# Audit of Depreciation and Amortisation
Depreciation and amortisation are non-cash charges representing the systematic allocation of the cost of tangible and intangible assets over their useful lives. The auditor must verify both the policy framework and computational accuracy.
## A. Key Attributes to Verify
The auditor needs to consider the following while verifying depreciation and amortisation expenses:
1. Accounting Policy Understanding – Obtain understanding of the entity's accounting policy related to depreciation and amortisation.
2. Compliance with Companies Act – Ensure Company's policy for charging depreciation/amortisation is as per relevant provisions of Companies Act, 2013 (Schedule II).
3. Consistency – Policy has been applied consistently year on year; any change has been adequately disclosed.
4. Residual Value Adjustment – Depreciation has been calculated after making adjustment of residual value from cost of assets.
5. Validity – Depreciation and amortisation charges are valid (relate to assets actually owned/controlled).
6. Accuracy – Charges are accurately calculated and recorded.
7. Cut-off – All charges are recorded in the appropriate period.
8. Component Approach – Each part of an item of PPE with cost that is significant in relation to total cost of item have been depreciated separately (Component Accounting as per AS 10 / Ind AS 16).
## B. Audit Procedures – Occurrence, Measurement & Cut-Off
### 1. Process Understanding
Obtain understanding of entity's process of charging depreciation and amortization.
### 2. Fixed Asset Register (FAR)
Obtain FAR maintained by entity.
> Risk: There is always a risk that an entity could:
> - Capitalize revenue expense to increase profit, OR
> - Charge capital expenditure directly to P/L to reduce profit (tax avoidance)
### 3. Intangible Assets Amortisation
Ensure intangible assets have been properly amortized over their useful period.
### 4. Depreciation Commencement
Ensure depreciation is charged on assets from the date when it is READY TO USE and not from the date of actual usage.
### 5. Revaluation
Ensure depreciation on the revalued amount is properly accounted from the revaluation reserve.
### 6. Income Tax Computation
Check depreciation computation as per Income Tax Act, 1961 (separate from book depreciation).
### 7. Analytical Procedures
Perform AP to obtain audit evidence as to overall reasonableness of depreciation.