Audit of Fixed Assets
Points for Discussion • Accounting of FA (AS -10) • Audit of FA Statutory Audit- CARO Compliance Internal Audit & Management audit Controls on FA Practical Challenges in Modern Business Improvements in Asset controls
ACCOUNTING FOR FIXED ASSETS (AS-10)
• • • • •
Meaning of Asset Applicability Components of Cost Valuation of Assets in specific cases Retirement & Disclosure
Meaning Fixed Assets: Fixed asset is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. Examples:Land Building Plant and Machinery Furniture etc.
Applicability Applicability:This accounting standard is not applicable for the following items:Forests, Plantations, and similar regenerative resources. Wasting assets like minerals , oil, and natural gas. Expenditure on real estate development. Live stock.
Components of Cost Historical Cost: The historical cost of acquired fixed assets consists of the following Purchase price Import duties and other non-refundable taxes Any directly attributable cost of bringing the asset to the working condition for its intended use like:site preparation , delivery and handling cost , professional fees etc.
Valuation of Assets in specific cases Type of Assets
Method of valuation
Self Constructed Asset
Cost of construction after eliminating internal profits
Assets under exchange
a) Fair Market Value of the asset given or b) Fair Market Value of the asset acquired Which ever is more evident
Joint Ownership
To the extent of its share
Valuation of Assets in specific cases Type of Assets
Method of valuation
Assets under Hire Purchase
Cash Value including interest
Several assets for consolidated price
Fair basis as determined by Competent Valuers
Repairs
Only if they increase the future benefits from the existing asset beyond its previously assessed standard of performance.
Retirement & Disposal • An item of fixed asset is eliminated from the financial statements on disposal. • Assets retired from active use and are held for disposal - are stated at the lower of a) net book value and b) net realisable value and are shown separately in the financial statements. • Any expected loss is recognised immediately in the profit and loss statement.
Audit of Fixed Assets
Stages of controls on FA in its life cycle
Considerations • Statutory Audit • Internal Audit • Management Audit
Statutory Auditor
Statutory Audit • Material Item in the Balance Sheet • Material Item in the Profit & Loss Account • Comment in CARO
Matters to be commented in CARO
Sale of substatial assets
Proper Records
Physcial Verificati on
Matters to be commented in CARO • Maitenance of Proper Records [Paragraph 4(i)(a)] • Physical verification of assets and recording of descrepancies in the books of accounts ; [Paragraph 4(i)(b)] • Substatial disposal and its impact on Going concern ; [Paragraph 4(i)(c)]
Maitenance of Proper Records [Paragraph 4(i)(a)] The term 'Proper Records' not defined. However, the FAR should contain the following. (i) Sufficient description of the asset to make identification possible; (ii) Classification, e.g., plant and machinery, office equipment, etc; (iii) situation; (iv) quantity, i.e., number of units; (v) original cost; (vi) year of purchase; (vii) adjustment for revaluation (viii) date of revaluation, if any; (ix) rate(s)/basis of depreciation or amortisation, as the case may be; (x) depreciation/amortisation for the current year; (xi) accumulated depreciation/amortisation; (xii) particulars regarding impairment; (xiii) particulars regarding sale, discarding, demolition, destruction, etc
Practical Issues- FAR Acceptability of FAR in Electronic Form Fully Depreciated Assets Intangible Assets Self Constructed Assets Assets received free of cost Location details for movable assets Employee Assets
Practical Challenges- Electronic Register • Acceptance of register in elctronic form - Permitted only when the following conditions are satisfied. • (i) The controls and security measures in the company are such that once finalised, the fixed assets register cannot be altered without proper authorization and audit trail. • (ii) The fixed assets register is in such a form that it can be retrieved in a legible form (i.e. it can be read on the screen or a hard copy can be taken).
