Fixed Asset Audit Checklist - Complete Guide

Fixed Asset Audit Checklist

Your Complete Guide to Asset Verification & CWIP Audit Procedures

Introduction to Fixed Asset Auditing

Fixed asset auditing represents one of the most critical components of an organization's financial audit. It involves a systematic examination and verification of all physical assets owned by a company, including equipment, machinery, buildings, vehicles, and other items with a useful life exceeding one year. The primary objective of fixed asset auditing is to ensure that assets are accurately recorded in the financial statements, properly valued, and protected against misappropriation or loss.

In today's complex business environment, fixed assets often constitute a significant portion of a company's total assets—sometimes representing 30-50% or more depending on the industry. Manufacturing companies, utilities, and real estate firms typically have substantial fixed asset balances. Even service-based companies maintain considerable investments in office equipment, computers, and furniture. This substantial value makes fixed asset audit procedures indispensable for financial statement users, including investors, creditors, and regulatory agencies.

The audit process extends beyond simply verifying existence. Auditors must confirm that assets have been properly recorded at acquisition cost, that depreciation has been correctly calculated and applied, and that disposals have been appropriately documented and removed from the records. Additionally, auditors must assess whether assets have become impaired and determine if salvage values remain reasonable assumptions.

  • Fixed assets are non-current items with useful lives exceeding one year
  • Fixed asset audits ensure accuracy, completeness, and existence of recorded assets
  • Proper valuation and depreciation are critical audit objectives
  • Construction Work in Progress (CWIP) requires specialized audit procedures
  • Asset disposals and retirements must be properly documented and recorded

Key Definitions & Terminology

Fixed Assets Tangible or intangible assets with a useful life exceeding one year that are used by the organization in its operations. These are recorded on the balance sheet under non-current assets and are subject to depreciation or amortization.
Construction Work in Progress (CWIP) Assets under construction or assembly that have not yet been placed into service. CWIP includes all costs directly related to construction, including materials, labor, and allocated overhead, but is not subject to depreciation until the asset is operational.
Depreciation The systematic allocation of the cost of a fixed asset over its useful life. Depreciation methods include straight-line, declining balance, units of production, and sum-of-years-digits. It represents the consumption of the asset's economic benefit.
Accumulated Depreciation The cumulative total of all depreciation expense recorded against an asset since its acquisition. It is deducted from the gross asset value to determine the net book value or carrying value of the asset.
Residual/Salvage Value The estimated amount for which an asset can be sold at the end of its useful life. This value is used in depreciation calculations and should be reviewed periodically for reasonableness.
Useful Life The estimated period during which a fixed asset is expected to be economically useful to the organization. Useful life varies by asset type and may depend on physical factors, obsolescence, or contractual limitations.
Impairment A permanent decline in an asset's value below its book value, indicating that the asset should be written down. Impairment testing is required when events suggest assets may no longer be recoverable.
Asset Capitalization Threshold The minimum cost at which an item is recorded as a fixed asset rather than expensed immediately. Organizations establish capitalization policies, often using amounts like $1,000 or $5,000 depending on industry and internal policy.

Why Fixed Asset Auditing Matters

Financial Statement Accuracy

Fixed assets often represent 25-60% of total assets on the balance sheet. Errors in fixed asset accounting can materially misstate financial position. A manufacturing company with a $10 million equipment base needs accurate depreciation records—an error in useful life assumptions could swing net income by hundreds of thousands of dollars annually. Auditors must verify that the fixed asset balance and related depreciation expenses presented in financial statements are free from material misstatement.

Compliance & Regulatory Requirements

Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) both establish specific requirements for fixed asset accounting and presentation. IAS 16 (Property, Plant, and Equipment) requires detailed disclosures about depreciation methods, useful lives, and residual values. Auditors ensure compliance with these standards and verify that required disclosures are complete and accurate.

Internal Control Assessment

Fixed asset audits provide insight into an organization's control environment. Weak controls over asset acquisition, disposal, and record-keeping indicate broader organizational control deficiencies. Areas auditors evaluate include segregation of duties (authorization separate from custody), physical security measures, and completeness of fixed asset records. Control deficiencies discovered during fixed asset audits often suggest the need for additional audit procedures in other areas.

