Auditing and Ethics · Audit of Items of Financial Statements

Audit of Property, Plant and Equipment and Intangibles

Updated 4 October 2026 · Fact-checked

Audit of PPE and intangibles means collecting evidence that the assets exist, belong to the entity, are correctly valued and depreciated or amortised, and are properly presented and disclosed. You solve questions by walking through the assertions: existence, rights, completeness, valuation, and presentation, and naming a procedure for each.

Understand Audit of Property, Plant and Equipment and Intangibles

Property, Plant and Equipment (PPE) are tangible assets held for use in production, supply of goods or services, rental to others or administration, and expected to be used for more than one period. Land, buildings, plant, vehicles and furniture are examples. Intangible assets are identifiable non-monetary assets without physical substance, such as software, patents, licences and trademarks. This page uses the Accounting Standards (AS 10 for PPE, AS 26 for intangible assets and AS 28 for impairment) as the framework for illustration. Companies that follow Ind AS apply Ind AS 16, Ind AS 38 and Ind AS 36 instead, and the audit approach stays the same. One term differs: AS 28 measures recoverable amount using net selling price, while Ind AS 36 uses fair value less costs of disposal.

These assets are usually material, long-lived and few in number but high in value. The risks are different from inventory. There is less risk of theft and counting error, and more risk of wrong capitalisation, wrong depreciation, missing title documents and impairment not recognised.

The auditor works through the assertions. Existence: does the asset physically exist? Rights and obligations: does the entity own it, or is it pledged or leased? Completeness: are all assets recorded? Valuation: is cost correct, and are depreciation and impairment right? Presentation and disclosure: are the Schedule III disclosures made?

For intangibles, there is nothing to see. So the auditor relies on documents: registration certificates, licence agreements, contracts, and the management's basis for recognition. Internally generated intangibles need extra care. Under AS 26, research costs are expensed. Development costs can be capitalised only when all the AS 26 recognition criteria are met.

The auditor also checks the controls: a fixed asset register, authorisation of purchases, periodic physical verification by management, and approval of disposals. Under the Companies Act, 2013 the auditor's report must also include a statement on the matters in CARO 2020 for companies to which the Order applies. CARO 2020 is issued under section 143(11). Certain classes of companies, such as banking companies, insurance companies, Section 8 companies, one person companies and small companies, are exempt, subject to the conditions in the Order. Always check those conditions before you say the Order does or does not apply. For companies covered, the Order asks about the records of PPE and intangibles, physical verification, title deeds of immovable property and revaluation.

Key rules to remember

Cost of PPE (AS 10): Cost = Purchase price (incl. import duties and non-refundable taxes, less trade discounts) + directly attributable costs to bring the asset to working condition; Excludes general overheads, and excludes input tax credit that is available to the entity.
Straight-line depreciation: Annual depreciation = (Cost − Residual value) ÷ Useful life; Pro-rate for part-year use. Useful life and residual value follow Schedule II to the Companies Act, 2013 or are justified by management.
Written down value method: Depreciation for the year = Opening WDV × Rate; Rate is applied on the reducing balance, not on original cost.
Profit or loss on disposal: Profit or loss = Sale proceeds − Carrying amount (WDV) at date of sale; Recognised in the statement of profit and loss, not adjusted against the asset's cost.
Impairment: Impairment loss = Carrying amount − Recoverable amount, where Recoverable amount is the higher of net selling price and value in use (AS 28); Recognised only when carrying amount exceeds recoverable amount. Under Ind AS 36, recoverable amount is the higher of fair value less costs of disposal and value in use. Net selling price is the AS 28 term.
Intangible recognition (AS 26): Recognise only if: identifiable, controlled, future economic benefits probable, cost measurable reliably; Research is expensed. Development is capitalised only when the AS 26 criteria are all shown to be met.

How to solve Audit of Property, Plant and Equipment and Intangibles questions

Use the same frame for any question, whether it asks for procedures, duties or a given scenario.

1Identify the asset class: tangible PPE, intangible, assets under construction, leased or revalued assets.
2List the assertions that matter: existence, rights, completeness, valuation, presentation.
3For each assertion, name a specific procedure: inspect, vouch, recompute, confirm, inquire.
4Cover the controls: asset register, physical verification by management, authorisation of capex and disposals.
5Check depreciation: method, rate, useful life, residual value, consistency, and changes treated per the applicable standard.
6Check disclosures under Schedule III and CARO 2020 where the question involves a company.
7If a scenario is given, apply the procedures to its facts and state the conclusion on any misstatement and its effect on the report.

Quickest way: Assertion-wise answer grid

When to use it: Use it for 'discuss the auditor's procedures' questions and when eliminating MCQ options in the 30-mark objective section.

Write five headings in the margin: Existence, Rights/Ownership, Completeness, Valuation, Presentation and disclosure. This gives you a layout that earns step marks.
Under each, put one or two procedures and one document, such as a title deed, invoice or register.
Add one line on depreciation: recompute and check consistency.
For MCQs, eliminate options that say the auditor must physically verify all assets himself. The primary responsibility for physical verification is the management's. The auditor checks it.
Also reject options that capitalise research costs or routine repairs. These are expensed.
Close the written answer with a one-line conclusion on the effect on the true and fair view.

