INTRODUCTION

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LEARNING OBJECTIVES
❖ Explain the importance of asset verification in financial statement audits.
❖ Identify relevant auditing standards applicable to asset auditing.
❖ Design an audit plan for asset accounts, considering risk assessment and materiality.
❖ Execute audit procedures such as confirmations, physical inspections, and analytical
reviews.
❖ Assess asset accounts using key audit assertions (existence, valuation, completeness,
etc.).
❖ Recognize potential misstatements in asset accounts and recommend corrective
actions.

Definition of Key Terms in Asset Auditing:

1. Audit Evidence – Information used by auditors to form conclusions on financial statements (e.g.,
invoices, contracts, physical inspection).
2. Substantive Procedures – Audit procedures designed to detect material misstatements (e.g.,
confirmations, recalculations, physical inspections).
3. Materiality – The threshold at which a misstatement impacts the financial statements' users.
4. Risk of Material Misstatement (RMM) – The risk that financial statements contain significant
errors before being audited.
5. Assertions – Management’s claims about financial statement elements that auditors verify.
6. Professional Skepticism – A questioning mindset when assessing audit evidence.
7. Audit Risk – The risk that an auditor gives an incorrect opinion on financial statements.
8. Analytical Procedures – Comparing financial data over periods or against industry benchmarks
to identify unusual trends.
9. Control Risk – The risk that a company’s internal controls fail to prevent or detect a
misstatement.
10. Inherent Risk – The susceptibility of an account to material misstatement due to its nature.

Introduction to Asset Auditing

I. Overview of External Auditing and Its Application to Asset Accounts

• External auditing involves an independent review of a company's financial statements to ensure
they present a fair and accurate picture of its financial position.
• Asset auditing is a crucial part of external audits, as assets form a major portion of a company’s
balance sheet.

Key Objectives of Asset Auditing (Assertions):

A. Existence – Verifying that the assets recorded in financial statements physically exist.
B. Valuation – Ensuring assets are recorded at appropriate values based on applicable accounting
standards.
C. Ownership & Rights – Confirming the entity has legal rights over the assets.

Prepared & Compiled by: Bernard Rodney D. Alvarez, CPA, CAT, CTT, CB, RCA, MICB, MRITax
D. Completeness – Ensuring all assets owned by the company are recorded in the financial
statements.
E. Presentation & Disclosure – Checking that asset accounts are correctly classified and disclosed
per financial reporting standards.

Application to Asset Accounts:

• Cash and Cash Equivalents: Checking bank reconciliations, confirming balances with banks, and
verifying restrictions on cash.
• Receivables: Reviewing aging schedules, confirming balances with customers, and analyzing
allowances for doubtful accounts.
• Inventory: Observing physical counts, reconciling with records, and verifying valuation
methods.
• Property, Plant, and Equipment (PPE): Inspecting assets, reviewing depreciation policies, and
verifying impairment.

II. Importance of Asset Verification in Financial Statement Audits

• Ensures the financial statements are free from material misstatements.
• Prevents fraud and misrepresentation of asset values.
• Provides stakeholders with confidence in the financial integrity of the company.
• Helps in compliance with regulatory requirements.

Illustration: ABC Corp. reported P10,000,000 in inventory on its balance sheet. The auditor performed a
physical count and found discrepancies. By tracing the variances to accounting records, the auditor
discovered unrecorded inventory purchases worth P500,000, ensuring completeness.

III. Regulatory Framework and Auditing Standards Related to Asset Auditing

International Standards on Auditing (ISA) and Philippine Standards on Auditing (PSA):

• ISA 500 (Audit Evidence): Requires sufficient and appropriate evidence for audit conclusions.
• ISA 505 (External Confirmations): Guidance on confirming balances such as receivables and bank
accounts.
• ISA 530 (Audit Sampling): Explains the use of sampling in asset verification.

Illustration: An auditor examining PPE under ISA 500 gathers purchase invoices, physically inspects the
assets, and checks depreciation calculations to verify asset valuation and existence.

