Auditing Fixed Assets – Risk, Assertions, And

Procedures
Types of Audit

Overview:

Fixed Assets are a type of tangible non-current assets. Typically, they are the assets with

the largest balance on the balance sheet comparing to other assets held by an entity.

Fixed Assets are categorised as non-current assets as they have useful lives of 12 months

and above. There are many types of Fixed Assets, a few of the notable ones are furniture

and fittings, office equipment, motor vehicles, etc. 

Risks:

Before we can determine what procedures to perform on Fixed Assets, we need to first

identify the risks associated with auditing Fixed Assets:

Risk of Material Misstatement: Management estimates are involved in determining

useful lives, the timing of recognition or derecognition, revaluations, residual values,

and impairment. Biasness and human errors can lead to misstatements in asset

value. Other inherent risks related to existence and rights and obligations should also

be taken into account. For instance, Fixed Assets recorded may not exist at the

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 reporting date either due to fraud or theft or the entity may not be the rightful owner

of the items shown on the Fixed Assets register.

Control Risk: Control Risk includes failure to recognize a Fixed Asset, lack of safeguard

on Fixed Assets, no authorization or approval obtained for the purchase of a large

value asset based on the entity’s policy, etc.

Detection Risk: Detection Risk is basically the risk that the auditor may not be able to

detect the material misstatements in the reported amounts of Fixed Assets. For

example, a low-value asset that has been omitted by the entity from the register

may not have been detected by the auditor due to its value being lower than the

testing threshold.

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Assertions:

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For an auditor to be reasonably assured of the Fixed Assets balance, tests will be performed

to cover the relevant audit assertions. The assertions applicable to Fixed Assets are as

follows:

Completeness: All Fixed Asset transactions during the accounting period have been

properly recorded in the financial statements.

Rights and Obligations (Ownership): The entity owns the Fixed Assets and has rights

for them as of the reporting date.

Valuation: The cost of capitalisation and recoverability of the Fixed Assets compared

to their net book values are properly evaluated.

Existence: Fixed Asset reported on the balance sheet actually exists at the reporting

date.

Presentation and Disclosure: The Fixed Asset balance is correctly presented as non-

current assets on the balance sheet and adequate disclosures on accounting policy,

significant purchases and disposals have been made in the notes to the financial

statements.

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Procedures:

Audit Procedures for testing Fixed Assets include Test of Controls and Substantive Tests. 

Test Of Controls:

Some common controls being tested include addition and disposal of Fixed Assets, Fixed

Assets tagging, segregation of duties, impairment policy and depreciation policy. We have

talked about how to audit depreciation expense in another article, read it here.

Addition and Disposal of Fixed Assets: This to make sure each addition and disposal is

processed, reviewed, authorized, and approved by different persons (segregation of

duties) in the entity following the authorization matrix stated in the entity’s policy.

Higher value items may sometimes require approval by the board of directors before

they can be acquired.

Fixed Assets Tagging: This procedure is to ensure each Fixed Asset is uniquely tagged

so that it can be easily matched to the Fixed Asset register. It allows the entity to keep

track of all its assets especially when there are additions and disposals. It can also

help avoid misappropriation of Fixed Assets for personal gain.

Segregation of Duties: Other than having segregation of duties in terms of purchase

and disposal, it is also vital that the person taking care of the assets being different

from the person purchasing them. This will discourage the employee from

inappropriately purchasing the assets for their own use and reduce the risk of theft.

Impairment Policy: Having this control in place allows the entity to properly identify

assets that need to be impaired on a timely basis. Without this in place could lead to

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 an overstatement of assets especially when there is a downturn in the entity’s

business.

See also  What is a Disclaimer of Opinion? (Definition, Explanation, Example, and How Is It

Different From the Adverse Opinion)

Before doing the Test of Controls, auditors will first perform a walkthrough to gain an

understanding of how the control is carried out. Samples will then be selected to test the

controls. If no exception is noted, the controls will be deemed effective and reliable. This

can, in turn, reduce the number of substantive audit procedures required.

Substantive Audit Procedures For Fixed Assets:

Substantive Audit Procedures for Fixed Assets consist of the following components:

1) Substantive Analytical Procedures:

Substantive Analytical Procedures include the consideration of whether there are any major

changes in the entity’s operations, e.g. discontinuation of product lines. Such changes are

indications that the Fixed Assets should be classified as assets held for sale or be retired. If

the Fixed Assets need to be retired, we need to determine if they have been reflected in the

level of disposals. Test of details is normally performed for this purpose.

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We could also review insurance coverage if the entity insures its Fixed Assets. A significant

drop in insurance coverage may suggest that some assets have been disposed of. An

uninsured asset could also indicate that the asset has been disposed of.

2) Test Of Details For Fixed Assets:

To test details for Fixed Assets, audit procedures are designed around assertions. Example

and description of test of details are given in the table below:

Audit
Example of Audit Procedure
Assertion

Selecting a sample of purchase invoices or contracts and determine

Completeness whether it has been properly recognized as Fixed Assets instead of being

expensed.

Rights and
Checking the Fixed Assets recorded in the register to the land titles.
Obligations

Testing the useful life and depreciation rate allocated to the samples
Valuation
selected are appropriate and in line with the entity’s accounting policies.

Existence Selecting a sample of Fixed Assets to perform physical sighting.

Presentation
Reviewing the financial statements prepared by the entity and identifying
and
if information regarding Fixed Assets have been sufficiently disclosed.
Disclosure

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