What is the focus of audit of intangible assets?

 

Intangible asset is an identifiable non‑monetary asset without physical substance. Common examples of intangible assets may include:

(a) brand names.

(b) mastheads and publishing titles.

(c) computer software.

(d) licences and franchises.

(e) copyrights, patents and other industrial property rights, service and operating rights.

(f) recipes, formulae, models, designs and prototypes; and

(g) intangible assets under development.

 Auditors use assertions to consider the different types of potential misstatements that may occur when identifying, assessing and responding to the risks of material misstatement.

Assertions related to item of balance sheet “intangible assets” and the disclosure of information about it are listed below:

·        Existence.

·        Rights and obligations.

·        Completeness.

·        Accuracy, valuation and allocation.

·        Classification.

·        Presentation.

The key assertions to obtain evidence about intangible assets are existence and valuation.

Existence means that intangible assets really exist.

Intangible asset is recognized in financial statements if:

·     It is identifiable and controlled by an entity as a result of past events.

·     The company is expected to receive future economic benefits as a result of using this asset.               

·     The cost of the asset can be measured reliably.

Valuation means that intangible assets have been included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments have been appropriately recorded, and related disclosures have been appropriately measured and described.

Procedures used to test intangible assets:

Inspection. Involves examining records or documents, whether internal or external, in paper form, electronic form, or other media, or a physical examination of an asset.

Observation. Consists of looking at a process or procedure being performed by others, for example, the auditor’s observation of inventory counting by the company’s personnel, or of the performance of control activities.

External Confirmation. Represents audit evidence obtained by the auditor as a direct written response to the auditor from a third party.

Recalculation. Consists of checking the mathematical accuracy of documents or records.

Inquiry. Consists of seeking information of knowledgeable persons, both financial and non-financial, within the company or outside the company.