Fixed assets are an essential component of the financial statements of any business, and their proper accounting and reporting are crucial to ensure the accuracy and reliability of the financial statements.
As such, conducting thorough audit procedures for fixed assets is a critical part of the audit process. In this article, we will discuss the best practices for conducting audit procedures for fixed assets.
Accounting Under IFRS
Under IFRS, fixed assets are initially recognized at cost and subsequently measured using the cost model or the revaluation model.
The cost model measures fixed assets at historical cost less accumulated depreciation and impairment losses.
The revaluation model measures fixed assets at fair value, less accumulated depreciation, and any impairment losses.
Under IFRS, fixed assets must meet certain criteria for recognition.
The asset must have a probable future economic benefit, and the cost or value of the asset must be reliably measured.
The entity must also control the asset arising from a past transaction or event.
IFRS requires that fixed assets be depreciated over their useful lives. The useful life is the period over which the asset is expected to be used by the entity.
The residual value is the estimated amount that the entity would receive after deducting the expected disposal costs.
The method of depreciation used must reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity.
IFRS also requires that fixed assets be tested for impairment if there is any indication of impairment. An impairment loss is recognized when the carrying amount of an asset exceeds its recoverable amount, which is the higher of fair value less costs to sell or value in use.
Disclosure requirements under IFRS for fixed assets include:
- The carrying amount of each class of fixed assets.
- The depreciation charge for the period.
- The useful lives and depreciation methods used.
- Any impairment losses recognized.
- Any revaluations of fixed assets.
Certainly! Here are some potential audit risks to consider when conducting audit procedures for fixed assets:
- Existence and completeness of assets: There may be a risk that fixed assets are not recorded in the correct accounts or are not recorded at all. Auditors should examine the fixed assets register, review purchase and disposal documentation, and physically verify the existence of the assets.
- Valuation: Fixed assets should be recorded at their fair value, and auditors need to consider the appropriateness of the valuation methods used. There may be a risk of over- or under-valuation of assets, particularly if they are unique or difficult to value. Auditors should assess the accuracy of depreciation calculations, examine the assumptions used, and verify that the assets have been valued in accordance with IFRS.
- Classification and presentation: There may be a risk that fixed assets are not presented in the financial statements in accordance with IFRS. Auditors should check that fixed assets are classified appropriately and that related disclosures are provided.
- Ownership: Auditors should verify that the company actually owns the fixed assets it claims to own. There may be a risk that assets have been pledged as collateral or are leased, which could affect the company’s financial position.
- Impairment: There may be a risk of impairment of fixed assets due to changes in market conditions or other factors. Auditors should assess whether the company has identified and recorded any impairments and whether the assessment is appropriate.
- Capitalization of costs: Some costs related to fixed assets should be capitalized (e.g., installation costs), while others should be expensed (e.g., repairs and maintenance). Auditors should check that the company has correctly identified which costs to capitalize and that the capitalization has been done in accordance with IFRS.
- Depreciation policies: Companies should have a consistent policy for depreciating their fixed assets, and auditors should verify that the policy is being followed. There may be a risk that the company has changed its depreciation policy without justification.
- Related party transactions: There may be a risk of related party transactions involving fixed assets. Auditors should examine such transactions and ensure that they are disclosed in the financial statements.
- Capital expenditure approval: There may be a risk of improper approval of capital expenditures. Auditors should examine approval documentation and ensure that all expenditures are properly authorized.
- Internal controls: Finally, there may be a risk of inadequate internal controls over fixed assets. Auditors should assess the company’s control environment, including its policies and procedures for managing fixed assets. They should also examine any significant deficiencies or material weaknesses in the company’s internal control over fixed assets.
The following are the assertions that auditors should consider when conducting audit procedures for fixed assets:
- Existence: the fixed assets exist and are owned by the company
- Completeness: all fixed assets that should be included in the financial statements are included.
- Valuation: fixed assets are recorded at their correct value.
- Rights and obligations: the company has legal ownership and rights to use fixed assets.
- Presentation and disclosure: fixed assets are properly presented and disclosed in the financial statements.
When conducting walkthrough testing for fixed assets, auditors should consider the following:
- Review the company’s fixed asset policies and procedures.
- Identify the personnel responsible for managing fixed assets and their roles and responsibilities.
- Trace a sample of fixed assets from acquisition to disposal.
- Review the company’s capitalization policy and ensure it is being followed correctly.
- Obtain a copy of the fixed asset register and compare it to the general ledger.
- Review the company’s depreciation policy and ensure it is being applied consistently.
Test of Control
The following are some of the tests of controls that auditors can perform when conducting audit procedures for fixed assets:
- Inspect fixed assets to ensure they exist and are in good condition
- Review purchase orders and invoices to ensure that fixed assets are properly authorized and recorded.
- Review the company’s fixed asset policies and procedures to ensure they are followed.
- Review the company’s segregation of duties policy to ensure adequate controls over the fixed asset process.
Substantive Audit Procedures
The following are some of the substantive audit procedures that auditors can perform when conducting audit procedures for fixed assets:
- Verify the existence of fixed assets: Physically inspect the fixed assets and compare them to the fixed assets register to ensure that all assets are present and accounted for.
- Test depreciation calculations: Check the calculation of depreciation on a sample of fixed assets to ensure that it has been accurately calculated and recorded in the financial statements.
- Review capital expenditure: Check for any capital expenditures recorded as expenses in the current year or prior years, as these expenditures should have been capitalized and depreciated.
- Confirm the ownership of fixed assets: Obtain ownership documents and verify that the assets are properly recorded in the company’s fixed assets register.
- Impairment test: Check whether there is any indication that fixed assets are impaired and assess the adequacy of the impairment loss.
- Test the completeness of fixed asset records: Compare the fixed assets register to the general ledger and ensure that all fixed assets have been recorded in the financial statements.
- Test the accuracy of fixed asset records: Check whether the fixed assets have been recorded at their correct cost and that depreciation has been calculated accurately.
- Review lease agreements: Review lease agreements for any terms that may impact the recognition, measurement, or disclosure of fixed assets.
- Review disposal of fixed assets: Check that the disposal of fixed assets has been properly recorded and that the proceeds from the disposal have been appropriately accounted for.
- Review the fixed assets policy: Check the company’s fixed asset policy for compliance with IFRS, and ensure that the policy is being followed consistently across the company.
In conclusion, conducting audit procedures for fixed assets is a critical part of the audit process. By following best practices, auditors can ensure accuracy and reliability.