Auditing Fixed Assets
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Fixed assets — property, plant, and equipment — make up a significant share of most companies' balance sheets, which makes them a well-tested topic on the AUD section of the CPA exam. Three procedures do most of the work: asset inspection, depreciation testing, and title confirmation.
What is asset inspection?
Asset inspection confirms the existence assertion — that a fixed asset actually exists and is in the condition the company reports. Auditors physically inspect the asset to verify it, rather than relying on the ledger alone.
Example: You're auditing a manufacturing firm that recently added a new assembly line, recorded on the ledger at $2 million. You physically inspect the asset, confirm its location, and check its operational status — verifying it exists and supporting the financial statement assertion. (Confirming the company actually owns it is a separate step — see title confirmation below.)
What is depreciation testing?
Depreciation testing validates the valuation assertion. Auditors review the depreciation methods, useful lives, and residual values a company uses to confirm they're reasonable and consistent with U.S. GAAP.
Example: You're auditing a tech company that depreciates a server over 10 years, but the industry standard is 5 years. Overestimating the useful life understates depreciation expense and overstates the asset's net book value — spreading the same cost over more years lowers the annual charge and leaves more of the cost still sitting on the books.
What is title confirmation?
Title confirmation verifies the rights and obligations assertion — that the company actually owns the assets on its balance sheet. This means checking title deeds, lease agreements, or other legal documents.
Example: The company you're auditing shows a piece of land on its balance sheet. To confirm legal ownership, you request and review the title deed, and check for any liens or restrictions that could affect the land's valuation.
Each procedure answers a different question. Asset inspection asks "does it exist?" Depreciation testing asks "is it valued reasonably?" Title confirmation asks "does the company actually own it?" A physical inspection alone never answers that last question.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 90 on AUD. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.