KnS School of Business Studies

Audit & Assurance

March 2019

FIXED ASSETS – Substantive Procedures

Expected Questions on Fixed Assets

1.Describe the substantive procedures to verify Fixed

Assets as of Balance Sheet date.
2.List and explain the F/S assertions for fxed assets.
3.Explain the principle risk of misstatement for fxed
assets.
4.Describe the audit tests to verify Additions &
Deletions
(disposals) made during the year.
5.Describe the substantive procedures to verify
depreciation expense for the year.
6.Describe the substantive to verify revaluation of
fxed Assets made during the year/
7.Describe the substantive procedures to verify capital
expenditure made / subsequent expenditure during
the year.
8.Describe the substantive procedures / audit test to
verify research & development expenditure made
during the year.

1 |Page Prepared by M.Sajid Kapadia

(ACA,FCCA,APFA)
 KnS School of Business Studies
Audit & Assurance
March 2019

EXAM FOCUS POINT

(Procedures for fxed assets can be asked Assertion
wise)

Substantive Procedures for Fixed Assets

(Tangible)
Relevant F.S Assertions: Existence / Rights & Obligations / Completeness /
Valuation & allocation

Principal risks of misstatement ……….Drives from F/S Assertions

The principal risks of tangible non-current asset balances are as follows:
a) Completeness assertion. There is a risk that assets owned by the reporting entity
have not been included in the fnancial statements.
b) Existence assertion. There is a risk that assets reported in the fnancial statements
do not actually exist (for example, they may have been sold or scrapped).
c) Valuation assertion. There is a risk that the assets have been incorrectly valued
(which could be due to incorrect recording, inappropriate valuations, or incorrect
depreciation calculations).
d) Rights and obligations assertion. There is a risk that the reporting entity does
not actually own the assets that are included in the fnancial statements.
e)Presentation and disclosure assertion. There is also a risk that the assets have
not been correctly presented and disclosed in the fnancial statements.

Audit Procedures – Assertion Wise

1. Verify Completeness

(a) Obtain or prepare a lead schedule of fxed assets and accumulated depreciation by
major asset Classifcation showing balances at beginning and end of period, additions,
disposal, depreciation on assets disposed of, and other adjustments.
(b) Trace last year’s balances with last year’s audited working papers.

2 |Page Prepared by M.Sajid Kapadia

(ACA,FCCA,APFA)
 KnS School of Business Studies
Audit & Assurance
March 2019
(c) Verify arithmetical accuracy of the Fixed asset schedule
(d) Trace totals of the fxed asset schedule to the general ledger control account ( FA
Control Ac ), TB and balance sheet

2. Verify Existence

Select a sample of assets from the non-current asset register and perform physical
verifcation. During the physical inspection, also note the physical condition of the
asset.
Inquire the reasons for any assets in the sample that are not found physically by the auditor.

3. Verify Rights

(a) Inspect title/ Sales deeds or other support docs for following :

Land and buildings: Verify legal title to the assets by inspecting appropriate
documents (such as legal documents of ownership, or lease agreements).
Vehicles: Examine vehicle registration documents or similar documentation giving
evidence of title. (Must be in the name of the company)
Other assets: Examine invoices or other documents transferring title.
Review legal documents, bank documents and other documents (e.g. Bank
Confrmation) for evidence of any loans that are secured by charges on assets

4. Verify Valuation of Fixed Assets

(a) Verify that the cost of fxed assets include: ( IAS 16 )

- Purchase price, including import duties and relevant purchase taxes
(b) Verify proper classifcation btw repair and capital expenditure.
(c) Cost to exclude any refundable taxes ( Sales Tax paid on asset in the case of import
)
(d) Review the allocation of total expenditure on non-current assets between capital
and revenue amounts.
(e) Verify fxed assets for any impairment testing - IAS 36

At COST
 Land and buildings: Confrm the fgures for cost with the purchase contract for
the asset and the invoices for associated costs (such as professional
fees).Verify proper allocation between land, buildings and equipment.
 Equipment and vehicles: Verify purchase invoices for the assets.
 General: Verify cost of fxed asset against purchase invoice / supporting
documents

3 |Page Prepared by M.Sajid Kapadia

(ACA,FCCA,APFA)
 KnS School of Business Studies
Audit & Assurance
March 2019
At REVALUED Amount
 Verify amounts in the fnancial statements with the valuer’s report.
 If assets are revalued, ensure that the entire class of assets to which that asset
belongs is revalued
 Consider the reasonableness of the valuation / Assumptions used for valuation
of fxed assets
 Verify valuations are regularly updated as per IAS 16
 Evaluate the competence, capability & objectivity of the expert used for
valuation.

Depreciation of assets

(a) Verify that depreciable amount of the asset is allocated on a systematic basis to the
accounting period.
(b) Ensure that the depreciation method is applied consistently from period to period
(c) Determine that following factors have been considered in estimating adequacy of
depreciation charge: Estimating useful life of asset:
- Expected physical wear and tear
- Obsolescence
(d) Re compute depreciation charge for the year

(PLEASE NOTE: If separate question is asked on Depreciation

of fxed assets than following answer to be given)

Substantive procedures to verify Depreciation expense (any method)

1- Review the reasonableness of the depreciation rates / useful life applied to the
asset. and compare rates applied and useful life to industry norms /averages.

