Fixed Asset Audits & Verification

Background

All private and public entities

are required to conduct an annual physical count of all fixed assets to verify actual assets in hand
and value and ensure the accuracy of related financial records. One of the topics covered in the
Final Asset Management Guide issued by National Treasury is that a comprehensive Fixed
Assets Register must be prepared. Once the Fixed Assets Register has been prepared, there is
need to continuously update with additions and disposals (maintaining a separate Disposal
listing), the assets must be depreciated on an annual basis. More importantly there is need to
estimate the remaining useful lives and residual values of the assets on an annual basis at the
bare minimal.

The fixed asset register shall be maintained in the format determined by the entity, which format
shall comply with the requirements of any accounting requirements, which may be prescribed.

Keeping track of assets can be a challenge to organizations large and small. Assets can move
locations, get reassigned to other people, get replaced, etc. Management wants reports about
asset allocation, usage and service history. Accounting needs accurate data for tracking
inventory and calculating depreciation.

The first core component of asset management is the asset inventory. This component is
probably the most straightforward of all. It is also, arguably, the most important as it underlies all
other aspects of asset management.

Knowing what assets you have, where they are located, when they were purchased, if they are
still in use, etc. is critical to any organization.

Some of our recent Clients

Managing Asset Information to Make Better Decisions
Are your systems and processes configured to provide you with the information you need to
manage your assets?

Or are they viewed as a burden with little value?

There are many processes and tools to support the management of the information on assets and
the maintenance of the assets. Depending upon the size and requirements of the organization,
tools from manual paper based systems, to spreadsheets, to EAMS (enterprise asset management
systems), and ERP (enterprise resource planning) systems have been effectively used.

The critical issues are to select the processes and tools most appropriate for your organization,
and to use them effectively. There are many situations where the appropriate tools were not
effectively used due to ineffective processes, ineffective training, or poor implementation and
configuration. The selection of inappropriate tools may cause even more issues. These situations
can cause poor quality or inaccurate data, as users see no value to the systems, inefficient
processes with considerable manual intervention where the processes are not optimized for the
system used, and duplicate data entry or use of manual entry when the systems could better
manage the data. The final result is often a considerable investment in systems with little of the
promised benefit achieved.

How good is the information in your systems?

Should you be getting more value from your systems?

The use of Spreadsheets

While companies for a wide range of tasks use spreadsheets, a majority of companies continue to
use spreadsheets for financial tracking and reporting. It is however more important that
companies keep tighter track of their financial data, including their fixed assets.

Some negative aspects of spreadsheets when it comes to tracking and depreciating fixed assets
are

 manual creation of formulas

 lack of audit trails
 security concern
 potential for fraud

It is important that companies understand the deficiencies with spreadsheets and implement
solutions that are designed specifically for the intended purpose.

Asset Management Personnel

Asset management needs to focus on the organizational requirements of the assets, rather than
solely upon asset-related technical issues.

In many cases, asset management is the responsibility of individuals with no formal training in
business and organizational issues. They often have promoted based upon their understanding of
technical processes and systems, and naturally focus on the areas in which they are comfortable
and competent in working. Many are very capable long-term employees with limited exposure
to other asset management practices, depending upon company policies and practices on
attending conferences, training, and opportunities to visit other operations.

Managing Your Assets to Manage Your Risk

What risks are the most critical to you?

Do you look at production risks?

What about health and safety, and environmental risks?

There are many risks related to asset management facing organizations today, with different
probabilities and severity of outcomes. Often the implications of the risks are not fully
understood.

If you are not able to operate your physical assets when needed, is it just lost revenue for the
duration of the downtime? Or additional costs due to expedited deliveries? Or is the matter
more severe, resulting in a permanently lost customer because of missed deliveries in a JIT (Just
in Time) manufacturing environment? Customer issues related to quality or customer service can
have similar outcomes.

The negative outcomes related to health and safety, and environmental violations have gotten
much more severe. As well as the amount of the fines increasing for violations, more
jurisdictions are imposing jail sentences for the violations.

What is the risk impact to your organization? What is the risk impact to you, given the
responsibility of your position.

Check that a Fixed Assets Register is maintained and updated at all times ( Manual /
Computerized ).

(2) Check that the Fixed Assets Register gives details of the fixed assets - Quantity / No /
Location / Identification Number / Depreciation / Rate / accumulated depreciation / original cost
/ additions /deletions/ written down value.
(3) Check that the identification number given on the fixed asset tallies with the number
given in the FA Register.

