Fixed Assets Audit Services

What are Fixed Assets?

Fixed assets, also known as non-current assets, are integral components of a company’s operational infrastructure, acquired with the intention of facilitating the production or provision of goods and services. These assets are distinct from those held for sale in the regular course of business and are expected to remain in use for an extended period, typically spanning more than one accounting period. Common examples of fixed assets include property, plant, equipment, and intangible assets like patents or trademarks. Their enduring nature underscores their strategic importance, as they contribute to the organization’s long-term capabilities and functionality. Proper management and accounting for fixed assets are crucial to ensure accurate financial reporting and effective decision-making within the business.

Some of the examples are:

Buildings & Furniture
Machinery & Equipment
Computer
Vehicles

Audit Objective:

1) Implementing a robust asset management system and conducting regular audits are crucial to ensure accurate and up-to-date records of fixed assets are consistently maintained.

2) Establishing stringent capitalization policies and conducting thorough reviews of expenditures are imperative to ensure that only qualifying capital expenses are appropriately capitalized on the balance sheet.

3) Regularly conducting comprehensive reviews and audits of depreciation calculations is essential to validate accuracy, correctness, and compliance with Schedule II of the Companies Act, 2013, ensuring financial statements align with regulatory requirements.

4) Ensuring adherence to applicable Indian Accounting Standards (IND AS) and fulfilling disclosure mandates outlined in Schedule III of the Companies Act, 2013 is imperative for maintaining financial transparency and regulatory compliance in financial reporting.

Documents required from the client:

1) Transparent documentation and communication of internal policies and guidelines governing fixed assets, including depreciation methodologies, are essential to ensure clarity, consistency, and adherence to established practices within the organization.

2) The client’s fixed asset register serves as a comprehensive record, documenting key details such as acquisition costs, depreciation, and current values, while features of the fixed assets budget outline planned expenditures, providing a strategic financial roadmap for acquiring, maintaining, and managing assets over a specified period.

3) Examining copies of supporting documents, including purchase requisitions, requests for quotations, comparative statements, purchase orders, and invoices, for the selected samples ensures the audit’s thoroughness and verifies the accuracy of recorded financial transactions.

4) Compile a comprehensive list of authorized personnel responsible for approving the purchase or disposal of fixed assets at various stages in the respective processes, ensuring accountability and adherence to organizational protocols.

5) Reviewing the client’s physical verification register for fixed assets provides crucial insights into the accuracy and reliability of asset records, supporting the overall integrity of the financial reporting process.

Process of Verification:

1) Thoroughly assess the client’s internal policies to determine their alignment with statutory requirements, ensuring robust compliance and minimizing the risk of regulatory discrepancies.

2) Confirming the congruence of opening balances in the current financial statements and the Fixed Asset Register (FAR) with the closing balances from the prior year’s audited financials is essential for maintaining accuracy and consistency in financial reporting, ensuring a reliable basis for evaluating the financial health of the organization. Any discrepancies must be thoroughly investigated and reconciled for reliable financial information.

3) Conduct a meticulous examination of the Fixed Asset Register (FAR) to ensure completeness, correctness, and accuracy, while also verifying compliance with the Companies Act, 2013, specifically addressing the requirements outlined in the Companies (Auditor’s Report) Order (CARO) 2016, thereby fortifying the reliability and regulatory adherence of the financial reporting framework. Any identified issues should be appropriately addressed for compliance assurance.

4) Verify that if assets within a class are revalued, the revaluation process encompasses the entire class of fixed assets, ensuring consistency and fairness in reflecting the updated values across all relevant assets.

5) Confirm that any increase or decrease resulting from the revaluation of fixed assets is accurately accounted for by adjusting against the Revaluation Reserve or, if applicable, the Profit & Loss Account, maintaining transparency and aligning with accounting principles for proper financial representation. Any adjustments should be clearly documented and in accordance with established accounting standards.

6) Conduct a rigorous physical verification of fixed assets to ensure accuracy, existence, and proper valuation, safeguarding the integrity of the asset register and financial reporting.

7) Verify the physical existence of each asset by comparing it with the information recorded in the fixed asset register, confirming that assets are present and accounted for in the designated locations.

8) Ensure that fixed assets are properly labeled with their respective asset numbers, facilitating easy identification and tracking, a key practice for efficient asset management and accountability.

9) Verify that all assets are in proper working condition, confirming their operational status, which is crucial for accurate financial reporting and efficient utilization of resources within the organization.

10) Confirm that the Fixed Asset Register (FAR) comprehensively captures details regarding the number of fixed assets, ensuring accurate documentation and a reliable record of the organization’s asset inventory.

