## Audit of Property, Plant and Equipment (PPE)

PPE is typically the largest asset on a balance sheet. Audit risk arises from incorrect capitalisation, overstated/understated depreciation, fictitious assets, and improper cut-off on additions/deletions.

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### Audit Procedures by Financial Statement Assertion

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#### A. Existence

Goal: Confirm that recorded PPE physically exists.

1. Review the entity's physical verification plan — determine whether performed by own staff or a third party.

2. Check policy on periodicity of physical verification (annual, rotational).

3. Obtain evidence of appropriate supervision of those performing verification.

4. Obtain the PPE physical verification report with working sheets.

5. Verify all items are properly tagged (identification marks/asset numbers) and that the physical report captures those marks.

Reconciliation of physically verified items with the Fixed Asset (FA) Register:

Check PPE additions are updated in the FA Register.
Verify any discrepancies (e.g., shortage or asset not in working condition) — such assets must be deleted from books with proper management approval.

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#### B. Completeness

Goal: All PPE belonging to the entity is recorded; no 3rd-party assets included.

1. Verify the PPE movement schedule (asset-class wise):

> Opening Balance + Additions − Deletions = Closing Balance

2. Tally closing balance with the books of accounts.

3. Recalculate arithmetic accuracy of the movement schedule.

4. Verify opening balance agrees with prior year audited figures.

Additions:

Obtain a listing of all additions from management.
Verify additions are properly authorised (approved).
Verify proper procurement processes were followed (tenders, quotations).
Verify date of addition against: purchase invoice, installation certificate/report, and other relevant documents.

Deletions:

Understand the reason for each deletion.
Obtain management approval and discard note authorising the disposal.
Verify the internal process followed for deletion of PPE.
Check accuracy of recording of deletions — ensure resultant gain/loss is correctly recorded.

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#### C. Rights and Obligations

Goal: Confirm the entity owns or has legal rights over the PPE.

1. Land & Building additions — check Conveyance Deed / Sale Deed.

2. All immovable property at balance sheet date — verify original title deeds.

3. Verify Register of Charges — check whether any charge has been created against PPE.

4. If entity has given immovable property as security for borrowings and original title deeds are NOT with the entity → request confirmation from the respective lender.

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#### D. Valuation

Goal: PPE is carried at correct value; depreciation and impairment are appropriate.

1. Verify entity charges depreciation on all PPE (except freehold land, which is not depreciated).

2. Assess whether the depreciation method reflects the pattern in which the asset's future economic benefits are expected to be consumed.

3. Verify whether management has carried out an impairment assessment in accordance with AS 28 (Impairment of Assets).

Worked example

### Example 1

Example — PPE Physical Verification Discrepancy:

During physical verification, Machine #M-045 (book value ₹8 lakhs, written down) cannot be located on the factory floor. Auditor steps:

1. Checks if the asset was formally disposed of — looks for disposal note and management approval.

2. If no disposal was authorised, this is an unexplained shortage — must be written off after proper management approval.

3. Checks whether the loss on write-off (₹8 lakhs) was correctly routed through P&L.

### Example 2

Example — Verification of a PPE Addition:

A company capitalised a CNC Machine worth ₹45 lakhs on 15 February.

Auditor verifies:

Purchase invoice from supplier dated 10 February.
Installation certificate from the supplier's technician dated 15 February.
Capital expenditure approval from the Board (for items above ₹25 lakhs, per internal policy).
Date used for depreciation start: 15 February (date of installation) — correct per AS 10.

### Example 3

Example — Title Deed Unavailable for Mortgaged Property:

ABC Ltd has a factory land (₹2 crore) mortgaged to SBI against a term loan. The original title deed is held by SBI.

Auditor action: Cannot inspect original title deed directly → sends a direct confirmation letter to SBI asking them to confirm they hold the title deed and the outstanding loan balance.

⚠️ Common exam mistakes

Not verifying additions are authorised — capitalising unauthorised expenditure or repairs (revenue items) as PPE inflates assets.
Accepting the FA Register without physically verifying a sample — ghost assets (already scrapped but still on books) remain undetected.
Forgetting that freehold land is not depreciated — applying depreciation to land overstates expenses.
Not checking the depreciation method for consistency with the pattern of consumption — e.g., using straight-line when the asset delivers most benefits in early years (SLM understates early depreciation).
Missing the impairment check — simply verifying depreciation is not enough; if indicators of impairment exist (e.g., asset idle for extended periods, market value decline), an impairment test per AS 28 is required.
Including third-party assets (e.g., assets given on consignment, leased-in assets under operating leases) in the PPE schedule — overstates the entity's asset base.

Bare-Act text Paragraphs 5–9 · Accounting Standard (AS) 28 — Impairment of Assets · click to expand

An asset shall be assessed at each reporting date for any indication that the asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset. An asset is impaired when the carrying amount of the asset exceeds its recoverable amount.

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