Fixed assets, also known as property, plant, and equipment, represent a significant portion of a company’s asset base and require specialized audit procedures. Auditing fixed assets is commonly tested on the U.S. CPA exam, specifically within the Auditing and Attestation (AUD) section.

Candidates should be proficient in several key audit procedures specific to fixed assets: Asset Inspection, Depreciation Testing, and Title Confirmation. These procedures provide various types of assurance, such as existence, valuation, and rights to the assets, which are critical for both the CPA exam and real-world auditing.

Asset Inspection

Asset Inspection is a fundamental audit procedure that confirms the existence and condition of a fixed asset. During this procedure, auditors physically inspect assets to ensure they exist and are in the condition reported by the company. This step is critical in auditing, as it confirms the “existence” and “rights and obligations” assertions for fixed assets.

Example: Suppose you’re auditing a manufacturing firm that recently added a new assembly line. The ledger indicates this new assembly line cost $2 million. You physically inspect the asset, confirm its location, and even check its operational status. By doing so, you verify its existence and obtain evidence that supports the financial statement assertions.

Depreciation Testing

Depreciation Testing is essential for validating the “valuation” assertion of fixed assets. Auditors review the depreciation methods, useful lives, and residual values used by a company to ensure they are reasonable and in accordance with relevant accounting standards like U.S. GAAP.

Example: While auditing a tech company, you notice that they have a server that they have depreciated over 10 years. However, upon closer inspection, you find that the industry standard for server depreciation is 5 years. The overestimation of the server’s useful life could significantly impact the financial statements, understating depreciation expense and overstating the asset’s net book value

Title Confirmation

Title Confirmation involves verifying that the company owns the assets recorded on its balance sheet. This usually includes checking asset titles, lease agreements, or other legal documents to confirm ownership. This step is crucial for the “rights and obligations” assertion in the financial statements.

Example: The company you’re auditing shows a piece of land on its balance sheet. To confirm that the company has the legal rights to the land, you request and review the title deeds. You also check any liens or restrictions on the property that could affect its valuation.