How to Audit Fixed Assets

Fixed assets are the long-term tangible assets that are used for the production of goods and services in the business providing long-term financial gain with a life of more than a year. Fixed assets are property, plant, and equipment on the balance sheet and are also known as capital assets.

Auditors play an important role in evaluating the fixed assets and hence it becomes necessary to understand how to audit fixed assets and what procedures are involved in it.

Report on fixed assets

Assets are divided into current assets and noncurrent assets wherein current assets are liquid assets that will be converted into cash in less than a year and noncurrent assets are the assets and property owned by the business which cannot be converted into cash. Assertions carried out in preparing the reports are not much different than the balance sheet items and the following are the steps on auditing the fixed assets.

Understanding the procedure:  The most important aspect is to understand the client’s working pattern on the fixed assets and hence clients are asked for policy and SOPs regarding the fixed assets and based on that audit program is planned for fixed assets.

Obtaining the records: It is mandatory to check whether the client has maintained the fixed asset register and to obtain it from them with the following details to be part of the register such as year of acquisition, description of assets, classification under proper heads, location, quantity, original costs, revaluation, depreciation, particulars of sales, demolition, and destruction and whether all the fixed assets agree with the general ledger balance.

Vouching of addition: Addition, period, and assessment of risk deciding the % of addition to checking, ensuring all the fixed asset addition are done through proper channels, obtaining the list of the asset taken/given on lease, compliance of AS 19, proper classification as per revised schedule VI, freight and insurance expenses are capitalized, exchange fluctuation as per AS-11, and ensuring the replacement of asset is capitalized when assets are removed.

Vouching of deletion: Checking on whether the considerable part of the fixed asset is disposed off, on basis of deletion, period, and assessment of risk deciding the % of deletion, ensuring fixed asset deletion as per the route through proper channels mentioned in FA policy and SOPs, profit/loss is correctly calculated, and cost, depreciation is eliminated from fixed assets for the items which are scrapped.

Depreciation and Amortization: Obtaining the number of shifts worked during, ensuring depreciation and amortization are calculated as per Schedule XIV, AS-26, depreciation is charged on a pro-rata basis, and premium to be amortized.

Revaluation:  Identifying the basis on which revaluation is done, facts of evaluation disclosed for coming five years, the quantum of revaluation is disclosed, depreciation on the revalued amount is transferred to revaluation reserves, and if the assets are sold then the balance to be transferred to revenue account.

Auditing on the fixed assets is a must as these are immovable properties and helps in checking whether the investment and stocks held are mentioned accordingly in the accounts following all the schedules.