Checking Amortization Calculations in an Audit
As an auditor, you have to check the company’s intangible assets and that means understanding amortization. Amortization spreads the cost of an intangible asset over its expected useful life. Much like you use depreciation to calculate how much of a fixed asset’s value the client uses in a given year, you use amortization to make that calculation for certain intangible assets. Your client’s balance sheet will show the value of any owned:
The balance sheet and income statement reflect amortization using this value and the client’s estimation of the intangible asset’s useful life to calculate the amount of the intangible to be written off each financial period.
Most intangibles are amortized on a straight-line basis using their expected useful life.) For example, the U.S. government grants patent protection for a period of 20 years. Unless the patent becomes obsolete, 20 years would probably be the expected useful life used by your audit client.
If the value booked or the useful life for an intangible asset appears excessive or unreasonable, you may assess that the audit’s inherent risk is high. The audit client’s valuation may have to be reduced or the useful life modified, which can lead to rigorous disagreements with the client. This is an advanced auditing adjustment topic that requires a considerable amount of professional judgment and the help of a valuation specialist. It’s an excellent topic to discuss with your audit team leader should it arise. In any case, GAAP state that an intangible asset can’t be amortized for more than 40 years.
Amortization applies to copyrights, trademarks, and patents. What about other intangible assets?
Intangible assets with an indefinite useful life aren’t amortized.
Goodwill is never amortized.
Leasehold improvements are amortized over the shorter of the life of the improvement or the remaining lease term.