Write-off of fixed assets without prior authorisation

1. The management of a public sector company carried out physical verification of fixed assets covering about 12,000 items spread over a good number of locations keeping in view the provisions of the MAOCARO 1975 and the importance given to this aspect by the Internal Audit Department and the Board of Directors of the Company. After re-verification /re-checking, necessary adjustments were made in the books to reflect the correct position in the Assets Ledger. Adjustments requiring write-off with regard to items not found/scrapped were approved by the concerned Departmental and Functional Heads in the normal course of sending the advice to the Accounts Department following the physical verification. However, the approval for write-off as per delegated authority to Director-in-charge and/or General Manager was not formally obtained until pointed out by the Statutory Auditors in their normal course of working.

2. The querist has pointed out that a view has been expressed that absence of prior approval by the said authorities for such write-off would call for severe criticism (emphasis supplied by the querist) from the statutory auditors. Another view expressed has been that there is no need for severe criticism if one goes by the merit of the decision and the need for physical verification, up-dating the records and reflecting the correct position. If the formality of obtaining the approval of the appropriate authority was not complied with originally, it could always be complied with before accounts are signed. According to this view, the statutory auditors are required to ensure that profits and loss account and balance sheet give a true and fair view of the working results and state of affairs. Had the required adjustments been not carried out in the books for want of the said authorities’ approval, the auditors could have resorted to the ‘adverse criticism’. The need for such criticism was eliminated by making necessary adjustments in the books subsequently. Also, ‘adverse criticism’, was not called for since the percentage of number of items and value thereof, which had been written-off was 4 and 2.5 respectively in relation to the total number of items and their original cost. Even obtaining approval from the appropriate authority for the write-off was a mere technical requirement in as much as there was no option for management but to reflect the shortage and surpluses conclusively established within the year to which the accounts pertain.

3.The querist has sought the opinion of the Expert Advisory Committee as to which of the above two views is correct.

Opinion December 31,1985

1.The Committee notes that para 15 of the Guidance Note on audit of Fixed Assets, issued by the Auditing Practices Committee of the Institute of Chartered Accountants of India, provides that “in respect of fixed assets retired, i.e., destroyed, scrapped or sold, the auditor should examine (a) whether the retirements have been properly authorized……………………..”.

2.The Committee further notes that para 22 (q) of the Statement on the Manufacturing and Other Companies (Auditor’s Report) Order, 1975, issued by the Research Committee of the Institute of Chartered Accountants of India, states as below:

“The auditor is required to state whether discrepancies are noticed on verification and whether the same have been properly dealt with in the accounts. The statement is required only if the discrepancies are serious. The auditor has therefore to use his judgement as to whether having regard to the circumstances of the Company and the normally accepted concept of materiality, the discrepancy is serious. In making the judgement, the auditor should consider not merely the cost of the asset and its relationship to the total cost of all assets but also the nature of the assets, its location and other relevant factors. If a serious discrepancy has been properly dealt with in the accounts (which may or may not imply a separate disclosure in the accounts depending upon the circumstances of the case) it is not necessary for the auditor to give details of the discrepancy or of its treatment in the accounts but he is required to make a statement that a serious discrepancy was noticed in the verification of fixed assets and that the same has been properly dealt with in the accounts”.

3.The Committee is of the opinion that the auditor may not qualify his report, if necessary accounting adjustments arising from the said write-offs have already been made in the accounts and the true and fair view thereof is not affected. However, under his report under MAOCAR Order the auditor may state that discrepancies were noticed on physical verification of fixed assets and that the same have been properly adjusted in the accounts. The auditor may also consider drawing the attention of the management separately about the failure to obtain necessary prior authorisations in respect of write-off of fixed assets, keeping in view the materiality considerations stated in para 2 above.

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