(4) Check that for purchases as well as sale of fixed assets proper authorization has been
taken from the appropriate authorities

(5) Check that the discrepancies observed on physical verification of fixed assets have been
correctly adjusted in the books of account after taking approval from the appropriate authority.

(6) Check the method and the procedure adopted for carrying out the physical verification of
fixed assets and ensure that verification was carried out as per the generally accepted accounting
practices and procedures.

(7) Check that the physical verification sheets in respect of fixed assets are properly prepared
and duly signed by the persons responsible for carrying out the physical verification. The name,
designation of employees and the date of carrying out the physical verification should also be
clearly mentioned in the physical verification sheets.

(8) Check that the physical verification of Fixed Assets is carried out by the Management at
least once in 3 years.

Account Balance Accuracy

The account balance of fixed assets in a financial statement is the accumulated value from past
asset additions and deletions up to a given point in time. The auditor must first establish that the
reported fixed-asset balance agrees with related account records in the general ledger. The
auditor verifies the accuracy of the account balance for fixed assets by obtaining a detailed
schedule on asset purchases and dispositions in the current period, including beginning balances.
Individual asset accounts are compared to their respective account records in the general ledger
for agreement in account balances.

Account Transaction Validation

Matching account balances don't preclude potential accounting irregularities or even fraud from
showing in the financial statements. Fixed-asset auditing helps ensure that assets listed in a
financial statement are from valid transactions, have been received and actually exist in service.
To test validity, the auditor vouches recorded fixed-asset transactions to supporting documents
such as vendors' invoices. If an asset purchase is properly authorized, the account transaction is
valid. To further verify the existence of a recorded fixed asset, the auditor may physically
examine the asset at the place where it supposedly has been placed in service.

Asset Valuation Test

Proper asset valuation ultimately determines the correctness of the account balance for fixed
assets. Capital assets are valued at their historical acquisition cost plus any additional money
spent on asset improvement. The auditor tests the proper asset valuation of the recorded fixed-
asset cost by examining vendors' invoices and other purchase supporting documents, the source
information on correct asset valuation. The auditor may further address the asset valuation issue
by assessing the appropriateness of the asset depreciation, which reduces the carrying value of
the fixed assets. In recognizing any depreciation expense, the auditor considers the
reasonableness of an asset's estimated economic life, the depreciation method used and any
expected salvage value.

Asset Classification Test

The asset classification test helps ensure that the recorded fixed assets are correctly classified as
capital assets, and certain expenses that should be capitalized are also recorded as part of the
fixed assets. For example, while the costs of repair and maintenance normally are treated as
expenses, significant amounts of money spent on asset improvement may be capitalized as an
addition to the asset's value. The auditor may examine selected repair and maintenance work to
vouch it to supporting transaction documents to determine whether it would be appropriate to
capitalize the repair costs.

Other Auditing Tasks

Audit procedures for fixed assets also cover issues of asset ownership proof and reporting-cutoff-
time test. To prevent potential accounting manipulation from compromising financial statement
reliability, the auditor may decide to verify the ownership of the recorded fixed assets by
examining and confirming property deeds or title documents as proof of ownership. The cutoff-
time test involves examining a sample of vendor invoices from a few days before and after the
end of a period. The auditor determines whether the fixed-asset transactions are reported in the
proper period.

Fixed Asset Management answers all the questions :

Where the firm’s assets are lying?
Does these assets present the true values?
Are the assets maintained properly?

Why Asset Verification?

Fixed asset verification involves lining up of all the assets specifying the places about where the
assets are held and the ones responsible for the possession .it provides with :
A true and fair statement of fixed assets.
An updated FAR.
Results into better internal control and accountability.
Audit compliance.
Better and simpler decision making process.
To such a degree it aids to present a true and fair financial position of a firm,know the
profitability level and future prospective of a firm.

Why Asset Tagging?

The places of placement of assets can be known with reduced time and efforts with the help of
asset tagging.
Automates the verification process.
Monitors asset movement.
Reliable and accurate verification.
Individual identity of each asset.
Reduced time and efforts in asset verification.

Why Automatic Fixed Asset Verification?

An automatic verification provides with the globalised accepted procedures.Managing the work
of a single firm is easy as compared to management of work of ten firms ,same is the case with
the manual and automatic verification as manual verification confines to a particular area of
working.

