5.21 Cost and Authorization
Cost and authorization can be vouched to appropriate documentation such as invoices, cash book, agreements, local purchase orders, director’s minutes. Another important factor to consider under cost is the distinction between capital and revenue expenditure. A check has to be made to ensure that all appropriate items of capital expenditure have been capitalised.
5.22 Valuation and allocation
As we saw assets are usually valued at cost or a valuation less a provision for usage or loss of value. We have to ensure therefore that the accounting policy adopted in determining the amount of provision to be written off in any one year is in accordance with the relevant IAS or generally accepted accounting principles or Companies Acts requirements. The IAS often allows several accounting policies in a given set of circumstances. So the question can often arise as to whether the particular accounting policy chosen is appropriate. Often it falls on the auditor to decide on this appropriateness. To do so, he has to consider the general practice in the industry, the previous practice in the company and the requirements of the true and fair view. Sometimes the requirements of appropriateness will override those of the IAS itself. A policy used for valuation apart from being appropriate and acceptable, must be consistently applied within the industry, within the entity and from period to period and must be in accordance with IAS.
Liabilities as we said are usually valued at cost, however where they involve estimation or they are provisions for specific liabilities then they too must be in accordance with clearly stated accounting policies. All these values must be determined on a historical cost basis and not replacement cost.
In the case of tangible assets existence is verified by the auditor visually, seeing the asset concerned and examining its condition. This is important in that visual evidence gives the auditor a good idea as to the reasonableness of the value attached to the asset. Where it is not possible to visually see the asset concerned, then we have to look for related evidence for example, if a company claims to own land payment of rates to the appropriate local authority is evidence that the plot of land exists. For assets that cannot be physically examined, independent confirmation from third parties would suffice. We have to take into account cut off arrangements to ensure that existence is at the balance sheet date and not at any other time.
5.24 Beneficial ownership :( Rights and obligations)
Here we have to examine documents of title, e.g. title deeds, motor vehicles log books. Where however there are no titles, implied ownership can suffice, for example stock items may have no title documents but the fact that we ordered them, we paid for them, we received them, they are in our warehouse, nobody else is laying claim on them, then it follows by implication that they are ours. This also involves substance over form transactions. If the commercial reality of a transaction is that the rewards and risks of ownership reside in the user then there is strong evidence that the user for all practical purposes is the owner of the asset and should recognise it as such despite contrary indications due to legal arrangements in existence.
5.25 Presentation and disclosure
Proper presentation includes presentation in accordance with the appropriate IFRS/IAS or International Accounting Standards. Adoption of accounting policies which are appropriate to the circumstances of the company and are adequately stated. Consistent application of accounting policies and where change in policy is deemed necessary with Companies Acts, Nairobi stock exchange and IAS requirements and taking into account materiality.