Asset management of enterprises demands precision as well as responsibility. Financial records provided by firms usually help the firm to understand the position of its assets, but they are sometimes inaccurate without being verified with the right measures. The physical verification process comes into play at this point of action of checking out a variety of things: By comparing actual assets and the recorded ones, the companies can ensure that there are no mistakes, identify the discrepancies, and miss the instances of serious asset misreporting.
Why Asset Misreporting Happens
There are quite a few reasons as to why asset misreporting takes place. Sometimes it can be caused by mere details like failure to update records when equipment is purchased, sold or disposed of. In other instances, it might occur due to negligence, or fraudulent recall. As an example, the overestimation of assets may present the financial strength of a company as stronger when compared to the actual status. The same applies to missing or damaged assets and as such would not be highlighted or detected in a case where there is no regular comparison of the records.
Unless a system of systematic check is put in place, such problems tend to increase with time, resulting in distorted financial reports, non-compliance with regulations and even investor losses. This is the reason why the processes of physical verification must be conducted by businesses on time.
How the Physical Verification Process Works
The physical verification process involves a direct comparison between actual assets and the records maintained in books of accounts. It is usually carried out in stages:
- Planning –The company decides about the possibilities, timeline, and the set of individuals or teams that are accountable for the verification.
- Identification– Assets are identified with the help of tags, serial numbers, or product description.
- Inspection –Teams inspect the condition, existence, and the places where the assets are placed.
- Reconciliation –The collected data is matched with financial records. In case any differences are found, they are flagged immediately.
- Reporting –In a final report, discrepancies are found following which recommendations are given for corrective action.
Such concise physical verification procedures ensure that assets listed in records are not just numbers on paper but actual resources available for use.
Preventing Errors through Verification
The conventional advantage of the physical verification procedure is the elimination of unintentional mistakes. As another example, when a company still has records machinery that was scrapped months prior, this can increase its asset value. Equally, assets are prone to being valued inappropriately and may even be replicated in multiple records. Through physical verification and reconciliation, it is through this that a business can rectify the errors commensurately without the financial statements becoming a mirror reflection of the truth.
Detecting and Reducing Misuse
In addition to rectifying the errors, the physical verification process also occurs to identify the cases of misuse. Assets may at times be misplaced, lost or may even be used in ways that are not related to business. One may do this without being detected in case there is no regular verification. When the checks are done in depth, missing assets or abnormal irregularities can be discovered and action can be taken instantly by the management.
This preventive measure tones down the likelihood of fraud and makes the workers responsible in the assets under their custody.
Building Confidence in Financial Reporting
Financial statements are used by investors, regulators and other interested parties to gauge the company. If the asset reporting is inaccurate, the credibility of the entire financial system within the organization is put to questioning. Thus, it is the need of the hour to conduct regular implementation of the physical verification process as it serves as an assurance to the stakeholders that reported assets genuinely exist and are in usable condition.
Add to that the verification process is equally valuable for the businesses aiming to attract funding or comply with audit requirements. The reason being it shows that the company is transparent.
Supporting Compliance and Governance
In most industries, regulators oblige business establishments to keep proper records of assets. Failure to comply may lead to monetary fines or penalties and loss of reputation. The physical verification process assists in staying on the right side of the regulation through a clean record of asset control, reconciliations and reconciliation measures.
Governance wise, it prevents internal controls. With management vigilance, there will be a sense of accountability and departments will be able to take responsibility for accurate reporting.
This content is meant for information only and should not be considered as an advice or legal opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.