Asset Verification: A Vital, Yet Challenging, Process & Best Solutions For Accurate Audits

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What Is Asset Verification & Physical Asset Auditing?

There are several risks and challenges of physical asset ownership, ranging from employee fraud and theft to erroneous data and inaccurate financial records. The latter accounts for 65% of fixed asset data being incomplete or missing, while the former results in year-on-year losses of £190 million for UK businesses.

For a business to be financially stable and successful in the eyes of its shareholders, it must mitigate risks through rigorous asset management methods. One such method is asset verification.

Asset verification is a hands-on asset management auditing method that validates and documents the existence of physical assets. Verifying the ownership of assets impacts financial records, tax and insurance payouts, asset misappropriation, and compliance management.

The asset verification process has four steps:

1. Plan & Prepare: Set objectives and review all asset documentation.
2. Physical Inspection: Identify the owned assets that exist on-site.
3. Correlate Data: Align with data from your fixed asset register.
4. Reports and Valuation: Determine asset valuation.

Reasons to Conduct a Physical Asset Verification Audit

For organisations comprising of and relying on tangible assets, undertaking regular asset verification audits is essential. Although mainly financial, there are several reasons why businesses need to conduct physical inspections.

Ensure Accurate Records (Financial & Information)

Asset verification helps businesses to identify discrepancies between recorded and actual asset ownership – this can also be referred to as identifying ghost assets. Identifying and rectifying differences in asset values directly affects financial and data-oriented outcomes such as:

• Paying tax and insurance on assets that don’t exist
• Having an accurate reflection of an asset’s value
• Tracking depression value as per asset conditions
• Reducing data duplication (resulting in ghost or zombie assets on balance sheets)
• Accurate asset information (purchase price, market value, lifecycle, depreciation, etc.)

Keep in mind, that accurate records are essential when presenting to shareholders or preparing for an external audit.

Verify Asset Ownership

Just because an asset is listed as owned on a company stock sheet or fixed asset register, doesn’t confirm complete ownership. Verifying the ownership of assets through physical audits provides a picture of what you actually own. This is why it’s essential to have asset-tracking processes in place, too – unlike 43% of small businesses that fail to track assets and inventory entirely.

Alongside the asset verification process, asset managers will examine ownership documents, titles, and other records to verify the legal ownership of assets.

Prevent Asset Misappropriation

Asset misappropriation is the most common type of internal equipment theft ahead of corruption and fraud. Regularly conducting internal asset audits helps to combat the misuse or theft of assets as well as reduce the likelihood of assets being misplaced or going missing.

Understand Asset Lifecycle Management

Physically verifying an asset is a useful way to understand current asset conditions and align it with the stage of its lifecycle – most notably stage 3; Operation and Asset Maintenance.

This helps to ensure financial records are accurate too, by understanding if the depreciation value has been tracked and calculated correctly. As well as to understand if assets need replacing or disposing of earlier than anticipated.

Establish an Audit Trail

Having an accurate audit trail that identifies changes in asset ownership, location, condition or status improves the accountability and transparency of a business’s asset management methods. Having an audit trail that can be presented to external auditors is often a requirement for financial reporting, too.

Compliance Requirements

Some 46% of asset managers claim regulatory compliance as the biggest challenge they face. Physical asset verification enables businesses to improve their chances of complying with accounting standards like Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).

The Four-Step Asset Verification Process

1. Plan & Prepare

This is the first and most critical stage of the asset verification process. It ensures that objectives are set and a decisive plan is in place, setting the tone for a successful internal audit. By prepping all relevant documents including purchase agreements, invoices, and receipts, you’re prepared to:

• Identify assets to be included or excluded in the verification process
• Know what team will conduct the physical verification (ensuring the correct training has been provided)
• Understand legal ownership of assets
• Set and track deadlines for verification completion
• Locate assets before initiating the auditing process

2. Physical Asset Verification

The next stage is conducting the physical asset verification audit. This requires a team of trained employees to verify existing documentation against physical assets. In this stage, important factors can be determined:

• Asset Condition: Is the asset damaged? Does it need repairing or replacing? Is it further along the asset lifecycle than initially stated?
• Matching Information: Look for serial numbers, model numbers, and other distinct features.
• Asset Tags: Is the asset tagged with an IoT tracking device or does it need to be?

