Definition: In general, verification refers to the confirmation of truth. In auditing, the term ‘verification’ refers to a process followed during audit program to check the accuracy of the Balance Sheet items, not just by scrutinizing the documentary evidence at hand, but also checking that the assets and liabilities recorded in the balance sheet exist in reality.
Meaning that, in case of capital items, the auditor needs to verify the physical existence of the assets and liabilities to confirm that the company’s financial statement presents a true and fair view of its position.
Verification is undertaken at the end of the financial year which aims at examining the coherence of actual facts with those represented in the books of accounts.
Verification of Assets
Verification of Assets simply means the physical examination of the company’s assets and corroboration concerning some transactions.
There are instances when the purchase of an asset is shown in the books of accounts, but this is not enough to prove that the asset is in actual possession of the company at the date on which balance sheet is prepared. As many times asset is purchased and entries are made but then sold out or pledged and are not recorded before closing the books of accounts.
Therefore, the auditor is required to confirm that assets actually exist or not, or they are just recorded in the books.
Principles for Verification of Assets
Verification of assets can be performed using the following principles:
- Valuation: The auditor has to check that the assets are accurately valued, i.e. as per their physical condition till the balance sheet date.
- Cost: To check the original cost of the assets recorded in the books of accounts.
- Ownership: The auditor identifies the right of ownership of assets belonged to the enterprise.
- Existence: The auditor examines that the assets actually existed on the balance sheet date.
- Objective: The auditor has to check that the acquisition of the asset is for business purpose only and under the relevant authority.
- Charge or lien: The auditor also checks that the assets are not under any charge or lien.
- Disclosure: The auditor checks that the assets are accurately disclosed in the Balance Sheet.
Basically, it is the duty of the company’s management to verify the assets, on the basis of its location, conditions, appearance, etc. because they have the correct idea of the amount at which it should be shown in the balance sheet.
The auditor’s responsibility is to assess the evidence, inspect and give an opinion on the areas affecting the verification principles.
Verification of Liabilities
Verification of Liabilities is equally important as verification of assets, because if any of them is understated (omitted) or overstated, then the company’s true and fair view will not be disclosed by the financial statements.
So, the auditor needs to check that the liabilities mentioned in the Balance Sheet are actually payable. As well as all the liabilities which auditor could identify with diligence and care are written in the balance sheet.
Further, the auditor can also acquire a certificate from relevant executive which states that all the liabilities, relating to purchases of assets, material or expenses are mentioned in the accounts books, as well as contingent liabilities, are also indicated as a footnote.
Hence, verification of the assets and liabilities confirms that the balance sheet of the enterprise is free from any errors, and ommissions, as well as there is no manipulation in the company’s accounts.