The Inevitable Audit

Few issues in auditing cause as much consternation as the need for a complete fixed asset audit. They are alternately feared or despised. Counting all assets hardly seems worth the trouble... or the cost

In some cases, assets are widely distributed and difficult to access, for example, oil drilling equipment. In other cases, organizational change has increased the difficulty. Perhaps a merger or divestiture has occurred which can add complexity to the project. Management turnover at the inventory site may limit the amount of local expertise available. Downsizing may have reduced the staff available to complete the audit. All are common to some degree.

But the most difficult issue is self-inflicted – the poor condition of the fixed asset ledgers from an audit perspective. While the accounting records may accurately reflect the financial and tax profile of the assets, they can be nearly impossible to audit for any or all of the following reasons:

• Entries have been aggregated with descriptions like Servers or Furniture that are so general that the auditor is left to make an educated guess as to their presence.
• Assets are inconsistently capitalized. When applying the capitalization limit, the accountant assessed the invoice total allowing two identical assets to be treated differently - one capitalized because it was part of a group and one expensed because it was purchased separately.
• No data in the fixed asset record provides a means to relate it to the individual asset, such as serial number or asset tag.
• Information is woefully out of date due to a reliance on manual input from the field organization to keep location data and retirements up-to-date.

To minimize these challenges, organizations will often take a small sample based on net book value or number of entries and audit only those. If they can be reconciled, it is assumed that the records are materially accurate. Alternatively, they may hire an outside firm to review some or all large value items and apply the same accuracy assumption.

While this approach may satisfy near term audit requirements, it ignores the crux of the problem which, unless addressed, continues to grow unabated. Asset ledgers continue to deteriorate due to poor maintenance until, at some point they cannot be audited. When that happens, the organization will face the inevitable audit.

This audit requires all field assets be identified, evaluated and recorded. Then, the results reconciled to the fixed asset records and every entry in the fixed asset ledger confirmed or removed to establish a fully confirmed ledger, a considerable undertaking for most organizations.

But, there is a rare opportunity as well. If all assets are tagged during the inventory and proper controls established for new asset purchases, the constant erosion of the accuracy of the fixed asset ledger can be eliminated and future audits can be automated. Even greater savings accrue from reduced property and income taxes, insurance costs and reduced capital expenditures.

So when you are presented to the task of conducting the inevitable audit, use it to shrewdly leverage its cost into an investment that will provide savings for years to come.