Depreciation Recalculation and Disposals Testing: Procedures With Worked Calculations

Depreciation is arithmetic applied to a register. If the register is right, recomputation is quick and conclusive. Disposals are the reverse: low in volume, high in risk, because an asset sold or scrapped and not removed from the register keeps depreciating and overstates the balance. This post covers both. The additions program is in fixed asset additions.

Depreciation: two levels of test

Level 1: analytical expectation by class. Build an expectation for annual depreciation: average cost by class (opening and closing cost, weighted for the timing of additions and disposals) divided by the useful life, or times the rate. Compare to recorded depreciation.

The vehicles difference stands out: recorded depreciation is 17 percent above expectation. The next step is detail.

Level 2: detail recomputation. For classes outside the threshold, and for a sample from the rest, recompute depreciation asset by asset: cost, in-service date, life, method, salvage value, months in service. Agree results to the register and the ledger.

For the vehicles, recomputation finds that two trucks with a cost of $190,000 were disposed of in June but depreciated through December. That alone explains $19,000 of the $37,400 difference. The rest comes from fully depreciated vehicles that continue to show depreciation. The register is the source of the problem, so the auditor extends the review to the entire vehicle class and asks the client to correct the register.

What to test in depreciation

• Method and life consistency. Compare to the prior year and the policy. A change in life is a change in estimate. A change in method is a change in estimate effected by a change in accounting principle (ASC 250), so management also has to support that the new method is preferable.
• Reasonableness of lives. Compare the lives to the asset's expected use, industry experience and experience with disposals. Assets scrapped well before the end of their stated lives suggest lives are too long.
• Fully depreciated assets. Review the list. Assets still in use are fine. Assets not in use need disposal processing.
• In-service dates for additions. Tie to the additions work. See the example in additions testing.
• Salvage value assumptions.
• Leasehold improvements. The life is the shorter of the useful life and the lease term, including reasonably certain renewals.
• Mid-year convention. Check that the client applies its stated convention consistently.
• Book versus tax. Tax depreciation (MACRS, bonus, Section 179) differs from book. Check that the book register is the basis for the financial statements, and the difference is in the deferred tax computation. See depreciation schedules and MACRS.

Disposals: find them, then test them

Finding disposals. Disposals recorded are the easy ones. The risk is disposals that are not recorded. Search for them:

• Proceeds from sales of equipment in the cash receipts or in other income accounts.
• Gains and losses on sales.
• Insurance recoveries after casualty losses.
• Board minutes about the sale or disposal of facilities or equipment.
• Physical inspection: walk the floor and trace a sample of assets from the register to the physical asset, and a sample of physical assets to the register.
• Changes in repairs, rent or insurance that indicate an asset is no longer held.
• Trade-in credits on new equipment purchases.
• Leases that ended.

Testing recorded disposals. For each disposal:

1. Vouch to the sale agreement, bill of sale, scrap record or trade-in documentation.
2. Agree proceeds to the bank deposit.
3. Recompute the carrying value at the disposal date: cost less accumulated depreciation, including depreciation to the disposal date.
4. Recompute gain or loss: proceeds less carrying amount.
5. Check authorization and, if the buyer is a related party, review the price against fair value and disclosure.
6. Verify removal from the register, so the asset stops depreciating.
7. Check the classification of the gain or loss in the income statement.

Worked example: disposals

The client sold a delivery truck on June 14:

The client charged a full six months of depreciation ($9,600), which left accumulated depreciation at $67,200, a carrying amount of $28,800 and a recorded loss of $4,800. The difference is $800 in the loss and $800 in accumulated depreciation. This is a recompute error of the kind that the test is designed to find.

Sale-leaseback and exchange

Look at disposals tied to leases. A sale with a lease back of the same asset has accounting consequences for control transfer, gain recognition and classification. Trade-ins give rise to exchange accounting for the difference.

Impairment and held for sale

Assets designated for sale at year end require evaluation for held-for-sale classification and measurement at the lower of carrying amount or fair value less cost to sell. Assets idle or abandoned require an impairment review. See ASC 360 and ASC 350 impairment.

Linking to the rest of the file

Depreciation expense ties to the income statement and the cash flow statement addback. Accumulated depreciation ties to the rollforward. Proceeds from disposals tie to the investing section of the statement of cash flows, and gains and losses are reversed in the operating section. See cash flow statement indirect method.

Documentation

Rollforward, analytical expectation with the threshold and explanations, detail recompute, disposal search procedures and results, tests of recorded disposals, entries proposed, conclusion.

CORAA prepares ready-to-review audit files for US CPA firms; the firm keeps the client, the review and the signature. See /us.

Sources

• AICPA, AU-C Section 520, Analytical Procedures; AU-C Section 330, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained
• FASB, Accounting Standards Codification Topic 360, Property, Plant, and Equipment
• U.S. Government Accountability Office, Financial Audit Manual, Volume 1 (GAO-26-108577), June 2026, sections 470 (including recalculation) and 475 (substantive analytical procedures): gao.gov

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error