Internal and Forensic Audit · Internal Audit of Specific Functions

Internal Audit of Fixed Assets and Capital Expenditure

Updated 11 October 2026 · Fact-checked

Internal audit of fixed assets checks that capital spending is authorised, assets are correctly capitalised, recorded in a reconciled register, depreciated properly, physically exist, are safeguarded and are disposed of with approval. You answer by covering each life-cycle stage: acquire, capitalise, record, depreciate, verify, dispose.

Understand Internal Audit of Fixed Assets and Capital Expenditure

Fixed assets are tangible or intangible resources a business holds to use over more than one year, not to sell in the normal course. Examples are land, buildings, plant, vehicles, computers and software. Capital expenditure (capex) is spending that creates or improves such assets and benefits several years. Revenue expenditure is spent to run the business this year, such as repairs and maintenance.

Fixed assets are usually large in value and long-lived. Errors therefore stay in the books for years. The main risks are unauthorised purchases, revenue items wrongly capitalised (or the reverse), assets missing from the register, ghost or untraceable assets, wrong depreciation, theft or misuse, and disposals at low prices without approval.

The internal auditor looks at the whole life cycle of the asset. Start with the capex budget and approval. Then check the purchase, the cost capitalised and the date it was put to use. Then check the asset register, depreciation, physical existence, insurance and title documents. Finally check the sale, scrapping or transfer.

The auditor's focus differs from the statutory auditor's. The statutory auditor gives an opinion on the financial statements. The internal auditor tests whether controls work, whether policies are followed, and whether assets are protected and used well. Reports go to management and the audit committee with recommendations.

Accounting rules come from the applicable accounting standards (Ind AS 16 or AS 10 for property, plant and equipment, and the standards on intangibles and impairment). Depreciation for companies follows the useful lives the company adopts, guided by Schedule II of the Companies Act, 2013. Use these as the criteria against which you test.

Key rules to remember

Cost of an asset: Cost = Purchase price + Duties and taxes not recoverable + Freight and installation + Other directly attributable costs − Trade discounts; Recoverable GST input credit is not part of cost. Costs after the asset is ready for use, such as training or idle running, are generally not capitalised.
Straight-line depreciation: Annual depreciation = (Cost − Residual value) ÷ Useful life in years; Check that the method and useful life are applied consistently. Charge from the date the asset is available for use.
Written down value (WDV) depreciation: Depreciation for the year = Opening WDV × Rate; Rate is applied on the reducing balance. Additions during the year are depreciated for the period used.
Profit or loss on disposal: Profit or loss = Sale proceeds − Carrying amount (WDV) at the date of sale; A positive result is a profit. A negative result is a loss. Depreciate up to the date of sale first.
Three-way reconciliation: Asset register = General ledger = Physical count; Any difference must be investigated, explained and approved before adjustment.

How to solve Internal Audit of Fixed Assets and Capital Expenditure questions

Use the life-cycle method. It fits any question on fixed assets or capex, whether it asks for objectives, a programme, a checklist or a case analysis.

1Read the question and mark the stage or stages involved: acquisition, capitalisation, register, depreciation, verification or disposal.
2State the objective in one line: existence, ownership, valuation, completeness, proper classification and authorisation.
3Name the key risk at that stage, for example unauthorised capex or revenue items capitalised.
4List the audit procedures: documents to examine, tests to perform and people to ask.
5Apply facts given in the case. Compute any figure asked, such as cost, depreciation or profit on sale.
6Identify the control weakness and its likely effect on the accounts or on asset safety.
7Conclude with a recommendation and the reporting line, such as management and the audit committee.

Quickest way: Six-stage life-cycle checklist

When to use it: Use when you have to write a short answer or a checklist in limited time.

Write the six headings: Authorise, Capitalise, Record, Depreciate, Verify, Dispose.
Under each heading write two or three procedures in one line each.
Add one risk or control point per heading.
Close with one line on reporting findings to management and the audit committee.