2- Determine that following factors have been considered in estimating useful life
of asset:
- Expected physical wear and tear
- Obsolescence
- Legal or other limits on the use of assets
3- Review the capital expenditure budgets made by management for the next
future years to assess any plans to replace any asset as this would indicate the
useful life of the asset.
4- Review profts and losses on disposal of assets sold during the year, to assess
the reasonableness of the depreciation rate and useful life of the asset.

4 |Page Prepared by M.Sajid Kapadia

(ACA,FCCA,APFA)
 KnS School of Business Studies
Audit & Assurance
March 2019
5- Select a sample of assets and recalculate the depreciation charge for the year
to ensure that deprecation charge is accurate and correctly recorded in the
accounting period.
6- Perform reasonableness test on the depreciation charged on the asset and
discuss with management in case of any signifcant variance.
7- Review the disclosure of the depreciation charged and policies in the fnancial
statements to ensure compliance with IAS 16.

5. Verifcation for ADDITIONS and DELETIONS / disposals during the year.

ADDITIONS …………..IMP
a) Obtain a breakdown of additions and total the list and agree the amount from the
non-current asset register to confrm completeness of fxed assets.
b) Verify sample of additions of fxed assets from the supporting documents eg Supplier
Invoice to confrm the valuation.
c) Inspect board of directors (BOD) minutes for authorization of sales and purchases of
fxed assets
d) Trace additions in fxed assets during the year to fxed assets / non-current register.
e) Review additions during the year to ensure that they pertain to capital expenditure
and not revenue expenditure / ( or Repair Maintenance expenses)
f) Confrm right by verifying ownership documents ( eg Title deeds and Sale/purchase
deeds)
g) Recalculate the depreciation charge for a sample of additions to confrm the
accuracy of calculations as per the company policy and in accordance with IAS 16.
h) For sample of fxed assets purchased during the year, verify their existence by
physical inspection.
i) Review disclosures of the additions and deletions in the draft F/S and ensure
compliance with IAS 16.

DISPOSALS………..IMP

 Obtain a breakdown of disposals and total the list and agree that all assets are
removed from the non-current asset register to confrm completeness and existence of
fxed assets.
 For a sample of disposals trace / verify sale proceeds of sales to cash book, bank
statement and sales invoice.
 Re-calculate gain or loss on sale of fxed assets and trace to income statement( P&L
Accuracy ) and G.L and Trial balance.
 Verify Non-current asset register to ensure that assets disposed of have been removed
from the same.
 Agree control account (Fixed Asset G.L) with subsidiary records for individual fxed
assets.
 For a sample of disposals verify supporting documents for disposal of fxed assets ( eg
Review Newspaper adds and sales invoices )

5 |Page Prepared by M.Sajid Kapadia

(ACA,FCCA,APFA)
 KnS School of Business Studies
Audit & Assurance
March 2019
 Recalculate the depreciation charge for a sample of disposals to confrm the accuracy
of calculations as per the company policy and in accordance with IAS 16.
 Review disclosures of the additions and deletions in the draft F/S and ensure
compliance with IAS 16.

6. Perform Analytical Procedures (Completeness & Valuation)

(a) Compare closing balance of Fixed Assets from last year’s balance ( B/S to B/S date
comparison )
(b) Current ratio of depreciation charge to fxed assets and compare from last year.
(c) Compare additions to fxed assets during the year vs capital expenditure budget.

7. Verify Presentation and disclosure

a) Inspect fnancial statements to ensure proper disclosure of Tangible non-current

assets in accordance with IAS 16.

Substantive procedures for Revaluation of Fixed assets

1- Obtain a schedule of assets revalued during year and cast the schedule to
confrm completeness and accuracy of the revaluation adjustment.
2- Verify the revalued amounts for these revalued assets from non-current asset
register to ensure correct amounts.
3- On a sample basis agree the revalued amounts to the valuation schedule
provided by the management/independent valuer.
4- Recalculate the total revaluation amount and agree from revaluation surplus
and ensure correct treatment as per IAS 16
5- Recalculate the depreciation charge for the year to ensure that for assets
revalued during the year, the depreciation was charged on the revalued
amount.
6- Perform predictive test (reasonableness test) on depreciation charge for the
year on revalued amount.
7- Review the fnancial statements disclosures for revaluation to ensure
compliance with IAS 16 Property, Plant and Equipment.

6 |Page Prepared by M.Sajid Kapadia

(ACA,FCCA,APFA)
 KnS School of Business Studies
Audit & Assurance
March 2019

Internal Control Weaknesses relating to Fixed Asset:

For Scenario Based
Question! 

1. Fixed Assets are not properly insured or under insured.

2. Fixed Assets are not properly tagged. (No Asset code / unique asset
code).
3. Fixed Asset register/ Non-Current Asset register not being maintained and
updated.
4. No physical verifcation of Fixed Assets on periodic basis/timely basis.
5. No reconciliation between physical assets and recorded assets. (General
Ledger).
6. Ambiguous classifcation of Fixed Assets.
7. Improper capitalization policy or no policy of capitalization.
8. No records maintained for Intra Company Fixed Asset transfers.
9. No internal controls on classifcation & recording of Capital & Revenue
Expenditure.
10. Improper physical controls on Fixed Assets. ( No insurance / no CCTV Camera /
No security guards)
11. No controls on surplus fxed assets in the company premises.
12. CAPEX budgets not being made.
13. Budgets being maintained BUT not approved by the B.O.D.

EXAM FOCUS POINT:

7 |Page Prepared by M.Sajid Kapadia

(ACA,FCCA,APFA)