Manual verification stands in need of more efforts,time and money whereabout automatic one
curtails all these to an extent by accomodating the usage of labels and scanning of bar codes
helping to deal with the security issues , the detailed phases of verification & costing
mannerism.The records can be automatically updated being handled by even a small team of
members in automatic verification whch is not feasible in manual one.

"During automatic verification all configuration issues are corrected leading to a synchronized
system of fixed asset verification which excludes the need of manual verification". A dynamic
working gets into account with the use of automatic verification and thus reduces the work load
and simplers the work.

"Automatic verification & fixed asset management multiply around a firm.To an increasing
extent automatic verification dictate the verification of fixed asset."

Why not to opt for physical Verification?

1. PRIOR TO MANUAL PHYSICAL VERIFICATION:

Preparation of FAR with all relevant Details

Pulling out Quantities and proper nomenclature/ model No. from the invoice wherever required
Team training for physical verification

2. WHILE CARRYING OUT PHYSICAL VERIFICATION:

Keeping a track of assets verified and not verified

Pulling out Quantities and proper nomenclature/ model No. from the invoice wherever required
Team training for physical verification

3. AFTER THE PHYSICAL VERIFICATION:

Resolving the issues related to missing assets

Communicate and coordinate with the person responsible for the Missing, Damaged and not in
use assets
Arrive at the write-offs /accounting adjustments required
Maintain a trail of all changes made and managing the documentation
Revision of FAR after attaining proper approval/ documents
Satisfy the Auditors and Companies Act requirements

Using photographic equipment, scanners and verification software, OpenAsset inventory

specialists go on-site, seek out each FAR asset, and verify its existence, asset type, location and
description with reference to the updated records from OpenAsset.

Asset information for those assets that are not currently listed on the ledger, but are of obvious
material value and consequently should be accounted for, are seeked and collected and the asset's
value appraised for inclusion into the ledger.

Photographs are taken of assets to assist in their identification for description, classification,
insurance purposes and replacement.

All vague descriptions of assets are investigated, clarified and corrected.

Conditions of assets are determined by following a standardized approach so that it can be

consistently applied across the Client’s Properties to:

 enable effective benchmarking, trend monitoring, and data aggregation;

 be cost effective, repeatable and objective;
 be linked to the expected failure pattern of the specific assets (wherever practicable);
 be modeled on performance criteria rather than visual inspection of condition where such
is not practicable or inappropriate

A simple generic five-point grading are adopted:

‘EUL’ is Expected Useful Life

‘RUL’isRemaining Useful Life

Grade Description Detailed

description
Indicative RUL
1 Very Sound structure, well maintained. Only normal maintenance 71-100%
good required. EUL
Serves needs but minor deterioration (<5%). Minor maintenance
required.
2 Good 46-70% EUL
Marginal, clearly evident deterioration (10-
20%).Significant maintenance required.
3 Fair 26-45% EUL
 Significant deterioration of structure and/or appearance. Significant
impairment of functionality (20-40%). Significant renewal/upgrade
required.

4 Poor 11-25% EUL

Unsound, failed needs reconstruction/ replacement (>50% needs
replacement)
5 Very 0-10% EUL
poor

Our proven methods and use of state-of-the-art technologies enable our inventory specialists to
complete a highly accurate physical count with little to no disruption to your normal daily
business operations. During this time, inventory movement should be controlled and, if practical,
receiving activities should be delayed until the physical inventory taking process is completed.

A Project Manager is assigned to the project to assess client objectives, existing business
controls, and asset information standards and conventions. Using this information, we craft a
concise plan that is used to govern specific asset counting methods, information, conventions,
and project stages

Physical verification of assets

5.4.1 At the end of each financial year the Head of Department is required to sign a year-end
certificate for their department; this includes certifying that the Fixed Asset Register holds the
correct number and type of assets held in the department.

5.4.2 Best practice recommends that departments perform a physical verification of the assets
listed at least once a year and notify the Fixed Asset Helpdesk of any changes required. Such
amendments may be submitted at any time.

However, to support best practice and the certification of assets in the department, Central and
Research Accounting conducts a bi-annual review of departmental assets and records. In
February and July each year full lists of assets registered to each department are distributed to
the relevant departmental contacts. This list enables departments to verify the presence of
assets and identify updates to ancillary information such as location and employee.

Once asset details have been verified departments should return the review sheets – within the
stated timetable- with details of any amendments required to their Fixed Asset Register. This
helps to ensure that UFS assets records and associated accounting is as accurate as possible.