ZeePedia buy college essays online


Fundamentals of Auditing

<<< Previous VERIFICATION OF ASSETS Next >>>
 
img
Fundamentals of Auditing ­ACC 311
VU
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:
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.
The above should reconcile both as to physical quantity and Rupees value of the closing
v.
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
108
img
Fundamentals of Auditing ­ACC 311
VU
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.
109
img
Fundamentals of Auditing ­ACC 311
VU
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.
110
Table of Contents:
  1. AN INTRODUCTION
  2. AUDITORSí REPORT
  3. Advantages and Disadvantages of Auditing
  4. OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS
  5. What is Reasonable Assurance
  6. LEGAL CONSIDERATION REGARDING AUDITING
  7. Appointment, Duties, Rights and Liabilities of Auditor
  8. LIABILITIES OF AN AUDITOR
  9. BOOKS OF ACCOUNT & FINANCIAL STATEMENTS
  10. Contents of Balance Sheet
  11. ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
  12. Business Operations
  13. Risk Assessment Procedures & Sources of Information
  14. Measurement and Review of the Entityís Financial Performance
  15. Definition & Components of Internal Control
  16. Auditing ASSIGNMENT
  17. Benefits of Internal Control to the entity
  18. Flow Charts and Internal Control Questionnaires
  19. Construction of an ICQ
  20. Audit evidence through Audit Procedures
  21. SUBSTANTIVE PROCEDURES
  22. Concept of Audit Evidence
  23. SUFFICIENT APPROPRIATE AUDIT EVIDENCE AND TESTING THE SALES SYSTEM
  24. Control Procedures over Sales and Debtors
  25. Control Procedures over Purchases and Payables
  26. TESTING THE PURCHASES SYSTEM
  27. TESTING THE PAYROLL SYSTEM
  28. TESTING THE CASH SYSTEM
  29. Controls over Banking of Receipts
  30. Control Procedures over Inventory
  31. TESTING THE NON-CURRENT ASSETS
  32. VERIFICATION APPROACH OF AUDIT
  33. VERIFICATION OF ASSETS
  34. LETTER OF REPRESENTATION VERIFICATION OF LIABILITIES
  35. VERIFICATION OF EQUITY
  36. VERIFICATION OF BANK BALANCES
  37. VERIFICATION OF STOCK-IN-TRADE AND STORE & SPARES
  38. AUDIT SAMPLING
  39. STATISTICAL SAMPLING
  40. CONSIDERING THE WORK OF INTERNAL AUDITING
  41. AUDIT PLANNING
  42. PLANNING AN AUDIT OF FINANCIAL STATEMENTS
  43. Audits of Small Entities
  44. AUDITORíS REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIALSTATEMENTS
  45. MODIFIED AUDITORíS REPORT