Audit objective
The job is to verify that recorded PPE exists, is owned by the entity, is valued correctly (cost less accumulated depreciation and impairment), is appropriately classified between capital and revenue expenditure, and is presented and disclosed per Schedule III to the Companies Act, 2013. PPE often anchors the balance sheet, and getting it wrong cascades into depreciation, impairment, CARO reporting, and tax computation.
Relevant framework
- IND AS 16 · Property, Plant and Equipment · recognition, cost / revaluation model, depreciation, derecognition
- AS 10 · PPE for non-IND AS entities, revised 2016, broadly aligned with IND AS 16
- IND AS 36 / AS 28 · Impairment of Assets · indicators, recoverable amount, reversal
- IND AS 23 / AS 16 · Borrowing Costs · capitalisation to qualifying assets
- IND AS 20 / AS 12 · Government Grants related to PPE
- IND AS 116 · Right-of-Use assets presented separately from owned PPE under Sch III Division II
- IND AS 105 · Non-current Assets Held for Sale (reclassification out of PPE)
- IND AS 113 · Fair Value Measurement (if revaluation model adopted)
- Section 129 · True and fair view requirement
- Section 133 · Notified accounting standards
- Section 134(5)(d) · Directors' Responsibility on going concern, affects depreciation policy
- Schedule II · Useful lives, methods of depreciation, residual value ceiling of 5% unless justified
- Schedule III Div I & II · Presentation and disclosure of PPE
- Reconciliation of gross block, accumulated depreciation, net block
- CWIP ageing schedule: <1 year, 1-2 yrs, 2-3 yrs, >3 years
- CWIP projects overdue on completion or with cost overrun
- Title deeds not in Company's name: gross carrying value, title holder, promoter/director relationship, period held, reason
- Revaluation during the year: registered valuer status
- Loans/advances to promoters or directors related to PPE
- Benami transactions · proceedings under Benami Transactions (Prohibition) Act, 1988
- 3(i)(a)(A) · Proper records with full particulars including quantitative details and situation of PPE
- 3(i)(a)(B) · Proper records for intangible assets
- 3(i)(b) · Physical verification by management at reasonable intervals, material discrepancies dealt with
- 3(i)(c) · Title deeds of all immovable properties in Company's name, else disclose: description, gross carrying value, holder, relationship, period held, reason
- 3(i)(d) · Revaluation of PPE / intangibles during year, valuer status, amount of change if 10% or more in aggregate of net carrying value of each class
- 3(i)(e) · Benami proceedings initiated or pending, disclosure in financials
- SA 230 · Audit Documentation
- SA 315 · Identifying and Assessing Risks of Material Misstatement
- SA 330 · Auditor's Responses to Assessed Risks
- SA 500 · Audit Evidence
- SA 501 · Audit Evidence · Specific Considerations (physical verification principles)
- SA 505 · External Confirmations (assets with third parties)
- SA 530 · Audit Sampling
- SA 540 · Auditing Accounting Estimates (useful life, residual value, impairment)
- SA 580 · Written Representations
- Section 32 · Depreciation on block of assets, WDV method, prescribed rates per IT Rules Appendix I
- Section 43(1) · "Actual cost" definition
- Section 43A · Foreign exchange fluctuation on imported assets
- Section 50 · Capital gains on depreciable assets (block concept)
- ICDS V · Tangible Fixed Assets for business income computation
- Section 16 · ITC eligibility and conditions
- Section 17(5) · Blocked credit · motor vehicles for transport of persons, works contract for immovable property, goods/services for construction of immovable property on own account
- Rule 43 · ITC reversal on capital goods used partly for exempt supplies, over 60 months
- Guidance Note on Audit of Property, Plant and Equipment · ICAI AASB
- Guidance Note on Accounting for Depreciation in Companies in the Context of Schedule II to the Companies Act, 2013
Risk areas by assertion
Risks below are mapped to financial statement assertions per SA 315. Use this map when assessing inherent and control risk at the engagement level.
Existence / Occurrence
- Fictitious assets recorded with no physical counterpart
- Disposed, scrapped, or stolen assets still in FAR
- Personal assets of directors / KMP capitalised
- Branch-level assets recorded centrally without verification
Completeness
- Assets used but not capitalised (kept in R&M)
- Returnable items capitalised, or capex items expensed
- Small-value assets below threshold bypassing FAR
Valuation / Accuracy
- Revenue expenses capitalised, or capex booked to P&L
- Useful life longer than Schedule II without justification
- Residual value above 5% of cost without documented basis
- Depreciation from invoice date instead of ready-for-use date
- Pro-rata depreciation not applied mid-year
- Impairment indicators ignored (idle assets, obsolescence)
- Borrowing costs not capitalised to qualifying assets
- Directly attributable costs (install, testing) expensed
- Trade discounts / rebates not deducted from cost
Rights & Obligations
- Title deeds not in Company's name (CARO trigger)
- Operating lease wrongly capitalised as owned
- Pledged / mortgaged assets not disclosed
- Insurance not in Company's name
Cut-off
- Asset ready for use but capitalisation deferred (under-depreciation)
- Year-end purchases booked but asset not received or not ready
Presentation & Disclosure
- Movement schedule reconciliation errors
- CWIP ageing schedule missing or wrong buckets
- Capital commitments not disclosed
- Title deed disclosure omitted
- Revaluation disclosure incomplete
- CARO 3(i)(d) 10% threshold not commented
- ROU assets not separately disclosed under Div II
Documents to request
Hand this to the client at the start of the engagement. A consolidated PPE document request avoids the trickle-down asks that frustrate finance teams and slow fieldwork.
- Fixed Asset Register with quantitative details, location, ID, addition / capitalisation date, useful life, residual value
- Movement schedule for the year (opening, additions, deletions, depreciation, closing)
- Capex budget vs actual reconciliation
- Board / Capex committee minutes approving major additions
- Vendor invoices for additions (samples)
- Bill of Entry and customs documents for imports
- Installation, commissioning, ready-for-use certificates
- Title deeds, sale deeds, conveyance deeds for land and building
- Lease deeds for leasehold premises and ROU assets
- Building approval and completion certificates
- Vehicle RC books
- Insurance policies covering PPE
- Management's physical verification report and reconciliation with FAR
- Independent valuation report (if revaluation or impairment)
- Schedule II useful life policy approved by Board
- Depreciation computation working file
- Impairment assessment working
- CWIP movement and ageing schedule
- Capital advance / capital creditor balance confirmations
- Asset disposal documentation (sale agreement, scrap challans, e-waste)
- Borrowing cost capitalisation working for qualifying assets
- Government grant accounting working (if relevant)
- MCA Form CHG search to confirm charge / mortgage status
- Management representation on Benami Act proceedings
- List of immovable properties with title deed status (CARO 3(i)(c) input)
Walkthrough · P2P capex
Pick one capex transaction during the year, high-value if possible. Trace end-to-end per SA 315 and document in working papers. The walkthrough also doubles as your design-effectiveness test for IFC over PPE.
- Capex requisition originated by user department, reviewed against approved Capex budget
- Technical specifications approved by user head and engineering
- RFQ / tender process, vendor comparison sheet, lowest-bidder justification or documented technical preference
- Capex committee or Board approval per Delegation of Authority matrix
- PO raised, vendor master verification, terms aligned with approval
- GRN on delivery, quality inspection, deviation reports
- Installation, commissioning, ready-for-use certificate
- Capitalisation entry, FAR update, asset tagging
- Depreciation auto-computed by ERP from ready-for-use date
- Insurance updated, statutory registrations where applicable
Fieldwork procedures
Procedures are grouped by assertion. Cross-reference to the SA each procedure satisfies. Sample size and selection method should be documented per SA 530 using the AuditAIKit Audit Sampling Engine.
- Obtain management's physical verification report; reconcile to FAR
- Perform independent physical verification of high-value assets on sample basis; verify location, tag, condition
- For assets with third parties (job-workers, branches), obtain confirmation under SA 505
- Inquire about idle, obsolete, damaged assets; trace impairment treatment
- Inspect insurance policies; reconcile insured values to recorded asset base
- Reconcile FAR additions to GL, Capex register, approved Capex budget
- Scrutinise R&M ledger for capitalisable items: thresholds, complete replacements, productivity enhancers
- Cut-off testing: examine last 10 invoices before year-end, first 10 after; verify capitalisation against ready-for-use date
- Cross-check Form 26AS and TDS deductions on capital purchases for unrecorded additions
- Review property tax demand notices for buildings not in FAR
- Vouch sample additions to vendor invoice, BOE, transport, installation; verify all directly attributable costs per IND AS 16.16-17
- Recompute depreciation on sample basis: useful life vs Schedule II, residual value, method, pro-rata
- Verify depreciation start from ready-for-use date, not invoice or payment date
- Where useful life differs from Schedule II, obtain technical justification and Board approval
- Where residual value exceeds 5%, obtain documented basis (manufacturer, technical, scrap benchmarking)
- Impairment indicator review per IND AS 36.12: idle assets, market decline, obsolescence, restructuring, physical damage
- For qualifying assets, recompute borrowing cost capitalisation per IND AS 23
- For revalued assets, examine registered valuer's report; verify CARO 3(i)(d) 10% threshold
- Verify GST input tax credit: cost net of ITC where credit availed, gross where Section 17(5) blocked
- Inspect title deeds for sample of land and building; verify name matches Company name exactly
- For amalgamated / merged entities, verify transfer of title via Court order or Tribunal order or registered conveyance
- Verify charge status via MCA Form CHG search; reconcile pledged assets to disclosure
- Inspect lease deeds for leasehold properties; verify ROU recognition under IND AS 116
- Obtain CARO 3(i)(c) working: complete list of immovable properties with title status
- For year-end additions, verify physical receipt, installation, ready-for-use status
- Examine subsequent period for any reversal of year-end additions
- Verify movement schedule: opening + additions - disposals - depreciation - impairment = closing
- Verify CWIP ageing buckets per Schedule III 2021 amendment
- Verify CWIP project disclosure for overdue completion or cost overrun
- Verify capital commitments disclosure (Schedule III, Part I, General Instructions)
- Verify title deed disclosure where not in Company's name
- Verify revaluation disclosure including valuer details
- Verify Benami Act disclosure (Schedule III + CARO 3(i)(e))
- Verify intangible assets disclosed separately
- Verify Right of Use Assets disclosed separately under Schedule III Division II
Materiality considerations
PPE is typically material in manufacturing, infrastructure, real estate, hospitality, telecom, and power sectors. Compute and document the materiality framework per SA 320.
- Overall materiality · typically 5-10% of profit before tax, or 0.5-1% of revenue, or 1-2% of net assets, using a Company-specific benchmark
- Performance materiality · typically 50-75% of overall materiality
- Clearly trivial threshold · typically 5% of performance materiality
- Sample selection thresholds · all additions above performance materiality verified 100%, items above clearly trivial sampled per SA 530
- Schedule II depreciation impact · if depreciation per Schedule II differs materially from Company's policy, evaluate restatement and disclosure
IFC over PPE
Under Section 143(3)(i), the auditor must report on the adequacy and operating effectiveness of internal financial controls over financial reporting. Key controls to test for PPE:
- Capex approval matrix · Board / committee approval per Delegation of Authority with monetary thresholds
- Vendor master controls · onboarding, KYC, blacklisting, dormant vendor monitoring
- PO controls · budget vs PO validation, PO release per matrix
- GRN controls · physical inspection, three-way match before invoice booking
- Capitalisation controls · ready-for-use sign-off, capitalisation checklist, FAR update with asset tagging
- Depreciation controls · useful life master in ERP, automated depreciation run, exception report review
- Physical verification controls · annual physical verification with documented reconciliation
- Disposal controls · Board approval for disposal above threshold, market value comparison, scrap accounting
- Title deed custody · physical custody log, periodic verification, scanned copy in DMS
- Impairment review · annual indicator review by finance, valuation expert engaged where required
Test design via walkthrough + inquiry + observation. Test operating effectiveness via attribute sampling per SA 530 with reference to the deviation rate.
Group audit considerations
Applicable where the Company has subsidiaries, joint ventures, or associates. Refer SA 600 (Using the Work of Another Auditor) and AS 21 / IND AS 110 for consolidation principles.
