, measurement, and disclosure of investment property.
Audit Assertions for Investment Property
Audit assertions are the underlying assumptions that management makes about their financial statements. For investment properties, the following are the audit assertions that auditors should focus on during the audit process:
- Existence and ownership: The auditor should verify the existence and ownership of the investment property, ensuring that the entity has a right to use or occupy the property.
- Valuation: The auditor should assess the validity of the valuation method used by management to determine the fair value of the investment property. This includes testing the accuracy of the inputs used in the valuation process.
- Classification: The auditor should verify that the investment property has been correctly classified in accordance with the applicable accounting standards.
- Measurement: The auditor should test the accuracy of the measurements used to determine the fair value of the investment property, including the use of any estimates or assumptions.
- Disclosures: The auditor should review the disclosures made by the entity in relation to the investment property to ensure that they are complete and accurate. This includes information about the valuation method used, any assumptions made, and any significant changes in the value of the property.
- Subsequent events: The auditor should assess whether any subsequent events that could affect the value of the investment property have been taken into account in the financial statements.
- Transactions: The auditor should test the accuracy of transactions related to the investment property, including purchases, sales, and transfers.
- Impairment: The auditor should verify that the entity has made an assessment of the impairment of the investment property, if required by the applicable accounting standards.
- Reclassifications: The auditor should test the accuracy of any reclassifications of the investment property, including transfers to or from held for sale.
- Compliance with laws and regulations: The auditor should verify that the entity is in compliance with all applicable laws and regulations, including those related to the ownership, use, and occupation of the investment property.
Walkthrough testing is a form of auditing procedure where the auditor verifies the accuracy and completeness of transactions recorded in the financial statements.
This process involves physically following a selected transaction from start to finish, examining all relevant documentation, and inquiring of responsible personnel to confirm the validity of the transaction.
In the context of investment property, walkthrough testing can be used to examine transactions related to the acquisition, management, and disposal of investment properties.
Test of Control:
Test of control refers to the procedures performed by the auditor to evaluate the efficiency and effectiveness of the client’s internal control system. In the context of investment property, the auditor may perform a test of control over transactions related to the purchase and disposal of investment properties, rental income recognition, and the calculation of depreciation.
This may involve examining the policies and procedures in place for ensuring the accuracy of the financial statements, evaluating the process for determining the fair value of investment properties, and testing the calculations of depreciation and amortization.
Substantive Audit Procedures:
- Reviewing contracts and agreements related to the acquisition and disposal of investment properties.
- Obtaining a confirmation of property ownership and any encumbrances from relevant authorities.
- Examining the calculations of fair value and comparing it to market data.
- Confirming the accuracy of property tax assessments and payments.
- Testing the depreciation calculations to ensure they are in line with IFRS requirements.
- Evaluating the process for recording rental income and ensuring it is consistent with the lease agreements.
- Reviewing the process for recognizing any gains or losses related to investment properties.
- Examining the accuracy of the balance sheet classification of investment properties.
- Confirming the existence and condition of investment properties through physical inspection.
- Reviewing the process for disposing of investment properties and ensuring that the proceeds from the sale are accurately recorded in the financial statements.