Asset Management & Protection

During fixed asset audits, auditors conduct physical inspections to confirm the existence and condition of assets. These procedures help organizations identify missing assets, obsolete equipment, and security vulnerabilities. Many asset thefts and misappropriations are discovered through detailed fixed asset verification procedures. Organizations benefit from knowing the accurate location and condition of their assets.

Tax Compliance

Fixed assets and depreciation have significant income tax implications. Different tax jurisdictions allow different depreciation methods, useful lives, and bonus depreciation treatments. Auditors verify that depreciation calculations comply with applicable tax rules and that tax depreciation differences are properly tracked and disclosed for deferred tax accounting.

Complete Fixed Asset Audit Checklist

Planning & Risk Assessment Phase

Understand the Entity's Business: Evaluate the nature of the company's operations, industry characteristics, and the significance of fixed assets to the business model.
Identify Significant Asset Transactions: Review prior year audit files and management reports to identify unusual additions, disposals, or revaluations from the current period.
Assess Materiality: Determine quantitative and qualitative materiality thresholds for fixed assets and related depreciation. Fixed asset balance and depreciation expense should both be considered separately.
Identify Key Accounting Policies: Review and document the organization's fixed asset accounting policies, including capitalization thresholds, depreciation methods, useful lives, and residual value assumptions.
Evaluate Prior Period Findings: Review audit findings, management letters, and internal audit reports from prior periods related to fixed assets to identify recurring issues.
Document Changes in Estimates: Inquire about and document any changes in depreciation methods, useful lives, or residual values adopted during the period.

Internal Control Evaluation Phase

Review Fixed Asset Policies: Examine and evaluate the organization's written policies for asset acquisition, capitalization, depreciation, and disposal.
Evaluate Authorization Controls: Verify that there is appropriate segregation between the authority to purchase assets, approval of expenditures, and custody of assets.
Assess Fixed Asset Register Maintenance: Evaluate whether the fixed asset register is complete, accurate, and regularly updated. Test whether all acquisitions and disposals are timely recorded.
Test Depreciation Calculations: Review the system controls that calculate and record depreciation. Verify whether depreciation is calculated correctly and recorded completely for all assets.
Verify Physical Security Controls: Evaluate whether controls exist to prevent unauthorized access, theft, or misuse of fixed assets. Assess whether access logs or security patrols are in place.
Evaluate IT System Controls: If using a fixed asset management system, test user access controls, system change controls, and audit trail functionality.

Substantive Testing Phase - Additions

Identify Significant Additions: List all fixed asset additions during the period exceeding materiality or a predetermined threshold (e.g., $50,000).
Verify Supporting Documentation: For each selected addition, obtain and review purchase orders, invoices, receiving reports, and authorization documents.
Confirm Proper Capitalization: Verify that costs have been capitalized per company policy and accounting standards. Ensure that repairs and maintenance are not capitalized.
Trace to Journal Entries: Confirm that the transaction has been properly recorded in the general ledger and fixed asset master file.
Assess Proper Valuation: Verify that the asset cost includes all directly attributable acquisition costs (installation, freight, etc.) and properly excludes general overhead.
Confirm Existence with Physical Inspection: Physically locate and inspect significant additions to confirm their existence, condition, and operational status.

Substantive Testing Phase - Disposals

Identify All Disposals: Obtain a complete listing of fixed asset retirements and disposals during the period and verify completeness.
Review Authorization: Verify that disposals have been properly authorized per company policy. Review supporting documentation such as disposal approvals and work orders.
Test Gain/Loss Calculation: Verify the mathematical accuracy of gains and losses on disposal. Test whether book value was correctly determined using accumulated depreciation records.
Verify Proceeds Recording: Confirm that proceeds from asset sales or salvage have been correctly recorded and deposited. Investigate any unusual proceeds amounts.
Confirm Removal from Records: Verify that the asset has been properly removed from the fixed asset register and that accumulated depreciation has been reversed.
Test for Cut-off: Verify that disposals occurring near period-end have been recorded in the correct accounting period.

