CHAPTER 4

AUDIT OF FIXED ASSETS AND

DEPRECIATION EXPENSE

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 Learning objectives

After studying this chapter, students can:

- Understand the characteristics of fixed assets;
- Determine the audit objectives of fixed assets;
- Analyze and assess risks related to fixed assets;
- Carry out procedures for auditing fixed assets.

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 AUDIT OF FIXED ASSETS AND DEPRECIATION EXPENSE

4.1
 Contents and characteristics of items

4.2
 Internal control over fixed assets &
depreciation expense

4.3  Audit procedures

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 Learning Materials
•Textbook:

[1] Alvin A. Arens, Mark S Beasley, Randal J Elder (2020), Auditing and Assurance
services – an integrated approach, 17th edition.
•Other materials:
[2] Bộ môn Kiểm toán (2019), Kiểm toán. Đại học kinh tế TP.HCM, NXB Lao Động Xã Hội.
[3] Trần Thị Hải Vân & cộng sự (2016), Tóm tắt lý thuyết và Bài tập thực hành Kiểm toán
doanh nghiệp, Đại học Ngân hàng TP.HCM
[4] Các website: www.mof.gov.vn; www.vacpa.org.vn;...

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 Preparatory questions

Question 1: What is the meaning of auditing fixed assets?

Question 2: List the audit objectives of the fixed assets.
Question 3: What are the control activities for fixed assets?
Question 4: What are the risks of auditing fixed assets?
Question 5: Describe the substantive tests for auditing fixed assets.

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 AUDIT OF FIXED ASSETS AND
DEPRECIATION EXPENSE

4.1
 Contents and characteristics of items

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 4.1.1. Contents

Fixed assets are large-value items, often accounting for a significant

proportion of total assets on the financial statements.
However, the audit of fixed assets does not take up much time because:
- The number of fixed assets is usually not much and each object is often of
great value.
- The number of transactions on increasing and decreasing fixed assets in the
year usually arises not much.
- The issue of year-end closing is not as complicated as short-term assets
because the possibility of confusion in recording transactions on fixed assets
between years is usually not high.
Fixed assets include Tangible assets, intangible assets, and financial leased
assets.

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 4.1.1. Contents

Tangible fixed assets: are assets with a physical form held by

enterprises to be used for production and business activities in
accordance with the standards of recording tangible assets
• Intangible fixed assets: are assets that do not have a physical
form, but their value can be determined and are held and used by
enterprises in production, business, service provision, or leased to
other objects, in accordance with the standards of recording
intangible assets.

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 4.1.1. Contents

Some related concepts:

 Cost: All the costs that businesses have to spend to get fixed assets up to the
time to put that asset into a ready-to-use state;
 Liquidation value: This is the estimated value obtained at the end of the
useful life of the asset, after subtracting (-) the estimated cost of liquidation.
 Fair value: This is the value of assets that can be exchanged between fully
understood parties in the parity exchange.
 Residual value: Is the cost of fixed assets after deducting (-) the accumulated
depreciation of that asset. Recoverable value: Is the estimated value derived
in the future from the use of assets, including their liquidation value.

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 4.1.1. Contents

Depreciation of fixed assets is the systematic allocation of the

depreciation value of the asset during the useful life of that asset.
Thus, depreciation of fixed assets is the systematic calculation and
allocation of the cost of fixed assets to production and business
costs during the period of use of fixed assets.

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 4.1.1. Contents

For depreciation expense, Unlike other common expenses, the audit

pays attention to the following two characteristics.:
• Depreciation expense is an accounting estimate, rather than actual
cost incurred.
• Depreciation is a systematic allocation of cost after deducting the
estimated liquidation value, so its reasonableness depends on the
depreciation method used, Therefore, the audit of depreciation
expense is also in the nature of an examination of the application of
accounting methods..