Audit Planning for Asset Accounts

I. Developing an Audit Plan for Asset Accounts

• Audit planning ensures the audit is conducted efficiently and focuses on areas with higher risks
of material misstatements.

Steps in Developing an Audit Plan for Asset Accounts:

1. Understanding the Entity and Its Environment – Identifying key business activities affecting
asset balances.
2. Assessing Risk of Material Misstatement – Evaluating potential risks in asset accounts (e.g.,
overstated inventory, uncollectible receivables).
3. Determining Audit Procedures – Selecting appropriate substantive and control tests for each
asset class.
4. Setting Materiality Levels – Defining thresholds for material misstatements.
5. Planning Substantive Procedures – Designing tests such as confirmations, reconciliations, and
analytical procedures.

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Illustration: For XYZ Corp., which has significant receivables, the auditor plans to confirm major
customer balances and analyze aging schedules to assess collectability.

II. Risk Assessment and Materiality Considerations

Risk Assessment Procedures:

• Inquiry with Management – Understanding policies for asset valuation and existence.
• Analytical Procedures – Comparing financial ratios (e.g., inventory turnover) to industry
benchmarks.
• Observation & Inspection – Examining physical assets and records.

Types of Risks in Asset Accounts:

• Inherent Risk – Risks due to the nature of assets (e.g., high inherent risk in cash due to theft).
• Control Risk – Risk due to weaknesses in internal controls (e.g., lack of segregation of duties in
asset management).
• Detection Risk – Risk that audit procedures fail to detect a misstatement.

Materiality Considerations:
• Determined based on asset significance to financial statements.
• Higher materiality for fixed assets, lower for cash due to susceptibility to fraud.

Illustration: If an auditor sets materiality at ₱1,000,000 for PPE, any misstatement below this amount
may not require audit adjustments. However, for cash, materiality may be set lower due to fraud risk.

III. Considerations for Planning Substantive Procedures

1. Substantive Tests for Cash: Bank confirmations, bank reconciliations, and reviewing cash count
procedures.
2. Substantive Tests for Receivables: Customer confirmations, reviewing subsequent collections,
and assessing allowance for doubtful accounts.
3. Substantive Tests for Inventory: Physical inventory observation, reconciling stock records, and
assessing obsolescence.
4. Substantive Tests for PPE: Inspecting assets, reviewing supporting documents for acquisitions,
and recalculating depreciation.

Illustration: The auditor of DEF Ltd. performed a cash count and found discrepancies between recorded
and actual cash balances. Investigation revealed unrecorded transactions, highlighting weaknesses in
cash handling procedures.

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Theoretical Problems

1. Which of the following best defines audit evidence?

A. The risk that an auditor gives an incorrect opinion on financial statements.
B. The questioning mindset when assessing financial records.
C. Information used by auditors to form conclusions on financial statements.
D. The threshold at which a misstatement impacts financial statement users.

2. What is the primary objective of performing substantive procedures in asset auditing?

A. To confirm that internal controls prevent fraud.
B. To detect material misstatements in financial statements.
C. To increase detection risk and reduce materiality.
D. To ensure all financial information is publicly disclosed.

3. What does professional skepticism require auditors to do?

A. Accept management's explanations at face value.
B. Question and critically assess audit evidence.
C. Focus only on high-value assets.
D. Rely solely on external confirmations.

4. Which assertion is tested when an auditor verifies that assets recorded in the financial statements
physically exist?
A. Completeness
B. Ownership & Rights
C. Valuation
D. Existence

5. Which of the following risks is specifically related to the effectiveness of internal controls?
A. Inherent Risk
B. Control Risk
C. Detection Risk
D. Audit Risk

6. In asset auditing, what is the purpose of analytical procedures?

A. To replace substantive testing entirely.
B. To compare financial data over time or against industry benchmarks to identify unusual trends.
C. To ensure that all transactions are recorded accurately.
D. To confirm cash balances through bank reconciliations.

