Auditing of Statement of

Financial Position
Financial Reporting Sense

•Accounting Equation
Assets = Equity + Liabilities
•Criteria:-
Recognition
Measurement
Disclosure
• Non Current Asset :- Machinery, Motor Vehicles, Buildings,
land etc
• Current Asset:- Inventory, Bank, Cash, Trade Receivables,
Prepayments
• Equity:- Capital, Ordinary Shares, Preference Shares, Share
Premium, Reserves, Retained Earnings, Profit
• Non Current Liabilities:- Long Term Loan, Debentures
• Current Liabilities:- Trade Payables, Short term loans
Non-Current Assets

 Assets generally constitute a significant item in the financial statements due to their
value
 Due to their value it is imperative that the auditor give them a lot of attention
 The purpose of an audit is to enable an auditor to form an opinion on whether the
financial statements agree with underlying records and give a true and fair view
 The auditor needs to consider the following factors
i. Reliability of the internal accounting system of the client
ii. Materiality of the amounts involved
iii.Current professional practices
iv.The risk or absences of suspicious circumstances
• Legal requirements relevant to the client
The Auditor’s objective with the verification of assets can
be summarized as follows

1.Cost- is it fair, is it consistent with the cost of such an asset

2.Authorization- was acquisition properly authorized and was the
disposal authorized
3.Valuation- is the asset properly valued in the financial statements
4.Existence- is the asset physically present, can be easily identified
5.Beneficiary- is the asset being used for the benefit of the entity
6.Ownership- who owns the asset, in whose name is the asset
7.Presentation- is the asset properly classified in the financial
statements
Procedure for Verification of Non current Assets

• Cost
 This is done for asset acquired during the year under audit
 The auditor examines the purchasing documents of the purchasing
procedure to see whether they are transparent
 The auditor inspects if there was objective selection of the uppliers and of
the quality of the product is consistent with the price
 The auditor also examines if the purchase was properly accounted for as
capital and not revenue expenditure
 The auditor also examines if the correct asset cost has been calculated e.g.
hire purchase cost include current and future payment
• Authority
 The auditor is there to observe authority levels e.g.
when purchasing certain items of a higher cost a
certain number of signatures of people in certain
higher levels in the organization are used as
authorization
 The auditor examines how use and disposal was
authorized
• Valuation

 The auditor must satisfy himself that the asset is disclosed at fair
value in the financial statements
 Fair value may differ from the original cost, but the auditor must
satisfy himself that value disclosed is justified
 the auditor must also satisfy himself that any other considerations
affecting the asset must be taken into account, for example
improvements, location, impairment, obsolence, market value,
consistent application of adopted principles
• Existence
 the auditor should rely upon physical
identification of the asset
 physical identification will help to
determine the state of the asset, the
location and any other improvements
• Beneficiary and Ownership

 the auditor has to prove that the assets are owned by the organization and they are being used for
the legitimate purpose of the entity there should be reference to:
i. title deeds in terms of building
ii. registration books in terms of motor vehicles
iii. serial numbers in terms of other assets
 if the use of the asset gives rise to a benefit or expense, the vouching of the benefit or expense
will provide sufficient evidence of both ownership, beneficiary and existence
 an asset should have verifiable income regularly remitted and identifiable expenses for the
general upkeep
 ownership and benefits from assets should be attached to benefit enjoyed as well as expenses
incurred in the use of the asset
• Presentation
 the auditor needs to verify the disclosure of
the asset in the financial statements to ensure
that the disclosure is in accordance with IAS
 presentation should show a fair view and should
be consistent from year to year
Tutorial
Rubbie’s Motors has called you for the annual audit.
There line of business is buying and selling motor
vehicles but they also have pool cars that the
organization uses in their day to day running.
Required
a)State the audit objectives associated with
verification of fixed assets. (8 Marks)
b) Outline the substantive testing procedures you
would perform to achieve the objectives in (a)
(12 Marks)