How to Audit Fixed Assets?
Fixed assets are the long-term assets that company owns and use to support its operation. They are expected to last for more than one accounting period.
These are the items that company uses to run the business activities which aim to generate revenue. They are classified into the land, buildings, vehicles, computers, and so on. The company should not include items that are not expected to last more than a year. They do not include the assets that company held for sale.
Auditor will classify the risk of material misstatement of fixed assets based on the nature of assets and business activities. They should spend time reviewing the fixed assets policy as well. It helps them to understand more if the company complies with proper accounting policy. When the company designs a poor control, it will indicate a high risk of material misstatement within the account.
The fixed assets are also linked with the depreciation expense on income statement. To get the proper fixed assets balance, they require to have a proper depreciation expense as well. The audit team that tests fixed assets and depreciation should be the same. It will help them to see the full picture and be able to detect unusual transactions.
Audit Assertion for Fixed Assets
- Existence: Fixed assets must really exist otherwise the company cannot record them on its balance sheet. It is considered fraud when company records fake fixed assets on the financial statement.
- Right and Obligation: The company has the right to use the fixed assets to generate economic benefit for the company. This right includes the legal right to sell or transfer assets to someone else.
- Completeness: All fixed assets under company control must be recorded on the balance sheet. There is no exception for the company to exclude fixed assets from the reporting unless they are sold or disposed.
- Accuracy: The balance of fixed assets must be reflected with the real asset value. It is related to both costs of purchase and the accumulated depreciation.
- Classification & Presentation: The company has the obligation to classify and present the fixed assets in the correct category,
Substantive Analytical Procedure for Fixed Assets
The auditor can use the substantive analytical procedure as a guideline to get the overall picture of the account balance. It helps them to understand the relationship between financial and non-financial data.
If the business is expanding new location, they are required to purchase new fixed assets to support the operation. So auditors will expect to see a significant increase in fixed assets. The type of fixed assets will depend on the expansion. The increasing of factories will require a lot of fixed assets from production-related machinery, warehouse, and so on. It depends on the nature of the information that auditors collect and their judgment.
The increase in assets also has a connection with sales revenue as well. When a company increase fixed assets, it will lead to an increase in sale revenue as well. If the actual sale is not increased, the auditor has to check if there is anything wrong.
At the same time, auditors are also required to review the repair and maintenance expenses if they increase significantly. The client may not capitalize the fixed assets properly but record them as repair and maintenance expenses instead.
Test of Detail for Fixed Assets
- Existence: The auditor has to ensure that the fixed assets on the financials statement really exist. If the fixed assets do not exist, it will be a problem. Company intends to overstate the value of the asset to increase the company’s overall valuation. So the auditors have to make sure all the fixed assets really exist.
They can perform the physical inspection by selecting from the fixed assets listing the actual assets. The selection can depend on the sampling and auditor judgment. It is not necessary to inspect all assets that company owns, it depends on the auditor’s judgment.
- Right and Obligation: Company can only record the fixed assets that they really own. It means they only record them when they are the owners who have the right to use the assets. Some assets exist in the company but do not belong to them, for example, the consignment goods and so on.
Auditors can inspect the ownership document such as the land/building title. For the other small fixed assets, they can check the purchasing documents to prove the ownership.
- Completeness: All the fixed assets that are company-owned must be present on the financial statement. The company can make a slight error by excluding the assets due to some reasons.
Auditor has to obtain the fixed assets listing from accountant and reconcile it with the balance sheet. The reconciliation is a bit tricky for fixed assets. First, they have to reconcile the beginning balance and compare it with last year’s report. Then they reconcile the new purchase with the fixed assets general ledger. They have to make sure all fixed assets are really included.
During the physical inspection, auditor can trace back the fixed assets from the actual asset to the listing. It helps to ensure that all assets have been included.
- Accuracy and valuation: The fixed assets must be recorded based on the real value that represents the actual fixed assets. It is a bit complicated as the fixed assets do not remain the same from the purchase date. The amount present on the balance sheet is the net book value (carrying amount) which is equal to the initial cost less accumulated depreciation.
Auditor can reconcile the opening balance with last year’s report to ensure the beginning balance.
The fixed assets addition during the year has to be checked with the purchasing documents. These new assets must start the depreciation at the right time, otherwise, it will overstate the value of the fixed assets.
They have also required the check of the disposal of assets during the year as well. The disposed of fixed assets must exclude both cost and accumulated depreciation from the balance sheet.
The depreciation expense is tested in its own section, auditors can cross-check with the team to see if there are any material misstatements.
The final step is to review the movement of the fixed asset which include all of the above figures. The fixed assets balance is equal to total cost less total accumulated depreciation.
- Classification & Presentation: The fixed assets must be classified as the noncurrent assets on the balance sheets. It must follow the company policy which is already a proper review. There must be a proper disclosure related to fixed assets movement.