The GYF Assurance & Advisory (A&A) Group is wrapping up final fieldwork for our year-end audit engagements. This phase of the audit process focuses on gathering the evidence needed to support the balances, activity and disclosures presented in the financial statements – ultimately forming the basis for the audit opinion to be issued in the coming months.
This post, which focuses on fixed assets, is a continuation of a blog series that is designed to explore and explain various areas of the audit process.
What Are Fixed Assets?
Fixed assets are long-term assets acquired for use in operations, rather than resale. Common examples of fixed assets include land, buildings, machinery, equipment, and furniture & fixtures. Collectively, these assets are often referred to as property, plant and equipment (PP&E).
Unlike current assets, fixed assets have a useful life of more than one year and typically require a significant up-front investment. Because they are not easily converted into cash, fixed assets are generally less liquid than current assets and are primarily used to support business operations and generate revenue over time.
With the exception of land, most fixed assets are subject to depreciation, which reflects the gradual loss of value due to wear and tear, usage or depletion over the useful life of the assets.
Why Do Auditors Test Fixed Assets?
In order to issue an audit opinion, auditors must obtain reasonable assurance that the company’s financial statements are fairly presented in all material respects. As part of this process, auditors perform testing and other evidence-gathering procedures to determine whether the fixed assets reported on the balance sheet are accurate and complete.
Because fixed assets often represent a significant investment and can materially impact financial statements, auditors focus on several key financial statement assertions, including:
- Existence – Verifying that fixed assets recorded on the balance sheet physically exist and are owned by the company
- Completeness – Ensuring all fixed asset transactions, such as acquisitions, disposals, and retirements, are properly recorded during the period
- Valuation – Confirming that fixed assets are recorded at appropriate amounts, including proper capitalization, depreciation and impairment considerations
Testing these assertions helps auditors assess whether fixed assets are stated correctly and whether related expenses, such as depreciation and repairs and maintenance, are properly reflected in the financial statements.
How Do Auditors Test Fixed Assets?
The extent of the testing performed by auditors will vary based upon various factors such as the quantity of transactions during the period under audit, the significance of fixed assets to the overall financial statements, the nature of the assets and the assessed level of risk. Common audit procedures for fixed assets may include the following:
- Testing of additions and disposals – Auditors may select a sample of fixed asset additions and disposals during the period under audit to ensure that the transactions occurred and were properly recorded. This process typically involves examining supporting documentation such as invoices, contracts, purchase agreements and sale or disposal records. Auditors will also verify that additions are capitalized at appropriate amounts, disposals are removed from the records in a timely manner, and any resulting gain or loss is accurately calculated and recorded.
- Physical inspection – Auditors may perform a physical inspection of fixed assets to confirm that assets recorded in the company’s records exist and are currently in use.
- Rollforward procedures – The auditors may request a fixed asset rollforward from management that summarizes the beginning and ending fixed asset balances along with current year additions, disposals, depreciation and other activity recorded to fixed asset accounts. These procedures help to provide assurance that the balances ultimately reflected on the balance sheet are complete and accurate. This information also provides support for the amounts reflected in the statement of cash flows.
- Depreciation testing – Auditors may recalculate depreciation expense and accumulated depreciation to confirm accuracy. Procedures may include evaluating the reasonableness of useful life estimates, depreciation methods, and any residual value assumptions.
- Additional analytical procedures – Auditors may perform ratio analyses and trend comparisons to prior years, budgets or industry benchmarks. Auditors may evaluate repair and maintenance expenses to assess proper capitalization versus expensing. Auditors may also assess whether fixed assets are properly classified, presented at net book value, and evaluated for potential impairment when indicators exist.
What Information May the Auditors Request?
To accurately and completely test the information noted above, auditors may request that the company provide the following:
- Additions and disposals listings
- Invoices, contracts, purchase agreements, payment support, and sale receipts for the additions and disposal transactions
- Fixed asset register and depreciation report
- Construction in progress listing, if applicable
- Fixed asset rollforward
- Summary of repair and maintenance expense for the period under audit
Key Takeaways
While auditing fixed assets is just one component of a broader audit process, it plays a crucial role in supporting the overall audit opinion. Understanding the purpose behind these procedures (and the information the auditors may request) helps ensure a smoother, more efficient audit for all parties involved.
If you would like to learn more about the audit process or discuss the specific needs of your organization, please do not hesitate to contact a GYF associate.
Related Posts:
Understanding the Audit Process: Accounts Receivable (A/R)
Understanding the Audit Process: Cash and Cash Equivalents
Understanding the Audit Process: Expenses
Understanding the Audit Process: Accounts Payable & Accrued Expenses
