What is Verifiability in Accounting?

Verifiability means that it should be possible for an organization's reported financial results to be reproduced by a third party, given the same facts and assumptions. For example, an outside auditor should be able to construct the same financial statement results as a client, using the same set of financial records and using the same assumptions applied by the client. When financial statements are verifiable, this assures the users of the statements that they fairly represent the underlying business transactions.

The Need for Assumption Testing and Documentation

Verifiability cannot be achieved without knowing the assumptions used by a business in the construction of its financial statements. For example, the depreciation expense calculated by a third party could easily vary from the same expense calculated by a business, depending on the projected useful life and salvage value used by the business. Similarly, a business uses assumptions regarding the number of products that will be returned when it derives an allowance for product returns.

Verifiability involves more than simply duplicating the results reported by another party. It also involves deciding whether the assumptions used by the other party are reasonable. It is quite possible that an auditor investigating the financial statements of a client will conclude that the client made incorrect assumptions (such as an unusually low estimated bad debt percentage). Another aspect of verifiability is that a business provides clear documentation of how it achieved its numbers. By examining these documents, you can see if there is a logical flow from the source documents to the financial statements.

Example of Verifiability

A junior auditor is asked by her audit manager to verify the revenues of an audit client. To do that, she asks the client to provide her with the billings that support its claimed revenue figure, as well as its cash receipts journal and bank statements. With these documents, she can trace a selection of customer invoices to the payments made by them (which are recorded in the cash receipts journal), and trace these cash receipts to the related bank statements. In addition, she issues confirmations to a selection of the client’s customers, to have them independently verify that they did indeed receive the billing amounts claimed by the client.

The auditor finds no discrepancies in the documents provided by the client, customers confirm that they have been billed the claimed amounts, and she can trace customer payments back to the client’s bank records. Based on the procedures followed, the auditor can reasonably state that the client’s revenue information is fully verifiable.