Wednesday, February 15, 2012

Verification of Assets and Liabilities - Auditing

Verification of assets and liabilities appearing on the balance sheet is one of the main concerns of the auditing exercise.

General principles regarding verification

1. Confirm that the assets were in existence on the date of the balance sheet.
2. Ascertain that the assets had been acquired for the purpose of the business and under proper authority.
3. Confirm that owner ship of the asset rests with the organization.
4. Ascertain that no charge has been created on the asset.
5. Ensure that the current book value of the asset is determined after providing correct amount of depreciation for various years.
6. Ensure that values reflect current physical condition of the asset.
7. Ensure that disclosures regarding assets are adequate.
Procedures - Verification of Assets

1. The auditor should verify the records (accounting books) with reference to the documentary evidence. Physical verification of fixed assets is the primarily the responsibility of the the management.
2. The opening balance is to be verified from schedule of fixed assets, ledger or fixed asset register.
3. Assets acquired during the year or improvements done during the year should be verified on the basis of purchase orders, invoices, material receipt notes, and title deeds.
4. Capital assets built inside (self-constructed fixed assets) and capital work-in-progress should be verified by reference to work-order records, contractor bills.
5. For fixed assets fully depreciated during the year of acquisition,  the auditor has to examine whether they were recorded in the fixed assets register.
6. In the case fixed assets registered, the auditor should examine (i) the authorisation procedure (ii) sales process (calling for quotations etc.) (iii) adjustments to the account of the asset (iv) accounting for the proceeds of the sale and (v) adjustment for the gain or loss on the sale.
7. Ownership of assets such as land and buildings should be verified by examining the title deeds. In case the title deeds are with other parties such as bankers (mortages or safe custody) and solicitors, confirmation should be obtained directly by the auditor through a request mailed to the concerned persons signed by the client.
8. Physical verification is the responsibility of the management and they need to ensure that it is carried out at appropriate intervals in order to ensure assets are in existence. The auditor has to ensure that physical verification was done. For this purpose, he should observe the verification being conducted. He should examine the instructions given by the management for physical verification and working papers of physical verification. It is to be ascertained that the persons carrying out the physical verification has the necessary competence.


Kamal Gupta, Contemporary Auditing for Students, Fourth Edition
If auditors have to responsibility of verifying assets and liabilities how Satyam management could show manipulated balance sheets. It is a question that many ask me. I need to find an answer.
Many top US investment companies have invested in Satyam. Many US top broking company analysts have covered Satyam. PriceWaterhouseCoopers is the auditor. Still, Satyam management could hoodwink all of them. How?

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