Substantive Testing Phase - Depreciation

Test Depreciation Method Consistency: Verify that each asset class continues to use the appropriate depreciation method consistent with prior years (unless a change is justified).
Review Useful Life Estimates: Evaluate whether asset useful lives remain appropriate given technological changes, physical condition, and intended use. Assess whether any changes were justified.
Evaluate Salvage Value Assumptions: Review and test the reasonableness of residual value assumptions. For assets approaching the end of useful life, assess whether adjustments are needed.
Calculate Depreciation Expense: Independently calculate depreciation expense for a sample of assets and compare to recorded amounts. Assess whether the company's depreciation calculation system is functioning correctly.
Test Depreciation Timing: Verify that depreciation begins when the asset is placed in service (not upon acquisition) and terminates when the asset is disposed.
Review Impairment Indicators: Assess whether any assets show indicators of impairment (damage, obsolescence, reduced market value) and determine if impairment testing should be performed.

Physical Verification Phase

Plan Physical Inspection Procedures: Develop a testing strategy that selects a representative sample of assets based on risk and materiality. Consider stratification by asset class and location.
Observe Asset Condition: During physical inspections, note the condition of assets (excellent, good, fair, poor). Obsolete or damaged assets may require special audit procedures.
Trace to Register: Confirm that each physically inspected asset is properly recorded in the fixed asset register with correct descriptions and serial numbers.
Identify Unrecorded Assets: During physical inspections, remain alert for assets that may not be recorded in the fixed asset register. Document any such findings for further investigation.
Assess Idle or Obsolete Assets: Identify assets that appear to be idle, obsolete, or not in use. Assess whether the company should perform impairment testing or disclose the condition.
Document Physical Verification: Maintain detailed records of all assets inspected, including identification numbers, locations, condition notes, and any exceptions noted.

Review & Reconciliation Phase

Reconcile Fixed Asset Register to General Ledger: Verify that the fixed asset register total agrees with the general ledger balance for gross fixed assets and accumulated depreciation.
Evaluate Roll-Forward Analysis: Develop or test management's roll-forward of the fixed asset balance from beginning balance through additions, disposals, and depreciation to ending balance.
Test Accumulated Depreciation Recalculation: Independently recalculate accumulated depreciation and verify it agrees to the register balance.
Review Disclosure Completeness: Verify that all required fixed asset disclosures are included in the financial statements, including depreciation methods, useful lives, and gross and net asset values.
Evaluate Subsequent Events: Inquire about subsequent events (after period-end) that might affect fixed asset accounting or require disclosure.
Document Audit Conclusions: Prepare a summary of audit procedures, findings, adjustments, and audit conclusion regarding whether fixed asset balances are fairly stated.

Construction Work in Progress (CWIP) Audit Procedure

Construction Work in Progress represents one of the most complex areas in fixed asset auditing. Unlike completed assets, CWIP requires ongoing monitoring and special audit attention due to its nature as partially constructed assets with fluctuating costs, extended timelines, and multiple contract modifications. CWIP is particularly significant for companies in capital-intensive industries such as utilities, manufacturing, telecommunications, and real estate development.

Understanding CWIP Accounting

CWIP includes all costs directly attributable to bringing an asset to its intended location and condition for use. These costs encompass acquisition cost plus all directly incremental costs of construction, including materials, direct labor, contractor fees, engineering costs, permits, and allocated overhead directly related to the construction project. Critically, CWIP is NOT depreciated until the asset is placed in service.

The treatment of costs in CWIP requires careful judgment. General corporate overhead should not be capitalized, but project-specific overhead (such as a project manager's salary dedicated to the construction) typically should be included. Interest costs incurred during construction may be capitalized under certain conditions defined by ASC 835. Testing interest capitalization requires understanding the company's policy and the specific assets under construction.

CWIP to Fixed Asset Conversion Process Project Authorized CWIP Balance Accumulate Costs Under Construction Placed in Service Fixed Asset Key Point: CWIP NOT depreciated Depreciation begins when placed in service All acquisition costs capitalized to CWIP Monitor project delays and cost overruns

