## Audit of PPE – Valuation, Depreciation, and Impairment

### Why This Verification is Significant

PPE depreciates due to:

Efflux of time (age)
Use (wear and tear)
Obsolescence (technology changes)

If depreciation is not correctly charged:

Profit or loss is misstated.
PPE is overstated on the balance sheet.

### Audit Procedures for Valuation

1. Depreciation Charged on All PPE

Verify depreciation has been charged on all PPE items.
Exception: Freehold land is non-depreciable (it does not wear out).

2. Appropriateness of Depreciation Method

The method must reflect how the asset's economic benefits are consumed:

Method	When Appropriate
Straight Line Method (SLM)	Uniform benefit over asset life
Diminishing Value Method (WDV)	Higher usage/benefit in early years
Unit of Production Method	Benefit tied to output volume

3. Impairment Assessment (AS 28)

Verify whether management has performed an impairment assessment per AS 28 / Ind AS 36.
An asset is impaired when its carrying amount exceeds its recoverable amount.
If impaired, the carrying amount must be written down to recoverable amount.

### Legal Ownership Verification

Inspect title deeds for freehold land and buildings.
Check vehicle registration certificates.
Verify lease agreements for leasehold assets.
Confirm that assets are free from encumbrances (or that encumbrances are disclosed).

Worked example

### Example 1

Scenario (BOTS Manufacturing): The auditor finds that no depreciation has been charged on a building acquired 10 years ago. Management argues the building is in excellent condition.

Audit Response:

Buildings (other than freehold land) are depreciable regardless of their condition.
The condition of an asset does not negate the requirement to depreciate.
Check Schedule II of Companies Act, 2013 for prescribed useful life of buildings.
Insist on charging depreciation; if management refuses, qualify the audit report for non-compliance with AS 10.

### Example 2

Scenario (PRISM Limited): The company owns machinery with a carrying value of ₹40 lakh but similar machinery is available new at ₹25 lakh, and the recoverable amount (value in use) is estimated at ₹22 lakh.

Impairment Calculation:

Recoverable Amount = Higher of (Fair Value less costs of disposal, Value in Use) = ₹25 lakh (assuming NRV > VIU)
Impairment Loss = ₹40 lakh − ₹25 lakh = ₹15 lakh
This must be recognised as an expense per AS 28.

⚠️ Common exam mistakes

Charging depreciation on freehold land — land does not depreciate and this is a common error.
Using only one depreciation method for all assets — the method must reflect the pattern of consumption, which can differ by asset class.
Ignoring the impairment assessment — many students discuss depreciation but forget AS 28 impairment testing.
Confusing depreciation (systematic allocation of cost) with impairment (sudden loss in recoverable value).

Reference:

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