22. Fixed Assets Audit — FAR, Depreciation, Impairment

Fixed assets represent long-term investment decisions of a business.Errors in capitalization, depreciation, or impairment can distort profits over multiple years and attract serious audit observations.
This article explains how auditors examine fixed assets through FAR verification, depreciation testing, and impairment assessment, and how businesses can avoid common fixed asset audit issues.

1. Introduction — Why Fixed Assets Are Audit-Sensitive

Fixed assets:
  • Impact profitability through depreciation
  • Affect balance sheet strength
  • Involve judgement in capitalization and useful life
Because of their long-term nature, errors here tend to accumulate silently over years.
Fixed asset mistakes often surface during audits, due diligence, or litigation—not immediately.

2. Objective of Fixed Assets Audit

The objectives of fixed asset audit are to:
  • Verify existence and ownership of assets
  • Ensure correct capitalization and classification
  • Test depreciation accuracy and consistency
  • Assess impairment or loss in value
  • Confirm adequate disclosures
Auditors aim to ensure that assets reflect real economic benefit.

3. Fixed Asset Register (FAR) — Core Audit Document

Auditors expect a proper FAR containing:
  • Asset description
  • Location
  • Date of acquisition
  • Cost and capitalization details
  • Depreciation rate and method
  • Accumulated depreciation and WDV
Incomplete or outdated FAR is a common audit weakness.

4. Verification of Additions and Deletions

Auditors examine:
  • Supporting invoices for additions
  • Nature of expenditure (capital vs revenue)
  • Date of capitalization
  • Authorization for purchase
For deletions, auditors verify:
  • Sale or disposal documentation
  • Accounting of profit or loss on disposal
  • Removal from FAR

5. Capitalization vs Revenue Expenditure

Auditors assess whether:
  • Expenditure provides future economic benefit
  • Capitalization policies are consistently applied
Misclassification of expenses as assets is a frequent audit issue.
Incorrect capitalization inflates assets and suppresses expenses.

6. Depreciation Audit Procedures

Auditors test:
  • Depreciation method
  • Useful life and residual value
  • Compliance with applicable standards
  • Mathematical accuracy
Consistency across periods is critical unless justified.

7. Impairment Assessment

Auditors assess whether:
  • Assets show indicators of impairment
  • Recoverable value is less than carrying value
  • Impairment losses are recognised where required
Impairment is often ignored in SMEs but remains an audit requirement.

8. Physical Verification of Fixed Assets

Auditors may:
  • Perform physical verification
  • Rely on management verification reports
  • Test asset existence on sample basis
Missing or unusable assets raise audit red flags.

9. Common Fixed Asset Audit Issues

Frequently observed issues include:
  • No proper FAR
  • Assets capitalised but not in use
  • Incorrect depreciation rates
  • Assets not written off after disposal
  • No impairment review
These issues prolong audits and invite adjustments.

10. Practical Guidance for Businesses

Businesses should:
  • Maintain an updated FAR
  • Clearly document capitalization policies
  • Perform periodic physical verification
  • Review asset usage and impairment indicators
  • Reconcile FAR with general ledger
Good FAR discipline simplifies audit significantly.

11. CABTA Insight

“Fixed asset audit tests long-term discipline, not short-term bookkeeping.”

Next Article

 ⁠⁠23. Cash & Bank Audit — Key Checks⁠