CWIP Audit Procedures Checklist

Identify All CWIP Projects: Obtain a complete listing of all construction projects in progress at period-end and verify completeness against capital budgets and project management records.
Evaluate Project Authorization: Verify that each CWIP project has been properly authorized by appropriate management and that authorization documentation is on file.
Review Cost Accumulation Procedures: Evaluate the company's procedures for accumulating costs to CWIP, including how direct materials, labor, and contractor costs are tracked and allocated.
Test Capitalized Costs: For a sample of significant CWIP projects, verify that only costs meeting capitalization criteria have been included. Challenge any allocated overhead or general corporate expenses.
Assess Interest Capitalization: If the company capitalizes interest, verify that interest has been capitalized only for assets qualifying under ASC 835. Test the calculation of capitalized interest.
Evaluate Advance Payments: Review advance payments made to contractors and verify they are appropriately held in CWIP pending completion and placement in service.
Monitor Project Status: Obtain status reports for significant CWIP projects and evaluate the percentage of completion. Assess whether any projects are experiencing delays or cost overruns indicating potential impairment.
Test Capitalization Cut-off: Verify that assets capitalized as CWIP at period-end were indeed not yet placed in service. Review subsequent period records to identify when assets were transferred to depreciable fixed assets.
Inspect Physical Progress: When possible, physically inspect significant CWIP projects to observe construction progress and confirm the project exists and is actively progressing.
Evaluate Impairment Indicators: Assess whether any CWIP projects show indicators of impairment such as abandonment, significant scope reduction, or expected inability to generate economic benefits.
Reconcile CWIP to General Ledger: Verify that the CWIP balance per the project tracking system agrees with the general ledger and that all significant variations are explained.
Review Disclosure Requirements: Verify that the company discloses CWIP amounts if significant, provides details of major projects, and explains the basis for determining when assets are placed in service.

Real-World Examples & Case Studies

Manufacturing Company Example

Scenario: Widget Manufacturing Inc. - Equipment Addition Audit

Background: Widget Manufacturing Inc. is a mid-sized manufacturer with annual revenues of $50 million. During the audit of their fiscal year ended December 31, 20X3, the audit team identified a significant equipment addition recorded in the fixed asset system.

The Transaction: In September 20X3, the company purchased new automated assembly machinery for $500,000. The equipment was ordered, received, and installed over a three-month period. The supplier invoice showed:

  • Equipment cost: $425,000
  • Freight and insurance: $18,000
  • Installation and setup: $42,000
  • Training (3-month duration): $15,000
  • Total invoice: $500,000

Audit Findings: The audit team tested this addition and discovered that the company had capitalized the entire $500,000, including the training costs. According to the company's accounting policy and GAAP principles, training costs should be expensed, not capitalized. Only the equipment ($425,000), freight ($18,000), and installation ($42,000) totaling $485,000 should be capitalized.

Impact: The company recorded a $15,000 adjustment to record training expense in the current period. This also affected the depreciation calculation for the asset. Using a 10-year useful life, this resulted in an annual depreciation adjustment of $1,500.

Audit Conclusion: The misstatement was corrected in the financial statements. The audit team also recommended that the company enhance its capital expenditure procedures to include a checklist ensuring that all components of significant acquisitions are properly classified as capitalized or expensed.

Retail Chain CWIP Example

Case Study: Retail Expansion and CWIP Management

National Retail Chain - Store Renovation Project

Situation: A major retail chain with 200 stores initiated a multiyear store modernization program. Capitalized renovation costs were accumulating in CWIP with a balance of $8 million at year-end. The company planned to complete 50 renovations during the following year.

Audit Challenge: The auditors needed to determine whether all $8 million in CWIP was properly capitalized. They specifically questioned whether certain promotional spending, general corporate overhead, and contingency amounts should have been included.

Audit Procedure: The team selected 10 completed store renovations from the prior year and traced the actual costs incurred to the CWIP documentation and project budgets. They identified approximately $200,000 of general corporate marketing and advertising costs that had been inappropriately charged to CWIP. Additionally, they found that the company had included a 15% contingency reserve in CWIP that should have been expensed as incurred.

Resolution: Management removed the unallowable costs from CWIP totaling approximately $750,000. This required adjustments to reduce CWIP and recognize additional construction expense. The company revised its procedures to implement a detailed cost tracking system that properly segregates capitalized project costs from general overhead and contingencies.

Asset Disposal Discovery

Scenario: Unrecorded Equipment Disposal

Situation: During the physical inspection of fixed assets at a manufacturing facility, audit team members observed that a significant piece of equipment that had been recorded in the prior year's fixed asset register was no longer present. According to the fixed asset records, the equipment with an original cost of $275,000 and accumulated depreciation of $165,000 (book value $110,000) was still on the books.

