Tailoring the correct audit procedures to the testing of fixed assets is not only helps auditors to minimize the detection risks but also helps the auditor to work more efficiently. That means the auditor could spend less time and effort on reviewing the fixed assets but still get the required result.
The auditor could tailor the right auditor procedure only if the controls related to fixed assets are obtained and the risks are properly assessed.
Now, before we go into the detail on audit procedures of fixed assets, it is good to start with the overview of fixed assets including the relevance standard with deal with, the control, audit assertion, and the risks that might be happened to fixed assets.
Fixed assets are the long-term assets that are recorded in the balance sheet and show balance at the end of the reporting date. Fixed assets are non-current assets that have a useful life for more than one year.
Fixed assets are not recognized as expenses in the income statement at the time of purchasing but it is recognized as expenses when the entity uses them. The company uses the systematic method to depreciate fixed assets and the depreciation expenses are recognized during the useful life of assets.
Fixed assets are normally large if we compare them to other assets like current assets. And they are generally considered as sensitive areas from the audit perspective.
The auditor in charge of these areas should be the one that has the experience and knowledge enough otherwise the detection or audit risks might be increasing.
Auditors should obtain the key control on how the entity manages and control its fixed assets. The better auditors understand internal control over fixed assets, the better the auditor tailors the procedures and implement the procedures.
There are many key areas that they should consider reviewing. Those include CAPEX budget preparation and authorization.
The procurement procedures from suppliers’ finding process into receiving assets as well as making payments. These controls are critical for auditors. If the controls here are not strong, then the quality of financial reporting related to fixed assets is also questionable.
The auditor should also obtain an understanding of how the management controls the physical assets. For example, if physical control is strong enough to ensure that our assets are safe? How often does the management perform the physical count and reconcile all of the assets?
One auditor obtains and updates their understanding of the key internal control, then they should validate the control by testing the key process and control that matter to financial statements. The procedure should be tailored after validation of the control.
Now let talk about the assertions that auditors used to audit fixed assets,
Fixed assets are the accounting balance that reports and present in the balance sheet and the assertion used to prepare and report these items are not much different from other balance sheet items. The audit procedures should sufficient enough to address all of these assertions.
- Existence: There are the risks that fixed assets that report in the balance sheet might not exist. To ensure this, the auditor should consider performing the physical observation as well as joining the physical observation.
- Completeness: this assertion concern the completeness of fixed assets that record in the balance sheet, as well as fixed assets listing. If the fixed assets are not completely records, understatement is likely to happen.
- Valuation assertion concern the net present value of the reported fixed assets. These including the cost that the entity include or exclude from the cost of capitalization as well as recoverability of fixed assets compared to its net book value. There are the risks of overstatement of fixed assets for certain assets that significantly affected by technology.
- Cuff off is the income statement assertion, but it is like the balance sheet assertion. For example, if the fixed assets that purchase before and after the reporting date are not correctly cut off then the fixed asset amount that reports in financial statements also not correct.
- Classification: This assertion concerning the classification between fixed assets and current assets as well as the items among the fixed assets. For example, repair and maintenance might be included in the capital expenditure.
- Disclosure: This assertion concern the disclosure of important information that matters to the users of financial statements. Those include the accounting policy, significant purchase, as well as disposal.
Common Risks Related to Fixed Assets:
The audit risks related to fixed assets are vary based on the nature of fixed assets, control that entity has, and auditor limitation. The following are the risks that normally attach to an audit of fixed assets:
- Incorrect Depreciation rate and calculation: Depreciation rate is normally decided by management. In some cases, management might intend to manipulate the depreciation rate to get the depreciation expenses based on what they want. The auditor needs to ensure that the assessment of the depreciation rate is performed. The rate should be based on the expected useful life, as well as the capacity of assets.
- The reported fixed assets are not existing: The assets that report in the financial statements are normally material compare to other assets and the existence of those assets is normally the concern of auditors. To address this, the audit might need to check between book value in the financial statements to fixed assets listing. And then check the listing to the fixed assets count sheet.
- Overstatement of fixed assets: It is important to assess the recoverable amount of fixed assets. For example, the business units of the entity have their revenues down over that last twelve months. This indicates that book values of fixed assets that use in these business units are lower than the reported amount.
- Reconcile the book value of assets to GL and TB: Auditors should have entity’s financial statements, general ledger as well as Trial Balance for the period that they are auditing as well as relevance period. Before working on TB and GL of fixed assets, it is important for the auditor to check whether the GL and TB are linked to fixed assets book value, depreciation, as well as accumulate depreciation, which is tight to financial statements.
- Reconcile book value of assets to fixed assets register or mater file to ensure that the register that uses for the physical count is completed and accurate.
- Review the depreciation schedule: Accountant use depreciation schedule to calculate and control the depreciation expenses as well as accumulated depreciation. Auditor review the reasonableness of depreciation rate, useful life, depreciation calculation, as well as accumulate depreciation calculation.
- Review the working paper of reconciling fixed asset per listing to actual count to ensure that the result after count reflects fixed assets in the financial statements.
- Review repair and maintenance costs whether it is currently correctly classified. Repair and maintenance is the cost that spends for bringing assets to current and earlier condition. If the cost that spends on assets is to extend the capacity of assets, then those costs should not be included in the repair and maintenance. Those costs should be capitalized.
- Review the acquisition of fixed assets and related capitalization cost whether all necessary costs that should be capitalized as per IAS 16 had been included in the capitalization costs.
- Disposing of fixed assets during the years are also important for certain cases. For example, based on the pre-analytical review, auditors found that there are material amounts of fixed assets that were disposed of. If this is the case, the auditor should review not only the procedures of disposal, accounting recognition but also the main reason for disposal which might affect the others recoverable of fixed assets.
- Maintaining a fixed asset register and/or master file is only important for the accuracy, completeness, and existence of fixed assets. The auditor should consider reviewing the reliability of fixed assets listing as well as mater file.
- Review fixed assets impairment assessment: Based on IAS 36 Impairment, the entity needs to assess the impairment every year. The auditor should consider reviewing the procedures and processes that managers use to assess the impairments.
- De-recognition of fixed assets is agreed to the de recognition procedure and policy. Make sure that assets that had been disposed of and written off are removed from the list and financial statements.
Written by Sinra