Physical verification is the procedure that normally performs by the auditor to confirm the existence of certain physical assets that records 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 are referring 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 count, during the count, and after the count.
For example, in the client’s balance sheet there are records of fixed assets with the carrying value amount 500,000 USD. The client has fixed assets listing that used to records the identification, condition, and movement of assets.
Part of audit procedures that use for testing these assets is usually the physical inspection. This procedure starts with reconciling the amount between listing and accounting records in financial statements first. Then, the auditor selects certain items for verification.
The selection or sampling is normally based on judgment or systematic selection. Physical verification normally confirms certain criteria like the existence, quantity, and condition of assets.
The auditor might also perform physical verification on the inventory that records in the client balance sheet by using the same procedures.
Inventories that record in the balance sheet normally large amount and the physical verification normally perform at the annual inventory count.
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 not really important.
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 observation will use the assess the effectiveness of the client’s counting procedures. The auditor should also if the reconciliation between the records and actual count being properly and correctly perform.
Variance is being investigated and taking the appropriate accounting treatment for the variance. Assets that are appeared to be broken or lost should be writing down or off since the carrying value is lower than the recoverable value.