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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: 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. iiiDisposals 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 . v. The above should a. Vouch authorization of policy with minutes. b. Examine adequacy and appropriateness of policy. c. Investigate revaluations. d. Check calculations Reconcile Both as to physical quantity and Rupees value of the closing balance.

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 relevant.

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. 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.Appropriate accounting policies must be adopted, consistently applied, and adequately disclosed. Accounting Standards must be followed.

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. 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. 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. 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.