Which one of the following is not the objective of verification in auditing ?

Correct — A, (a) Checking the historical accuracy of accounts. The booklet sets 'not' in bold italic — the item asks which is NOT an objective of verification — and this option describes the work of a different procedure altogether.

Verification is the auditor's satisfaction as to the ASSETS AND LIABILITIES standing in the balance sheet at the close of the year. Its objectives are conventionally stated as five:

EXISTENCE — that the asset shown in the balance sheet actually exists at the date of the balance sheet; OWNERSHIP and TITLE — that the asset belongs to the entity, established by the authority for its acquisition and by the title deeds or other evidence of ownership; VALUATION — that the asset is stated at a proper value on a proper and consistently applied basis; POSSESSION — that the asset is in the possession of the entity or of a person holding it on the entity's behalf; FREEDOM FROM ENCUMBRANCE — that the asset is not charged, mortgaged or pledged, or that any charge is disclosed; with the presentation and disclosure of the asset in accordance with the applicable framework as a sixth head in modern formulations.

Checking the HISTORICAL ACCURACY of accounts is not on that list. Testing whether the transactions of the year were correctly recorded — whether the entries agree with the vouchers, whether the casts and postings are right — is the work of VOUCHING and of routine checking. The textbook statement of the distinction is exactly this: verification is not concerned with the historical accuracy of the records; that is the function of vouching. Verification looks at the position AS AT the balance sheet date and asks whether what is shown is really there and really the entity's; vouching looks BACK over the year and asks whether what was recorded really happened.

The point is not merely terminological. An auditor could vouch every entry in the plant and machinery account perfectly and still be deceived about the balance sheet, because a machine bought in year one and stolen in year five would have an impeccable purchase voucher and no existence. Verification exists to close that gap, which is why physical inspection, confirmation and examination of title are its characteristic procedures rather than examination of vouchers.

The other three options are the second, third and fourth of the objectives listed above, and the notes identify each.

Why the others are wrong

• (b)Verification of the existence of the assets — Verification of the existence of the assets IS an objective, and the first one. The auditor must satisfy himself that the asset shown in the balance sheet existed at the balance sheet date, and the procedures follow the nature of the asset: physical inspection or attendance at the count for inventory and cash, inspection for plant and machinery, direct confirmation from the bank for balances, from debtors for receivables and from third parties holding stock or securities on the entity's behalf. SA 501 deals specifically with attendance at physical inventory counting and with obtaining confirmation about litigation and claims. Existence is also the objective an audit most conspicuously fails when it is not met, which is why it heads the list.
• (c)Verification of the valuation of the assets — Verification of the valuation of the assets IS an objective, and it is a component of verification rather than a separate procedure — a point on which examiners occasionally build a question. The auditor satisfies himself that the asset is stated on a proper basis, consistently applied: fixed assets at cost less accumulated depreciation, inventories at the lower of cost and net realisable value under AS 2, investments according to whether they are current or long-term under AS 13, receivables after adequate provision for doubtful debts. Valuation is the objective that most often requires the auditor to evaluate an estimate made by management, which is why SA 540 on auditing accounting estimates sits behind it.
• (d)Verification of the authority of the acquisition of the assets — Verification of the authority of the acquisition of the assets IS an objective — it is the ownership and title limb, expressed as the authority under which the asset came into the entity's hands. The auditor examines the board resolution or other sanction authorising the purchase, the contract, the invoice, and then the evidence of title itself: title deeds for immovable property, the registration certificate for a vehicle, share certificates for investments. Where the asset was acquired without proper authority a question arises whether it is the entity's asset at all, and where the title deeds are with a lender the auditor must satisfy himself about the charge, which links the ownership objective to the freedom-from-encumbrance objective. Note the wording of the option as printed, which uses 'authority of the acquisition' where a textbook would usually say ownership or title.

The auditor's work on the balance sheet is verification; his work on the profit and loss account is vouching. VERIFICATION is the process of substantiating the assets and liabilities appearing in the balance sheet, and its accepted objectives are existence, ownership and title, valuation, possession, and freedom from encumbrance, with proper presentation and disclosure added in modern formulations. Its characteristic procedures are physical inspection, external confirmation, examination of title documents and evidence of authority, and evaluation of the basis of valuation — not examination of vouchers, which is the province of vouching. VOUCHING is the examination of documentary evidence supporting entries in the books, directed at whether a transaction is genuine, is the entity's own, was properly authorised, was correctly recorded and falls in the right period. ROUTINE CHECKING is the mechanical checking of casts, sub-casts, carry-forwards, postings and balances. VALUATION is not a separate procedure but a limb of verification, though textbooks often treat it at length because it is the limb most dependent on judgment. The relationship between the three main procedures is cumulative: routine checking establishes that the arithmetic is right, vouching that the transactions behind the arithmetic are real, and verification that what those transactions have left behind at the year end genuinely exists, belongs to the entity, and is properly stated. Only when all three have been done can the auditor express the opinion that the financial statements give a true and fair view.

Key facts

• Verification is the auditor's satisfaction as to the assets and liabilities appearing in the balance sheet at the year end.
• Its objectives are existence, ownership and title, valuation, possession, and freedom from encumbrance, with proper presentation and disclosure.
• Verification is not concerned with the historical accuracy of the records; that is the function of vouching.
• Vouching examines documentary evidence supporting entries in the books, and relates to transactions and the profit and loss account.
• Routine checking is the mechanical checking of casts, carry-forwards, postings and balances.
• Valuation is a limb of verification rather than a separate procedure.
• Characteristic verification procedures are physical inspection, external confirmation, examination of title deeds and of the authority for acquisition, and evaluation of the basis of valuation.
• SA 501 deals with attendance at physical inventory counting and with inquiry regarding litigation and claims; SA 505 with external confirmations; SA 540 with auditing accounting estimates.
• An asset may have a perfect purchase voucher and no present existence, which is precisely the gap verification closes.

Common traps

• Answering the positive question. Three of the four options are genuine objectives of verification.
• Attributing historical accuracy to verification. That is vouching's work.
• Treating valuation as separate from verification. It is one of verification's limbs.
• Assuming a purchase voucher proves an asset exists. It proves the acquisition, not the present position.

• practice — not a real PYQ

  Which one of the following is a procedure characteristic of verification rather than of vouching ?

  • (a)Examination of the supplier's invoice supporting a purchase entry
  • (b)Checking the casts and carry-forwards of the purchases day book
  • (c)Physical inspection of plant and machinery at the balance sheet date
  • (d)Examination of the authority sanctioning a payment of travelling expenses

  Answer(c) Physical inspection of plant and machinery at the balance sheet date

• practice — not a real PYQ

  In auditing, valuation of assets is :

  • (a)A procedure entirely separate from verification
  • (b)One of the objectives of verification
  • (c)A part of routine checking
  • (d)An objective of vouching

  Answer(b) One of the objectives of verification