In this article, we will cover the audit procedures for goodwill. This includes the objective of the audit, key assertions as well as the specific procedures for the audit of goodwill.
Table of contents
What is Goodwill?
Goodwill is the value of the reputation of a company and it is considered as intangible non-current asset. Goodwill enables a company earn more than its normal profit. Auditor should obtain an understanding of the occurrence, recognition and measurement of goodwill.
Objective of Goodwill Audit
The objective of goodwill audit is to identify intangible assets and appropriate accounting for each type of assets. Auditor will identify basic process, controls and weaknesses of goodwill and the solution for those weaknesses.
Key Assertions of Goodwill Audit
Key assertions for Goodwill audit are described below:
Completeness is checking that the goodwill balance is properly recorded.
Valuation is ensuring that the reported Goodwill balance truly reflect the underlying value of goodwill.
Accuracy is checking the goodwill is recorded at the correct amount.
Key Audit Procedures for Goodwill Audit
- Goodwill is recognized in the consolidated financial statements when a company purchases another company. To assess the goodwill amount, auditor should obtain the purchase agreement between both companies and review if the purchasing date is agreed with the goodwill recognition date. The auditor will also review the agreement to ensure the consideration payment and other payment requirements are correct.
- The auditor should obtain payment voucher to see the occurrence of payment as result of business combination or acquisition. Then auditors shall need to perform the cross-checking of the payment amount to bank statements. They should also check if there is any contingent consideration and whether it is correctly incorporated in the goodwill calculation.
- Auditors need to determine the ownership of goodwill recognized in the financial statements. They should check the company’s share registration documents to confirm the correctness of ownership of goodwill.
- Auditors should review the board meeting minutes to check if the purchasing transactions are authorized by the boards. They should also check the price, date and purpose of purchasing.
- The due diligence report to assess the net assets value of the targeted company should be obtained and checked.
- Where there is third party evaluation on the goodwill, obtain such valuation report from client. Then auditor shall review that valuation report and assess the competency of the third party. The auditors shall cross check such evaluation report to the amount of goodwill recorded in the book.
- The auditor should perform recalculation of goodwill to check whether the goodwill amount calculated by the client is correct. If there is any difference the auditor will ask management about the reason of the difference and obtain explanation.
- In case there is any revaluation of assets that has raised the goodwill account, the auditor should review the basis on which the asset has been revalued.
- If any goodwill was written-off but later bought back to write off capital loss, auditor should investigate the period over which the goodwill was written-off.
- In case of partnership, the auditors shall perform the checking on the partnership agreement or contract and verify the changes made in the goodwill account.
- Goodwill impairment test should be done by the client annually. The auditor should obtain the client’s assessment for impairment testing and review the assessment. They will compare the fair value of the reporting unit to its carrying amount and identify if there is any impairment loss and whether the impairment loss is recognized and calculated properly.