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.

    <p>False</p> 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.

    <p>Salvage</p> Signup and view all the answers

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

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

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

    <p>All of the above</p> Signup and view all the answers

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

    <p>True</p> 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.

    <p>productive</p> Signup and view all the answers

    Match the following with their descriptions:

    <p>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</p> Signup and view all the answers

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

    <p>To confirm the existence of physical assets of Fixed Asset Accounting Records within reasonable time intervals.</p> 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?

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

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

    <p>True</p> Signup and view all the answers

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

    <p>land</p> Signup and view all the answers

    Match the risk with its corresponding description:

    <p>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</p> Signup and view all the answers

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

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

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

    <p>Impacts the timing of depreciation</p> Signup and view all the answers

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

    <p>True</p> Signup and view all the answers

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

    <p>state of affairs</p> Signup and view all the answers

    Match the following assertions with their descriptions:

    <p>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</p> Signup and view all the answers

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

    <p>Identify any physical characteristics affecting value</p> Signup and view all the answers

    Ownership structure assessment aims to identify conflicts of interest.

    <p>True</p> Signup and view all the answers

    What is the purpose of valuation in land ownership evaluation?

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

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

    <p>Mutation</p> Signup and view all the answers

    Match the following land ownership data with their descriptions:

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

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

    <p>Physical Verification Records</p> Signup and view all the answers

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

    <p>Inaccurate Useful Life Assessment, Inconsistent Depreciation Methods, Insufficient Documentation, Failure to Update Depreciation Estimates, Overlooked Impairments</p> 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.

    <p>True</p> Signup and view all the answers

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

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

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

    <p>reduce tax liability</p> Signup and view all the answers

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

    <p>Based on their useful life</p> Signup and view all the answers

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

    <p>True</p> Signup and view all the answers

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

    <p>multiple</p> Signup and view all the answers

    Match the correct data required for fixed asset audits:

    <p>Purchase Orders and Invoices = Supporting Documentation Depreciation Schedules = Depreciation Calculations Barcode or RFID Scanning Log = Asset Location Records Physical Inventory Reports = Asset Inspection Reports</p> 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.

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