Audit of Fixed Assets: Verification and Valuation

Understand Verification and Valuation of Fixed Assets

Key rules to remember

Verification vs valuation

Verification = existence + ownership + condition; Valuation = correct carrying amount

Use this one-line contrast whenever the question asks for the difference.

Carrying amount

Carrying amount = Cost − Accumulated depreciation − Accumulated impairment loss

With the revaluation model, start from the revalued amount instead of cost.

Straight-line depreciation

Annual depreciation = (Cost − Residual value) ÷ Useful life

Charge pro rata for part-year use where the policy requires it.

Written down value depreciation

Depreciation = Opening carrying amount × Rate

Rate is applied to the reducing balance each year.

Recoverable amount

Recoverable amount = Higher of (Fair value less costs of disposal) and (Value in use)

Impairment loss arises only if carrying amount exceeds recoverable amount.

Impairment loss

Impairment loss = Carrying amount − Recoverable amount

Recognised in profit or loss, unless the asset is carried at a revalued amount.

Profit or loss on disposal

Gain or loss = Net sale proceeds − Carrying amount at date of disposal

Check that depreciation was charged up to the date of sale.

How to solve Verification and Valuation of Fixed Assets questions

1. 1Identify the asset class: land, building, plant, vehicle, intangible, or assets under construction.
2. 2Name the assertion at stake: existence, rights and ownership, completeness, valuation or disclosure.
3. 3List verification procedures: register to ledger, physical inspection, title documents, additions and disposal vouchers.
4. 4List valuation procedures: cost build-up, capitalisation policy, depreciation method and rates, impairment indicators, revaluation by a registered valuer.
5. 5Check compliance and disclosure: Schedule III notes, relevant accounting standard, CARO 2020 reporting.
6. 6If numbers are given, recompute depreciation, carrying amount or gain or loss, and compare with the books.
7. 7Conclude: say whether the treatment is acceptable, what adjustment is needed, and the effect on the audit report if it is not corrected.

Quickest way: Assertion-to-evidence table in your head

Common mistakes in Verification and Valuation of Fixed Assets

• Treating verification and valuation as the same thing.

  Both are performed on the same asset and the words sound alike.

  Fix: Say verification is about existence and title, valuation is about the amount. Give one example of each.

• Relying only on physical inspection to prove ownership.

  Seeing an asset feels like proof that it belongs to the company.

  Fix: Inspection supports existence only. Ownership needs title deeds, registration certificates, invoices or lease documents.

• Capitalising repairs or expensing genuine additions.

  Students do not apply the test of whether future economic benefit increases or life is extended.

  Fix: Capitalise cost that adds to capacity, life or efficiency. Expense routine repairs and maintenance.

• Forgetting depreciation on assets bought or sold during the year.

  Students focus on opening balances.

  Fix: Check the date of use and date of disposal and charge depreciation for the period of actual use.

• Treating all intangibles as capitalisable.

  Students assume any spend that benefits the future is an asset.

  Fix: Remember internally generated goodwill is not recognised, research cost is expensed, and development cost is capitalised only when the criteria are met.

• Reversing the impairment test, comparing cost with recoverable amount.

  Students forget accumulated depreciation.

  Fix: Always compare carrying amount, not original cost, with recoverable amount.

Worked examples