What is an Internal Audit of Fixed Assets?
Fixed Assets are often referred to as Property, Plant, and Equipment (PP&E) and the terms are used interchangeably. Section 404 of Sarbanes-Oxley states that companies must have adequate and effective internal controls for financial reporting and these control procedures must be regularly evaluated. Therefore, organizations having fixed assets must have adequate processes and controls for Fixed asset management.
1. Maintaining of Fixed asset register which should record the date of purchase, model number, serial number, acquisition cost, expected life, and assignment to any debt instrument.
2. Minimum once a year physical verification of all fixed assets
3. Physical inspection for assets having high exposure to damages or have a lesser shelf life. If required, the valuation of assets should be performed.
4. Review of insurance policies related to the particular assets that have exposure to damage and loss.
1. Process of capitalization of assets
2. Depreciation policy
3. Inventory of Assets
4. Acquisition and disposal of assets
5. Writing off assets
How to audit Fixed assets?
1. Check DOA (delegation of authority) matrix which details who is authorized to take what action. This is an organizational document which is very useful for internal audit of other functions.
2. Get the ledger of Fixed assets for the audit period and identify purchases and sales of assets made during the period. Take the sample of purchases and review the related documents. You should be looking at the date of acquisition, date put in the records, physical inspection of that asset if possible, and so on.
3. Perform reconciliation of Fixed assets (FA) register with General ledger(GL) of Fixed assets. If there is any difference, get clarification from the responsible team and document the same. Companies perform periodic reconciliation of FA register with GL which can also be checked.
4. Review classification of assets- Sometimes assets are incorrectly classified as an expense which represents incorrect figures in the balance sheet.
5. Check approvals as per DOA matrix for any sale, purchase or writing off of the asset (sample)
6. Review the depreciation schedule and check whether the adequate provision of depreciation has been made.
7. Impairment of assets- Check compliance with accounting standards for any impairment of asset has taken place during the audit period.
8. Check IT controls on recording and approving entries. Segregation of Duties is the requirement for more than one person to complete a task so that the risk of fraud or theft is eliminated.