VERIFICATION OF ASSETS

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Fundamentals of Auditing ACC 311

Lesson 33

VERIFICATION OF ASSETS

VOUCHING = Inspection of supporting documents and records.

VERIFICATION = Inspection, Observation, Enquiry, Computation, Analysis

A large part of the final audit stage will be taken up with the verification of the assets and liabilities appearing

in the balance sheet. There are well established techniques for verifying specific assets and liabilities.

Following few lectures will cover verification of assets, liabilities and equity.

Verification of Assets

Auditor has a duty to verify all the assets appearing on the balance sheet and also a duty to verify that there are

no other assets which ought to appear on the balance sheet.

Following aspects of assets must be verified:

1. Cost

2. Authorization

3. Value

4. Existence

5. Beneficial Ownership

6. Presentation in the accounts

These aspects can be remembered by the mnemonic CAVE BOP.

While verifying assets at a balance sheet date, it is possible to divide the assets into two classes:

1. Those acquired during the year under review.

2. Those held at the date of the previous balance sheet.

For the assets acquired during the year it will be necessary to vouch their acquisition. For this purpose cost and

authorization aspects are verified.

For the assets held at the beginning of the year, the acquisition would have been dealt within a previous year.

The other aspects like value, existence, beneficial ownership, and presentation in financial statements are verified in this

regard. Of course, these need to be consistent with the previous years.

Verification Methods:

a. Make or request from client's staff a schedule of each asset. This schedule will show the following and

suggest the associated verification procedures:

Opening balance

a. Verify by reference to previous year's balance sheet and audit files,

ii.

Acquisitions

b. Vouch the cost with documentary evidence e.g invoices.

c. Vouch the authority for the acquisition with minutes or with authorized delegated

authority.

iii.

Disposals

-. Vouch the authority - minutes or company procedures.

a. Examine documentation.

b. Verify reasonableness of the proceeds.

c. Pay special attention to scrapings.

d. Note accounting treatment.

iv.

Depreciation amortization and other write downs

a. Vouch authorization of policy with minutes.

b. Examine adequacy and appropriateness of policy.

c. Investigate revaluations.

d. Check calculations.

The above should reconcile both as to physical quantity and Rupees value of the closing

balance.

The use of plant or other asset registers can be of great use to the auditor.

vi.

vii.

Internal control procedures for the purchase, disposal, and maintenance of assets are very

relevant.

b. Existence and Ownership

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These are treated together but note that existence does not imply ownership. For example, my television set

exists and is in my house, but is in fact owned by the person from whom I rent it.

Verification procedures include:

Physical inspection. Auditors should not sit in offices but should get about

seeing things. Of course, sitting in a client's office goes to confirm the existence of

that office!

ii)

Inspection of title deeds and certificates of ownership e.g., share certificates. This is a technique

that confirms together existence and ownership. Problems arise if the deeds are held by third

parties (a certificate from the third party is needed) possibly as security for a loan.

iii)

External verification. This applies primarily to 'chases in action' e.g., bank accounts, debtors,

loans etc. A letter of acknowledgement is sought from the bank, debtor etc.

iv)

Ancillary evidence. Examples are:

Confirmation of the existence of property by examination of rate (local taxes) demands, repair

bills and other outgoings.

vi)

Ownership is not necessarily implied. Investment ownership and existence tend to be confirmed

by the receipt of dividends and interest.

c. Presentation and Value

Appropriate accounting policies must be adopted, consistently applied, and adequately

disclosed.

ii)

Accounting Standards must be followed.

iii)

Materiality must be considered. For example, in a balance sheet of a large company it would be

misleading to show an asset such as patents in a class by itself it its total value was negligible in

relation to other assets.

iv)

The classification of assets can be difficult. Certain industrial structures can be considered as

buildings or as plant with consequent major differences in depreciation, profit, and asset and

equity values. A number of interesting examples have cropped up in tax cases. A dry dock

including the cost of excavation has been held to be plant (Barclay Curie 1969), as has a

swimming pool for use on a caravan site (Beach Station Caravans 1974). The auditor may take a

contrary view to the tax courts and of course to the Board of the Company he is auditing.

The choice of disclosure of an asset as a separate item or as part of a single figure representing a

class of asset is important for a true and fair view. Also important is the choice of words used in

the description. In some cases, assets could be classed as fixed or as current e.g. investments.

vi)

The distinction between revenue and capital is important. Sometimes this is a matter of

accounting policy e.g. research and development. Sometimes it is a matter of opinion; for example

repair expenditure is revenue but may include an element of improvement which is capital.

d. Other matters relevant to verification

The letter of representation. This will be discussed in detail in the next lecture.

ii)

Reasonableness and being 'put upon enquiry'. In all audit assignments, the

auditor investigates thoroughly and seeks adequate assurances on the truth and

fairness of all the items in the Accounts. However, he does not do so with a

suspicious mind. He should not assume that there is something wrong, but if he

comes across something which seems to him unlikely, unreasonable, suspicious

he is said to be 'put upon enquiry'. In such circumstances he is required to probe the

matter to the bottom to adequately assure him-self that there exists nothing untoward or to unearth

the whole matter.

iii)

Some assets are pledged or mortgaged as securities for loans. This may involve deposit of title

deeds etc., with a lender, or in some cases the asset itself. This creates problems for the auditor

who must also see that the liability is properly described as secured.

iv)

Taxation. Tax and capital allowance computations should be in accordance with asset accounts.

Clearly the auditor will be put upon enquiry if claims for capital allowances are made for items of

plant which do not appear in the plant register.

Insurance. The auditor would be put upon enquiry if there were no correspondence between the

assets in the balance sheet and the assets insured, and if there were differences between the

balance sheet figures and the insured values.

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vi)

Other than balance sheet date verification. Some assets can be verified at dates other than the

balance sheet date. The techniques are discussed later but in sum (money value) they are:

a. Verify at an earlier date and reconcile with acquisitions and disposals to balance sheet date.

b. Verify at an earlier date and then parcel them up and seal the parcels. At balance sheet date

examine acquisitions, vouch proceeds of disposals, and see all other items are still sealed.

vii)

Third parties. Auditors must take special care to satisfy them-selves that all assets held by third

parties are included in the balance sheet and verified. Likewise, no assets owned by third parties

may be included in the balance sheet.

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