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If you run a company in India, you’ve probably heard your auditor mention “physical verification of fixed assets” around year-end. For many business owners, this sounds like just another box to tick. But it’s actually a legal requirement, and skipping it (or doing it poorly) can lead to audit qualifications, compliance trouble, and — worse — assets that quietly go missing without anyone noticing.
This guide breaks down what physical verification of assets actually means, what Indian law says about it, why it matters even beyond compliance, and how to get it done properly.
Table of Contents
- What is Physical Verification of Assets?
- What does Indian law actually say about physical verification of assets?
- Does Every Company Need to Do This? Applicability and Exemptions
- What counts as "Reasonable Intervals" for physical verification of assets?
- Why physical verification of assets matters beyond just "Following the Law"?
- How Physical Verification Actually Works, Step by Step
- In Summary
- How can Mercurius help?
What is Physical Verification of Assets?
Physical verification of assets is exactly what it sounds like: physically checking that the assets recorded in your company’s books — machinery, computers, furniture, vehicles, equipment, and so on — actually exist, are in the location they’re supposed to be in, and are in usable condition.
It sounds simple, but here’s the problem most companies run into. Your books might show 500 laptops on the asset register. But over the years, some get transferred between offices without anyone updating the records, some get scrapped, some get stolen, and some are sitting in a storeroom nobody remembers. Without physical verification, your fixed asset register is just a list of numbers — not a true reflection of what your company actually owns.
This is precisely why Indian company law doesn’t leave it to chance.
What does Indian law actually say about physical verification of assets?
This is the part most blogs skip over or get vague about, so let’s go straight to the source.
1. Section 128 of the Companies Act, 2013
Section 128 requires every company to maintain proper books of account that give a true and fair view of its financial position. These records must reflect the company’s assets and liabilities accurately, on an accrual basis, using the double-entry system. This applies to all companies registered under the Act, and the books must be preserved for a minimum of eight years.
Here’s the connection people miss: if your books show assets that don’t physically exist, or don’t show assets that do exist, you’re already out of compliance with Section 128. Physical verification is simply the practical step that lets you confirm your books are telling the truth.
2. Section 134: Responsibility of the Board
Under Section 134, the Board of Directors is responsible for ensuring that the company has adequate internal financial controls, and that the company’s assets are safeguarded. A board that has never verified whether its assets physically exist is not really in a position to make that confirmation in its Directors’ Report.
3. Section 143: The Auditor’s Duty
Section 143 requires statutory auditors to verify whether proper records of fixed assets are maintained and whether physical verification has been carried out at reasonable intervals. Your auditor isn’t just trusting your spreadsheet — they’re expected to check whether you’ve actually gone and looked.
4. CARO 2020 — Where Physical Verification of Assets Gets Specific
The Companies (Auditor’s Report) Order, 2020 (CARO 2020), issued by the Ministry of Corporate Affairs, is where the requirement becomes very concrete. Clause 3(i) of CARO 2020 requires the auditor to specifically report on:
- Whether the company maintains proper records showing full particulars, including quantitative details and the situation (location) of Property, Plant and Equipment (PPE) and intangible assets.
- Whether the PPE has been physically verified by management at reasonable intervals.
- Whether any material discrepancies were noticed during this verification.
- If discrepancies were found, whether they were properly dealt with in the books of account.
CARO 2020 also has a separate clause — 3(ii)(a) — that requires similar reporting for inventory: whether physical verification of inventory was conducted at reasonable intervals, and whether discrepancies of 10% or more in any class of inventory have been properly recorded in the books.
CARO 2020 applies to most companies (private and public) above certain size thresholds, with a specific exemption for small companies and one-person companies. If your auditor is required to issue a CARO report on your company, physical verification is no longer optional — your auditor will be asked to comment on it directly, by name, in the audit report.
