Organizations with quality asset management systems perform fixed asset audits. In this article, we will explain what an audit of fixed assets is, and the common procedures and processes involved.
What is a Fixed Asset Audit?
A fixed asset audit is the process of cross-checking items to make sure they are still within the business’s possession. It also evaluates all of the items’ monetary value. Fixed assets typically make up the largest number on the balance sheet, making them your most important investments.
For this reason, we recommend doing such an audit of these items at least once a year to keep your asset register up-to-date and accurate. Audits should be done on these noncurrent assets that are expected to be used by the business for a year or longer.
Noncurrent items cannot easily be turned into cash. This includes fixed assets like equipment, furniture, buildings, land, vehicles, and machinery.
BENEFITS OF COMPLETING A FIXED ASSET AUDIT
Although it may seem like a lot of work, audits can be extremely beneficial. Here are a few reasons why:
- Identify and reduce risk: Drawing more attention to an item will naturally help you find more areas in which the item is vulnerable to risk. As a result, you are more likely to work to mitigate that risk. Risks can include things like asset fraud, which involves the theft or misuse of company items.
- Discover essential details: While doing an audit, you will be jotting down information that can help you maintain the item in the long run. For instance, knowing the date of purchase will give you a better idea of how long the item will last and how soon preventative maintenance is needed.
- Make better decisions: Knowing what items you have and what they are valued at allows you to make more informed business decisions. You can decide whether to prioritize replacing an item or continuing to maintain it. When your company decision-makers know what to prioritize, this provides a clearer agenda to work from.
- Organize your assets: Keeping track of these important resources allows you to develop a more organized system. Storing your findings and reports in an asset management system will keep the data safely secure and accessible for all employees, rather than that one “kitchen sink” desk drawer with papers spilling out.
- Internal control: Audits are part of the company’s policies and procedures that ensure that the financial statements are reliable. This internal control allows the organization to depend on the financial information they receive from an internal audit.
- Save money: When you track and record your items, you will avoid displacement, loss, and undocumented assets.
- Improve compliance: Audits entail verification that your business is meeting the requirements of the laws and regulations governing your assets and business procedures. Ideally, your business procedures should align with the standards of the Institute of Internal Auditors (IIA).
Procedures and Processes of a Fixed Asset Audit
Before you embark on the asset audit process, you will need to choose an auditor. The auditor can be hired in-house or can be hired from an outside firm. The auditor’s main duties in a fixed asset audit are to make sure all items previously listed are accounted for, add any new records or updates, and that all financial statements are following generally accepted accounting principles (GAAP).
If you own a public company, the Securities and Exchange Commission (SEC) requires that the process is done by an external auditor. Once you’ve found your auditor, you are ready to begin fixed asset processes and procedures.
CREATE AND/OR VERIFY ASSET RECORDS
First things first. We start with the asset register. The fixed asset register is a list of the fixed assets that belong to your organization. In the past, this list used to be maintained in a book that the bookkeeper kept track of.
This method was inefficient due to its failure to address risks like avoidable maintenance costs, quality assurance issues, and issues with compliance, health, and safety regulations. However, now companies typically use an electronic accounting system for these purposes.
The asset management solution you choose should allow you to export checklists from your fixed asset register. You can then fill them out as you proceed through the audit process. With asset management software, you can also capture all the item information electronically to keep track of them.
This can be done through barcode technology, making item verification quick, simple, and efficient. This asset database must be accurate and comprehensive. Therefore, you must create any new records of items that have been missed, which are called zombie assets.
For the fixed assets already in the register, you’ll want to verify the information that has been previously reported. Errors happen, whether through mistyping or other human mistakes. That is why it is important to verify every previous detail reported.
The audit should focus on creating, verifying, and updating the following item record details, if applicable:
- Asset location
- Type of item
- Description of the asset
- That the item is/isn’t accounted for
- Purchase date
- Original purchase price
- Acquisition costs
- Current value
- The vendor you purchased it from
- Estimated useful life
- Receipt number
- Its assigned barcode, serial number, or ID number
- Warranty expiration date
- The state of the item’s condition
- Quantity of the item
- Any blocks to access authorization
- Asset user history
- Protocol for the sale or disposal of the item
IDENTIFY GHOST ASSETS
Approximately 10 to 30% of a business’s fixed assets are estimated to become ghost assets. If you are unable to physically verify all your listed items, some may be unaccounted for. Ghost assets are those items that are listed in the register but are unable to be found.
Typically it is because they’ve gone missing (lost or stolen), or were found to be unusable but were not reported. Once you’ve identified which items are ghost assets, you’ll want to remove them from the register. You don’t want to keep paying taxes on those items, nor pay inflated insurance premiums.
