<Previous Lesson

Fundamentals of Auditing

Next Lesson>




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
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:

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


-. 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


both as to physical quantity and Rupees value of the closing
vi. The use of

plant or other asset registers

can be of great use to the auditor.

Internal control procedures

for the purchase, disposal, and maintenance of assets are very

b. Existence and Ownership

page 109
These are treated together but note that existence does not imply ownership. For example, my television set
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


Appropriate accounting policies

must be adopted, consistently applied, and adequately

Accounting Standards

must be followed.


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


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


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.


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.


. 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.


. 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

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.

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.

<Previous Lesson

Fundamentals of Auditing

Next Lesson>


Lesson Plan


Go to Top

Next Lesson
Previous Lesson
Lesson Plan
Go to Top