Does Every Company Need to Do This? Applicability and Exemptions
Not every company is required to report on physical verification under CARO 2020 — but that doesn’t mean exempt companies can skip the exercise altogether. CARO 2020 applies to every company audited under the Companies Act, 2013, including foreign companies operating in India, unless it falls into one of the categories below.
Companies exempt from CARO 2020:
- One Person Companies (OPCs) — exempt unconditionally, regardless of turnover or capital.
- Small companies — per the latest MCA revision effective 1st December 2025, a company qualifies as a “small company” under Section 2(85) if its paid-up capital doesn’t exceed ₹10 crore and its turnover (per the preceding financial year) doesn’t exceed ₹100 crore.
- Section 8 companies (charitable/not-for-profit), banking companies, and insurance companies.
A private company that isn’t a subsidiary or holding company of any public company is also exempt if it meets all three conditions together: paid-up capital plus reserves ≤ ₹1 crore as on the balance sheet date; borrowings from banks/financial institutions ≤ ₹1 crore at any point in the year; and total revenue ≤ ₹10 crore during the year. Cross even one limit, and CARO 2020 applies in full, including Clause 3(i)(b).
A few nuances worth knowing: qualifying as a “small company” is the stronger exemption — it holds even if a company would otherwise fail the private-company test above. Subsidiaries or holding companies of public companies can’t claim the private-company exemption at all; they must independently qualify as a small company. And CARO applies equally to branch audits.
Exemption from CARO isn’t exemption from the underlying law. It only removes the specific reporting clause your auditor would otherwise comment on — it doesn’t remove your company’s obligations under Section 128 (accurate books) and Section 134 (the Board’s duty to safeguard assets). Many small companies and OPCs still verify assets voluntarily, especially if they’re growing toward the thresholds, raising funds, or simply want clean records.
Quick self-check — ask, as on your balance sheet date: Are you a public company, or a private company that’s a subsidiary/holding company of one? Is your paid-up capital above ₹10 crore or turnover above ₹100 crore? Does your capital-plus-reserves, borrowings, or revenue exceed the ₹1 crore / ₹1 crore / ₹10 crore limits above? A “yes” to any of these means CARO 2020 — and the physical verification reporting requirement — applies to you. Since companies cross these thresholds often as they grow, it’s worth checking annually rather than assuming last year’s status still holds.
What counts as “Reasonable Intervals” for physical verification of assets?
This is a question we get asked constantly, and the honest answer is: the law doesn’t give you an exact number. “Reasonable intervals” is left to professional judgment, based on the size of the company, the nature of its assets, and the risk involved. In practice, most companies and auditors follow a similar approach:
- High-value, mobile, or high-risk assets (laptops, vehicles, machinery that moves between sites) — verified annually.
- Lower-value, fixed-location assets (furniture, fixed installations) — verified on a rotational cycle, often once every three years, so the entire asset base gets covered systematically over time.
Whatever frequency you choose, document it as a board-approved policy. That way, when your auditor asks “why this frequency,” you have a clear, defensible answer rather than an ad-hoc one.
Accounting Standards Reinforce the Same Point
Beyond company law, Accounting Standard 10 (AS 10) and its Ind AS equivalent, Ind AS 16, govern how Property, Plant and Equipment should be recognised, measured, and disclosed in financial statements. Schedule III of the Companies Act, 2013 also requires PPE to be classified and disclosed under separate heads (land, buildings, plant and equipment, furniture and fixtures, and so on) in the financial statements. None of this works correctly if the underlying physical reality of your assets isn’t confirmed first.
Why physical verification of assets matters beyond just “Following the Law”?
Compliance is the reason most companies start doing this. But once you’ve done it properly, the benefits go well beyond satisfying your auditor.
It protects your balance sheet from silent errors. Industry estimates suggest a large share of fixed asset registers carry errors — assets that no longer exist, duplicate entries, or assets recorded at the wrong location. Left uncorrected, this distorts your depreciation calculations, your insurance coverage, and ultimately your reported profits.
