Physical Verification of Fixed Assets and Inventories

Definition:

Physical verification is the procedure the auditor normally performs to confirm the existence of certain physical assets that are recorded in the client’s financial statements.

Most of the assets that auditors verified are fixed assets and inventories. The auditor might also use this procedure to confirm the condition of those assets.

The physical verification is normally performed at the year ended or at the end of the report date of financial statements. The full count is performed by the client’s delegate staff and observers by auditors.

Physical verification, sighting, or observation of fixed assets refers to the same procedure being used by auditors to verify the existence and condition of assets.

Auditors also need to review the counting procedures from before the count, during the count, and after the count.

Breakdown:

For example, in the client’s balance sheet are records of fixed assets with a carrying value of 500,000 USD. The client has a fixed asset listing that records asset identification, condition, and movement.

A physical inspection is usually part of the audit procedures used for testing these assets. This procedure first reconciles the amount between listing and accounting records in financial statements. Then, the auditor selects certain items for verification.

The selection or sampling is normally based on judgment or systematic selection. Physical verification normally confirms specific criteria like assets’ existence, quantity, and condition.

The auditor might also perform physical verification on the inventory that records in the client balance sheet by using the same procedures.

Inventories recorded in the balance sheet are normally large amounts, and physical verification is normally performed at the annual inventory count.

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Auditors observe client year-ended inventory counts and sometimes choose to confirm certain items check to the lists.

Counting procedures are very important for auditors. If the count is the full count, maybe using the counting approaches from list to floor or from floor to list is unimportant.

But if the counting is performed only for the selected items, then auditors consider using floor-to-list and list-to-floor approaches. This approach help audit to ensure the completeness and existence of inventories.

The result of the observation will use the assess the effectiveness of the client’s counting procedures. The auditor should also determine if the reconciliation between the records and the actual count is properly and correctly performed.

Variance is being investigated, and taking the appropriate accounting treatment for the variance is. Assets that appear broken or lost should be written down or off since the carrying value is lower than the recoverable value.

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