Fixed Asset Audit Planning Checklist
The term fixed asset is generally used to describe a piece of physical property that a business owns and uses for its operations in order to generate income. More specifically, the term applies to any property (even intellectual property or digital property such as a song) that is used for a year or more to generate goods or services for customers. Often, fixed assets consist of machines, buildings, and other equipment that organizations rely on in order to create and deliver their products to customers. A wide variety of industries and settings rely on fixed assets for their operations. Educational institutions may have a number of computers, tablets, and other devices that serve as fixed assets temporarily loaned to students. Manufacturers may have robots, forklifts, or warehouses that they use to build their products and manage their inventory. These are all examples of fixed assets.
For many businesses, fixed assets are not only critical for day-to-day operations but also have a major influence on the balance sheet. It is critical to ensure that your company is regularly auditing these assets. Failure to do so could result in thousands of dollars in hidden costs, hazards to your employees, and trouble with the IRS. On the other hand, fixed asset audits can be expensive and complex, especially if your organization has large numbers of assets distributed around a number of geographically dispersed facilities. By following the steps we’ve listed below and complying with this audit planning checklist, you can overcome these challenges and ensure the accuracy of your ledgers.
Why Are Fixed Asset Audits Important?
Fixed asset audits are important for the benefits they provide and the fraud that they can prevent. Firstly, a fixed asset audit helps you to know more about the current state of the assets throughout your business. Specifically, a fixed asset audit uncovers certain facts about each asset that you need to know, such as its location, condition, and value.
This information can be vital in ensuring that you have the correct asset valuations on the books and that your fixed assets are in good working condition. After all, a deteriorating fixed asset that hasn’t been audited in several years could become an occupational hazard for your employees.
Secondly, there are several types of fraud that can cost you thousands of dollars when it comes to your fixed assets. You may think that fixed asset fraud is low risk because most employees cannot easily steal large machines. However, there are still a number of issues to be aware of. For example, a buyer in one department could fraudulently purchase an asset that doesn’t exist in an attempt to manipulate the ledger or steal money from the organization. A department could also misrepresent the value of certain fixed assets, improving the appearance of its asset position fraudulently. In order to avoid these fraud risks and maintain the accuracy of your financial statements, regular fixed asset auditing is a requirement.
Fixed Asset Audit Checklist
The need for fixed asset audits is undeniable. This is the method for executing these audits efficiently and comprehensively.
1. Define audit goals
Another task to complete before the audit begins is to define the goals of your audit. Is the goal merely to get general confirmation of the ledger’s valuation of your most expensive assets? Or is the goal to complete a comprehensive, in-depth analysis of every fixed asset in your organization? The goal of your audit will help you determine the scope and create clear objectives that can keep your auditing team on track.
2. Consider rules & regulations
Your organization may already have internal procedures which place certain restrictions and requirements on how fixed asset audits are to be performed. If this is the case, it is critical that you know these requirements and follow them before starting the audit. Furthermore, there may also be state or federal regulations that could impact your auditing process. Identify if any of these regulations are relevant and ensure that you are complying with them as you plan and execute your audit.
3. Determine the scope
You may decide to opt for a limited fixed asset audit instead of a complete inventory. If this is the case, it is important that you clearly define the scope of the audit before you begin. If you have already completed a full audit recently, you may opt to only audit a minimum number of assets or a dollar amount in order to provide reasonable assurance that the ledgers are accurate. Defining scope is one of the critical first tasks that you will need to undertake when you start your fixed asset audit.
4. Collect facts on your assets
According to Patrick Gleeson, Ph.D., “the most basic of all audit procedures is establishing that the asset exists.” There are several options for confirming this vital information including having an auditor physically identify and inspect the asset or comparing printed data to descriptions of the assets on the ledger. This printed data would come from inventory reports and would need to be verifiable and accountable.
Once you have identified that each asset you possess does physically exist, you are then ready to start collecting data on them. This data would cover several details like:
- Serial number
These details can help you to get a better understanding of what assets you possess and can be used to correct and update your inventory list.
5. Establish the value of your assets
Once you have the specifications on your assets, you will need to record their value as well. This is arguably the most important part of your fixed asset audit. In order to achieve an accurate valuation, follow the guidelines of the Generally Accepted Accounting Procedures (GAAP). This means that you will first need to identify the acquisition costs for the asset as well as the date purchased. This is where one of the other key topics of fixed asset audits comes in: asset depreciation.
All fixed assets depreciate over time. Using the data you’ve collected in the previous steps of the audit, you should be able to calculate the depreciation of the asset using either a straight-line method or an accelerated depreciation method. The straight-line method is the simplest and allows you to apply a steady rate of fixed asset depreciation every year over the course of the asset’s lifetime. Accelerated depreciation methods are designed to have large amounts of depreciation early on. This second method can be useful for taxation purposes because it allows a business to have more business expenses written off in the short term in exchange for paying more taxes in the long term. Depreciation is also critical because it can allow you to predict when assets need to be salvaged and replaced, helping you to keep your operations running smoothly and your employees safe. Establishing depreciation is another vital task in a fixed asset audit.
6. Asset reconciliation
Every fixed asset audit concludes with asset reconciliation. Here is where the collected data from the audit is compared against inventory reports to identify the accuracy of the ledgers. It is also in this stage that irregularities and fraud can be uncovered. If an inaccuracy or inconsistency is found, your auditing team will need to investigate it thoroughly to determine if the root cause was merely negligence or if fraud has occurred.
7. Select an audit interval
Once you have completed the full fixed asset audit, you will then want to decide on the frequency of your future audits. Generally, most organizations conduct these kinds of inventories on a 3-to-5-year cycle. If your business holds a significant number of volatile fixed assets, you may also decide to hold limited audits on an annual basis.
The Problem– Common Difficulties With Running Fixed Asset Audits
Businesses tend to avoid conducting fixed asset audits because they can be so expensive and complex to complete. For many organizations, these inventories are nothing more than a hassle, and some don’t even attempt them. When faced with a lack of proper documentation, incorrect asset identification barcodes, and irregular physical inventories, it is no surprise that fixed asset audits have built a poor reputation in the industry. An additional challenge with running audits is that most organizations still rely on paper-based approaches that can be inefficient and disorganized. Fortunately, there is a way to eliminate these challenges and conduct fixed asset audits with relative ease and simplicity: asset management software.
The Solution – An Asset Management System
With fixed asset management software, you can streamline your entire fixed asset auditing workflow using the power of technology. One of the best examples of this kind of platform is Redbeam. With Redbeam’s software, you can automatically track all of the vital details about your assets, including depreciation, current value, location, and use history. Instead of wasting time tracking down paper reports and filling out spreadsheets, you can quickly get the data and information you need. In fact, Redbeam enables you to decrease the time spent on auditing and inventories by up to 70%. If you would like to see how our cutting-edge technology can support your business, click below to schedule your free demo, or visit https://redbeam.com/schedule-demo.