The Guidance Note on Audit of Fixed Assets issued by the ICAI recommends that the verification of fixed assets consists of examination of related records and physical verification. The auditor should normally verify the records with reference to the documentary evidence and by evaluation of internal controls. The verification of records would include verifying the opening balances of the existing fixed assets from records such as the Schedule of fixed assets, ledger or register balances to acquisition of new fixed assets should be verified with reference to supporting documents such as orders, invoices, receiving reports and title deeds. Self-constructed fixed assets and capital work-in-progress should be verified with reference to the supporting documents such as contractors’ bills, work orders and independent confirmation of the work performed from other parties. When fixed assets have been written off or fully depreciated in the year of acquisition, the auditor should examine whether these were recorded in the fixed assets register before being written off or depreciated. In respect of retirement of fixed assets, the auditor should examine whether retirements were properly authorised, whether depreciation accounts have been properly adjusted, whether the sale proceeds, if any, have been accounted for and the resulting gains or losses, if material, have been properly adjusted and disclosed in the profit and loss account. In case the asset has impaired the auditor must ensure that the asset has met the criteria as specified in AS 28, “Impairment of Assets”. Further, if conditions so warrants the reversal norms of impairment loss are duly complied with.
The ownership of assets like land and buildings should be verified by examining title deeds. In case the title deeds are held by other persons such as bankers or solicitors, independent confirmation should be obtained directly by the auditor through a request signed by the client. Physical verification of fixed assets is primarily a responsibility of the management. The management is required to carry out physical verification of fixed assets at appropriate intervals in order to ensure that they are in existence. However, the auditor should satisfy himself that such verification was done by the management wherever possible and by examining the relevant working papers. The auditor should also examine whether the method of verification was reasonable in the circumstances relating to each asset. The reasonableness of the frequency of verification should also be examined by the auditor in the circumstances of each case. The auditor should test check the book records of fixed assets with the physical verification reports. He should examine whether discrepancies noticed on physical verification have been properly dealt with.
The auditor should see that the fixed assets have been valued and disclosed as per the requirements of law and generally accepted accounting principles. The auditor should test check the calculations of depreciation and the total depreciation arrived at should be compared with that of the preceding years to identify reasons for variations. He should particularly examine whether the depreciation charge is adequate keeping in view the generally accepted basis of accounting for depreciation. The Institute has also recommended that the company should provide depreciation so as to write off the asset over its normal working life. The company may provide depreciation at higher rate than the rates prescribed under Schedule XIV to the Companies Act, 1956, if it feels that the normal working life of the asset is low. However, if the company feels that the normal working life of the assets is much higher, it cannot provide depreciation at the rates lower than the rate prescribed by the Schedule XIV to the Companies Act, 1956. In such a case the rates given in Schedule XIV should be followed. Re-valuation of fixed assets implies re-statement of their book values on the basis of systematic scientific appraisal which would include ascertainment of working condition of each unit of fixed assets. It would also include making technical estimates of future working life and the possibility of obsolescence. Such an appraisal is usually made by independent and qualified persons such as engineers, architects, etc. To the extent possible, the auditor should examine these appraisals. As long as the appraisal appears reasonable and based on adequate facts, he is entitled to accept the revaluation made by the experts.