Fixed Assets: Accounting and Depreciation

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Questions and Answers

What are fixed assets?

Fixed assets are long-term assets used by a business to generate income.

What is the purpose of a fixed asset register?

A fixed asset register is used to maintain a detailed record of all fixed assets, including their cost, depreciation, and other key details.

Which of the following are types of fixed assets? (Select all that apply)

Cash Assets

Intangible Assets (correct)

Liquid Assets

Tangible Assets (correct)

Land is a fixed asset that depreciates over time.

False Signup and view all the answers

____ value is the estimated amount that a fixed asset can be sold for at the end of its useful life.

Salvage Signup and view all the answers

What is salvage value in the context of auditing a Fixed Assets Register?

estimated residual value that a fixed asset will have at the end of its useful life Signup and view all the answers

What data is typically required for assessing salvage value for fixed assets?

All of the above Signup and view all the answers

Salvage values assigned to each asset should be periodically reviewed and updated if necessary.

True Signup and view all the answers

The useful life of an asset refers to the period over which the asset is expected to be ________ and generate economic benefits for the company.

productive Signup and view all the answers

Match the following with their descriptions:

Documentation Review = Examine title deeds, land purchase agreements, leases Physical Inspection = Assess condition of fixed assets and useful life consistency Comparison with Industry Standards = Compare useful life estimates with benchmarks Review of Depreciation Methodology = Assess appropriateness of depreciation calculation approach Signup and view all the answers

What is the purpose of physical verification in relation to fixed assets?

To confirm the existence of physical assets of Fixed Asset Accounting Records within reasonable time intervals. Signup and view all the answers

According to ICAI’s Guidance Note on CARO, 2020 (Revised 2022), which of the following statements regarding physical verification intervals is correct?

Assets are verified at least once in three years. Signup and view all the answers

Discrepancies between book records and physical verification must be properly investigated and reported.

True Signup and view all the answers

Companies must maintain proper title deeds for their ___ and buildings to ensure their right to use the assets.

land Signup and view all the answers

Match the risk with its corresponding description:

False Existence of Asset = Companies may present false assets in financial statements Misappropriation of Cash = Risk of concealing misrepresentation or fraud Inefficiency in Internal Control = Non-compliance with Reporting Requirements under CARO Wrong Value of Assets = Revaluation of fixed assets must be done at regular intervals Signup and view all the answers

What does 'Right To Use' refer to in the context of fixed assets?

The legal right to use an asset without physically possessing it Signup and view all the answers

What is the importance of 'Put To Use' in relation to fixed assets?

Impacts the timing of depreciation Signup and view all the answers

Component depreciation can be done if estimates are made for the useful lives of the components.

True Signup and view all the answers

Assertions are claims made by management in their financial statements about their ____________ and economic condition.

state of affairs Signup and view all the answers

Match the following assertions with their descriptions:

Existence = Whether the Asset or Liability actually exist or not Rights and Obligations = Company's rights over assets or obligations with regards to Liabilities Completeness = Reporting all essential account balances in financial statements Valuation and Accuracy = Proper valuation and accuracy of figures in financial statements Presentation and Disclosure = Proper presentation and disclosure for informed financial decisions Signup and view all the answers

What is the purpose of physical inspection in land ownership evaluation?

Identify any physical characteristics affecting value Signup and view all the answers

Ownership structure assessment aims to identify conflicts of interest.

True Signup and view all the answers

What is the purpose of valuation in land ownership evaluation?

Evaluate the fair market value of the land based on various factors such as comparable sales and income potential Signup and view all the answers

__________ refers to the transfer of ownership of a property from one person to another.

Mutation Signup and view all the answers

Match the following land ownership data with their descriptions:

Encumbrance Certificate = Verification of property liabilities Record of Rights (RoR) = Official document containing land details Court Decrees = Establish rightful owner in legal disputes Signup and view all the answers

What data is required for separate depreciation calculation of component-based assets?

Physical Verification Records Signup and view all the answers

What risk is associated with misallocation of costs related to fixed assets?

Inaccurate Useful Life Assessment, Inconsistent Depreciation Methods, Insufficient Documentation, Failure to Update Depreciation Estimates, Overlooked Impairments Signup and view all the answers

The sale of fixed assets in an audit ensures the accuracy of depreciation, valuation, and adherence to disposal procedures.

True Signup and view all the answers

What data is required for the review of fixed assets written off but not sold?

Fixed Assets Register, Documentation Supporting Write-Offs, Accounting Records, Control Procedures and Policies, Asset Valuation and Impairment Assessments Signup and view all the answers

What is the purpose of claiming depreciation as per the Income Tax Act of 1961 in India?

reduce tax liability Signup and view all the answers

Under the Income Tax Act 1961, how are assets categorized for depreciation purposes?

