What are the Objectives of Verification of Assets? Why is it needed?
Verification of assets: Its need and objectives
As we know that the exercise of audit in a company is meant for the purpose of examining the correctness of books of account. The aim is to ascertain whether its financials depict a correct picture of the affairs of the business during the period under review. In order to achieve this purpose of auditing, an auditor performs a number of checks and tests. One of those important tests is the technique of verification of assets and liabilities.
Verification is a technique used by an auditor to assess the correctness of assets and liabilities appearing in the client’s balance sheet. Using this technique, the auditor ensures whether the assets and liabilities shown in the balance sheet are correct both in items as well as figures. If there is any discrepancy between the details shown in the balance sheet and the assets/liabilities actually existent at the balance sheet date, either an auditor gets the mistakes rectified before signing the report or he states clearly in his report about the areas of dissatisfaction in the financial statements.
Even though other procedures such as vouching are performed to examine the entries made in books, it is critical to understand that cross-checking of entries against their supporting vouchers is not enough. It may so happen that an entry for the acquisition of assets is validated through a proper bill/invoice, yet it may have been misappropriated or non-existent. Hence, physical verification is extremely necessary even after vouching a transaction. The checking of an entry and finding it correct does not rule out the possibility of errors and fraud. With verification, you can be assured about the existence, ownership, valuation, and possession of assets. An asset that appears in the balance sheet does not guarantee that the money paid for its purchase has actually been brought into the business. The risk is that:
- It doesn’t exist at all.
- It exists but is owned by somebody else and not the client.
- It is owned by the client’s company but is in possession of somebody else.
- It exists and is owned by the client, but is not shown at the correct value.
- It was sold to another party outside the business.
- It was pledged or mortgaged outside the business.
So, what exactly is done in verification. To examine that the client’s balance sheet shows a correct picture with regard to its assets and liabilities, an auditor verifies each asset and liability. With the help of inspection, enquiry, confirmation, and documentary evidence, he checks whether different items in the balance sheet are appearing at accurate figures or not. The major things checked in this process are existence, value, and authority for acquisition. Whether or not assets represented in books are actually existent, whether they are shown at correct values, and whether the acquisition of assets is authorized by a designated official? All of these parameters are checked in verification. Verification of assets is, therefore, an examination done to substantiate the complete authenticity of the Balance Sheet (or statement of financial position). It gives answers to the following questions:
- Is there any reliable evidence that can prove the asset is owned by the client and belongs to his company?
- Does the asset physically exist on the balance sheet date?
- Does the principle and basis of valuation used by the company correct enough to give the asset a fair value?
- Are appropriate disclosure requirements adopted by the company to show the asset in the balance sheet?
Objectives of verification of assets
Now, in the following points, you may find some of the most important objectives of Verification of Assets. Verification of assets plays a key role in any audit process and if you want to get a clearer picture from your audited financials, then verification is a must-have tool.
It offers many advantages such as:
- Helping in the detection of frauds and errors with respect to assets and liabilities
- Getting to know whether the Balance Sheet displays a fair view of the business’s state of affairs
- Confirming the arithmetical accuracy of accounts
- Determining whether suitable internal controls prevail in the areas of asset acquisition, utilization, and disposal
- Avoiding the manipulation of accounts
- Acting as a guard against improper use of assets
- Ensuring proper recording and valuation of assets
The process of verification of assets is essentially a confirmation process. The goal is to validate the following:
Existence: To ensure that the assets were present at the time the Balance Sheet was prepared.
Acquisition: To ensure that it was a properly authorized acquisition for commercial purposes.
Ownership: To ensure that the assets are lawfully owned by the company.
Possession: To ensure that the assets are in the possession of the company on the date of the Balance Sheet.
Charges: To ensure that the assets are not subject to any liens, charges, or encumbrances.
Valuation: To ensure that the assets have been accurately valued based on their current state.
Record: To ensure that all the assets and liabilities are recorded in the books of account and there is no omission of any asset or liability.
Disclosure: To ensure that the assets’ values have been appropriately disclosed in the Balance Sheet.
Audit report: The Companies (Auditor’s Report) Order, 2020 requires that an auditor must report if the management has performed physical verification of fixed assets and stock, as well as the difference, if any, between the physical inventory and the inventory as recorded in the books.
Event after balance sheet date: The auditor should investigate whether any events that occurred after the balance sheet’s date have had an impact on any assets or liabilities.
What are the methods of performing verification?
Inspection, observation, and confirmation are the three commonly used techniques of verification. Inspection may include a physical inspection of tangible assets i.e., the company’s cash in the cash box, physical inventory, an inspection of shares certificates, documents, etc. An auditor can also make surprise visits to count the cash kept in stock with the cashier.
In addition, an auditor may see or witness the inspection of assets performed by others. He may observe a procedure being conducted by others, for example, witness the counting of stock by the entity’s staff or the execution of internal control procedures as part of his auditing process.
Further, an auditor may also obtain written evidence from external parties to confirm the existence of assets. Confirmation entails taking response to an inquiry in order to validate information already provided to the auditors through the course of the audit. An example might be confirmation of outstanding debts by communication with debtors or confirmation of legal cases by communication with solicitors.
Just as verification is needed for assets, when it comes to verification of liabilities, the auditor wants to make sure that all liabilities of the company as of the date of its Balance Sheet have been included, are shown in accurate figures, and no liability has been excluded.
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