Verification of Assets and Liabilities (Part -1) - Vouching, Auditing & Secretarial practice | Auditing and Secretarial Practice - B Com PDF Download

Verification of assets and liabilities.

Verification means ‘proving the truth’ or ‘confirmation of the truth’. Verification of assets and liabilities means proving the truth about the existence and the correctness of the money value of the assets and liabilities appearing in the balance sheet of the business. In other words, it means establishing the actual existence of the assets and liabilities appearing on the balance sheet, ownership and possession of the assets, and proper classification and valuation of assets and liabilities.

Objects of verification of assets and liabilities.

1. To find out whether assets and liabilities shown in the balance sheet actually exist.
2. To ascertain whether the assets and liabilities appearing in the balance sheet are shown at their correct values.
3. To confirm the possession and ownership of the assets appearing in the balance sheet.
4. To find out whether there is proper classification of assets and liabilities.
5. To check the arithmetical accuracy of the books of accounts.
6. To ascertain whether the balance sheet gives a true and faire view of the financial position of the business.

Difference between vouching and verification. 

1. Nature:- vouching is the examination of the business transactions recorded in the books of original entry, where as verification is the examination of assets and liabilities appearing in the balance sheet.
2. Objectives:- vouching is done to examine the correctness and the authenticity of the business transactions recorded in the books of original entry. But verification is undertaken to confirm the values of assets and liabilities of the business as shown in the balance sheet.
3. Work begins:- verification of assets and liabilities are undertaken after the vouching of the books of accounts. In other word, verification begins where vouching ends.
4. Time:- vouching is done throughout the year, whereas verification is done at the end of the year after the balance sheet is prepared.
5. Scope:- vouching does not include valuation of assets. But verification of assets includes the valuation of assets.
6. Utility:- vouching of books would only indicate that a particular assets or liabilities ought to exist. It does not indicate whether a particular assets or liabilities really exist at the date of the balance sheet. But verification proves whether the assets or liabilities really exist at the date of the balance sheet.
7. Basis: -vouching is based on documentary examination. On the other hand verification is based on physical as well as documentary examination
8. Personnel:- vouching is done by the staff of the auditor. But verification is done mostly by the auditor himself.

Valuation of assets.

Valuation of assets means the determination of or the ascertainment of the money value at which the assets are shown in the balance sheet. However in audit it implies critical examination and testing of the determined values of the assets on the basis of generally accepted accounting principles. In short, it is the process of ensuring that the money value of the asset as shown in the balance sheet has been properly determined.

Objectives.

1. To verify whether the assets shown in the balance sheet have been properly valued.
2. To indicate that the balance sheet represents a true and fair view of the financial position of the business.
3. To indicate that there is no manipulation of account to inflate or reduce the profit.

Auditors duty in regard to valuation of assets

Valuation of assets is a difficult task. It requires technical knowledge. But an auditor has neither technical knowledge nor the time required for the valuation of assets. So an auditor can’t be expected to do the valuation of assets. In short an auditor is not a valuer. The valuation of assets is done by the officials of the business. Auditor has only to make an enquiry into the valuation of assets and satisfy himself that the value of assets are properly determined. This view was upheld in many cases. For example, the Kingston Cotton Mills company’s case, it was held, it is no part of an auditor’s duty to take stock. He must rely on other people for the details of the stock.

An auditor has to critically examine the valuation and satisfy himself that valuation of assets has been properly made to satisfy himself that the values of assets are correct, an auditor should do the following:-

1. He should obtain all information available in respect of the valuation of assets.
2. He should critically examine and analyze the all figures of the valuation of assets.
3. He should verify whether the principles and practice of valuation of assets have been consistent from year to year.
4. He should verify whether the value of assets have been determined properly in accordance with the generally accepted accounting principles.
5. Wherever necessary he should take the assistance of technical experts for valuing the assets.
6. He should ascertain whether current values of assets are fair and reasonable.

If the auditor does not exercise proper care and skill in the matter of enquiry into the valuation of assets. He will be held guilty of negligent or fraud. This was upheld in many cases

For example, in the case of Lease Estate Building & investment v/s shepherd, the auditor was held liable for the dividend paid out of the capital for several years, based on the wrong financial statement.

Classification of assets/types of assets for the purpose of valuation & mode of valuation

1) Fixed assets They are acquired for permanent use in the business. It is not for resale in the ordinary course of business but for the purpose of enabling the business to earn profit. These assets will be in use for a pretty long period. Examples are land, building, plant, machinery, etc. Fixed assets are to be valued at original or historical cost less total depreciation written off(Going concern value).

