Intangible assets are long-term assets that lack physical substance but provide economic benefits to the entity. They can include patents, trademarks, copyrights, customer lists, and trade secrets, among others. The audit of intangible assets can be complex, as they often require a higher degree of judgment and estimation.
Accounting under IFRS:
International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB) to provide a common global language for financial reporting.
The IFRS provide a framework for the preparation and presentation of financial statements and aim to ensure that financial statements are comparable, transparent and understandable across different companies and industries.
Under IFRS, intangible assets are recognized and measured if they meet the definition of an intangible asset, and it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity. Intangible assets are identified by considering factors such as legal ownership, contractual rights, or other evidence of control.
Intangible assets are recorded at cost and are subject to amortization over their useful lives. The useful life of an intangible asset is the period over which it is expected to generate future economic benefits. The amortization period and method are reviewed annually and adjusted if necessary.
IFRS requires intangible assets to be tested for impairment when there is an indication that the carrying value may not be recoverable. An impairment loss is recognized when the carrying amount of an intangible asset exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal or its value in use.
The accounting of intangible assets under IFRS requires a careful consideration of the definition, recognition, measurement, and impairment testing of intangible assets.
The IFRS provide a clear and consistent framework for the reporting of intangible assets in financial statements, ensuring that users of financial statements have a transparent and understandable view of a company’s intangible assets.
- Valuation Risks: Intangible assets often require significant estimates and assumptions, including the cost of development, the expected life of the asset, and the future economic benefits it is expected to provide.
- Misrepresentation of Assets: Entities may overstate the value of intangible assets or misclassify them as intangible assets when they are in fact intangible liabilities.
- Omission of Assets: Entities may omit intangible assets that should have been recognized or inappropriately capitalize expenditures related to intangible assets.
- Unauthorized Acquisitions: Entities may acquire intangible assets without proper authorization or may pay more than the fair value for intangible assets.
- Misclassification of Expenditures: Entities may classify expenditures related to intangible assets as expenses, instead of capitalizing them.
- Non-compliance with IFRS: Entities may not follow the accounting standards for recognizing, measuring, and disclosing intangible assets.
- Unreliable Forecasts: Entities may provide unreliable forecasts for the future economic benefits of intangible assets.
- Internal Control Weaknesses: Entities may have internal control weaknesses in the identification, recording, and tracking of intangible assets.
- Unreliable Supporting Documentation: Entities may not have reliable supporting documentation for the recognition, measurement, and disclosure of intangible assets.
- Fraudulent Activities: Entities may engage in fraudulent activities related to intangible assets, such as overstating their value or misusing them.
Auditing intangible assets requires a higher degree of judgment and estimation and requires the auditor to assess various risks. It is crucial for the auditor to obtain a thorough understanding of the entity’s intangible assets, the accounting standards applicable to them, and the entity’s internal control over the recognition, measurement, and disclosure of intangible assets.
Audit Assertions for Intangible Assets:
- Existence: The auditor must obtain sufficient evidence to support the existence of intangible assets, including evidence of legal ownership, contractual rights, or other evidence of control.
- Rights and Obligations: The auditor must determine that the entity has the rights and obligations to use the intangible assets as described in the financial statements.
- Valuation and Allocation: The auditor must ensure that the intangible assets have been recorded at the correct cost and are amortized in accordance with the appropriate method and period.
- Impairment: The auditor must determine that intangible assets have been tested for impairment and that any impairment losses have been recognized when appropriate.
- Presentation and Disclosure: The auditor must ensure that the intangible assets are presented and disclosed in accordance with IFRS and that the related disclosures are adequate.
Walkthrough testing is a type of substantive audit procedure that involves reviewing the flow of transactions and the process used to record and control the transactions.
It is a useful technique in auditing intangible assets as it provides the auditor with a good understanding of the flow of transactions related to intangible assets.
The auditor should follow the following steps in walkthrough testing for intangible assets:
- Obtain an understanding of the client’s system of internal control and the flow of transactions related to intangible assets.
- Identify the key control points in the process related to intangible assets.
- Test the controls by reviewing transactions and documentation.
- Evaluate the effectiveness of the controls and the completeness and accuracy of the transactions.
- Conclude on the results of the walkthrough testing and document the findings.
Walkthrough testing provides the auditor with an understanding of the client’s process for recording and controlling intangible assets, allowing them to identify and assess the risks of material misstatement. It also provides evidence to support the auditor’s assertions about the completeness, accuracy, and existence of intangible assets.
Test of Controls:
Test of controls is a type of audit procedure that assesses the effectiveness of the client’s internal controls. It is designed to provide evidence to support the auditor’s conclusions regarding the client’s internal controls over the financial reporting process.
The auditor should follow the following steps in the test of controls for intangible assets:
- Identify the key control activities related to intangible assets, such as approvals, authorizations, and documentations.
- Test the design of the controls by reviewing the policies, procedures, and systems used to control the intangible assets.
- Test the operating effectiveness of the controls by performing substantive procedures such as inspection, observation, and confirmation.
- Evaluate the results of the test of controls and document the findings.
Test of controls is an important step in the audit of intangible assets as it provides the auditor with a deeper understanding of the client’s internal control system and helps to identify any potential weaknesses or inefficiencies in the process.
Substantive Audit Procedures:
- Confirmations: The auditor can request written confirmation from third parties, such as suppliers or customers, to confirm the existence and ownership of intangible assets.
- Physical Inspection: The auditor can physically inspect the intangible assets, such as patents, trademarks, and copyrights, to verify their existence and ownership.
- Analytical Procedures: The auditor can perform analytical procedures to compare the balances of intangible assets to industry norms, trend analysis, or other relevant data.
- Documentation Review: The auditor can review the contracts and other legal documents related to intangible assets to verify the rights and obligations of the entity.
- Valuation and Allocation: The auditor can perform procedures to verify the proper valuation and allocation of intangible assets, such as reviewing the method and period of amortization.
- Impairment Tests: The auditor can perform procedures to test the impairment of intangible assets, such as reviewing the carrying value and estimating future cash flows.
- Subsequent Events: The auditor can review subsequent events, such as legal disputes or changes in market conditions, that may affect the intangible assets.
- Evidence of Historical Cost: The auditor can review the evidence of historical cost, such as invoices, contracts, and other supporting documentation, to verify that intangible assets have been recorded at the correct cost.
- Evidence of Ownership: The auditor can review evidence of ownership, such as legal documents and registrations, to verify the existence and ownership of intangible assets.
- Evidence of Control: The auditor can review the evidence of control, such as authorizations and approvals, to verify that the entity has the rights and obligations to use the intangible assets.
These substantive audit procedures are important in ensuring the completeness, accuracy, and existence of intangible assets and provide evidence to support the auditor’s conclusions.