How do you prepare for an intangible asset audit?

Full Explanation

Auditors scrutinise intangible asset valuations closely because they involve significant judgement and can materially affect reported earnings. To prepare effectively, companies should ensure the following are in order. Documentation: maintain complete valuation reports for all recognised intangible assets, including the identification basis, methodology selected, key assumptions, and data sources. Each assumption (discount rate, growth rate, attrition rate, royalty rate) should be supported by external evidence or documented management reasoning. Consistency: ensure that assumptions used in intangible asset valuations are consistent with those used elsewhere in the financial statements — for example, revenue growth rates in the PPA should align with business plan projections used for goodwill impairment testing. WARA reconciliation: have the weighted average return on assets analysis available, demonstrating that asset-level discount rates reconcile to the WACC. Sensitivity analysis: prepare sensitivity tables showing the impact of varying key assumptions, as auditors will test boundary conditions. Subsequent measurement: for finite-life intangibles, ensure amortisation schedules are being correctly applied and useful life estimates remain appropriate. For indefinite-life intangibles and goodwill, ensure annual impairment testing has been performed with current assumptions. Triggering events: be prepared to explain whether any events since the last valuation (customer losses, technology changes, market shifts) could indicate impairment. The most effective preparation is maintaining an ongoing relationship with valuation specialists who can provide real-time support during the audit process.

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