Physical Verification of Fixed Assets

Introduction

Fixed assets such as land, buildings, plant and machinery, furniture, vehicles, and equipment represent a substantial investment for an organization. Ensuring their existence, proper use, and accurate recording is critical for financial integrity. Physical verification of fixed assets is a key internal control and audit process that supports reliable financial reporting, statutory compliance, and effective asset management.

Meaning of Physical Verification

Physical verification of fixed assets refers to the systematic process of physically inspecting assets and reconciling them with the fixed asset register. It confirms that assets recorded in the books actually exist, are owned by the entity, are in usable condition, and are employed for business purposes.

Objectives of Physical Verification

The primary objectives are to:

Verify the existence and ownership of fixed assets
Ensure accuracy and completeness of asset records
Detect loss, theft, damage, or misuse
Identify idle, obsolete, or impaired assets
Support correct depreciation and valuation
Strengthen internal controls and governance
Ensure compliance with statutory and regulatory requirements

Scope of Physical Verification

The scope typically includes:

Land and buildings
Plant and machinery
Furniture and fixtures
Office equipment and IT assets
Vehicles
Tools and other capital assets

Verification may be conducted annually, periodically, or on a rotational basis, depending on the size, nature, and risk profile of the organization.

Procedure for Physical Verification of Fixed Assets

Planning and Preparation
- Review the fixed asset register
- Identify asset locations and custodians
- Define verification scope and timelines
Asset Identification
- Check asset tags, serial numbers, and descriptions
- Match physical assets with book records
Physical Inspection
- Verify existence, location, and usage
- Assess physical condition
- Identify damaged, obsolete, or non-functional assets
Reconciliation
- Compare physical verification results with records
- Identify shortages, excesses, or unrecorded assets
Reporting
- Prepare a physical verification report
- Highlight discrepancies and observations
Rectification and Follow-up
- Update asset records
- Pass accounting adjustments where required
- Improve controls to avoid recurrence

Physical Verification under CARO 2020

The Companies (Auditor’s Report) Order, 2020 (CARO 2020) places specific responsibilities on auditors regarding fixed assets.

CARO 2020 – Clause 3(i): Property, Plant and Equipment

Under CARO 2020, auditors are required to comment on:

Whether the company is maintaining proper records showing full particulars, including quantitative details and situation of Property, Plant and Equipment (PPE)
Whether physical verification of PPE has been conducted by management at reasonable intervals
Whether any material discrepancies were noticed on verification and, if so, whether they have been properly dealt with in the books
Whether the title deeds of immovable properties are held in the name of the company
Whether PPE has been revalued, and if so, whether the revaluation is based on a registered valuer
Whether any proceedings have been initiated for holding benami property

Importance of CARO 2020 Compliance

Ensures transparency in reporting of fixed assets
Enhances accountability of management
Strengthens investor and stakeholder confidence
Reduces risk of misstatement in financial statements

Physical Verification under SOX (Sarbanes–Oxley Act)

The Sarbanes–Oxley Act, 2002 (SOX) applies primarily to companies listed in the United States and focuses strongly on internal controls over financial reporting (ICFR).

SOX Relevance to Fixed Asset Verification

Under Section 404 of SOX, management must:

Establish and maintain adequate internal controls
Assess and report on the effectiveness of these controls
Enable auditors to independently attest management’s assessment

Role of Physical Verification under SOX

Physical verification of fixed assets is a critical control activity under SOX because it:

Confirms the existence assertion of assets
Prevents overstatement or fictitious assets
Supports accurate capitalization and depreciation
Ensures proper segregation of duties and asset custody

Failure to perform effective physical verification may result in material weaknesses or significant deficiencies under SOX reporting.

Role of Auditors

Auditors evaluate whether:

Physical verification is conducted at reasonable intervals
Asset records are accurate and complete
Discrepancies are properly investigated and adjusted
Internal controls over fixed assets are effective

Auditors may perform test checks or sample verification as part of their audit procedures.

Challenges in Physical Verification

Large volume of assets spread across multiple locations
Poor asset tagging or incomplete documentation
Frequent movement of assets
Identification of obsolete or impaired assets

Conclusion

Physical verification of fixed assets is a fundamental control mechanism that safeguards organizational resources and ensures accuracy in financial reporting. Compliance with CARO 2020 enhances statutory transparency, while adherence to SOX requirements strengthens internal control frameworks and corporate governance. A robust and well-documented physical verification process not only fulfills regulatory obligations but also supports efficient asset utilization and long-term business sustainability.

ACCOUNTINGDOSE