Mercia carries out hot and cold audit file reviews for a significant number of firms and there are often themes or audit areas which we observe as part of those reviews which cause firms difficulty. Fixed assets is one of those areas particularly verifying existence.
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 and are in reasonable condition and are being used in the business; essentially testing the debit entry on the balance sheet for overstatement.
I 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.
Samples for testing should be representative. I recently reviewed 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. Land and buildings are often included in the physical verification sample and are, almost invariably, seen (somewhat unsurprising given the immovable nature of it). However, this tends to exaggerate the level of assurance obtained. 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. I 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.
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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