Verifiability in accounting

The verifiability concept states 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.

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. Another aspect of verifiability is that a business provides clear documentation of how it achieved its numbers. By examining these documents, one can see if there is a logical flow from the source documents to the financial statements.

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