The accuracy of financial reporting in any organization is largely determined by the efficacy of the management and verification of fixed assets. Physical verification of fixed assets also creates certainty that the books maintained by the company reflect what the company really has. This form of verification does not only enhance transparency, but it also enhances internal controls and reliability of the audits. In the current competitive business environment, it has become a necessary practice for organizations that want to uphold accountability and trust among stakeholders.
Understanding Physical Verification of Fixed Assets
Physical verification of the fixed assets involves the examination of the presence, state, and location of the assets such as machines, equipment, furniture, and buildings. This procedure proves that the items recorded in the financial statements exist and could be used. It also assists in identifying a variance between what was documented and what existed which may be because of loss, misplacement, theft, or accounting errors.
This verification is done by organizations on a certain basis periodically, either once per year or once in six months as a way of ensuring that their records of assets are up to date. The verification results are compared to the asset register to identify any differences. These results are recorded, researched and corrected in internal control and financial audit.
Importance of Financial Transparency
Transparent financial reporting is important in sustaining the trust of investors, regulators and the management. Physical verification of the fixed assets has a direct contribution to this transparency whereby it ensures that the assets that are presented in the balance sheet are real and functional. It reduces the chances of inflating the value of assets or reporting non-existent assets that may give inaccurate financial statements.
Regular checks also help to be sure that depreciation is charged on a fair basis according to the actual condition and presence of the assets. This enhances the information quality of financial records and its adherence to the accounting standards and regulations of statutory audit.
Enhancing Audit Accuracy
Auditors rely on verified and revised records of assets to come up with opinion about the financial status of a company. In the case of no physical verification, there is a high probability that audit discrepancies may occur. In making sure that every asset is physically accounted, organizations will offer audit evidence, which helps in the process of audit and conclusions by an auditor.
Also, physical verification assists in revealing the assets that are obsolete, broken or useless. Writing off such assets or reclassifying them accordingly has the effect of avoiding misrepresentation of financial reports and enhancing the accuracy of the audits.
Strengthening Internal Controls and Risk Management
Physical verification is also important in risk management and internal control other than facilitating financial reporting. It aids in finding out possible points of weaknesses, including off tagging of assets, interdepartmental relocation of assets, or disposal which is not registered. Timely resolution of such questions improves discipline in operations and minimizes the chances of financial fraud or misstatement of financial results.
This verification process is usually combined with the systems of asset management to automate the tracking and reporting of organizations. Digital tools can enable real-time tracking, enhance management over the whereabouts of assets, and enhance quick reconciliation with accounting information.
Best Practices for Effective Verification
Companies need to adopt a systematic method to do an effective physical verification of their fixed assets:
- Take a new asset register and fill in all the particulars like asset code, location, date of purchase and value of the asset.
- Label each asset with an identification number or barcode.
- Arrange the schedule of verification to reduce the disruption in operations.
- Determine a verification test that involves finance and operational employees.
- Compare the reconcile findings with the financial records and enquire about any differences.
- Record the findings and create a verifying report that will be reviewed and audited by the management.
Also Read: Physical Verification of Fixed Assets: Simple Steps, Big Benefits