An audit of a company’s accounts is carried out to verify that the financial statements produced by the company represent an accurate declaration of the company’s financial position. Filing misleading financial statements is fraud. These documents are the main source of investor research on a company and creating false value to increase the company’s share price dupes investors. Creditors also rely on financial statements to assess a company’s credit worthiness. Therefore it is important that external interested parties can have confidence in the accuracy of financial statements. Fixed assets offer the widest scope for enhancing results and so are the main focus of an audit.
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Accountants have a variety of techniques at their disposal for valuing tangible fixed assets. These principally involve plant and property. Accountants can choose to either record the price paid for property as its value on the balance sheet, or it can revalue the property to current market value. A company that wants to increase its value would keep the purchase price of the property if the property market is falling, but revalue the asset to market price if property prices have risen.
The cost of equipment should be written off over a number of years rather than being accounted for in the year it was bought. This leads to the appearance of more cash in the accounts than exists in real life. This is acceptable because it is only reasonable that part of the cost of that equipment should be contributed for each year it is used. However, extending the projected life of an asset reduces the depreciation recorded in each year. This can create a profit by pretending that a piece of equipment will last longer than is reasonable.
An audit of tangible fixed assets starts with a check that those assets actually exist and that they are owned by the company. This is the completeness check. The accuracy check makes sure that any assets bought in the period have been added to the asset register and any sold were removed. The valuation check is the next stage in the audit process. The value should be either the cost of acquisition minus depreciation to date, or the current valuation based on a revaluation. The next step examines beneficial ownership. This checks whether the company actually owns the listed assets. Some of those assets may not be on the premises because equipment that has been leased out to others should also be included. The final check confirms that the asset position presented in the financial statements reflects that shown in the asset register.
The valuation step of the audit is the most difficult of all. The prudence concept of accounting and auditing dictates that whichever is lowest between cost of acquisition and current value should be written in the books. The accountant and the auditor should always err on the side of undervaluing assets. A full audit will require a property or machinery valuation from a credible expert. The lifetime of a particular piece of machinery would also need an assessment from the manufacturer on its likely useful lifespan in order to properly judge depreciation.
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