What are the audit objectives and procedures in auditing intangible assets?

AUDIT OF INTANGIBLE ASSETS

Overview

This module will discuss the audit of intangible assets. Specifically, this will

involve audit objectives to primarily achieve the overall objectives for intangible assets

and audit procedures for the substantive tests of details of balances to determine that

the intangible assets exist by reviewing appropriate documentation.

Objectives

At the end of the module, you should be able to:

1.Describe the auditor's objectives for the substantive tests of details of balances of

intangible assets accounts.

2.Describe the nature of the audit procedures to accomplish the auditors' objectives for

the audit of intangible assets.

3.Understand and prepare audit working papers to document audit procedures for

intangible assets.

AUDIT OF INTANGIBLE ASSETS

Intangible assets are assets that provide economic benefit for longer than a year,

but lack of physical substance. This includes patents, leaseholds, copyrights, formulas,

organizational costs, franchise fees, and goodwill acquired in a business combination.

The essential features of substantive tests of balances for intangibles are

emphasis on specific audit objectives related to existence and valuation achieved

Small businesses hold a wide variety of assets, which make up a large portion of a new company's balance sheet. During an audit, the audit team is required to verify management's assertion that these assets truly exist. Understanding some common audit procedures used to test the existence of assets can help you avoid surprises during an audit of your small business.

Cash

1. When auditors are testing the existence of cash, it is common for the audit team to use a two-pronged approach. First, the auditor will ask the small-business owner for the company's bank statements and bank reconciliations. These documents are used to reconcile the bank cash balance with the cash balance recorded in the financial statements. Second, the auditor will send a request to the bank asking for third-party confirmation of the bank balance as of the balance-sheet date. This step guards against the fabrication or altering of bank statements.

Accounts Receivable

1. Auditors test accounts receivable existence through both confirmation and examination of documentation. Customer confirmation, because it is from a third-party, is considered to be the strongest form of audit evidence for accounts receivable. However, the company's customers often do not return requests for confirmation. In these cases, the auditor will examine cash receipts related to the accounts receivable that were received after year end. The concept behind the examination of subsequent cash receipts is that if the sale of the product or the rendering of the service happened before the balance-sheet date and the cash was received to pay the account after the balance-sheet date, then an open account receivable had to exist at the balance-sheet date.

Intangible Assets

1. Tests for the existence of intangible assets are usually conducted through the examination of documentation. Common intangible assets include patents, trademarks and goodwill. Most of these items arise from contractual interactions, legal filings and business combinations. As such, companies should have substantial documentation related to their ownership. Auditors will request supporting documentation and cross-validate the information with other audited accounting information.

Capital Assets

1. The existence of capital assets, such as buildings, equipment and other fixed assets is often tested through observation. For example, to test for the existence of the company's factory, the auditor simply needs to examine a title deed and observe the factory to satisfy audit requirements. Observation is a preferred testing method because it is convincing audit evidence, as it is produced by the auditor instead of the company under audit, and is relatively simple to complete.

What are the audit procedures for intangible assets?

What are the objectives of intangible assets?

What are the objectives of audit procedures?

How does auditor verify intangible assets?