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 4.1.2. Item characteristics

- Items of great value, often accounting for a significant proportion

of total assets on the Balance Sheet.
- The number of fixed assets is usually not much, and each object
is usually of great value.
- The number of transactions of increasing or decreasing fixed
assets in the year is usually less incurred.
- Accounting estimates (Depreciation expense)
- The problem of year-end closing is not as complicated as liquid
assets because the possibility of confusion in recording
transactions on fixed assets between years is usually not high.

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 4.1.3. Audit objectives

 Tangible assets and intangible assets exist;

 Owned by enterprises;
+ The entity owns or has legal control over all fixed assets at the
date of the balance sheet.
+ All fixed assets are not bound by any bet, mortgage, or limitation
commitments. In the event of mortgage, wagering, or binding
commitments, these commitments should be defined.
 Cost and depreciation are recorded fully, accurately, at the right
age, and in accordance with;
 Presented fixed assets on financial statements in accordance with
the framework of preparing and presenting applicable financial
statements.

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 AUDIT OF FIXED ASSETS AND
DEPRECIATION EXPENSE

4.2
 Internal control over fixed assets &
depreciation expense

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 4.2.1. Control objectives

Improve the efficiency of using investment capital in fixed assets

through proper investment, without waste and effective use of fixed
assets.
Properly account for the costs that constitute the cost of fixed
assets, repair costs, and depreciation expenses.
Strictly control the process of increasing and decreasing fixed
assets.
• Make sure the depreciation calculation is correct and sufficient.

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 4.2.2. Control procedure

 Applying the principle of division is responsible for functions

such as asset preservation function, bookkeeping function,
purchase approval function, liquidation function, and asset sale
function.

 Plans and estimates for fixed assets: Planning and estimation

for fixed assets in both large and small companies are very
important. Not only at large companies, but every year small
companies also make plans and estimates for fixed assets.

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 AUDIT OF FIXED ASSETS AND
DEPRECIATION EXPENSE

4.3
 Audit procedures

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 4.3.1. Risk assessment

Control procedure: Limit substantive tests

Low Control R
effective Perform tests of control

Control procedure:
High control R Perform tests of details
Weakness

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 4.3.1. Risk assessment

- Management of fixed assets is not strict: The fixed assets are not
complete, and the fixed assets have not yet transferred ownership to the unit
but have been recorded on the balance sheet; there are no detailed books
and cards for each fixed asset.
- Not conduct a counting of fixed assets at the end of the period,
stock-take minutes do not classify unused fixed assets, pending liquidation,
or have expired depreciation. The discrepancies in the books compared to
the inventory minutes have not been processed.
- The assets put into operation lack handover minutes and delivery
minutes.
- Accounting for increasing fixed assets when there are not enough
invoices and valid documents: finalization of works, minutes of acceptance,
handover and put into use...
- Not keep track of the detailed book of capital sources forming fixed
assets. Do not separately monitor pledged and mortgaged fixed assets.
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 4.3.1. Risk assessment
- Misclassification: assets that do not meet the criteria for
recording fixed assets but are still recorded as fixed assets,
mistakenly accounting for tangible assets and intangible assets.
- Upgrade fixed assets completed but not recorded an increase in
the cost of fixed assets, have not redefined the useful use period
and adjusted depreciation must be deducted from expenses in the
period.
- Apply the method of calculation and depreciation inappropriately,
inconsistent, unreasonable determination of useful use period,
improper depreciation deduction, exceeding the maximum
depreciation or lower than the minimum depreciation deducted from
expenses in the period, the depreciation deduction for all
depreciated assets…
- Incorrect accumulated depreciation, depreciation in parts that are
not allocated.
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 4.3.1. Risk assessment
- Have not fully implemented the procedures for liquidation of fixed
assets: establishment of a liquidation council, liquidation decision, no
minutes of liquidation or minutes without the signature of competent
persons...
- Accounting for reduction of fixed assets when in fact not liquidated,
dismantled, no decision of the Board of Directors or Director,...
- Failure to fully and promptly account for income from the liquidation
of fixed assets.
- Invest in fixed assets before the approval of competent authorities
or not included in the approved investment plan.
- Investment assets are not properly sourced and purposeful.
- Unreasonable investment in fixed assets: too much or using short-
term loans to invest.