Investigation: When questioned, facility management indicated the equipment had been removed from service and sold approximately 8 months into the current year. However, no formal disposal transaction had been recorded in the general ledger or fixed asset system.

Impact: The disposal required adjustments to:

  • Remove the original equipment cost ($275,000)
  • Remove accumulated depreciation through the disposal date ($165,000)
  • Record the net book value as a loss on disposal ($110,000)
  • Record proceeds received from the sale ($45,000)

Audit Conclusion: This finding highlighted a control deficiency in the company's asset management procedures. The company lacked a formal process to notify the accounting department when equipment was disposed. We recommended implementation of a disposal authorization form that must be submitted before assets are removed from service.

Depreciation Methodology Change

Case Study: Straight-Line to Units of Production Conversion

Heavy Equipment Manufacturer - Depreciation Accounting

Background: A heavy equipment manufacturer had historically used straight-line depreciation for all production equipment based on estimated useful lives (e.g., 7-10 years). Management determined that this methodology did not appropriately reflect the consumption pattern of their equipment, which was driven more by production volume than calendar time.

Change Made: Effective January 1 of the current year, the company changed to a units-of-production depreciation method for manufacturing equipment, calculating depreciation based on hours of operation rather than years.

Audit Testing: The audit team verified that:

  • The change in accounting principle was properly authorized and documented
  • The units-of-production calculation was reasonable and consistently applied
  • The cumulative effect of the change (if material) was properly disclosed
  • Depreciation for the current year was correctly calculated using the new method

Outcome: The change was properly supported and resulted in more accurate matching of depreciation expense to production activity. The company provided appropriate disclosure in the financial statements explaining the change and its impact on net income.

Visual Audit Procedures Overview

Fixed Asset Audit Phases

PLANNING & RISK Understand business Assess materiality Identify key policies CONTROL EVALUATION Review policies Test controls Assess procedures SUBSTANTIVE TESTING Test additions Test disposals Test depreciation PHYSICAL VERIFICATION Inspect assets Confirm existence Assess condition CONCLUSION & REPORTING Reconcile Review disclose Finalize findings

Depreciation Methods Comparison

Comparison of Depreciation Methods (5-Year Asset, Cost $10,000) Year 1 Year 2 Year 3 Year 4 Year 5 $0 $2000 $4000 $6000 $8000 Straight-Line Declining Balance Annual Depreciation Expense

Frequently Asked Questions

What is the minimum capitalization threshold for fixed assets?

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There is no single universal minimum capitalization threshold. GAAP requires that organizations establish their own capitalization policy based on materiality and their specific circumstances. Common thresholds range from $500 to $5,000, depending on the company's size and nature. The key is that the threshold must be consistently applied and disclosed in the notes to financial statements. During audits, we verify that organizations are consistently applying their stated policy.

When should depreciation begin for a fixed asset?

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Depreciation should begin when the asset is placed in service and ready for its intended use, not when it is acquired or paid for. This is a critical audit point. For example, if equipment is purchased in November but not installed and operational until February of the following year, depreciation should begin in February, not November. This principle applies regardless of the depreciation method used.

Can companies change their depreciation method? What are the requirements?

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Yes, but changes in accounting principles are permitted only if the new method is preferable and is justified by the circumstances. Changes must be properly authorized, documented, and disclosed in the financial statements including the impact on net income. The cumulative effect of the change must be calculated if material. Auditors must verify that the change is properly justified and that management is not simply making a change to manipulate earnings.

What costs can be capitalized as part of a fixed asset's acquisition cost?

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Capitalized costs include the purchase price plus all directly attributable costs to bring the asset to its location and condition for use. This includes freight, insurance during transit, installation, testing, site preparation, and professional fees (engineering, legal). However, general corporate overhead, training (usually), and costs incurred after the asset is in service should be expensed. Auditors carefully challenge capitalized costs to ensure only qualifying amounts are capitalized.

How should auditors test the completeness of fixed asset disposals?

