When conducting Physical Verification of Fixed Assets to ensure that the organization owns the fixed assets listed in the balance sheet and the organization’s rights to fixed assets are confirmed and not limited by the rights of third parties, the auditor should analyse the documents confirming the organization’s rights to fixed assets.

Such documents include contracts for the sale and purchase of fixed assets, leasing contracts, contracts for the use of land plots, documents confirming the state registration of ownership of property, concerning transactions with which such registration is required.

Within the framework of this procedure, such documents as a building permit, certificates of registration of rights, etc. are usually also checked these are the documents confirming the rights of the organization related to real estate and its creation.

If the Physical Verification of Assets of the organization is not the first time, the specified procedure can be carried out with the fixed assets acquired by the organization during the reporting period.

If the audit is carried out for the first time, such procedures are carried out in relation to the balance of fixed assets at the end of the reporting period. Ownership verification procedures are carried out on a sample basis.

If during the audit procedures it is revealed that fixed assets are reflected in the organization’s statements, the ownership of which is not properly confirmed, the auditor should consider the legality of the reflection of such fixed assets in the reporting, assess the scale of the violations identified and determine how they affect the reliability the financial statements of the auditee and the auditor’s report.

Restrictions on the right to dispose of fixed assets arise in most cases in connection with pledge agreements. Certain restrictions on the rights to dispose and use fixed assets may also be contained in lease agreements and the purchase of fixed assets with a deferred payment.

Limitations arising in connection with the terms of the lease and purchase agreements are identified by the auditor during the analysis of the terms of the relevant agreements during a random check of transactions for the receipt of fixed assets for the reporting period.

Limitations arising in connection with pledge agreements for fixed assets, as a rule, are revealed during an audit of debt on loans and borrowings- cross-audit procedures.

Having identified restrictions on an entity’s rights to property, plant, and equipment, the auditor should also ensure that material information about such restrictions is disclosed in the financial statements.

Observing the physical verification taking place, analysing the documents confirming the organization’s ownership of fixed assets, the auditor should pay attention to fixed assets that are not used in the production process and are not least, that is, they do not generate income for the organization.

If such property, plant, and equipment are identified and their value is significant, the auditor should discuss the situation with the auditee’s management and decide whether such property, plant, and equipment should be written off the entity’s balance sheet as not meeting the criteria for assets.

As you can see, there are several things related to fixed assets that require responsibility and accountability at the time of verification. So, we suggest you contact an expert to perform these activities as only a person with specialized knowledge knows how to deal with such work.

This content is meant for information only and should not be considered as an advice or legal opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.

Posted by

CA Aman Aggarwal

AKGVG & Associates