3. Correlate With Existing Asset Data

This can be performed either during physical verification or after, where detailed notes of each asset are taken and compared to existing notes and documentation. During this process, it is important to make notes of all discrepancies or changes.

4. Reports and Valuation

Once the verification audit is complete, it’s suggested that detailed reports are drawn up on what assets were found to have discrepancies, what information has changed, and any other findings that may impact asset ownership or financial records.

Also, asset managers should now be able to determine the current valuation of each asset. This will be determined using collected information such as current conditions, market trends, and calculated depreciation values. Updated valuation information is crucial for financial and investment contexts.

5 Factors That Challenge the Asset Verification Process

As with any asset management process, there are risks involved. When it comes to physically verifying assets, five challenges need to be considered:

1. Volume of Assets: Organisations with a large volume of assets and a diverse portfolio of physical assets should understand that internal audits will require more time and planning.
2. Complex Locations: The location of assets may make it challenging to physically access them. For instance, assets can be located in unsafe locations in manufacturing plants and construction sites. Take into account moveable assets too, which are constantly transferred between locations and can be tough to accurately track.
3. Accuracy of Existing Records: Be prepared for existing data to show signs of discrepancies. Inaccurate records can lead to carrying out a physical audit with misleading information regarding locations, conditions, and value.
4. Human Error: As with most manual processes, human error is a common risk. It is the leading cause of erroneous spreadsheets, with 90% containing formula errors. Wrong data entry can lead to misidentification of assets and incorrect financial records.
5. Adverse Environments: For some businesses, assets may be located outside and risk being exposed to extreme weather conditions. This makes the verification process challenging and time-consuming.

How Asset Management Tools Can Ease Physical Auditing Processes

Asset management tools – such as Asset Management Software – are utilised by asset-heavy organisations to not only improve asset availability and track value but also to improve the collection and verification of assets.

SaaS asset management tools allow asset managers to utilise cloud-based functionalities. Not only does a cloud-based asset management system offer seemingly unlimited data storage and quick accessibility, but it also ensures data is kept up-to-date. For instance, once an asset’s location is updated on a shared system, it will be visible to everyone in real-time.

Asset data is stored in a shareable and centralised fixed asset register. Real-time data such as location, condition, value, and purchase receipts can be accessed by anyone at any time from anywhere. Changes to data are also recorded and saved, providing asset managers with a detailed and high-quality audit trail that tracks and chronologically records all actions.

The ability to update data in real-time comes from the use of mobile devices in the form of mobiles, tablets, and laptops. Using a dedicated app or web browser access – like 67% of warehouse managers for inventory management – those conducting a physical audit can update data instantly. As opposed to writing information in a notepad and going back to the office to update a spreadsheet.

When linked with asset tagging devices such as RFID tags and barcodes, the asset verification process can be semi-automated. IoT sensors can track conditions, location, and users, and report data back to an asset management system in real-time. The use of asset tags in medical facilities alone has reduced errors by over 41%.

What the Future Holds for Fixed Asset Physical Verification

Two elements will improve the accuracy and efficiency of collecting asset data; artificial intelligence (AI) and augmented reality (AR).

AI In Asset Verification

The use of AI tools will help to modernise and enhance the asset auditing processes. By using sources such as images, documents, and IoT sensors, the capture of asset data can be automated and updated on a more frequent basis. This will reduce the reliance on manual verification tasks and ultimately eliminate data entry errors.

Verifying Assets With VR

While there are still hurdles when it comes to the implementation of VR and AR in business – such as costs, training, and infrastructure – VR can be used for several key areas of the asset verification process, including:

• Virtual inspections of assets in challenging environments
• Augmented-guided inspections through complex or large environments
• Live collaboration with stakeholders during audits
• Training and simulating audits to give a hands-on experience to staff
• Displaying real-time data while inspecting physical assets

FAQs

What Are The Different Types of Asset Audits?

Asset audits can be put into two categories; internal and external.

An external audit is a review of financial records related to asset ownership by a party not associated with an organisation.

An internal audit is an independent inspection of assets to verify risks, procedures, financial records, asset ownership and compliance management in preparation for an external audit or a presentation to shareholders.

Other sub-types of asset audits include financial, operational, compliance, lease, insurance, facility, and environmental.