Asset verification – particularly the verification of cash - is a critical process in ensuring the integrity of financial statements. As a chartered accountant with extensive audit experience having worked at BDO, I've seen firsthand the importance of verifying the physical existence of assets, particularly as of the balance sheet date. This process is essential for maintaining the accuracy of financial records and building trust with stakeholders.
In this article, we’ll explore key methods for verifying assets, the importance of independent data retrieval, and how technology can streamline this process.
Why asset verification is crucial
Asset verification is a cornerstone of financial integrity. Ensuring that assets physically exist as stated on the balance sheet prevents errors, fraud, and misstatements that could otherwise compromise the financial health of a company. For auditors, this often involves physically counting inventory, inspecting property, and verifying the existence of other tangible assets as of the balance sheet date.
For many companies, December 31st is a common year-end date, making New Year's Eve a crucial time for auditors. During my audit training, I often spent the final hours of the year in warehouses, meticulously counting stock to confirm its existence. This hands-on verification is essential to ensure that the financial statements truly reflect the company’s assets.
The role of technology in asset verification
Incorporating technology into the asset verification process can greatly enhance its efficiency and reliability. For example, solutions like Verified Transactions allow auditors to retrieve transactional data directly from independent sources in real-time. This not only reduces the potential for manipulation but also streamlines the verification process, making it faster and more accurate.
Independent third-party confirmations
When verifying assets, particularly high-value ones, independent third-party confirmations are indispensable. For cash, bank confirmations are crucial as they directly corroborate the company's statements. For other assets, such as investments or property, confirmations from custodians or valuations from certified real estate valuers provide the necessary assurance.
During the property market crash, for example, asset values fluctuated wildly. It became more important than ever to obtain credible valuations from independent experts before signing off on financial statements. This level of diligence ensures that the financial records accurately reflect the company’s assets, even in volatile markets.
Assessing intangible and digital assets
Verifying intangible or digital assets, such as intellectual property or cryptocurrencies, requires a different approach. The focus here is on fair value—determining the asset's market value at the reporting date. Given the volatility of digital assets, auditors must adopt a nuanced approach and frequently reassess the asset’s value to ensure they accurately reflect it on the balance sheet.
For example, impairment tests often involve discounted cash flow analysis to estimate future economic benefits. This method is particularly useful for intangible assets, providing a robust framework for assessing their value.
This is another use case for Verified Transactions, where auditors can leverage client authorisations for neobanks such as Revolut and Monzo to instantly retrieve transactional data or verify balances. Not only that, but users can easily verify digital assets through authorisations to exchange platforms for digital currencies like Coinbase.
Ensuring all assets are recorded
A comprehensive review of financial documentation is essential to ensure all assets are recorded and no off-balance-sheet items are overlooked. This involves scrutinising contracts, purchase orders, and asset ledgers to identify any discrepancies. Unexplained differences between internal records and third-party confirmations are red flags that warrant further investigation.
Mitigating risks in asset verification
Failing to detect inaccuracies or misstatements in asset accounts can have severe consequences. Regulatory bodies closely monitor audit quality, and any oversight can lead to reputational damage, legal penalties, and loss of client trust. Accurate asset verification is not just about regulatory compliance; it’s about safeguarding the company’s future by providing stakeholders with reliable financial information.
The importance of independent data retrieval
One key element in mitigating these risks is the implementation of independent transactional data retrieval. By accessing data directly from sources such as banks or custodians, auditors can bypass potential client manipulation and ensure the integrity of the data. This independent verification is crucial for providing auditors with essential confidence that the financial statements are accurate and complete.
Working with third-party vendors
When using third-party vendors for asset verification, it's essential to ensure that the data provided is reliable and unaltered. While technology has made it easier to access and verify data, auditors must remain vigilant. Even with reputable systems, auditors practicing professional skepticism should always stay aware of the risk that a client could manipulate the data they provide.
Conclusion
Asset verification is a vital process in ensuring the accuracy and reliability of financial statements. By implementing solutions for independent transactional data retrieval and verification, auditors can significantly enhance the integrity of their work. This not only protects the company and its stakeholders but also upholds the reputation of the auditing profession. As technology continues to evolve, embracing these tools will be key to maintaining robust and effective audit practices.
Want to verify business transactions independently in real-time? Circit can help. We are directly regulated by the Central Bank of Ireland, have the latest ISO27001 certification and are SOC2 compliant. Get started with Verified Transactions.
