What is Verification of Assets? What are its Objectives? Distinguish between Vouching and Verification.
The verification of assets implies an inquiry into the value ownership and title existence and possession the presence of any charge on the assets. Joseph Lancaster has defined verification of assets as a process by which the auditor substantiates the accuracy of the right hand side of the balance sheet and must be considered as having three distinct objects:
- The verification of the existence of assets,
- The valuation of assets, and
- The authority of their acquisition.
Hence, verification of assets can be stated as a process of substantiation of assets recorded in the books of account by means of physical inspection and examination of legal and official documents, and then forming expert opinion as to existence, ownership, possession, classification and valuation of assets of an entity.
Objectives of Verification of Assets.
The auditor’s objective with regards to verification of assets generally is to satisfy himself about the following:
Existence: The physical verification of fixed assets is primarily the responsibility of the management and not the auditor. In order to verify the existence of assets, he should examine the records with reference to the documentary evidence and the internal controls.
Ownership: Ownership of the assets should be verified by examining the title deeds. In case the title deeds are held by other persons such as solicitors or bankers, confirmation should be obtained directly by the auditor through a request signed by the client. In case of assets without any document to title, such as debtors, cash and work in progress, the auditor should verify the ownership by designing audit procedures to ascertain the efficacy of internal control system.
Possession: The auditor should ascertain that the assets are in the possession of the client. If any asset is in possession of any other person, it should be seen that
such possession has been duly authorized by the client.
Adequate disclosure of encumbrances or lien: The duty of an auditor with regards to such disclosures is two fold firstly, he should adopt audit procedures to ascertain whether any asset is subject to charge samples of some such procedures are representations obtained from the management and confirmation obtained from the bank with regards to the purpose of holding securities. Secondly, if a charge exists, the auditor should ensure its proper disclosure in the financial statements.
Valuation and disclosure: The auditor should satisfy himself that the assets have been valued and disclosed in the financial statement according to the generally accepted accounting principles and statutory requirements, if any.
Similarly, The objectives of an auditor in regard to verification of liabilities is generally to satisfy himself that
- The balances appearing in the balance sheet are really liabilities.
- Unrecorded liabilities, whether by accident or design, are brought into books.
- They are properly valued, and
- They are properly classified and disclosed as per statutory requirements or generally accepted principles and policies.
Difference between Vouching and Verification:
- Meaning and Scope: Vouching of assets is a process of substantiating the occurrence of the transactions recorded in the books of account with reference to relevant documentary evidence.
- Object: The object of vouching is to verify the authority, authenticity and genuineness of transactions recorded in the books of account.
- Level of expertise: Vouching is done generally by junior level clerks having sufficient knowledge of the accounting principles.
Meaning and Scope: Verification is a process of substantiating existence of assets with reference not only to relevant documentary evidence but it also includes forming an expert opinion on different aspects (such as existence, ownership, possession, etc.) of an asset Thus, verification is wider in scope and vouching is followed by verification.
Object: The object of verification is to satisfy the auditor as to existence, ownership, possession (in case of assets) or completeness (in case of liabilities), valuation and disclosure of items mentioned in the balance sheet.
Level of expertise: Verification should be either done by senior clerks or the auditor having sufficient knowledge not only of the accounting principles but also of various compliance’s and substantive audit procedures and of statutory requirements, if any.