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 4.3.1. Risk assessment
- There is no plan or estimate for major repairs,...
- Inadequate investment procedures: no investment decisions,
decisions approving estimates, no bidding, offers…
- Investment documents for payment of money are not strict:
buying equipment without invoices, paying money to foreign partners,
and not making payments through banks.
- Have not conducted a reassessment of fixed assets when
equitizing an enterprise or have an assessment but are not suitable.

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 4.3.1. Risk assessment
Answer Not
Question e
Y N Weakness
Important Not
significant

Is the person who approves the procurement

and liquidation of fixed assets different from the
bookkeeper?
Do you set up plans and budget estimates for
procurement?
How often do you compare the detail book with
the ledger?
1. Is there a periodic inventory of fixed
assets and reconciliation with accounting
books?

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 4.3.1. Risk assessment

Answer Note
Question Y N Weakness
Important Not
significant

Are the differences between the estimated price and

the actual price reviewed and approved?
When ceding or liquidating assets, is there a
liquidation board to be established?
Is there a policy to distinguish between expenses
that will increase the cost of fixed assets or include
them in the cost of the year?
Is there a periodic report on unused fixed assets?
5.

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 4.3.2. Tests of control
- Observe and inquire:
+ The division of responsibilities
+ The process of preparing, reviewing, and circulating
documents
- Test the business transactions of purchasing and exporting
goods
+ Check the continuity of documents
+ Check the authorization
+ Check the process of recording on the ledgers
+ Check the payment approval

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 4.3.2. Tests of control

Auditors conduct control surveys through mainly control methods:

Observe the management and use of fixed assets in the unit, interview
relevant people about the procedures and regulations of the unit for fixed
assets, check the book documents, redo the procedures for controlling
fixed assets in the unit.
 For fixed assets purchased in the period, it is necessary to consider
the full implementation of the procedures for applying for purchase
approval, reviewing documents related to fixed assets in the
accounting department and mechanized management department of
the company, considering the separation between the management
department and the bookkeeping department..

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 4.3.2. Tests of control
Auditors conduct control surveys through mainly control methods:
For fixed assets increased through basic construction, it is necessary to
review the process of the entity’s internal controls for the process of
gathering documents and calculating the cost of the project.
 For the reduction of fixed assets, the internal control process that
takes place through reporting to the top management on the sale,
liquidation, and capital contribution of the joint venture must be
approved and must be in accordance with the current financial regime.
Real estate operations must be properly recorded. The auditor must
check the entire process mentioned above to review the KSNB system
of the audited entity.

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 4.3.3. Substantive tests
Reassess control risk and redesign substantive tests: to identify
weaknesses and strengths of the internal control system, to
adjust the program accordingly.

Control risk LOW Minimize substantive tests

Control risk HIGH Expand substantive tests

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 4.3.3. Substantive tests
General procedures
- Check the accounting principles applied
consistently with the previous year and in accordance with
the provisions of current accounting standards and
regimes.
- Make a table of aggregate figures that compare
with the balance at the end of the previous year.

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 4.3.3. Substantive tests
Analytical procedures

- Compare and analyze the increase and decrease of the balance

of tangible assets and intangible assets this year compared to the
previous year, and assess the reasonableness of major
fluctuations.
- Compare the average depreciation rate for asset groups with the
previous year and ask for an explanation if there is a change.
- Check the reasonableness of determining the useful use time of
the asset, compare with Circular 45/2013/TT-BTC dated 24/5/2013
and related accounting standards.

