Audit Intangible Asset

Overview

Intangible asset is a long-lived asset that does not have physical substance. Similar to other assets on the balance sheet, we perform the audit of the intangible asset by testing several audit assertions such as existence, valuation, right and obligation, and completeness.

Intangible assets may include copyright, patent, license, software, and goodwill (from business combination), etc. The goodwill from the business combination is usually considered a significant intangible asset that has the highest audit risk among other intangible assets.

Audit assertions for intangible asset

The audit assertions for intangible asset are included in the table below:

Audit assertions for intangible asset
Existence	The intangible assets reported on the balance sheet really exist at the reporting date.
Valuation	The balance of intangible assets truly reflects their actual economic value.
Right and obligation	The company really owns all intangible assets reported on the balance sheet as of the reporting date.
Completeness	All intangible asset transactions that should have been recorded have been recorded.
Presentation and disclosure	Intangible assets have been properly presented on the balance sheet and adequate disclosure has been made in the note to financial statements.

Existence and valuation assertions are usually the most relevant assertions in the audit of intangible assets. This is due to the existence assertion is related to the risk of overstatement of the assets on the balance sheet of the company.

Meanwhile, the valuation assertion of the intangible asset is related to the risk of improper amortization as well as the risk of impairment test has not been performed or has not been properly performed by the client. They both lead to the significant risk of material misstatement on financial statements.

Audit procedures for intangible asset

We perform the audit of the intangible asset to obtain sufficient appropriate audit evidence in order to form an overall conclusion on the carrying value of the intangible assets as of reporting date. Several audit assertions such as existence, valuation, right and obligation, and completeness will be tested in the audit procedures for the intangible asset.

Existence

We test the existence audit assertion to ensure that the intangible asset included in the balance sheet actually exist as of reporting date.

We can test the existence audit assertion for the intangible asset by reviewing the original supporting documents. For example, we can review the legal documentation of a license or a patent to ensure its existence on the balance sheet.

Valuation

We test valuation assertion for the intangible asset in the audit to ensure that its net balance on the balance sheet actually reflects the net realizable value.

We usually test the valuation assertion of the intangible asset by

– verify whether the amortization of the intangible asset have been properly done

– assess the reasonableness of the carrying amount of the intangible asset

– if there is any impairment on the intangible asset, assess whether the impairment estimate done by the client is reasonable and followed an acceptable accounting standard.

Right and obligation

We test right and obligation assertion in the audit of the intangible asset to ensure that the company really owns all intangible assets that are shown on the balance sheet.

In this case, we usually test the right and obligation assertion in the audit of the intangible asset by inspecting the purchase agreement or sale agreement of the asset. Such agreement is a valid supporting document to show that the company has the ownership right to the intangible asset.

Completeness

The audit assertion of completeness for the intangible asset is in the low-risk area as the company usually wouldn’t hide the assets. However, sometimes, the company may have an intangible asset, but it is not included in the balance sheet due to the difficulty of valuing such asset.

For example, our client builds their own software to use in the daily business operation. However, due to the difficulty of valuing such software, they choose to not include it in the accounting records.

In this case, we need to determine whether the value of such software is material or not. If the value of the software is determined to be material, there will be a lack of completeness by not include the software on the balance sheet.