In an average company the non-current assets that will be encountered are: Freehold land and buildings, plant and machinery, motor vehicles and fixtures, furniture and fittings. The verification process is similar in all these. Therefore we shall look at freehold property and plant & machinery.
Freehold Land & Buildings
- To verify that there was proper authorization to acquire the land and the buildings.
- That land and buildings exist
- That the company has legal ownership rights over these assets
- That these assets are valued at an appropriate amount
- That these assets are properly presented and disclosed in the financial statements according to the relevant financial reporting standards such as International accounting standard No. 16, 17 or 40.
To be able to meet the above objectives the auditor carries out the following audit procedures:
- Cost and authorization
This is verified by inspecting to the appropriate documentation such as the sale agreement and surveyors certificates. To verify whether the acquisition was authorized the auditor can inspect the minutes of the board of director’s meetings at which such the green light was given to acquire the assets in question.
Verified through physical inspection of the land or the building.
- Ownership rights
This can be verified by inspecting the title documents. The auditor should also ensure that such title documents are in the name of the company and are free from any charges. E.g. the land title deed should not be charged as security for a loan. If this is the case then such information should be disclosed in the financial statements.
Freehold land should be disclosed as cost. Leasehold land should be amortized over the life of the lease. Generally buildings should be carried at the depreciated historical cost or at depreciated revalued amounts.
The auditor should ensure that:
- The depreciation policy adopted is appropriate i.e. the rate applied and the estimated useful life.
- Where buildings or land has been revalued that this is carried out by a qualified and reputable valuer and the revaluation seems reasonable.
- That the land and buildings are evaluated for impairment and where necessary written down to the impaired value.
- Presentation and disclosure
For proper presentation fixed assets should be split into appropriate classes. The following information should be disclosed;
- Depreciation policy
- Useful life’s
- Total depreciation charge for the period
- Additions of new assets or disposals during the period
- Any assets that are charged in favour of another person.
Plant and Machinery
- The auditor will be aiming at proving the following assertions;
- Proper authorisation to acquire the asset
- Ownership rights
- Presentation and disclosure
The significant plant and machinery acquired during the year is vouched to supporting documentation such as supplier’s invoices, cashbooks, approved budgets etc.
Check in the directors’ minutes or AGM minutes for proper authorisation for acquisition of the asset.
Auditor’s responsibility is to ensure that the accounting policy for depreciation is appropriate. For example if the diminution in value of an asset is largely related to time then reducing balance method would not be appropriate but straight-line method. Check appropriateness of the useful life. Where the assets have been revalued the auditor should ascertain that an independent and qualified valuer carried out this revaluation.
Existence should be checked by physical inspection. The problem arises that items of plant & machinery are mobile, numerous, portable and valuable. It becomes difficult therefore for the auditor to be assured that the value attached to the plant and machinery represents plant and machinery that actually exist at balance sheet date. To ensure the existence of plant and machinery, it is necessary to have a Fixed Asset Register.
Fixed Asset Register
For it to be independent the person maintaining it must have no responsibility for: the assets purchase, maintenance, custody or disposal.
- Ordering or authorising the purchases of fixed assets.
- The custody of the fixed assets.
- Authorising the disposal of fixed assets.
- Maintaining general ledger accounts.
- Custody of readily realisable assets.
The register contains the following information:
i. Fixed asset number.
ii. Fixed asset location & responsibility for custody.
iii. Nature and description of the asset.
iv. The cost and date of purchase.
v. The estimated useful life and the residual value.
vi. Accounting policy for depreciation.
vii. Accumulated depreciation.
viii. The gain or loss on disposal.
ix. Capital allowances.
When the register is reconciled to the general ledger the auditor can check the asset for physical existence by reference to the number and locations recorded.
For Plant & Machinery, it is usually implied and unless there is clear evidence to the contrary, proof of purchase and possession will suffice as evidence of ownership.
This is similar to freehold property.
Similar considerations should govern verification of motor vehicles as those that govern plant and machinery. The only issue here is existence and ownership.
If we cannot see the vehicle prove evidence should suffice e.g. if we own a vehicle then we expect that it will incur costs such as insurance, repair, fuel, e.t.c. Which are proof of its existence.
The engine and chassis number should be checked to ensure that the vehicle described in the logbook is the same one we are looking at as clients can change the registration number plates from one vehicle to another.
Ensure client’s name is the one in the logbook.
Disposal of Non-Current Assets
- The issue here is authorisation for disposal.
- Also the auditor tries to ensure that the value obtained was reasonable either by engaging an expert or by looking at the values obtained and related values for assets of that nature.