FIXED ASSET AUDIT

INTRODUCTION TO FIXED ASSETS AUDIT

A fixed asset audit is the examination of a company’s fixed assets to verify that the assets exist, are accurately valued, properly recorded in the accounting records, and legitimately owned by the company. It ensures that the fixed assets are adequately safeguarded, properly insured, accurately counted for tax purposes, and monitored for impairment.

IMPORTANT TERMINOLOGIES

RECORDING:

• Testing whether fixed asset transactions are completely and accurately captured
• Evaluating correct application of capitalization policies
• Assessing accuracy of depreciation calculations

OWNERSHIP:

• Confirming clear title and ownership of land, buildings, equipment
• Reviewing terms of significant leases and rental agreements
• Validating assets purchased on installment plans have clear ownership transfer

EXISTENCE AND CONDITION:

• Physically inspecting fixed assets to ensure they exist and are in working condition as recorded in the fixed asset register
• Vouching fixed assets to purchase invoices, titles, or other evidence of ownership
• Evaluating if assets are obsolete, fully depreciated, or need to be impaired Valuation
• Verifying that asset costs and useful lives used for depreciation align with accounting policies
• Assessing if impairment is required for declining asset values
• Testing fair value estimates if assets are revalued

SAFEGUARDING ASSETS:

• Determining if physical access and security controls for assets are adequate
• Checking insurance coverage is sufficient
• Inspecting asset labeling procedures.

OWNERSHIP:

• Confirming clear title and ownership of land, buildings, equipment
• Reviewing terms of significant leases and rental agreements
• Validating assets purchased on installment plans have clear ownership transfer

EXISTENCE AND CONDITION:

• Physically inspecting fixed assets to ensure they exist and are in working condition as recorded in the fixed asset register
• Vouching fixed assets to purchase invoices, titles, or other evidence of ownership
• Evaluating if assets are obsolete, fully depreciated, or need to be impaired Valuation
• Verifying that asset costs and useful lives used for depreciation align with accounting policies
• Assessing if impairment is required for declining asset values
• Testing fair value estimates if assets are revalued

SAFEGUARDING ASSETS:

• Determining if physical access and security controls for assets are adequate
• Checking insurance coverage is sufficient
• Inspecting asset labeling procedures

PROCEDURES FOR CONDUCTING A FIXED ASSET AUDIT

1. Planning

• Understand client’s business, operations, fixed asset policies
• Identify material fixed assets from prior audits or client asset register
• Assess risk areas to focus audit testing and sample selection

2. Fieldwork

• Physically inspect major assets and select samples from listing
• Observe asset condition and existence
• Verify ownership titles and rights?
• Test valuation, useful life, depreciation accuracy
• Analyze accounting records and supporting documents
• Interview personnel responsible for managing fixed assets

3. Reporting

• Inform management of control deficiencies or errors noted
• Quantify misstatements and make audit adjustments as needed
• Highlight areas needing policy or procedural improvements
• Provide recommendations to enhance fixed asset monitoring

BENEFITS OF A FIXED ASSET AUDIT

DETECT ERRORS AND FRAUD

A fixed asset audit determines whether assets exist and transactions are recorded accurately, highlighting omissions, understatements or evidence of fraud for management to rectify.

ASSESS CONTROL EFFECTIVENESS

Examining an organization’s fixed asset policies, procedures and management allows auditors to gauge operational effectiveness and identify control gaps needing improvement.

TRUE ASSET VALUATION

Verifying proper asset valuation, impairment assessment and depreciation leads to a more accurate total asset value on the balance sheet.

OPTIMIZE TAXES

Having substantiated records of asset costs and depreciation minimizes overpayment of taxes like property taxes and prevents underpayment of income taxes.

INFORM DECISION MAKING

An updated fixed asset register with accurate valuations and existence confirmation enables better decisions regarding capital investments and asset maintenance.

KEY FOCUS AREAS IN A FIXED ASSET AUDIT

ASSET EXISTENCE & CONDITION ASSESSMENT

• Physically inspect assets and confirm they exist as recorded and are in working order
• Ensure adequate segregation of duties in recording asset acquisitions & dispositions

OWNERSHIP & RIGHTS VERIFICATION

• Examine purchase contracts, titles, leases, licenses, legal agreements
• Confirm ownership transfer for purchased assets on installment plans
• Review terms of significant operating & finance leases

PURCHASE DOCUMENTATION

• Vouch fixed asset additions to invoices, delivery documents, installment agreements
• Check correct supplier details, date, amount, approvals contained on documents

AUTHORIZATION OF DISPOSALS

• Verify authorization documentation for assets scrapped, sold or written off?
• Check disposal proceeds were appropriately calculated and recorded

SAFEGUARDING EVALUATION

• Assess if physical security controls for various assets are adequate
• Confirm insurance coverage is sufficient relative to asset replacement values

CAPITALIZATION POLICY APPLICATION

• Test significant purchases are correctly classified as fixed assets
• Ensure expense vs. capitalization thresholds are consistently applied.

VALUATION & IMPAIRMENT ASSESSMENT

• Check fair value estimates for revalued assets are supported
• Review fixed assets for indications of impairment?
• Test impairment losses are appropriately recorded

USEFUL LIFE & DEPRECIATION CONSISTENCY

• Verify useful life estimates align with accounting policies & asset categories
• Recalculate depreciation charges to check accuracy of recording
• Determine obsolete & idle assets are appropriately impaired/written down.

COMPLIANCE

Documenting existence and ownership of fixed assets provides auditors assurance that relevant regulations and accounting standards are being complied with.