Based on their useful life Signup and view all the answers

Assets must be in business use for depreciation to be claimed under the Income Tax Act.

True Signup and view all the answers

Shift depreciation accounts for the increased wear and tear due to prolonged operation in ______ shifts.

multiple Signup and view all the answers

Match the correct data required for fixed asset audits:

Purchase Orders and Invoices = Supporting Documentation Depreciation Schedules = Depreciation Calculations Barcode or RFID Scanning Log = Asset Location Records Physical Inventory Reports = Asset Inspection Reports Signup and view all the answers

Study Notes

Overview of Fixed Assets

Fixed assets are long-term assets used to generate income, with a useful life of more than one year and a measurable cost.
Types of fixed assets include tangible assets (e.g., land, buildings, machinery) and intangible assets (e.g., patents, copyrights, software).

Fixed Asset Register

A fixed asset register is a comprehensive record of an organization's long-term assets, including details such as asset code, description, capitalized date, and depreciation category.
The register serves as a crucial tool for managing and tracking fixed assets.
Information recorded in the register includes company code, asset code, sub-asset, asset description, and more.

Purpose and Importance of Fixed Asset Register

The register helps with accurate financial records, insurance management, and asset tracking.
It provides data for financial reporting, decision-making, and historical records.
The register also aids in depreciation management, data for debt applications, valuation, and disposal management.

Fixed Asset Acquisition and Capitalization Process

The process involves identifying the need for an asset, evaluating its cost, and recording it on the balance sheet.
The acquisition and capitalization of fixed assets impact a company's financial statements.

Fixed Asset Depreciation and Amortization

Depreciation and amortization are calculated based on the historical cost, useful life, and residual value of the asset.
IND AS allows for the revaluation of fixed assets, which affects depreciation and amortization calculations.

Methodology for Calculation of Depreciation

The Companies Act 2013 defines broad categories of fixed assets, each with a specific useful life and depreciation rate.
Useful life is estimated based on factors like technological obsolescence, expected physical wear and tear, and intended use.
Depreciation is calculated using the straight-line method and Written Down Value Method.

Important Terms relating to Fixed Assets

Salvage value, also known as residual value, is the estimated amount a fixed asset can be sold for at the end of its useful life.
Sub-assets are fixed assets broken down into sub-components, each with their own useful life and depreciation rate.
Land assets are unique fixed assets that do not depreciate and are recorded at historical cost.

Shift Wise Depreciation Concept

Shift-wise depreciation is a method used to allocate depreciation expenses based on the shifts or hours during which an asset is used.
The concept is used in industries where assets operate continuously in multiple shifts.
Higher usage leads to faster depreciation.

Componentization Approach of Depreciation

Assets can be broken down into individual components with different useful lives.
Depreciation is then calculated separately for each component, providing a more accurate representation of the asset's value.

Assertions

Assertions are claims made by management in their financial statements about their state of affairs and economic condition.
Assertions are classified into two parts: Transaction Assertions and Account Balance Assertions.

CARO Compliances

CARO, or the Companies (Auditor's Report) Order, is a crucial compliance requirement for Indian companies.
CARO outlines guidelines for auditors to report on the financial health and operations of a company, including the management of its fixed assets.
CARO compliance requirements for fixed assets include maintaining proper records, physical verification, discrepancy reporting, title deeds, and revaluation.### ICAI Guidance on Property, Plant and Equipment (PPE)
Proper records of PPE should consist of sufficient description, component-wise breakup, classification under the relevant accounts head, and adjustment for revaluation.
Records should also include location, quantity, original cost and year of purchase, accumulated depreciation, useful life, and residual value.

Fixed Assets Register in Electronic Form

The auditor may not accept a PPE register in electronic form if it does not satisfy two conditions: authenticity and maintenance in a standard form.
The register should be in a legible form and should be able to be retrieved with proper authorisation and audit trail.

CARO Compliance Requirements for Fixed Assets

The management, in consultation with the auditor, should make a reasonable estimate of the cost of each asset.
The auditor should maintain adequate documentation evidencing the evaluation of controls that ensure the completeness, accuracy, and security of the PPE register.

Physical Verification of Fixed Assets

Physical verification is the process of confirming the existence of physical assets through verification within reasonable time intervals.
The term "reasonable intervals" depends on the circumstances of the case, but generally, assets should be verified at least once in three years.
Assets that are few and can be easily verified can be verified annually.

Audit Checks for Fixed Assets

The auditor should observe the title deeds and ownership justifying documents to ensure the ownership or obligation.
The auditor should verify the existence, completeness, accuracy, and presentation of fixed assets, and ensure that the rights and obligations are properly disclosed.

