Physical verification of fixed assets: how to plan it

Physical verification of fixed assets is planned around a rotational policy that covers all material assets over a reasonable cycle — commonly three years — rather than verifying every asset every year, because management is responsible for safeguarding assets and the auditor's role is to evaluate whether that process is reasonable and whether discrepancies found are investigated and recorded. The core work is reconciling an actual physical count against the fixed asset register, specifically covering assets held at third-party or customer sites, and the results feed the auditor's reporting under CARO clause 3(i).

Whose responsibility this actually is

Physical verification of fixed assets is a management responsibility, carried out as part of the company's internal control over asset safeguarding. The auditor's job is not to conduct the count personally in most cases — it is to evaluate whether management's verification programme is reasonable in frequency and coverage, to review the results, and to form a view on whether discrepancies, if any, have been properly dealt with in the books.

A rotational policy, not an annual full count

For a company with a large, dispersed asset base — multiple plants, hundreds or thousands of tagged items, assets ranging from a forklift to a server rack — verifying the entire register every year is neither practical nor what the reporting requirement calls for. A rotational programme that covers, say, one-third of locations or asset classes each year, cycling through the full register over three years, is the common and defensible approach, provided it is documented as a policy and actually followed.

Reconciling the count to the register

1. 01Obtain management's verification working papers for the period coveredThe count sheets, the locations covered that cycle, and management's own reconciliation against the register, not just a summary memo stating that verification was done.
2. 02Re-perform the reconciliation on a samplePick a sample of assets from the register that fall within the locations verified and confirm each was actually counted, with the tag number recorded. Separately, pick a sample of items from the count sheet and confirm each exists in the register — this second direction catches assets physically present that were never recorded.
3. 03Review how discrepancies were handledFor every asset in the register but not located during the count, and every asset found but not in the register, check what management did: investigated, located elsewhere, written off, or added. An unresolved discrepancy carried forward without action is the finding that matters for CARO reporting.
4. 04Attend a sample count directly where risk warrants itFor a client with weak verification discipline, or where this is a new engagement, attending part of the count directly rather than relying solely on management's own papers gives first-hand evidence rather than a review of someone else's work.

Assets at third-party or customer sites

Assets given on loan to a customer, held at a job-worker's premises, or installed at a client site under an annual maintenance contract are the assets most likely to be missing from a standard walk-through verification, because they are, by definition, not on the company's own premises. They are also the assets most likely to have drifted out of the register's location field over time.

• Identify every asset the register shows as located outside the company's own premises, and separately identify any asset known to be out (from gate records, delivery challans, or job-work agreements) that the register still shows as on-site.
• For material items, obtain a confirmation of existence and condition from the third party holding the asset, rather than relying only on internal records.
• Check that the insurance schedule covers these assets at their actual location — assets insured as if on the company's premises are commonly underinsured once they move out.
• Confirm the accounting treatment is consistent with who controls the asset. An asset still owned and controlled by the company remains on its books and in its register regardless of physical location; one effectively transferred needs separate consideration.

Documenting the conclusion

• Management's stated verification policy — cycle length, coverage, and who performs it — and the auditor's assessment of whether it is reasonable for this asset base.
• The locations or classes actually covered in the year under audit, against the policy's own schedule.
• The reconciliation performed by the audit team, including both directions of the sample, and its results.
• Every discrepancy found, how it was resolved, and whether the resolution is evidenced in the books.
• The basis for the CARO clause 3(i)(b) conclusion, stated explicitly rather than inferred from the working papers alone.