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Lesson#33
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VERIFICATION OF ASSETS
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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:
i. 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.
v. The above should
reconcile both as to physical
quantity and Rupees value of the closing
balance.
vi. The use of
plant or other asset registers can be
of great use to the auditor.
vii. Internal
control procedures for the purchase,
disposal, and maintenance of assets are very
relevant.
b. Existence and Ownership
page
109
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:
i) 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:
v) 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
i) 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.
v) 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
i) 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.
v) 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.
page
110
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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