7. Which assertion is being tested when an auditor verifies that a company has recorded all its assets
in the financial statements?
A. Existence
B. Completeness
C. Valuation
D. Rights & Obligations

8. Which of the following best describes materiality in auditing?

A. The risk that an auditor will not detect a misstatement.
B. The risk that an internal control does not function properly.
C. The level at which a misstatement affects financial statement users' decisions.
D. The total value of a company’s assets.

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9. What is the main goal of an external audit?
A. To prepare financial statements for management.
B. To identify fraudulent transactions only.
C. To provide an independent opinion on the fairness of financial statements.
D. To improve a company's profitability.

10. Which type of risk refers to the inherent susceptibility of an asset account to material
misstatement due to its nature?
A. Control Risk
B. Audit Risk
C. Inherent Risk
D. Detection Risk

11. The auditor of XYZ Corporation is assessing its receivables. During confirmations, several
customers dispute the balances reported by the company. What is the most appropriate action for
the auditor?
A. Ignore the discrepancies since they are immaterial.
B. Perform additional substantive procedures, such as reviewing subsequent collections.
C. Accept the company's records without further verification.
D. Rely only on analytical procedures.

12. A company reports ₱20,000,000 in fixed assets. The auditor finds that ₱3,000,000 worth of assets
have been fully depreciated but are still in use. What should the auditor do?
A. Recommend adjusting depreciation calculations.
B. Ignore the finding since the assets are still functional.
C. Advise the company to reclassify the assets as inventory.
D. Remove the assets from the financial statements.

13. An auditor is reviewing inventory and finds that some items are obsolete and unlikely to be sold.
Which assertion is most relevant in this situation?
A. Existence
B. Valuation
C. Completeness
D. Ownership & Rights

14. ABC Corp. has a large cash balance reported in its financial statements. During the audit, the
auditor identifies several transactions missing from the cash ledger. What should the auditor do next?
A. Perform a bank reconciliation and review cash transactions for completeness.
B. Ignore the missing transactions as long as they are not significant.
C. Assume the transactions will be recorded later.
D. Focus on fixed asset verification instead.

15. During an external audit of a manufacturing company, the auditor notices that inventory records
do not match the physical count. What is the best response?
A. Recalculate the inventory value and adjust accordingly.
B. Perform additional tests to reconcile the discrepancies.
C. Accept the company's inventory records as correct.
D. Disregard the discrepancy as long as total assets remain the same.

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16. In an audit of cash and cash equivalents, the auditor finds that a company has recorded a cash
balance of ₱5,000,000, but the bank confirmation only shows ₱4,500,000. What should the auditor
do?
A. Accept the company’s balance since the difference is small.
B. Investigate the discrepancy and perform further reconciliation procedures.
C. Report the issue as an immaterial misstatement.
D. Ignore the issue since the company has other liquid assets.

17. An auditor is verifying PPE and notices that some assets are recorded under incorrect
depreciation methods. Which assertion is most relevant?
A. Existence
B. Rights & Obligations
C. Valuation
D. Completeness

18. The auditor of DEF Ltd. is reviewing customer receivables. The company has recorded ₱2,000,000
in outstanding receivables, but confirmations and subsequent collections suggest that ₱500,000 is
uncollectible. What should the auditor do?
A. Ignore the discrepancy since it is only 25% of the balance.
B. Require the company to write off the ₱500,000 as a bad debt expense.
C. Recommend that management reassess and adjust the allowance for doubtful accounts.
D. Accept the company’s records and issue an unqualified opinion.

19. An auditor is evaluating a company’s asset disclosure. If the company failed to disclose legal
restrictions on its cash balance, which assertion is violated?
A. Completeness
B. Valuation
C. Presentation & Disclosure
D. Existence

20. XYZ Corp. recently purchased land for ₱50,000,000 but recorded it at ₱40,000,000 to minimize
tax liabilities. What should the auditor do?
A. Recommend that the company adjust the recorded amount to the actual purchase price.
B. Ignore the issue since tax avoidance is legal.
C. Accept the company's valuation without further verification.
D. Remove the land from the financial statements.

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