Auditing fixed assets is essential. This is because auditing is needed to ensure that capital assets and depreciation is in compliance with your organizations objectives.
Below we have listed some basic guidelines on how to audit fixed assets and what you need to know beforehand.
UNDERSTANDING CORE TERMINOLOGY
Before you begin to audit fixed assets, you first need to be aware of the terminology and what it means.
Capital assets can be defined as equipment, property, furniture, fixtures and leasehold improvements that can be acquired by a company during normal course of business. These assets are usually have a useful life for at least one year. An example of a capital asset is a computer software used for internal use.
REPAIRS AND MAINTENANCE
Repairs and maintenance are known as expenditures that are made to physically maintain a usable asset without extending its life and/or greatly increasing its capacity.
Installation costs can be defined as expenditure’s made to third parties to place an asset in service.
Freight is known as any expenditure made to transport an asset to the asset’s resident location.
Sales tax is any state or local tax applied to the purchase of an acquired asset.
CREATING POLICIES FOR VALUABLE ASSETS
Once you are more familiar with the terms associated with auditing fixed assets, you can then move on to identifying valuable assets and creating a policy that reflects the set cash threshold.
When auditing all items other than software, a policy should be created that state that a single item of tangible property, with a gross (including sales tax, freight and installation) cost of a specified dollar amount or more, will be capitalized.
When auditing all software, a policy should be created that a single package with a gross cost of a specified dollar amount (or local currency equivalent) or more, will be capitalized.
Items that do not meet necessary requirements for capitalization should be expensed through one of your businesses major GL accounts. After this is done, a depreciation schedule should be created for your fixed assets. One created, a retirement and disposal policy should also be created. When an asset is determined to have been sold or disposed of, the asset’s cost and accumulated depreciation should be removed from the general ledger and the sub ledger. Notably, all asset disposition needs to be approved by department controllers who are responsible for assets prior to disposition. In order for an asset to be properly retired, an asset disposal form needs to be filled out. This form then needs to be submitted to the general ledger by a business unit controller prior to any disposition.