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 4.3.3. Substantive tests
Tests of details

- Collect a summary table of fluctuations of each type of

fixed asset according to the cost and accumulated wear
value.
- Choose a sample to check the opening balance of the
first period of fixed assets.
- Observe the reality of fixed assets.
- Check the depreciation of fixed assets in detail.
- Check the presentation of tangible assets, and
intangible assets on financial statements.

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 4.3.3. Substantive tests
Tests of details
Synthetic tabulation
- Check the arithmetic accuracy of the pivot table.
- Make sure the balance on the pivot table matches the figures on
the ledger.
• Check the increase in fixed assets: Select a sample of the
increased fixed assets during the year to check the relevant
original documents, compare with the plan and procedures for
purchasing the fixed assets and the approval of the Board of
Directors and check the ownership of the Company in the fixed
assets..

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 4.3.3. Substantive tests
Tests of details
Check for reduced fixed assets: Check the accuracy of accounting for
the operation of franchising, liquidating fixed assets by type and
group, calculating profits/losses on liquidation, and selling fixed
assets on the basis of relevant documents.

Physical inspection of fixed assets: Participate in the actual

stocktaking of fixed assets at the end of the period, ensure that
the stocktaking is carried out in accordance with the procedures,
and the difference between reality and accounting is handled
appropriately.

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 4.3.3. Substantive tests
Tests of details
Check depreciation expense
- Collect the depreciation worksheet of fixed assets in the period, and
compare the depreciation calculation table with the balance on the ledger.
- Consider the appropriateness of the start of depreciation calculations
and allocate to ensure the appropriateness between revenues and expenses
as well as the state of use of assets.
- Estimate depreciation in the period and compare it with the data of
enterprises.
- Check the write-down of accumulated depreciation due to the
liquidation and sale of fixed assets.
- Consider the reasonableness and consistency in the depreciation
allocation criteria for shared assets for each type of expense such as overhead
cost, selling expense, and administrative expense.
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 4.3.3. Substantive tests
Tests of details
Presentation and disclosure
- Check the presentation of tangible assets, and intangible assets on
the balance sheet.
- In addition, enterprises must also present in the explanation of
financial statements about:
- + Accounting policy for fixed assets.
- + The situation of increasing and decreasing fixed assets.
+ The situation of fixed assets being pledged and mortgaged.

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 QUESTIONS
Are the statements below True or False? Explain.

For operations of recording and reducing fixed assets, the auditor

needs to check the documents of the operations recorded on the
accounting books to ensure that these operations are fully
recorded on accounting books.
The auditor does not need to audit the balance at the beginning of
the year for fixed assets but is only interested in fixed assets that
are procured/built up during the period as well as fixed assets that
are liquidated/ sold in the period.
1. The potential risk to the fixed asset item is usually not high
because fixed assets are less likely to lose money and are not
as easily damaged as inventory.

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 EXERCISES
In early 2015, HADICO purchased a new software to replace a
software that controls a complex factory automatic feeder system
(the old software has been equipped since 2017 with an automatic
feeder system). This new software is worth VND 200 million
excluding VAT, it is estimated that it will have to be replaced after 5
years of use, the estimated liquidation value is zero. The old
automatic feeder system and control software were purchased in
2017, with an estimated use period of 6 years.

Upon receiving this new software, business accountants calculated

and recorded this asset in 2020 as follows:

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 EXERCISES
Cost of fixed assets recorded in 2015:
TK 213 Debt - Intangible Fixed Assets 200 tr
TK 133 debt - VAT deducted 20 million VND
Related TK (111, 112, 331...) 220 million VND
Depreciation in 2020:
TK 6274 Debt - Depreciation expense of overhead cost 40 million
VND
TK 2143 - Depreciation of fixed assets 40 million VND
Know that: The VAT rate is 10%; The CIT rate is in accordance with
current regulations. The HTK balance at the end of the period is
zero.
Required: How do you point out the errors in accounting for the
above operations and analyze their impact on the financial
statements?
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 REQUIREMENTS

Students answer the Questions and Exercises in chapter 4

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