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Testing disposal completeness is challenging because auditors must identify disposals that may not have been recorded. Procedures include: (1) physically inspecting assets to identify items previously recorded but no longer present, (2) reviewing subsequent period insurance coverage and property tax records, (3) examining capital asset removal work orders, (4) reviewing scrap/salvage proceeds accounts, and (5) inquiring with operations management about removed assets. Physical inspection during asset verification is often the most effective procedure for identifying unrecorded disposals.

What is asset impairment and how do auditors test for it?

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Impairment occurs when an asset's book value exceeds the amount that can be recovered through future use or disposal. Under GAAP/IFRS, companies must test for impairment whenever events indicate an asset may be impaired. These events include physical damage, technological obsolescence, market value decline, or idleness. Auditors should remain alert during asset verification for signs of impairment and challenge management about potential write-downs. Testing involves reviewing historical cash flows against projections and evaluating fair value estimates.

How should auditors approach testing CWIP?

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CWIP auditing requires understanding the specific construction projects. Auditors should: (1) obtain a detailed CWIP schedule for each project, (2) verify that costs are directly attributable to construction, (3) challenge any allocated overhead or capitalized interest, (4) inspect projects to confirm actual construction progress, (5) review project timelines to identify delays indicating potential impairment, and (6) verify that assets are properly transferred to fixed assets when placed in service. Physical observation of CWIP projects is particularly important because CWIP lacks tangible supporting documentation like invoices.

What should be included in fixed asset disclosures?

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Fixed asset disclosures must include: gross cost of asset classes, accumulated depreciation by class, net book value, depreciation methods used, useful life ranges, any impairment charges, gains/losses on disposals, and capitalized lease arrangements if applicable. IAS 16 requires more detailed disclosures including movements during the period (additions, disposals, depreciation). Auditors must verify that required disclosures are complete and that the information reconciles to the general ledger and fixed asset register.

How do auditors determine appropriate sample sizes for fixed asset testing?

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Sample size depends on materiality, risk assessment, and the nature of assets. Auditors typically stratify by dollar amount—testing all or most items above materiality and sampling smaller items. For example, for equipment with a $50,000 materiality, auditors might test 100% of items over $50,000 and a sample of 20-30 items below that threshold. Physical inspection samples might be smaller (5-10% of items) but would include all significant items. Professional judgment and audit risk assessment drive these decisions.

What are the key controls auditors look for in fixed asset systems?

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Critical controls include: (1) segregation of duties—authorization separate from custody separate from record-keeping, (2) capital expenditure budgets and approval workflows, (3) fixed asset register that is regularly reconciled to the general ledger, (4) physical security controls and periodic asset counts, (5) automated depreciation calculations, (6) disposal authorization procedures, and (7) IT system controls including user access restrictions and audit trails. Control deficiencies in these areas often expand the scope of substantive audit procedures required.

How should auditors address fully depreciated assets?

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Fully depreciated assets (where accumulated depreciation equals gross cost and book value is zero) still require audit attention. Auditors should verify: (1) that the asset still exists and is still in use, (2) whether the useful life estimate was appropriate (if assets are still productive, the estimate may have been too conservative), (3) whether disposal or salvage has been considered, and (4) that the asset is being properly maintained and insured. Fully depreciated assets sometimes represent opportunities for impairment testing or useful life reconsideration.

Knowledge Check: Fixed Asset Audit Quiz

Test your understanding of fixed asset auditing with this comprehensive quiz. You'll receive a score and detailed feedback on each answer.

1. Which of the following costs should NOT be capitalized as part of a fixed asset's acquisition cost?

2. When should depreciation begin for a fixed asset?

3. What does CWIP stand for and what is its primary characteristic?

4. Which of the following depreciation methods results in higher depreciation expense in the early years of an asset's life?

5. What is the primary objective of physical asset verification during a fixed asset audit?

6. An asset with a cost of $100,000 and accumulated depreciation of $60,000 has a book value of:

7. What is asset impairment and when must companies test for it?

8. Which of the following would indicate a control deficiency in fixed asset procedures?

9. How should auditors test the completeness of fixed asset disposals?

10. What should be included in fixed asset financial statement disclosures?

11. Which costs are typically capitalized as part of CWIP (Construction Work in Progress)?

Your Quiz Results

© 2024 Fixed Asset Audit Guide. Comprehensive auditing resource for finance professionals.

This guide is designed for educational and professional development purposes in the field of auditing and financial statement verification.

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