Revaluation of Fixed Assets

Revaluation of fixed assets must be carried out at regular intervals.
If there is a change in value upon revaluation, the amount of change should be specified if it is 10% or more of the net carrying value of each class of property, plant and equipment or intangible assets.

Risks Associated with Fixed Assets

False existence of assets
Asset misappropriation and defalcation of cash
Teeming and lading
Inefficiency in internal control
Misappropriation of assets
Rights and obligations not properly disclosed

Fixed Assets Charged as Revenue Expenditure

Failure to differentiate between capital and revenue expenditures is an error of principle.
The auditor should review accounting policies, analyze the fixed asset register, and perform physical inspection and analytical review.

Revenue Expenditure Charged as Fixed Assets

When revenue expenditure is wrongly charged as fixed assets, it can lead to misrepresentation of financial statements and misallocation of expenses.
The auditor should review accounting policies, test capitalization criteria, and ensure proper authorization and documentation for capitalization decisions.### Consistency of Salvage Value
Ensure consistent methodology for determining salvage value across all assets in the register
Justify and document any deviations or exceptions
Periodically review and update salvage values to reflect changes in market conditions, asset condition, or other relevant factors
Assess the reasonableness of salvage values based on asset nature, useful life, and market conditions

Risks of Inconsistent Salvage Value

Overstating or understating salvage values can lead to misleading financial statements and misinformed investment decisions
Understating depreciation expense can lead to artificial inflation of reported profits
Failure to comply with regulatory requirements can expose the company to regulatory scrutiny

Data Required for Salvage Value

Description of the asset, including type, model, serial number, and unique identifiers
Purchase details, including date of acquisition, cost, and associated expenses
Depreciation history, including accumulated depreciation, useful life, and depreciation method used
Comparable sales data for similar assets
Appraisal reports, if available
Internal policies related to salvage value estimation

Useful Life of Fixed Assets

Refers to the period over which an asset is expected to generate economic benefits
Determines depreciation expense, which is the allocation of the asset's cost over its useful life
Factors affecting useful life: asset type, industry norms, technological advancements, and company usage patterns

Auditing Useful Life

Review documentation related to asset acquisition, including invoices, purchase agreements, and asset registers
Assess the reasonableness of the assigned useful life based on factors such as asset nature, technological obsolescence, and company experience
Compare assigned useful life with industry standards or benchmarks
Physically inspect a sample of fixed assets to assess their condition and consistency with assigned useful life

Risks of Misstating Useful Life

Misstatement risk, either intentional or unintentional
Failure to comply with regulatory requirements can expose the company to regulatory scrutiny
Operational disruptions can lead to untimely breakdown of fixed assets

Land Ownership

Refers to the examination of an entity's rights or claims to land as recorded in its financial statements
Verifies legal title to the land, assesses encumbrances, and ensures proper valuation and presentation in financial statements

Auditing Land Ownership

Review title deeds, land purchase agreements, leases, and other relevant legal documents
Conduct a thorough title search to identify any encumbrances, liens, or claims on the property
Physically inspect the property to verify its existence, boundaries, and physical characteristics
Compare land records with previous audits or assessments to identify any discrepancies or changes in ownership

Risks of Misstating Land Ownership

Non-compliance with land ownership laws and regulations can lead to legal penalties, fines, or loss of ownership rights
Incorrect valuation or misrepresentation of land assets can lead to financial misstatements
Discrepancies surrounding company's land ownership can affect relationships with stakeholders and investors

Data Required for Land Ownership

Title deeds, land purchase agreements, leases, and other relevant legal documents
Encumbrance certificate, survey records, and mutation register extracts
Court decrees, if applicable
Supporting documentation for acquisition, disposal, and ownership of land

Quantity of Fixed Assets

Verifies the physical existence and accuracy of assets listed in the register
Conducts a physical count of assets and compares it with the quantities recorded in the register
Reviews supporting documentation, such as purchase orders, invoices, and receipts
Uses sampling techniques to select a representative sample of assets for inspection

Risks of Misstating Quantity

Errors or omissions in the fixed assets register can lead to misstatements
Deliberate misrepresentation of assets or fraudulent activities can occur
Physical verification limitations can lead to difficulties in verifying all assets listed in the register

Data Required for Quantity

Fixed assets register, which contains details of all fixed assets owned by the company
Supporting documentation, such as purchase orders, invoices, and receipts
Asset tags or labels, if applicable
Physical inventory reports, if available

Description of Fixed Assets

Verifies the accuracy and completeness of the descriptions recorded for fixed assets
Ensures that descriptions are supported by appropriate documentation
Conducts physical verification to ensure that the actual assets match the recorded descriptions

