Audit Fixed Assets
Fixed assets usually represent the biggest amount comparing to the other assets on the balance sheets of the company. As auditors, we usually audit fixed assets by testing the various audit assertions such as existence, completeness, rights and obligations, and valuation.
Fixed assets are the non-current assets that have a useful life for more than one accounting period. Fixed assets may include lands, buildings, furniture and fixtures, and equipment, which we will test in the audit of fixed assets. The intangible asset is also a fixed asset.
Like many other financial statements line items, we usually perform the test of controls on the fixed assets in the audit work. This is due to we can obtain sufficient appropriate audit evidence through test of control to support our assessment in the control risk when we assessed it as low.
However, for the client that has only a few high-value fixed assets, we usually do not perform the test of controls. In this case, we just tick the control risk as high and go directly to substantive tests as it is usually more efficient this way.
Audit Assertions for Fixed Assets
The audit assertions for fixed assets are included in the table below:
|Audit assertions for fixed assets|
|Existence||Fixed assets reported on the balance sheet really exist at the reporting date.|
|Completeness||Fixed assets recorded include all relevant transactions that have taken place during the accounting period.|
|Rights and obligations||The company has ownership rights for the assets as of the reporting date.|
|Valuation||The recorded balances of fixed assets truly reflect their actual economic value.|
|Presentation and disclosure||The fixed asset balance is reflected on the balance sheet in the non-current section and adequate disclosure has been made in the note to financial statements.|
Existence and valuation assertions are usually the most relevant assertions in the audit of fixed assets. Hence, we usually pay more attention to the areas related to them. The company may intend to overstate the value of fixed assets rather than understate.
For example, the client’s management may overstate the fixed assets by including fictitious assets on the financial statements or capitalize the costs, such as repair and maintenance costs, which should be the expense. On the other hand, the valuation issue is usually related to management estimate which involves the depreciation of the assets.
Inherent Risks of Fixed Assets
The common inherent risks associated with the fixed assets are those related to the valuation of the assets. Management estimates, such as estimating useful lives and residual values and determining whether asset impairment has occurred, is very important in the valuation. Hence, we usually focus on testing any external valuations made during the year and evaluate whether the values appear reasonable given the assets usage and condition.
Fixed assets impairment is also a risky area where we should pay attention to as the client’s management tend to not interested in identifying and writing down the value of the assets. Also, to write down the value of intangible assets, sufficient information, proper control, and professional judgment would be required.
Other inherent risks that may occur related to fixed assets include the existence and ownership of the assets themselves. For example, the assets recorded may not exist at the reporting date which may be due to fraud or thief. Also, some items shown on the fixed assets register may not belong to the company as the company may not have the right and ownership to the assets.
Preliminary Analytical Procedures
As auditors, we have the responsibility to perform preliminary analytical procedures in the planning stage of the audit. It helps us to identify key risk areas in the audit. In this case, trend and ratio analysis are the two procedures that we usually use in the preliminary analytical procedures for the audit of fixed assets.
An example of trend analysis here is comparing both fixed assets on the balance sheet and the depreciation expenses in the current period to the prior period. As a result, it will alert us that there may be a potential misstatement if there’s a big fluctuation between the balance of the two periods.
In this case, we may need to take note to inquiry with the client’s management for the explanation of the major fluctuation as well as inspecting the supporting document, to confirm the management’s explanation.
The common ratio used in analyzing the fixed assets is the insurance expense to fixed assets that are insured. We perform the analysis by comparing the ration in the current year to the prior year. In a normal case, the ratio should be around the same and if there’s an increase in rate from year-to-year, it should be consistent.
Any irregular fluctuation may be the result of misstatement that we need to take into consideration and pay close attention when performing the audit of fixed assets.
Test of Controls on Fixed Assets
There might be many internal control aspects on the fixed assets, including sufficient security arrangement over the assets, properly maintaining of the assets, and regular review of the depreciation.
However, the common tests of controls on fixed assets that we perform usually cover three aspects, including fixed assets tagging, segregation of duties, and procurement procedures of the assets.
Fixed Assets Tagging
The client performs this control procedure by attaching a unique identifying tag to each piece of the assets such as office furniture and equipment. Tagging the fixed assets helps the client to keep tabs on all its tagged items and assist in adjusting the balance sheet for addition and disposal. Moreover, it also helps to prevent the misappropriated use of assets for personal gain.
We usually perform this test of control by checking and verifying whether the fixed assets list containing the tag number is matched with the tag number on the fixed asset. This helps to examine whether the client has handled its assets in an effective and efficient manner. If this control procedure is working effectively, the chances are high that transactions are properly recorded and any mistake is caught and corrected on time.
Segregation of Duties over Assets
Segregation of duties simply means that no single individual handles all or most of the transactions involved in fixed assets alone, including recording, authorization, purchase, and payment. In this case, segregation of duties plays an important role in helping to prevent fraud that could occur on fixed assets.
In the test of control here we need to make sure that segregation of duties over the fixed assets exists and is working properly.