Common mistakes in Internal Audit of Fixed Assets and Capital Expenditure

Writing only about physical verification and ignoring approval, capitalisation and disposal.
Students link fixed asset audit only with counting assets.
Fix: Cover the full life cycle. Use the six headings every time.
Including recoverable GST input credit in the cost of an asset.
Students add the whole invoice value.
Fix: Capitalise only non-recoverable taxes. Recoverable credit is excluded from cost.
Capitalising repairs and routine maintenance, or expensing an improvement that extends life.
The line between capital and revenue expenditure is not tested against benefit period.
Fix: Ask whether the spend creates a new asset or increases future benefits or life. If yes, capital. If it only restores the existing level, revenue.
Calculating profit on sale without first charging depreciation up to the date of sale.
Students use the opening book value.
Fix: Bring depreciation up to date, find the WDV at sale, then compare with proceeds.
Giving the statutory auditor's opinion approach instead of the internal auditor's control and recommendation approach.
The two audits are mixed up.
Fix: Frame answers as control tests, findings and recommendations to management and the audit committee.
Adjusting differences between register and physical count without enquiry.
Students treat reconciliation as an accounting entry only.
Fix: Investigate causes, such as unrecorded transfers or theft, and require approval before any adjustment.

Worked examples

Example 1

During an internal audit of Sundaram Engineering Ltd, you find that a machine was bought for ₹12,00,000 plus ₹1,00,000 freight and ₹50,000 installation. The invoice also shows GST of ₹2,16,000, which is fully recoverable as input credit. The company capitalised ₹15,66,000, the full invoice including the recoverable GST. Identify the error and state the correct cost and the audit action.

Show the solution

Correct cost = Purchase price + Freight + Installation, as the GST is recoverable.
Cost = ₹12,00,000 + ₹1,00,000 + ₹50,000 = ₹13,50,000.
Capitalised amount = ₹13,50,000 + ₹2,16,000 = ₹15,66,000. This matches the amount the company capitalised, so the whole difference is the recoverable GST.
Overstatement = ₹15,66,000 − ₹13,50,000 = ₹2,16,000, which is the GST wrongly capitalised.
Depreciation on this machine is also overstated, so recompute it on the corrected cost.
Audit action: review the capitalisation policy and the checklist used by the accounts team, and recommend a review of GST treatment on other capex.

Answer: The correct cost is ₹13,50,000. The asset is overstated by ₹2,16,000 because recoverable GST was wrongly capitalised. Recommend correction, recomputed depreciation and a stronger capitalisation review.

Exam tips

Answer in the life-cycle order. It gives structure and covers the marks the examiner expects.
For case questions, apply the facts: name the asset, amount and control gap, then conclude.
Show working for any depreciation or profit on sale computation. Method marks are given even if the final figure is wrong.
Separate capital from revenue expenditure with a clear reason, such as benefit over more than one year.
Close with a recommendation and the reporting line to the audit committee.

Practice questions from Internal Audit of Specific Functions

Internal Audit of Fixed Assets and Capital Expenditure in other exams

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

Internal Audit of Fixed Assets and Capital Expenditure: frequently asked questions

What is the main objective of an internal audit of fixed assets?

The objective is to confirm that assets are authorised, correctly recorded, properly depreciated, physically present, safeguarded and disposed of with approval. It also checks that controls over capex work well.

How do you verify a fixed asset register?

Trace a sample of purchases to the register and a sample of register entries to the physical asset. Check that each entry has cost, date, location, tag number and depreciation details. Reconcile the total to the general ledger.

What is the difference between capital and revenue expenditure in an audit?

Capital expenditure creates an asset or increases its future benefits or life. Revenue expenditure keeps the asset in working condition and is charged to profit and loss in the year. Wrong classification changes profit and asset values.

How often should physical verification of fixed assets be done?

The law does not fix one frequency for internal audit purposes. Management usually sets a periodic cycle, often covering all assets over a period and high-value or risky assets more often. The auditor checks that the plan is followed and differences are resolved.