1. CHAPTER FIVE
AUDIT OF FIXED ASSETS

2. Meaning and nature of fixed assets
Fixed assets are assets :
Acquired for use rather than for sale
Have long life to be used
Have /have no physical existence
Requires huge capital
Subject to depreciation except land
Requires special skill to use them
Requires fix of accountability in order to use
them

3. Internal control over FixedAssets
 Fixed assets should be authorized before and
after purchase(actual cost vs authorizes cost;
specification of FA)
Fixed assets should be controlled physically
A controlling account should be established
for each group, supported by subsidiary
records
A controlling account should be established
for each group, supported by subsidiary
records

4. Cont’……
Retirement and sales of fixed assets should be
properly authorized, and the accounting
department should be notified of all sales and
retirement
Fixed assets should be inventoried periodically
every two or three years
Easily transferable small assets should be
under the control of as few persons as possible
All pieces of equipment marked or tagged with
an identified number

5. The auditors’objective in fixed assets audit
To verify the existence of fixed assets
To verify the ownership of fixed assets
To examine and fully disclose the valuation methods
for fixed assets
To verify the correctness of fixed asset transactions for
the year under audit
To evaluate the correctness of the depreciation
programme
To review and evaluate the internal control of fixed
assets

6. Cont’……..
The auditor must review the past accounting for fixed
assets, related expenses and depreciation, and disposition
of fixed assets
 He/she may rely partially up on the reports of preceding
auditors, if the report is available to him/her
 The value of fixed asset is dependent up on:
• The proper recording of initial cost or acquisition cost
• Proper distinction between capital and revenue
expenditure
• The correctness of recording sales, retirements, and
traded fixed assets

7. Cont’……
The auditor, with regard to depreciation, should be concerned about
its accuracy, consistency, and adequacy
There are many methods of computing depreciation like straight line,
sum -of -the –years- digit, double- declining balance, unit of
production, sinking fund, annuity, and composite.
The calculation of provision for depreciation is a matter of
accountancy rather than of auditing, but, of course, falls under audit
review
The responsibility of estimating the assets’ useful life and residual
value is the management
The duty of the auditor is to consider the reasonableness of the
method adopted and to check or test the arithmetical calculations.

8. Relevant audit procedures for FixedAsset
audit
The following are the suitable audit procedures that
should be followed by auditors while auditing Fixed
Assets
Physical observation→to check the existence of fixed assets in
the business locations of the audited company and to test how
fixed assets are safeguarded by responsible employee
Inspection of documents and records→ to check the ownership
right of the audited company over fixed assets
Examinations and analysis of controlling and subsidiary
ledger(records) →to prevent overstatement and
understatement of the fixed assets’ balance

9. Cont’….
Recalculation → to check the accuracy of accounting records
regarding to acquisition of FA, depreciation of FA, and disposal
of FA
Confirmation → to get relevant information about leased
fixed assets of the auditee, if any
Inquiry(Questionnares) → in order to obtain initial feedback
from inside(auditee) and out side(business partners) parties
for the auditors further investigation