11) Establish and enforce robust controls to restrict unauthorized access to fixed assets, safeguarding against potential misuse or misappropriation and ensuring the security and integrity of valuable resources.

12) Regularly conducted physical verification of fixed assets by the management enhances accountability and accuracy, providing assurance that the recorded asset information aligns with the actual physical presence, contributing to effective asset management practices.

13) Implement and execute relevant fixed assets auditing procedures, including detailed examination of supporting documentation, physical inspections, and compliance checks, to ascertain accuracy, completeness, and adherence to accounting standards and regulatory requirements.

Acquisitions

1) Verify that acquisitions of fixed assets align with internal policies, promoting consistency and adherence to established guidelines for transparent and accountable procurement processes.

2) Verify that actual expenses align with estimated or expected budgets, ensuring financial accountability and aiding in effective cost management practices.

3) Thoroughly examine the procurement/purchase process of selected samples, scrutinizing available documentary evidence to ensure transparency, accuracy, and compliance with established procedures.

4) Verify meticulous compliance with Accounting Standards (AS) 10(Revised), AS 26, AS 16, and AS 12 during the accounting of fixed assets in the books, ensuring accurate financial representation and adherence to accounting principles.

Disposals:

1) Verify that the disposal of a substantial part of a fixed asset is carefully managed to mitigate any adverse impact on the business’s going concern concept, preserving the organization’s stability and continuity.

2) Verify the accurate calculation and proper recording of any profit or loss resulting from the disposal of assets, ensuring precise financial reporting and compliance with accounting standards.

3) Adjust depreciation on the disposed assets, ensuring accurate accounting treatment and reflecting the appropriate impact on the financial statements in accordance with established depreciation methods.

4) Record or note fixed assets held for sale at the lower of their Net Book Value and Net Realizable Value, adhering to prudent accounting practices for realistic valuation and financial reporting.

Depreciation / Amortization:

1) Depreciation quantifies the decrease in value of depreciable fixed assets due to factors such as use, wear and tear, passage of time, or obsolescence resulting from technological advancements or market shifts.

2) Verify strict adherence to Accounting Standards (AS) 10(Revised) and AS 26 while calculating depreciation, ensuring accurate and consistent application of prescribed methodologies for sound financial reporting.

3) Calculate depreciation for acquisitions on a pro-rata basis, distributing the expense proportionately over the asset’s useful life, ensuring a fair and accurate representation of the asset’s gradual reduction in value.

4) Verify strict compliance with Schedule II of the Companies Act, 2013, ensuring accurate calculation of depreciation and adherence to the specified rates and methods for different classes of assets.

5) Any deviation from Schedule II requirements in depreciation calculation must be transparently disclosed in the notes to accounts, ensuring comprehensive and accountable financial reporting.

Disclosure requirements:

1) Verify that fixed assets are appropriately classified in accordance with the classifications specified in Schedule III of the Companies Act, 2013, ensuring accurate presentation in financial statements.

2) Comply with Schedule III of the Companies Act, 2013, by disclosing relevant details concerning fixed assets in the “notes to accounts,” providing transparency and comprehensive information for stakeholders.

3) Disclose the gross value of each class of fixed assets at the beginning and end of the reporting period, along with their respective useful life, as per the requirements of Schedule III of the Companies Act, 2013, enhancing transparency in financial reporting.

4) Additionally, disclose the accumulated depreciation of each class till the reporting date and the depreciation charge incurred during the year, providing a comprehensive overview of the fixed assets’ financial impact.

5) Include details of acquisitions and disposals during the year in the “notes to accounts,” with a separate disclosure of depreciation related to these transactions, ensuring transparency and clarity in financial reporting.

6) Specify the net block of each class of fixed assets at the beginning and end of the reporting period, adhering to Schedule III of the Companies Act, 2013, for a comprehensive representation of the assets’ financial position.

7) Disclose the method of depreciation employed for charging depreciation and elucidate any changes in the process during the year, ensuring transparency and adherence to disclosure requirements in financial reporting.

8) Any deviation from Schedule II of the Companies Act, 2013, must be transparently disclosed as part of the “notes to accounts,” ensuring comprehensive and accountable reporting of the reasons for the deviation.

9) For transparency, provide details of assets revalued, including the revaluation amount, in financials for a period of 5 years from the revaluation date, complying with disclosure requirements and enhancing visibility into the asset’s valuation history.

Change in accounting policy

When amortizing an intangible asset for over 10 years, disclose factors determining its useful life beyond this period in the financial statements, ensuring transparency and providing insights into the rationale for an extended amortization period.