It catches fraud and misuse early. Assets quietly “disappearing” — sold off, misused, or simply lost track of — is one of the more common and least discussed forms of internal leakage in growing companies. A structured verification exercise is one of the simplest internal controls you can put in place to catch this.
It strengthens your position during funding, M&A, or restructuring. If your company is being acquired, raising funds, or going through any kind of due diligence, investors and acquirers will ask for asset verification records. A clean, well-documented physical verification trail builds credibility and speeds up the process considerably.
It gives management an honest picture. You can’t make good decisions about capital expenditure, asset disposal, or insurance renewal if you don’t actually know what you own and where it is.
How Physical Verification Actually Works, Step by Step
A proper physical verification exercise generally moves through these stages:
- Planning. Define the scope — which locations, which categories of assets, and which financial year or period this verification covers. Decide on the team: internal staff, or an external party (more on why external is often better, below).
- Physical inspection. The verification team visits each location and physically checks every asset against the fixed asset register — confirming existence, tag/serial number, description, location, and condition.
- Reconciliation. The physical count is matched against the books. Three outcomes typically emerge: assets that match perfectly, assets in the books that can’t be found (“unrecorded retirements”), and assets found on the ground that aren’t in the books at all (“unrecorded additions”).
- Investigation of discrepancies. Every mismatch needs a reason — was the asset scrapped without being recorded? Transferred to another office? Simply mislabelled? This step is where the real value of the exercise lies.
- Reporting and documentation. A formal report is prepared, typically including a reconciliation statement (books vs. physical), a list of discrepancies with explanations, and supporting evidence — photographs, tag numbers, sign-offs. This becomes the audit trail your statutory auditor will want to see.
- Correction in the books. Once discrepancies are confirmed, the finance team updates the fixed asset register and books of account accordingly, exactly as CARO 2020 expects.
In Summary
Physical verification of assets isn’t just paperwork — it’s a legal requirement under the Companies Act, 2013, specifically called out by your statutory auditor under CARO 2020, and a genuinely useful exercise for protecting your company’s books, catching fraud, and staying audit-ready. The law doesn’t prescribe an exact frequency, but it does expect you to have a reasonable, documented approach — and to be able to show your auditor real evidence that the verification happened.
If your company hasn’t conducted a structured physical verification in a while, now is a good time to start — well before your next audit cycle puts you under pressure.
Not sure whether your asset records match what’s actually on the ground? Mercurius helps businesses conduct independent, audit-ready physical verification of fixed assets across India.
How can Mercurius help?
At Mercurius, physical verification of fixed assets and inventory is one of our core service offerings, built specifically around what Indian auditors and regulators expect under the Companies Act, 2013 and CARO 2020.
Here’s how we approach it:
- Pan-India and multi-location coverage, including teams equipped to work in remote or regional locations, with local-language support where needed.
- Line-by-line reconciliation between your fixed asset accounting records and what we find on the ground — not just a visual headcount.
- Systematic matching using asset tags, serial numbers, manufacturer and model details, descriptions, and location/department data, so nothing falls through the cracks.
- A complete, audit-ready report, including a reconciliation statement, an executive summary, supply chain, and finance functions, and a full audit trail you can hand directly to your statutory auditor.
- Inventory verification alongside fixed assets, since CARO 2020 expects both to be addressed.
At Mercurius, we are a team of over 400 professionals, including Chartered Accountants (CAs), Company Secretaries (CSs), accountants, and industry experts. Our partners bring more than 17 years of experience and have worked with leading global firms, giving us deep expertise across audits, compliance, and advisory services. Our clients don’t just see us as auditors — they trust us as long-term partners who deliver credibility, accuracy, and efficient solutions tailored to their business needs.
Whether you are looking for support with physical verification of fixed assets, stock audits, or statutory audits, our experienced professionals are here to help. Get in touch with us today to discuss how we can support your business with reliable and audit-ready solutions.
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