Audit of fixed assets

Meaning

Audit of fixed assets refers to the examination and verification of an organization's tangible assets, such as property, plant, and equipment. It involves assessing the accuracy and completeness of fixed asset records, ensuring proper classification and valuation, and confirming the existence and condition of assets. The audit aims to verify ownership, safeguard assets against theft or loss, assess depreciation calculations, and ensure compliance with accounting standards and policies. By conducting this audit, organizations can maintain accurate financial records, mitigate risks, and make informed decisions regarding their fixed asset investments.

Objectives

• Ensure that All Expenses which need to be capitalized are capitalized;
• Company is maintaining proper Records of Fixed Assets;
• Deprecation , Profit/Loss on Fixed Assets Correctly Calculated;
• Compliance of Accounting Standards;
• Compliance of Revised  Schedule VI;

Steps to achieve the Objectives

Step 1: understand the client procedure of Fixed Assets acquisition and disposal : This is first and very important aspect. In this step, we ask client for Policy and SOPs regarding Fixed Assets.  Form this we obtain the general understanding of Client Working Pattern on Fixed Assets and we came to know who is responsible for what. On the basis of same we can plan our audit program on Fixed Assets.

Step 2: Obtain Fixed Assets Register  as maintained by the Client  : In CARO we have to comment on whether the proper records of Fixed Assets is maintained by the client. To ensure this we have to obtain Fixed Assets Register maintained by the Client. Further we have ensure that the Fixed Assets Register contained following things:-

• Year of acquisition
• Sufficient description of assets for identification
• Classification of assets (e.g., Land, Building, Plant & Machinery)
• Location of assets
• Quantity of units
• Original cost of assets
• Adjustments for revaluation or changes in cost due to currency fluctuations
• Depreciation written off to date
• Written down value of assets
• Rate of depreciation and information on amortization and impairment
• Details of asset sales, discarding, demolition, destruction, etc.
• Information about fixed assets retired from active use and held for disposal
• Comparison of the Fixed Assets Register with the General Ledger balance for each asset class (e.g., Land, Building, Plant & Machinery, etc.) to identify any discrepancies.

Step 3: Vouching of Additions to Fixed Assets

a. Decision on Sample : On the basis of Total Addition, Period and Assessment of Risk decide the % of Addition to be check from total addition made during the period under review.

b. Checking of Bills : Ensure that all fixed assets additions are route through proper channel as mention in FA policy and SOPs.

Ensure that Cost which form part of installation or commission of fixed assets along with any charges incurred to bring the fixed assets to their present location and condition are capitalized.

If company takes credit on duty paid on fixed assets, ensure that such duty should not be forming part of cost.

Ensure expenditure prior to date of ready to use had been capitalized and expenditure incurred thereafter is booked as revenue expenditure.

c. Assets on Lease : Obtain list of fixed assets taken/given on lease during the year.

Ensure compliance of AS 19 with respect to assets given/taken on Lease.

Ensure that proper classification of Assets taken/given on lease as per Revised Schedule VI.

d. Imported Assets : Ensure that all duties on which credit not available should be form part of cost.

Freight and insurance expenses should be capitalized.

Ensure that treatment of Exchange Fluctuation should be as per AS-11

e. Other aspects for checking : Securitize all fixed assets/ repair & maintenance accounts to ensure that no items of revenue have been capitalized and visa versa.

Ensure that eligible borrowing cost upto of assets becomes ready to use has been capitalized.

Ensure that in case of composite acquisition of assets- the price should be bifurcated into assets supported by proper documents.

In case of Self capitalization case ensure that overheads are allocated on reasonable basis.

Ensure that replacement of assets is to be capitalized only when erstwhile assets is removed.

Step 4: Vouching of Deletion from Fixed Assets

a. CARO – Whether Disposal affect the Going Concern : Determine that substantial part of fixed asset is not disposed off. If substantial part is disposed off, determine that such disposal does not affect the Going Concern Status of the company. If its affect the Going Concern Status of Company then ensure that same should be reported in Audit Report.

b. Decision on Sample : On the basis of Total deletion, Period and Assessment of Risk decide the % of deletion to be check from total deletion form fixed assets during the period under review.

c. Checking of Sales bills of Disposal : Ensure that all fixed assets deletions are route through proper channel as mention in FA policy and SOPs.

Ensure that profit/loss on disposal is correctly calculated and disclosed

Ensure that cost, deprecation are eliminated from fixed assets for items which were scrapped and have no residual value.

Step 5: Depreciation and Amortization : Obtained total number of shift worked during the period under review from plant head.

Ensure that depreciation/Amortization is calculated as per Accounting Policy, No. of Shift Working and Schedule XIV, AS-26.

Depreciation on assets purchased during the year should be charge on pro-rata basis.

Lease premium should be amortized over the lease term.

Step 6: Revaluation : Identify the basis of revaluation.

Fact of revaluation should be disclosed for subsequent five years.

Quantum of Revaluation should be disclosed.

Depreciation on revalued amount should be transfer to Revaluation Reserve.

If the revalued assets sold, the remaining balance of Revaluation Reserve should be transfer to Revenue Account.

Step 7: Other : Ensure that immovable properties held as investments and as stock in trade have been shown accordingly in the accounts.

Ensure that Inter-unit Sales/Purchases are eliminated from Fixed Assets Register and Summary of Inter-unit Sales/Purchase should be available separately.

Treatment of Grant received towards cost of assets should be as per AS-12.

Obtained Physical verification Report and ensure that it should be carried out at regular intervals.

Impairment should be as per AS 28.

Ensure that all fixed assets are properly insured.

What are some common challenges businesses face when conducting fixed asset audits?

• Determining the age and location of assets is a common challenge in fixed asset audits.
• Lack of precise records of asset acquisition costs can lead to assets being forgotten or overlooked.
• Accurate and up-to-date asset detail throughout the asset lifecycle is crucial for successful audits.
• Verifying asset-level information like asset life and depreciation classifications can be difficult due to poor documentation or manual entry processes.
• Unexpected issues such as equipment theft, damage, and losses can create gaps during asset review.
• Storing asset information in a centralized repository that is regularly updated helps minimize audit risk. A central asset registry provides clarity to auditors when identifying discrepancies.

Regards

Renu