Question

Audit of Fixed Assets is a very important task for Auditor. What procedures will you apply to verify possible understatement of fixed assets? [5 Marks]

Answer 1

Fixed assets are the assets owned by an organization over a longer period of time like land, building, machinery etc. They are not liquid assets and cannot be easily converted into cash. Their purpose is to carry out the business activity like production and not selling.

Audits of company's financial statements is very important these days and one of them being fixed assets audit is very important to present fair balance sheet and to present a better internal control of the organization.

Certain points to be kept in mind before auditing fixed assets:

* Physical existence of fixed assets

* GAAP followed by the organization

* Depreciation charged to fixed assets

* Setup and installation costs have been charged

Procedures to be applied to verify possible understatement of fixed assets:

1. Physical Verification of Fixed Assets -

Physical verification of fixed assets should be done and the existence of fixed assets should match those entered in the books of accounts throughout the year. All the assets acquired should be recorded in the books of accounts and if there is an omission, it means there is understatement of fixed assets.

2. Perform Cost checks

It means that the costs of acquiring those assets and bring them to proper use should be properly recorded. Fro example - The costs of setting up and installation are added to the cost of fixed asset. If these costs are not included but have been incurred, the fixed assets stay understated in books of account.

3. Charging of capital expenditures

All capital expenditures should be recorded to fixed assets and should not be charged to revenues.

4. Depreciation calculation

Auditors should verify that the depreciation calculated by the organization on fixed asset is appropriate and the method of depreciation is constant and is not changed in the financial year. The method used to calculate depreciation is adequate and the depreciation calculated therefrom is proper and is not overstated.

5. GAAP principles followed

GAAP principles must be followed by the organization like consistency principle which states that the methods used by the organization in treating of fixed assets should be consistent, historical cost principle which states that fixed assets should be recorded at cost at which it was acquired or was put to use.