Below are some examples of segregation of duties:
- The client’s staff that request for the fixed asset is not the same person who approves for it
- The person who maintains fixed assets records is not the one who records the items in the general ledger or remove from it
- The person who maintains custody of fixed assets is not the one in the accounting function.
Procurement Procedures and Disposal of Fixed Assets
Procurement procedures of fixed assets are the process of purchasing which usually starts from requesting in purchase to finding quotes and then to the approval the purchase and payment. The control procedure here is to make sure that each purchase of the assets has been reviewed, authorized and approved by different levels of authorized persons.
Some items with a high value might need approval from the board of directors before they can be purchased. Similarly, control over the disposal of fixed assets is also about the authorization which exists in the disposal process.
We perform the test of control here to evaluate whether authorizations over acquisitions of fixed assets exist and are effective while each disposal of the assets is approved by the appropriate level of authorized personnel and the proceeds are accounted for.
Substantive Analytical Procedures for Fixed Assets
The analytical procedure is the audit procedure that we use in all stages of the audit by looking at the trend, ratio, and the relationship between data, etc. Similarly, we usually use substantive analytical procedures for fixed assets to gather audit evidence before performing the test of details.
Reasonableness test is the common substantive analytical procedure that we use to in the audit of fixed assets. The fixed assets balances and depreciation expenses have a close relationship. Hence, any change up or down in both of them should be within our expectations.
We also usually compare fixed assets that the client purchased during the year to the budgeted plan for the year in order to check the reasonableness of the spending. Either actual spending on fixed assets is much bigger or much smaller than the budgeted plan, we may need to inquiry the management for the reasons behind.
Test of Details for Fixed Assets
There is a variety of tests of details on fixed assets as they have many areas related to them, including fixed assets addition, disposal, existence and ownership, depreciation, repair and maintenance, impairment and cutoff.
Fixed Assets Addition
In the audit of fixed assets, the test of addition will help to ensure the occurrence, valuation, completeness and classification assertions on fixed assets.
An example of the test of fixed assets addition:
- Select a sample of fixed assets additions
- Vouch the selected sample to the supporting documents, such as vendor invoices, purchase agreements, and titles
- Check and verify to ensure that the additions have been properly recorded in fixed assets register and general ledger
- Check and verify to ensure that they meet the condition to be capitalized
Fixed Assets Disposal
The test of fixed assets disposal will ensure the rights and obligations, completeness, occurrence, and accuracy audit assertion.
An example of the test of fixed assets disposal:
- Select a sample of fixed assets disposal
- Vouch the selected sample of disposal to the supporting document, such as title transfer, fixed assets bill of sale, and sale receipt
- Recalculate gain or loss on disposal
- Check and verify to ensure that the gain or loss on disposal reflects in the income statement
- Check and verify to ensure that disposal of fixed assets have been removed from the balance sheet by reducing the assets account to zero
- If the asset was used as security, make ensure that the release from security has been correctly made.
Fixed Assets Existence and Ownership
An example below is the test to ensure the existence assertion as well as the ownership of the assets:
- Select a sample of items in fixed assets register or listing
- Perform physical inspection on the selected items to ensure their existence
- Examine the title documents or title deeds of the items to ensure they really belong to the client. This ensures audit assertion of rights and obligations .
- Review lease agreement to ensure that all and only financial leases are included in the balance sheet
Fixed Assets Depreciation
In the audit of fixed assets, we perform the test on depreciation to ensure the valuation assertion.
Below is an example of the test of fixed assets depreciation:
- Review the client’s depreciation method to make sure it conforms with applicable accounting standards
- Examine the useful life and salvage value of fixed assets to ensure that the client’s estimate is appropriate. This may involve a lot of professional judgment; one way to do is to compare the client’s estimate with the industry standard.
- Perform recalculation on depreciation to see if our result is the same as the client’s figures. This will ensure audit assertion of accuracy.
It is useful to note that the depreciation method and the estimate of fixed assets’ useful life that the client use will directly impact on both the balance and the income statement. In this case, an understatement of depreciation will result in an overstatement of both fixed assets and net profit, and vice versa.
Repair and Maintenance
Though repair and maintenance account is an expense account, we usually examine this account in the audit of fixed assets to test the completeness and classification of audit assertions.
An example of the test include:
- Select a sample of large expenses in repair and maintenance account
- Vouch those selected expenses to the invoices to ensure that they are really not needed to be capitalized.
Review for the indicator of impairment on the fixed assets. In this case, the asset is impaired when it no longer produces the benefits for the client as it did in the past. The assets that are likely to be impaired are those that are obsolete or those that are likely to be exposed prior to their estimated useful life.
If there are some cases like this, you might need to discuss with management in order to reduce their carrying value to an appropriate amount.
The cutoff test is performed to ensure that all fixed assets transactions have been recorded in a correct accounting period. This test can be performed by selecting purchases and sales of the items for the few days before and after the end of the accounting period to ensure that transactions related to items are recorded in the correct accounting period.