UPDATE ASSET TAGS
We recommend updating item data as often as it changes. However, this can be a little tricky if you have many items to sift through. That is why asset tags and asset tracking processes come in handy for physical verification.
Supplying each item with an asset tag will enable you to find them quicker, especially when doing a lengthy audit and fixed asset inventory. If you’d rather not use an official asset tag, you can also print barcodes and QR code labels from inventory apps.
This is a quick way to get your items tagged for easy identification purposes.
EVALUATE ASSET CONDITIONS
It can also be helpful to add high-resolution photos of your items to ensure they are experiencing normal wear and tear throughout their useful life. Examining previous photos may give insight into how the item is being used and if additional maintenance or repairs are required for upkeep and longevity.
Evaluating the condition of each item, both old and new allows you to determine whether to maintain or dispose of the item.
CALCULATE DEPRECIATION AND ASSET REVALUATION
Next, you’ll want to calculate the depreciation of your fixed assets. The financial information on the register must be in harmony with the balance sheet. Auditors may need to work together with the accounting department to calculate the depreciation amounts. To do so, each fixed asset will need to have the following financial information:
- Purchase date
- Purchase price
- Estimated useful life
- Rate of depreciation
- Depreciation schedule
- Accumulated depreciation
You will need this information to calculate the current year’s depreciation and the accumulated depreciation. What is depreciation?
Depreciation of the asset is the loss of value over time that is inevitable with fixed assets. To absorb this loss, bookkeepers use an accounting method to allocate the cost of a tangible business item over its useful life instead of in the period it was purchased.
This allows the business to earn revenue from the item immediately since the expense is spread out over time. According to GAAP accounting procedures, the depreciation is then tallied and the new figures are updated in the system.
There are several methods to calculate depreciation, which we’ve explored in the previous blog post, “What is Asset Depreciation and How Does it Work?”
Common methods include the straight-line method, declining balance/accelerated method, sum-of-the-years’-digits method, and the Modified Accelerated Cost Recovery System (which is used mainly for tax purposes). Find the right depreciation method to work with the item accounting standards of your organization.
Once you’ve totaled both yearly depreciation and accumulated depreciation, you will find the current value of each item. To find the current asset value, you’ll need the asset’s purchase price, market value, and depreciation amounts.
Then each asset revaluation can be tallied together to find the total value of all your fixed assets. Once you’ve reached your final valuation, you can then report these figures to taxes, insurance, and internal financial reporting.
As you perform your audits, you’ll want to ensure your items are meeting regulatory requirements. The asset management software you use should allow you to create compliance reports for accounting or any international jurisdiction compliance reports that are required.
The items must satisfy both:
- Internal compliance: The rules and regulations that have been determined by your management team will either affirm or deny each item’s compliance. These standards must be followed by every employee and customer. If internal compliance is not met due to a compliance violation, this means employees may be reprimanded or customers may be denied service. The purpose of internal compliance rules and regulations is to make sure the product or service of the company is not jeopardized. This sets a standard that customers and employees come to know and trust.
- External compliance: This is also called regulatory compliance, which includes the rules, laws, and policies of government authorities and organizations. These compliance measures are made so that employees are safe, so the product is quality, so that the organization uses valid software, and to ensure everything is formalized and documented in case of an external audit. This not only assures that you are operating under the specifications of the law, but it will also prepare your balance sheets for compliance with IRS audits.
If you violate these laws, you will be penalized. For instance, if you are found to be using unauthorized software, your organization can be fined a significant amount. This is called a compliance breach. When you meet external compliance standards, your financial records will show your company is clean and worth investing in through investors.
Also, you will be found more trustworthy by customers. That is why ensuring both internal and external compliance is important for business success.
LOOK AT THE BIG PICTURE
When you’ve got all the updated numbers in front of you, you can look at the big picture. Consider how much each item has depreciated, and then consider its current valuation. Then consider how much use the item gets. For instance, does your company vehicle get a lot of miles?
Do machines that manufacture your product get used constantly? Looking at each item’s rate of depreciation will tell you how much time the item has left to be useful for the company. Make sure the decisions you make are backed by audit and financial data you’ve gathered regularly.
Replace Fixed Assets With Coastal Kapital Financing
Following your audit of fixed assets, you will have created and verified records, identified ghost assets, updated asset tags, evaluated item conditions, calculated depreciation amounts, revalued assets, and ensured compliance standards.
The updated information in your management software will allow you to make better, informed decisions. With this information, you can determine how soon you will need to update or replace items. Will you have the funds necessary to buy a new item or will you need to get a loan? Are you in a good position for financing?
If you’ve determined this is the route for you, Coastal Kapital is here to help.If You Like Please Share It: