CARO 2020 and physical verification of fixed assets

The Companies (Auditor's Report) Order, 2020 (CARO 2020) applies to audits for financial years beginning on or after 1 April 2021. It does not apply to every company: banking and insurance companies, section 8 companies, one person companies, small companies and certain private companies below the prescribed thresholds are excluded. Check applicability with your auditor.

Clause 3(i) is the fixed-asset clause. The auditor reports on each sub-clause, so management needs records that answer each one.

This guide concentrates on sub-clause (b), the one that needs a planned exercise every year. Sub-clause (a)(A) depends on it too: a register cannot show the 'situation' of assets reliably unless someone checks it.

CARO 2020 does not prescribe a frequency. Whether an interval is reasonable depends on the nature, value, number and location of the assets and on how easily they can be moved or lost. The judgment belongs to management, and the auditor assesses whether the programme is reasonable.

A pattern often seen in practice is a phased programme in which every asset is covered over a cycle, for example once in three years for some categories, with portable or high-risk items counted more often. This is one way of reaching a reasonable interval, not a rule.

Write the programme down and get it approved. A documented plan with coverage tracked against it is far easier to defend than a count that happened to take place.

Scope and cut-off

Decide which branches, locations and categories are in this round and whether it is a full count or a sample. Fix a cut-off date and freeze movements, or record them, so the count compares against a known register position.

Teams

Counting teams should, where possible, not be the custodians of the assets they count. Pair someone who knows the site with someone independent of it, and brief them on what each outcome means.

Tags and count sheets

Every asset should carry a durable tag that links it to one register record, and each room or area should have a location label. Where scanning is not available, print count sheets per location listing the expected assets, with space for unlisted items found. Our guide on QR, barcode and RFID tagging covers the choices.

Rules for outcomes

Agree in advance how each result is classified: verified, missing, found at another location, with a different custodian, damaged, or found but not in the register. Agree also what evidence each outcome needs, such as a photo for damaged items or a signature for a custodian change.

Count against the register, not from it. A blind count, where the counter does not see the expected list, reduces the risk of ticking items that are not there. Record the date, the counter and the location for each sighting.

Reconciliation then compares what was found with what the register shows. Each difference goes into a queue and is investigated before anything is written off:

• found elsewhere: an unrecorded transfer; record the transfer with approval;
• custodian mismatch: update the assignment with an acknowledgement;
• not found: search again, check disposal and repair records, then propose recovery or write-off;
• found but not in the register: trace the purchase; the item may have been expensed, received free, or never capitalised.

A shortage that is confirmed after investigation is a derecognition: depreciate to the date of write-off, remove the cost and the accumulated depreciation, and charge the net book value as a loss. Where an insurance claim is lodged, consult your auditor on when the claim can be recognised.

Some points need care:

• Approval. Write-offs should follow the delegation of authority, with the investigation notes attached.
• GST. Input tax credit on goods lost, stolen, destroyed or written off can be restricted under section 17(5) of the CGST Act; check with your adviser whether a reversal applies to the capital goods written off.
• Income-tax. The tax block is not reduced by the book value written off; only moneys payable and scrap value are deducted. See income-tax depreciation on a block of assets.
• Excesses. Do not add an unrecorded item at an estimated value just to make the count agree. Trace its origin first.
• Theft. Keep the police report or internal incident report with the write-off.

Auditors generally want to see that the verification was planned, carried out by appropriate people, reconciled and acted on. A complete file usually holds:

Custodian self-declarations are useful, but they are not a substitute for a physical sighting and should be reported separately. Our CARO 2020 fixed-asset checklist and fixed asset audit checklist can help you assemble the file.

Sub-clauses (c) to (e) are answered from records rather than counts. For each immovable property, keep the title deed reference, the name in which it is held, the gross carrying value and, where it is not in the company's name, the reason and how long it has been held that way. Schedule III asks for a similar disclosure in the financial statements.

For revaluations, keep the valuer's report, the valuer's registration where applicable, and the before and after net carrying value per class, so the 10% test in sub-clause (d) can be worked out. For sub-clause (e), keep a note confirming whether any benami proceedings exist; a nil confirmation is still evidence.