Efficient Tests of Balances Series—No. 21: Reducing Fixed Asset Audit Time Charges

For most small to medium-size entities, internal controls over fixed assets will usually be few in number. On the other hand, limiting the authority for making purchases and disposals of fixed assets to the owner, manager, president, chief financial officer or other individuals charged with governance can create entity-level (key) controls that reduce the risk of material misstatement. Without such controls, the assessed level of risk of material misstatement will ordinarily be high.
 
Auditing Standards
 
The principal auditing standards affecting fixed assets are AU sections 328 and 342. The principal issues in AU Section 328 affecting fixed assets would be connected with the valuation of assets received in non-monetary exchanges and with the calculation of the fair values of future cash flows of an asset to determine if it is recoverable or if its fair value is less that it’s carrying amount. The auditor must evaluate the reasonableness of management’s calculation of fair values or, if management can’t or doesn’t make such calculations, request the client hire a specialist or request a client employee with suitable skill, knowledge or experience be assigned to oversee the valuation process performed by the auditor. Any other fair value accounting processes applied to fixed assets would also require the auditor’s review of management’s process and the results of the application.
 
For AU Section 342, the principal issues for fixed assets relate to the useful lives and residual values of depreciable assets and their depreciation and amortization methods. The auditor must determine that these estimates are reasonable and appropriate in the client’s circumstances.
 
Relevant Assertions for Fixed Assets
 
Financial statement assertions, management’s representations in financial statement classifications, are presented in SAS No. 106, Audit Evidence and its redrafted counterpart. Relevant assertions are those that are directly applicable to a financial statement classification. Audit procedures should be designed to test the applicable relevant assertions based on the facts and circumstances of a particular audit engagement. Risk and materiality will always be the guides!
 
Here are the relevant financial statement assertions for fixed assets arranged from the acronym COVEROD. For fixed assets, all assertions are normally relevant.
 
 C   ompleteness
To determine that all fixed assets transactions and account balances that should be presented have been included in the financial statements.
 
O   ccurrence and cutoff
To determine that all fixed assets transactions occurring during the period have been recorded in the financial statements in the proper period.
 
V   aluation, accuracy and classification
To determine that all fixed assets have been included in the financial statements at accurate amounts, classified properly.
 
E   xistence
            To determine that all recorded fixed assets exist at a given date.
 
R ights
            To determine that the entity has rights to all fixed assets recorded at a given date.
 
Ob ligations
To determine that all liabilities and obligations related to fixed assets are obligations of the entity at a given date.
 
D isclosure and Presentation
To determine that all components of the financial statements and other transactions and events are accurately classified, clearly described and disclosed.
 
Selecting the most cost efficient audit strategy for fixed assets will be discussed in my next blog. Efficient substantive procedures for fixed assets and other account classifications are discussed in my live and on-demand webcasts which can be accessed by clicking the applicable box on the left side of my home page, www.cpafirmsupport.com.
     

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by Larry Perry, CPA, CPA Firm Support Services, LLC - Larry has over 40 years experience as a CPA practitioner, author of accounting and auditing manuals, author and presenter of live staff training seminars and author of webcast and self-study CPE programs.  He is co-founder of CPA Firm Support Services, LLC (www.cpafirmsupport.com), an organization providing resources, training and consulting to smaller CPA firms.  Larry writes a weekly blog on AccountingWEB.com focusing on small audits, reviews and compilations.  He is currently developing documentation manuals and handbooks for small audits, reviews and compilations and related electronic practice aids.

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