Auditing – Alan Millichamp John Taylor (1)

Patents Development expenditure Goodwill Investments e.g. Loans Shares in other companies Current Inventories Work in progress Receivables Bank and cash We will look at the audit implications of each category in turn. This is not an accounting book so it does not include detailed explanations of how these categories of assets have to be disclosed in the financial statements. We will refer to them in the text where the elements of disclosure are significant from an audit perspective, for example disclosures relating to intangible assets, but students should be aware of the detailed disclosure requirements contained in CA 2006 and the relevant Financial Reporting Standards.

When we are looking to audit assets, whether they are current or non-current, we have to bear in mind the requirements of the assertions set out in Chapter 12. In particular, we are concerned with the second section of those assertions – ‘Assertions about account balances at the period end’ but, of course, the other assertions, particularly those relating to transactions, also apply. The assertions set out the following matters about which the auditor has to gather sufficient appropriate evidence so as to verify their truth – or otherwise: Assertions about account balances at the period end Existence • Assets, liabilities and equity interests (shareholdings) exist.

Rights and obligations • The company holds or controls the rights to assets and all liabilities are those of the company. Completeness • All assets, liabilities and equity interests that should have been recorded. Valuation and allocation • Assets, liabilities and equity interests (shareholdings) are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are properly recorded.

One mnemonic often used by students in connection with the audit of Statement of Financial Position items is: • Cost • Authorization • Value • Existence • Beneficial Ownership • Presentation in the accounts. CAVEBOP covers all aspects of the assertions and might be easier to remember. The audit approach to dealing with gathering sufficient reliable evidence is to consider each of these assertions and to obtain such information as is necessary to validate them.

You will also appreciate that the amount of evidence required will depend partly on the risk of a material misstatement in the accounts (Chapter 11). Older auditing textbooks tended to stress existence, ownership and value only. The addition of presentation reflects the relatively greater importance attached now to the ‘fair’ as well as the ‘true’ view given by the financial statements and the importance of the appropriate selection and disclosure of accounting policies. For assets held at the beginning of the year, the acquisition will have been dealt with in a previous year.

The presentation will, of course, need to be consistent with the presentation adopted in previous years. You will appreciate that this distinction does not arise with current assets. Tangible assets Tangible assets are so called because you can see them and touch them.

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