Risks of Misstating Description

Weaknesses in internal controls over fixed asset management can increase the risk of errors, omissions, or fraud
Inaccurate descriptions can conceal instances of asset misappropriation or theft
Misstatement of financial statements can occur

Data Required for Description

Fixed assets register, which contains details of all fixed assets owned by the company
Supporting documentation, such as purchase invoices, contracts, and asset tags
Physical inventory reports, if available
Analysis by technical experts, if necessary

FAR vs GL Reconciliation

Verifies that all transactions recorded in the general ledger (GL) related to fixed assets have corresponding entries or records in the fixed assets register (FAR)
Investigates and resolves any discrepancies between the GL and FAR
Ensures that all acquisitions, disposals, revaluations, and depreciation expenses are properly recorded in both systems

Data Required for FAR vs GL Reconciliation

Fixed assets register (FAR) data, including detailed listings of all fixed assets, records of additions, disposals, transfers, and depreciation
General ledger (GL) data, including account balances, transaction details, and supporting documentation
Reconciliation reports, if available

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Description

This quiz covers the basics of fixed assets, including their definition, register, depreciation, and amortization. It also touches on right to use vs put to use, assertions, and CARO compliances.

Fixed Assets: Accounting and Depreciation

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Questions and Answers

What are fixed assets?

What is the purpose of a fixed asset register?

Which of the following are types of fixed assets? (Select all that apply)

Land is a fixed asset that depreciates over time.

____ value is the estimated amount that a fixed asset can be sold for at the end of its useful life.

What is salvage value in the context of auditing a Fixed Assets Register?

What data is typically required for assessing salvage value for fixed assets?

Salvage values assigned to each asset should be periodically reviewed and updated if necessary.

The useful life of an asset refers to the period over which the asset is expected to be ________ and generate economic benefits for the company.

Match the following with their descriptions:

What is the purpose of physical verification in relation to fixed assets?

According to ICAI’s Guidance Note on CARO, 2020 (Revised 2022), which of the following statements regarding physical verification intervals is correct?

Discrepancies between book records and physical verification must be properly investigated and reported.

Companies must maintain proper title deeds for their ___ and buildings to ensure their right to use the assets.

Match the risk with its corresponding description:

What does 'Right To Use' refer to in the context of fixed assets?

What is the importance of 'Put To Use' in relation to fixed assets?

Component depreciation can be done if estimates are made for the useful lives of the components.

Assertions are claims made by management in their financial statements about their ____________ and economic condition.

Match the following assertions with their descriptions:

What is the purpose of physical inspection in land ownership evaluation?

Ownership structure assessment aims to identify conflicts of interest.

What is the purpose of valuation in land ownership evaluation?

__________ refers to the transfer of ownership of a property from one person to another.

Match the following land ownership data with their descriptions:

What data is required for separate depreciation calculation of component-based assets?

What risk is associated with misallocation of costs related to fixed assets?

The sale of fixed assets in an audit ensures the accuracy of depreciation, valuation, and adherence to disposal procedures.

What data is required for the review of fixed assets written off but not sold?

What is the purpose of claiming depreciation as per the Income Tax Act of 1961 in India?

Under the Income Tax Act 1961, how are assets categorized for depreciation purposes?

Assets must be in business use for depreciation to be claimed under the Income Tax Act.

Shift depreciation accounts for the increased wear and tear due to prolonged operation in ______ shifts.

Match the correct data required for fixed asset audits:

Study Notes

Overview of Fixed Assets

Fixed Asset Register

Purpose and Importance of Fixed Asset Register

Fixed Asset Acquisition and Capitalization Process

Fixed Asset Depreciation and Amortization

Methodology for Calculation of Depreciation

Important Terms relating to Fixed Assets

Shift Wise Depreciation Concept

Componentization Approach of Depreciation

Assertions

CARO Compliances

Fixed Assets Register in Electronic Form

CARO Compliance Requirements for Fixed Assets

Physical Verification of Fixed Assets

Audit Checks for Fixed Assets

Revaluation of Fixed Assets

Risks Associated with Fixed Assets

Fixed Assets Charged as Revenue Expenditure

Revenue Expenditure Charged as Fixed Assets

Risks of Inconsistent Salvage Value

Data Required for Salvage Value

Useful Life of Fixed Assets

Auditing Useful Life

Risks of Misstating Useful Life

Land Ownership

Auditing Land Ownership

Risks of Misstating Land Ownership

Data Required for Land Ownership

Quantity of Fixed Assets

Risks of Misstating Quantity

Data Required for Quantity

Description of Fixed Assets

Risks of Misstating Description

Data Required for Description

FAR vs GL Reconciliation

Data Required for FAR vs GL Reconciliation

Studying That Suits You

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