- Verify component auditor instructions explicitly cover PPE existence, valuation, title, depreciation, CARO
- Obtain consolidation schedule reconciling component PPE to consolidated PPE
- Verify intercompany asset transfers · eliminations, common cost allocation
- For shared assets (group HQ leased to subsidiaries), verify lease accounting under IND AS 116
- For step-up on business combinations per IND AS 103, verify Purchase Price Allocation (PPA) fair valuation of acquired PPE
- Compare component materiality vs group materiality and document differences
Common findings and red flags
The most common observations encountered in PPE fieldwork. Each line is a working-paper trigger.
Sample conclusion language
Use these as starting drafts. Adapt to engagement-specific facts and your firm's house style. All language is illustrative.
"Based on our procedures, which included physical verification on a test check basis, examination of title deeds and registration documents, recomputation of depreciation per Schedule II to the Companies Act, 2013, review of CWIP ageing and capital commitments, and assessment of impairment indicators per IND AS 36, the Property, Plant and Equipment as at 31 Mar XXXX are stated in accordance with IND AS 16 and presented in accordance with Schedule III to the Companies Act, 2013. No material misstatement was noted."
"As reported under CARO 2020 Clause 3(i)(c), title deeds for immovable properties aggregating to gross carrying value Rs. XX lakhs (net carrying value Rs. YY lakhs) are not held in the name of the Company. The matter has been disclosed in Note XX to the financial statements. This is a CARO reporting matter and does not impact the audit opinion."
"Plant and machinery aggregating to gross block Rs. XX lakhs at [location] has been idle since FY YYYY-YY. Management has not performed a documented impairment assessment under IND AS 36. We have communicated this to management for evaluation and, where applicable, recognition of impairment loss. [Modify opinion if material and uncorrected.]"
"During our review of the Fixed Asset Register, we noted that quantitative details and asset-wise location are not consistently maintained for assets located at branches or project sites. This is a CARO 3(i)(a) reporting matter and represents a deficiency in the design of controls over PPE record-keeping. Recommended that the Company implement asset tagging, location codes, and periodic reconciliation between branch and central FAR."
Linked AuditAIKit tools
Three-Way Match
Vouch PPE additions where PO, GRN, and Invoice can be reconciled with cut-off and duplicate testing.
Live · SA 530 CompliantAudit Sampling Engine
Select samples for vouching of additions, physical verification, and depreciation recomputation.
PlannedFixed Asset Audit Pack
Schedule II recomputation, useful life mismatch detection, CWIP ageing flag, capex-vs-revenue classification.
PlannedJET · Journal Entry Testing
Unusual capex postings, period-end spikes in PPE additions, weekend posting flags.
Sources & references
Every reference in this playbook traces to an official source. Open the link to verify the exact wording in force as at the last review date.
| Reference | Source | Link |
|---|---|---|
| Companies Act, 2013 · Sec 129, 133, Sch II, Sch III | MCA | mca.gov.in |
| Companies (IND AS) Rules, 2015 | MCA | mca.gov.in |
| IND AS 16 · 36 · 23 · 116 | ICAI / MCA notification | icai.org |
| CARO 2020 Order · 25 Feb 2020 | MCA | mca.gov.in |
| Schedule III amendments · 24 Mar 2021 | MCA notification | mca.gov.in |
| Guidance Note on Audit of PPE | ICAI AASB | icai.org |
| Guidance Note · Schedule II Depreciation | ICAI | icai.org |
| Income Tax Act · Sec 32, 43(1), 50; Appendix I | Income Tax Dept | incometax.gov.in |
| ICDS V · Tangible Fixed Assets | CBDT Notification | incometax.gov.in |
| CGST Act · Sec 16, 17(5); Rule 43 | CBIC | cbic.gov.in |
| SA 230, 315, 330, 500, 501, 505, 530, 540, 580 | ICAI AASB | icai.org |
| Benami Transactions (Prohibition) Act, 1988 | Income Tax Dept | incometax.gov.in |
| Companies (Registered Valuers) Rules, 2017 | MCA | mca.gov.in |