For any business, fixed assets—like machinery, buildings, vehicles, and equipment—are the backbone of operations. They represent significant capital investments and are crucial for generating revenue. But how do you ensure these vital assets are truly yours, valued correctly, and actually exist where they should be? The answer lies in regular and thorough fixed asset audits.

Without proper oversight, businesses risk financial misstatements, potential fraud, and inefficient use of their resources. A well-executed fixed asset audit acts as a critical safeguard, protecting these valuable investments and bolstering your financial integrity.

Audit of Fixed Assets: Safeguarding Your Business

Why Are Audit of Fixed Assets So Important?

A fixed asset audit goes beyond just counting items. Its primary objectives are to:

• Verify Ownership: Confirm that the business legally owns all recorded fixed assets. This prevents disputes and ensures assets aren’t mistakenly listed.
• Safeguard Against Fraud and Misuse: Unscrupulous activities like “ghost assets” (assets recorded but not physically present) or the misappropriation of equipment can be detected and prevented through regular audits.
• Ensure Accurate Valuation: Confirm that assets are recorded at their correct value, factoring in depreciation and any impairments. This directly impacts your balance sheet and profitability.
• Support Strategic Decision-Making: Accurate asset records provide reliable data for capital budgeting, insurance coverage, and strategic planning.

The Audit Process: What Does It Involve?

A comprehensive fixed asset audit typically includes several key procedures:

• Physical Verification: This is perhaps the most crucial step. Auditors physically inspect and tag assets, comparing them against the fixed asset register. This helps identify missing, damaged, or unrecorded assets.
• Review of Purchase Documents: Scrutinizing invoices, purchase orders, and ownership titles confirms the legitimacy of asset acquisitions and their recorded cost.
• Depreciation Assessment: Auditors meticulously review the depreciation methods applied to ensure they comply with accounting standards and reflect the asset’s true economic life and usage. This is particularly important for complying with Ind AS 16 (Property, Plant and Equipment), which sets out the accounting treatment for these assets.
• Capitalization Review: Ensuring that only eligible expenditures are capitalized as fixed assets (and not expensed) is vital for accurate financial reporting.

Common Issues to Watch Out For

During fixed asset audits, some recurring problems often surface:

• “Ghost Assets”: Assets recorded in the books but physically absent. These can be due to theft, disposal without proper record-keeping, or even intentional fraud.
• Incorrect Depreciation: Applying the wrong depreciation method, useful life, or residual value can lead to significant misstatements of asset values and profits.
• Improper Capitalization: Expensing items that should be capitalized, or vice versa, can distort financial statements.
• Inadequate Documentation: Missing or incomplete records for purchases, disposals, or transfers make it difficult to verify asset existence and ownership.
• Obsolete or Impaired Assets: Assets that are no longer in use, technologically obsolete, or whose value has significantly dropped (impairment) might still be carried on the books at an inflated value.

Recommendations for Maintaining Strong Controls

To avoid these pitfalls and ensure smooth audits, businesses should implement robust internal controls:

• Maintain an Accurate Fixed Asset Register: This detailed ledger should include acquisition date, cost, depreciation method, useful life, location, and unique identification numbers for every asset.
• Implement Strong Capitalization Policies: Clearly define what constitutes a capitalizable expense versus an operating expense.
• Regular Physical Counts: Don’t wait for an external audit. Conduct your own periodic physical verification to reconcile with the register.
• Document Everything: Keep all purchase invoices, disposal forms, transfer requests, and maintenance records organized and accessible.
• Regularly Review Depreciation Policies: Ensure your depreciation methods align with the actual usage and expected lifespan of your assets and comply with relevant accounting standards like Ind AS 16.
• Segregation of Duties: Ensure that no single person controls the entire fixed asset process, from procurement to disposal.

Audit of Fixed Assets – Conclusion

In Kolkata, or anywhere across India, your fixed assets are more than just items on a balance sheet—they’re the engines of your business. Regular fixed asset audits are not just a compliance exercise; they are a strategic necessity. By diligently verifying existence, ensuring accurate valuation, and maintaining meticulous documentation, you protect these crucial investments, prevent financial irregularities, and ensure your financial statements truly reflect the health of your business.

Contact Pitchers Global to learn more!