Audit file issues – tangible fixed assets

Tangible, moveable fixed assets

Problems in verifying the existence of tangible moveable fixed assets regularly feature in file reviews. Applying the concept of directional testing, the relevant audit assertions here are that fixed assets on the balance sheet exist, the entity holds or controls the rights to the assets, they are in reasonable condition, are being used in the business, and are being depreciated appropriately; essentially testing the debit entry on the balance sheet for overstatement.

Existence

We often see fixed asset schedules on which the items subject to physical verification are marked but without actually recording how the test was undertaken.

If, as is sometimes the case, audit staff spot a number of easily identifiable items and mark them on the fixed assets schedules this does not confirm existence but rather the opposite assertion which is the completeness of the fixed asset register.

It is essential that working papers record the direction of this test which should select items from the fixed asset register for physical verification; this confirms the existence of the assets on the register.

Sample testing

We have seen a file where the fixed assets comprised plant/machinery and motor vehicles with the majority of the net book value being the plant/machinery. However, only motor vehicles were tested, ignoring the more significant category, presumably as motor vehicles were more readily identifiable.

Likewise, we have seen samples selected purely from the list of additions rather than the wider population.

Sometimes this is used to justify no testing of the existence of the tangible, moveable fixed assets which can be material in their own right and still require testing.

What if the assets aren't there?

There are certain types of business where this should not come as a surprise. For example, in a plant hire business it would perhaps be a worry if the whole sample selected was present rather than out on hire. Similarly, for a haulier it is to be expected that commercial vehicles are in use away from the premises.

In these cases, an alternative means of gathering evidence on existence needs to be devised such as tracing assets on hire to the underlying hire agreements and the receipt of the income from the contract.

Hauliers are likely to have delivery schedules or possibly vehicle tracking devices which can be used to confirm the location of the vehicles and the income generated from their activity.

We regularly see audit working papers which note that some of the assets chosen for verification were not present without identifying an alternative means of testing or whether or not an extension to the sample is required.

Rights and obligations

Testing the existence of tangible fixed assets is all very well and good, but we also need to consider rights and obligations – does the entity actually hold or control the rights to the assets? Verifying the entity’s rights and obligations by reviewing purchase documentation, land registry documentation or, where applicable, lease agreements is often something that is lacking on a file.

Depreciation, residual values and useful economic lives

All too often on audit files, we see that the consideration of depreciation extends only to whether it has been calculated at the right percentage for that category of asset and testing the maths. This needs to be taken further to consider whether the depreciation method, residual values and useful economic lives used are appropriate for the asset concerned.

Conclusion

The root cause of audit failings in respect of fixed assets often reflects deficiencies in planning the audit. There is an assumption that the standard audit programme will be sufficient, but consideration should be given to any unusual aspects of fixed assets which will make physical verification difficult. The audit approach should be clearly documented, and the audit programme updated accordingly to ensure that staff undertaking the audit fieldwork are aware of what they need to do.

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