Hearing the word audit can be a stress-inducing trigger for many business owners. However, fixed assets are a huge investment for an organization. Asset auditing is necessary if you want to keep accurate financial balance sheets, prevent losses, and ensure your business has the fixed assets necessary to continue functioning. Here are the basics of what an audit of fixed assets entails and why an asset management audit is important.
What are Fixed Assets?
Fixed assets are any assets that are used over a long term, such as land, buildings, and equipment. Although these assets are generally substantial in nature, it should not be underestimated how easy it is for someone to make off with a fixed asset or defraud a business through a fixed asset.
For example, a small $10,000 microscope stored in a cabinet may easily go missing. Another common type of fixed asset fraud occurs when an employee in a purchasing department spends money to purchase an asset that in reality does not exist. Or when the asset is sold, an employee records a lower sale price and pockets the difference.
Why is a Fixed Asset Audit Important?
Asset management audits are done to keep an organization’s asset records accurate. A fixed asset audit is basically just cross-checking your assets to ensure that they exist, that they are still in your possession, and establishing their value. Asset audits should be done regularly, but at minimum once a year. They are essential to maintaining an accurate balance sheet.
Inaccurate balance sheets can cause problems for organizations, especially regarding depreciation and taxation. Some organizations like governments, non-profits and educational institutions are required to track assets by funding source or grant. Their failure to properly track fixed assets can result in loss of funding or being forced to repay funds. An inaccurate balance sheet can also lead an organization to underpay or overpay taxes.
It is estimated that organizations lose 5% of their revenue to employee fraud each year. Without asset tracking and auditing procedures in place, it would be hard to figure out when the theft or fraud occurred or even that it occurred at all. As more time passes from the date of the loss, it becomes harder to recover the lost asset.
In addition to helping curb fraud and theft, asset audits help an organization manage the depreciation of their assets. Depreciation provides a way for an organization to distribute the cost of an asset throughout its useful life.
Asset audits also help an organization identify and get rid of ghost assets, which are assets that are accounted for in the records that the organization no longer has. Audits ensure that an organization is not paying taxes for ghost assets. Audits also help identify zombie assets, which are assets that the organization physically has but are not recorded on the ledger.
If you are in a regulated industry, an effective fixed asset audit process can help your organization more easily comply with external compliance audits. For example, if your organization deals with Protected Health Information or PHI and must comply with HIPAA, you will need to know which assets you have to determine where the PHI is stored. If you don’t have an accurate accounting of your assets, you risk a situation where an asset with PHI stored on it could go missing. This would be a problematic situation that could subject you to fines, sanctions, and other legal repercussions.
Finally, effective asset management audit procedures will ensure that your organization does not lose hours of productivity in looking for equipment or tools needed to complete specific jobs or tasks. Your organization will know where the needed equipment and tools are at all times and whether they are in usable condition. There is nothing worse than finding out at the last minute that a tool you need to complete a task is in disrepair or is missing.
What Does an Asset Management Audit Entail?
An audit procedure is just a set of actions and controls to test and prove that an organization’s processes are being conducted effectively. It can be as simple or as complex as you need it to be. Your organization can hire an accountant to perform an audit or do it internally. Either way, it is essential that your organization develops an internal audit procedure. Here are some steps that should be included in an effective fixed asset audit procedure:
Verifying assets. The most basic fixed asset audit procedure is verifying that an asset exists. This can be done through physical inspection.
Determining value of fixed assets. Next, the current value of the asset must be established. This can be done using Generally Accepted Accounting Procedures (GAAP). The current value is determined by looking at the acquisition costs, verified freight costs, all taxes paid, and miscellaneous costs such as set-up costs. When an asset is sold, the organization needs to determine fair market value and record its sale price.
Depreciation of fixed assets. Each fixed asset an organization acquires likely has a depreciation schedule. The only exception is land. Depreciation schedules assist in determining the value of an asset that is not based on subjective or arbitrary valuations. Assets are depreciated by either a straight-line method (by assigning the same fixed reduction amount to the asset for each year it is held) or an accelerated depreciation method (by front-loading the depreciation in the first few years the asset is owned). Determining which method to use is a fixed asset auditing task.
Maintenance. Keeping up with fixed assets is an ongoing task. Assets should be tracked and regularly inspected for damages, loss or other issues. Your records should contain important information about each asset such as a description of the asset, classification, location, quantity, purchase cost, date of purchase, rate of depreciation, accumulated depreciation, and depreciation of the current year. Assets should also be tagged to make them easier to track when they are moved around. When assets are moved (i.e. checkouts/check-ins, disposal), their movements should be tracked to ensure that the equipment is not lost.
Reporting. Each asset audit should be concluded with a report of its findings. Ultimately, the amounts listed on your balance sheet should match the amounts of your fixed asset inventory. Reports are important tools to identifying whether losses have a pattern or whether your organization is experiencing disproportionate shrinkage. Reports also allow you to evaluate whether there are any weaknesses in your asset management procedures.
Yes! Investing in an automated asset management solution will make your audits of fixed assets as simple and painless as possible. Asset tracking software like Assetbots is affordable, easy-to-use software that enables you to capture and document all of the important information you need to track for each asset such as description, barcode number, location, classification, and depreciation.
Assetbots also allows you to easily track the movements of your assets by providing use of bar code technology so that you can quickly and easily scan items from any internet-enabled device and from any location without the need for a special barcode scanner. This makes it easier to track your equipment when it is checked out/checked in, sent to another location or user, or sold.
Finally, Assetbots allows you to create reports to summarize the findings of your audit. Reports are essential to allow you to identify weaknesses in your asset management procedures and to determine corrective measures. Assetbots also allows you to create reports to assist with compliance, accounting or other purposes as needed.
Assetbots is currently offering free subscriptions in a limited amount. Visit www.assetbots.com to reserve your free subscription and start minimizing your organization’s asset losses today!