What Are the Audit Procedures to Verify the Fixed Assets?

All companies have fixed and current assets that enable their operations. However, effective identification of long-term property, fixed assets, isn’t something every organization does well. This creates discrepancies in how a company’s assets are recorded, making it hard for auditors to establish their true value. Companies that don’t maintain an accurate fixed asset register also make it harder for the tax authority to do its job accurately.

Determining Fixed Assets in the UAE

Fixed assets, long-term property, are generally determined by their nature and use within a company, and identifying them correctly is part of an auditor’s role. Typically, fixed assets are purchased for long-term use and can include machinery, land, property, and similar equipment. These assets usually play a significant role in a company’s production process and, as such, aren’t purchased with the intention of near-term liquidation.

Also check: Inventory Audit Services

How This Ties to IAS 16 Recognition Criteria

The practical criteria auditors apply, covered below, ultimately connect back to the formal recognition test under IAS 16, Property, Plant and Equipment. Under IAS 16, an item qualifies for recognition as a fixed asset where it’s probable that future economic benefit associated with the item will flow to the company, and the cost of the item can be measured reliably. The five practical criteria below are essentially how auditors test whether an asset genuinely satisfies this formal standard in a specific, real-world case.

Criteria Used by Auditors to Identify Fixed Assets

• The asset needs to be tangible and real. Long-term property must be something that can be seen and touched, allowing the auditor to attach a genuine value to it. It’s rare for a company to invest in long-term property in the form of an idea alone, since there’s no guarantee how long the concept’s originator or implementers will remain employed. The item should be an appreciating or depreciating asset in a genuine sense.
• Fixed assets must have a determinable value. Long-term property needs a market value so management doesn’t end up over or underpricing the item, reducing the chance of disputes with auditors. This is one reason original purchase documents need to be presented for value evaluation, since an asset’s initial cost is essential for any depreciation or appreciation calculation that follows.
• An asset must be owned or controlled by the company. A company can’t claim ownership of long-term property where documentation shows the property belongs to a private owner instead. Auditors confirm legal ownership as part of identifying long-term property, which matters for applying fixed asset rules diligently and accurately.
• A fixed asset must play an active role in the company. It makes little sense for a company to invest in long-term property irrelevant to its own processes. During an audit, the officer focuses on assets playing a direct role in production, though a company legally retains the right to purchase and own any long-term property it chooses. Some companies do buy irrelevant assets, making it genuinely harder to place an accurate fixed asset value on them.
• Full ownership, free of outstanding charges. Some long-term property isn’t acquired all at once, with payments sometimes made in installments over time. An asset with outstanding charges creates ambiguity over rightful ownership until payments are complete. During an audit, officers confirm whether an asset is wholly owned or still in the process of being acquired, and this should be clearly indicated in the audit report.

Must check: External Audit Services

Worked Example: Applying the Five Criteria to a Specific Asset

A company is auditing a piece of production machinery purchased for AED 500,000, with AED 100,000 still outstanding under an installment agreement with the supplier. Applying the criteria: the machinery is tangible, satisfying the first test. Its AED 500,000 original cost provides a clear, determinable value, satisfying the second. It’s actively used in the company’s production line, satisfying the fourth. However, on ownership, the outstanding AED 100,000 balance means full ownership hasn’t yet transferred, the fifth criterion isn’t fully satisfied. The auditor records the machinery as a fixed asset given it meets the tangibility, value, and active-use tests, but flags in the report that AED 100,000 of the purchase remains under the acquisition process, rather than treating it as fully and unconditionally owned. This distinction matters for how the asset’s financing obligation is separately disclosed alongside the asset itself.

Managing Fixed Assets in the UAE

Farahat & Co. brings genuine auditing experience, with a team that can provide professional fixed asset register services, taking a considerable amount of work off a business’s hands. As an established UAE audit firm, we closely monitor long-term property in a way that helps protect the business overall.

Frequently Asked Questions (FAQs)

How Farahat & Co. Can Help

Farahat & Co., a trusted Audit And Accounting Firm, provides fixed asset identification, valuation, and register management services for UAE businesses.

Contact Farahat & Co. today to discuss your fixed asset audit requirements.