Practical chellenges- Quantity/Location
Land
Survey numbers conveyance
and
by
deeds
of
Electrical installations
Factory buildings, plant, service departments, township buildings, etc
Patents, trade marks and designs
Purchase agreements or the letters granting patent
Vehicles
Reference to the registration books
Development of property
Buildings or plant for which development work is undertaken
the
Physical verification [Paragraph 4(i)(b)] Points to be considered Reasonble intervals
Once in 3 years
Responsibility
Management. However, auditor shall satisfy himself that the PV was done
Method of verification
Reasonable to suit the circumstances
Material discrepancies
Properly dealt with in the books of accounts
Management Representation Letter
Mandatory
Substantial Disposal - Impact on Going concern [Paragraph 4(i)(c)]
• The term 'Substatial' is not defined Auditor to apply his professional judgement
• Audit procedures a) Discussion with the Management b) Review of Minutes of meetings c) Review of Subsequent events
Audit Complications Imporper recording of Addtions Improper recording of Disposals Ascertaining the actual date of capitalisation Subjectivity in Categorisation of assets (Shelters for security, Printers, Tanks etc) Lack of technical expertise Complex calculations of depreciation (SLM to WDV) Physical verification & Its reconciliation with FAR
Internal Audit & Management Audit
Control in FA Traditional Control Controls in Modern Business
Traditional Controls • • • •
Preparing an Asset Register Accounting of FA Computation of Depreciation Reporting in Financial Statement
FA Controls in Modern Business environment • Tracking Asset Locations • Movement history • Analyzing Maintenance, Repair & downtime history • Understanding Asset and Component attributes; • Accessing Insurance and legal contracts • ROI (Employee, Shareholders, Govt )
Challenges- Internal Audit & Management Audit • Challenges in Accounting and Recording • Challenges in Physical Verificaton • Challenges in Reconciliation
Challenges in Accounting and Recording • Policy changes - Capex Vs.Opex • No Unitisation of assets - No Quantity details • Improper recording of Sale/Demolition
• Improper recording of Donations and e-waste • • • • •
Non avaialbility of Source Documents No uniformity in catagerisation of assets (Lab & IT ) Treatment of assets procured for specific projects Bulk Capitalisation Improper recording of transfer of assets at free of cost
Challenges in Physical Verification • • • •
Assets in IT Industry Assets in Construction Industry Assets in Telcom Industry Assets in Manufacturing Company
IT Industry Significant Volume High Mobility Connected to Live Servers/ Electrical Installations Frequent exchange of assets (Refresh policy) Restrictions on Physical Access Employee Assets Assets at remote locations
Construction Industry Mobility of Assets Difficulty in Physical Verification- Assets on move Change in Registration Numbers of Vehicles Improper Records - Not structred Frequent use of Leased Assets
Telcom Industry Complexity in identifying the assets - very technical in nature Assembling of assets at clients location (No comparison with Invoice / delivery challan) Mobility of the assets - Hand held divices (Example Surf FFA etc) Position of the Physical Assets - (Assets in Box) Assets at Vendor locations
Manufacturing Industry • Age of the assets • Physcial condition of the asset
Reconciliation • Lack of technical expertise in identification of asset • Non availability of Asset Identification numbers for recording the impact of unreconciled assets • No record of assets received at Zero Value • Assets charged off to revenue (Ex: Monitors) • Categorization of assets - Bulk Capitalisation • Assets surrendered under exchange • Assets gone out of the company for repair etc.
Improvements
Improvements • Use of advanced applications like SAP / Oracle etc. • Use of RFID (Radio Frequency Identification) • GPRS compatible Sensors in movable assets • Advanced Net work software • Increase in the frequency of Physical verification and Its reconciliation with the FAR • Storing of documents in Electronic form • Maintenance of Log Books for movable assets • Cross referencing of assets with Financial Records (Assets numbers on physical assets)
Photograph of sample assets
Surf board 3/4/2014
FFA
QRD
38
Assets connected to live systems
3/4/2014
39
LAB
Stores
PV - in Scientific manner
RFID Tag
RFID Scanners