Common mistakes in Audit of Property, Plant and Equipment and Intangibles

Saying the auditor must physically verify every asset.
Students mix up the auditor's role with management's role.
Fix: Write that management verifies physically at reasonable intervals, and the auditor reviews the programme, observes or tests a sample, and checks reconciliation to the register.
Treating physical inspection as proof of ownership.
Seeing an asset feels like proof it belongs to the entity.
Fix: Keep existence and rights separate. For ownership, check title deeds, registration certificates, invoices and charge records.
Capitalising repairs and maintenance or research costs.
Students focus on the amount, not on whether it adds future benefit.
Fix: Capitalise only costs that extend life or increase benefit. Expense routine repairs and research cost.
Checking the depreciation amount but not the policy.
Recomputation looks like the whole job.
Fix: Also check method, rate, useful life, residual value, consistency with prior years, and the disclosure of any change.
Giving no procedures for intangibles because they have no physical form.
Students think existence cannot be tested.
Fix: Vouch to agreements, registrations and licences, check the amortisation period, and test whether the AS 26 recognition criteria are met.

Worked examples

Example 1

During the audit of a manufacturing company for the year ended 31 March 2027, you find that a machine costing ₹12,00,000 was bought and put to use on 1 October 2026. The entity incurred ₹80,000 on installation and ₹30,000 on a staff training programme, and also paid ₹20,000 as routine repair and maintenance cost in the year. All of it was capitalised, so the machine was recorded at ₹13,30,000. The company depreciates this machine on the straight-line basis over 10 years with nil residual value, pro-rata from the date of use, and charged depreciation on the full capitalised cost of ₹13,30,000 for 6 months. What is the correct cost of the machine, and what adjustment is needed?

Show the solution

Cost of purchase: ₹12,00,000.
Installation is a directly attributable cost: add ₹80,000.
Staff training is not a cost of bringing the asset to working condition under AS 10: exclude ₹30,000.
Routine repair and maintenance is a revenue expense, not an addition to the asset: exclude ₹20,000.
Correct capitalised cost = ₹12,00,000 + ₹80,000 = ₹12,80,000.
Amount wrongly capitalised = ₹30,000 + ₹20,000 = ₹50,000, which must be expensed. Check: ₹13,30,000 − ₹12,80,000 = ₹50,000.
Depreciation charged on the recorded cost = ₹13,30,000 ÷ 10 × 6/12 = ₹66,500. Correct depreciation on ₹12,80,000 = ₹12,80,000 ÷ 10 × 6/12 = ₹64,000. Excess depreciation = ₹66,500 − ₹64,000 = ₹2,500 (the same as ₹50,000 ÷ 10 × 6/12). This must be reversed.
Effect on profit: expenses were understated by ₹50,000 and depreciation was overstated by ₹2,500, so profit is overstated by ₹50,000 − ₹2,500 = ₹47,500.
Effect on assets: recorded carrying amount = ₹13,30,000 − ₹66,500 = ₹12,63,500. Correct carrying amount = ₹12,80,000 − ₹64,000 = ₹12,16,000. The carrying amount is overstated by ₹47,500.
Adjustment: charge ₹50,000 to the statement of profit and loss and reduce the machine cost by ₹50,000. Reduce accumulated depreciation and the depreciation charge by ₹2,500.
The auditor assesses materiality and asks management to correct it. If it is not corrected and is material, a modified opinion is considered.

Answer: Correct cost is ₹12,80,000. ₹50,000 was wrongly capitalised and should be charged to the statement of profit and loss, and the excess depreciation of ₹2,500 reversed. Profit and the carrying amount of the machine are each overstated by ₹47,500. The auditor asks for correction and, if uncorrected and material, considers modifying the opinion.

Example 2

Explain the auditor's procedures to verify the existence and valuation of intangible assets, such as acquired software and internally generated development costs, in a company's audit.

Show the solution

Existence and rights for acquired software: vouch the purchase invoice and licence agreement, and confirm the licence is in the entity's name and in force.
Completeness: review the register of intangibles and examine contracts, board minutes and capex approvals for items not recorded.
Valuation of acquired items: check cost includes only directly attributable costs, and recompute amortisation over the estimated useful life.
Internally generated development costs: obtain management's evidence of the AS 26 criteria, such as technical feasibility, intention and ability to complete, probable future benefit and reliable cost measurement.
Check that research-phase costs were expensed, and that capitalised costs are supported by timesheets and payroll records.
Test for impairment indicators and review the amortisation period and method for reasonableness and consistency.
Verify presentation and disclosure: separate classes, gross block, amortisation, additions, and the accounting policy.

Answer: The auditor vouches ownership documents, tests that cost meets AS 26 criteria, recomputes amortisation, tests for impairment, checks completeness, and verifies the disclosures required by Schedule III.

Exam tips

Structure every procedures answer by assertion. Examiners award marks for coverage, not length.
In scenario questions, state the correct figure first, then the misstatement, then the reporting consequence.
Remember who is responsible. Management verifies and maintains records. The auditor evaluates and tests.
For depreciation questions, always mention the method, consistency and any change in estimate, along with the recomputation.
Link the topic to CARO 2020 where a company is involved: records, physical verification, title deeds and revaluation.

Practice questions from Audit of Items of Financial Statements

Audit of Property, Plant and Equipment and Intangibles in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Audit of Property, Plant and Equipment and Intangibles: frequently asked questions

Does the auditor have to physically verify all fixed assets?

No. Management is responsible for physical verification at reasonable intervals. The auditor reviews the programme and findings, tests a sample, and checks that differences were properly dealt with.

What is the auditor's duty regarding depreciation?

The auditor checks that the method and rates are appropriate and applied consistently, and that the computation is accurate. The auditor also checks that any change is justified and disclosed.

How do you audit intangible assets with no physical form?

Rely on documents. Vouch agreements, registrations and licences, test whether AS 26 recognition criteria are met, recompute amortisation and consider impairment. Also check the disclosures.

How does the auditor check title to land and buildings?

The auditor examines title deeds, sale deeds, registered documents and property tax receipts. If the deeds are held by a lender or third party, the auditor obtains confirmation from that party.