2) Current assets (circulating or floating assets) Current assets are those assets, which are acquired for resale or produced for the purpose of sale or converting them in to cash. Examples are stock, semi-finished goods, book debts, cash and bank balance, etc…

Cash and bank balance- no valuation required

Book debts and bills receivable- valued at book value

Raw materials- first in first out or last in first out or average cost method

Closing stock-at cost price or market price whichever is lower.

3) Intangible assets Intangible assets are those assets, which cannot be seen or touched. Examples are good will, copy rights, patent etc. these assets are shown at cost price.

4) Wasting assets Wasting assets are of fixed nature, which are depleted gradually or exhausted in the process of earning income. Examples are mines, quarries, oil wells etc. These assets are valued at original cost less provision for depletion.

5) Fictitious assets These are neither physically visible nor realizable into cash. They are revenue expenditure that have been temporarily capitalized with the object of generating the amount over a period of years the benefit of which accrues. Examples are preliminary expenses, discount on issue of shares, advertisement suspense account etc.

6) Contingent assets These are assets the existence, values and ownership of which depends up on the occurrence of a specified event. Examples are claim for refund of income tax, sales tax.

Various values used for valuation.

1. Cost price.
2. Market price.
3. Replacement.
4. Realized value.
5. Book value.
6. Breakup value.
7. Going concern value.

Difference between verification and valuation 

Nature: - In verification of assets, an auditor verify not only the actual existence of the assets but also their proper valuation . But in the case of valuation of assets, an auditor has to merely ensure that the values of the assets as shown in the balance sheet is correct.

1. Scope: - Verification includes valuation also. Valuation is a part of verification of assets.
2. Work begins: - Verification of assets comes in before the valuation of assets but valuation of assets follows verification of assets.
3. Responsibility: - In the case of verification of assets , the auditor is entirely responsible for the work. But in the case of valuation of assets is done by the owners. The auditor merely ensures that the values of the assets as shown in the balance sheet are correct.
4. Guarantee: - In the case of verification of assets, the auditor gives guarantee that the assets have been properly verified. But in the case of valuation of assets he does not give any guarantee.
5. Basis : -Verification of assets can be made by an auditor on the basis of physical inspection as well as documentary evidences. But for valuation of assets, he depends up on the estimates of the proprietor.
6. Chance of fraud : -In verification of assets, the chances of manipulation of accounts to inflate or deflate profit is less, but in valuation of assets, there is more chance of such frauds.

Classification of liabilities for valuation. 

Current liabilities Current liabilities are those liabilities of the business, which are short-term liabilities. They are to be settled within a period of one year. Examples are trade creditors, bills payable, outstanding expenses.

Fixed liabilities These are of long-term nature. Examples are long term loans borrowed, long term deposit received.

Contingent liability It is not an actual liability. It may become a liability on the happening or nonhappening of certain events in future. In short it is a liability which may or may not arise in the future for payment. Examples are liabilities in respect of bills discounted, guarantee given, compensation pending.

Verification and valuation of different assets.

1) Freehold property Freehold property refers to the land and building which is absolutely the property of the business.

While undertaking the verification and valuation of freehold property an auditor should observe the following points:

1. Examine the title deeds He should examine the title deed relating to freehold land& building to ensure that they are in the name of the client. If there is any doubt relating to title of property, he should consult solicitors of the client.
2. Examine the conveyance or brokers account If the freehold property has been purchased, he should examine the correspondence, conveyance deed and broker’s or auctioneer’s account If the freehold property is consist of building constructed by the client the auditor should ask for and examine the architect’s and the builder’s certificates.
3. Capitalization of expenses He should see that if legal expenses, brokerage and other expenses are incurred for the acquisition of freehold property, they are capitalized.
4. Mortgage of freehold property If the freehold property mortgaged, auditor should get a certificate from mortgagee stating that the title deed are in his possession He should also make proper enquiry to ensure that there is no second mortgage on the freehold property If the title deeds of the freehold property are with a bank or solicitors for safe custody the auditor should get a certificate from the bank or the solicitor stating that they are held by him for safe custody and not as a security for any loan.
5. Additions to free hold property He should check additions to the freehold property, if any, made during the year with the help of relevant vouchers. He should also see that the cost of additions is capitalized.
6. Sale of freehold property If any freehold property sold during the year, an auditor should check such sales and see that profit or loss thereon is correctly dealt within the accounts.
7. Repairs and renewals He should see that repairs and renewals of freehold property are charged to revenue account.
8. Provision for depreciation He should examine the adequacy of provision for depreciation on free hold building.
9. Appreciation of freehold building If any appreciation of freehold building is taken into account, the auditor should see that appreciated value is clearly disclosed in the balance sheet. He should also obtain a certified copy of valuation of the property from a professional valuer.
10. Shown in the balance sheet See that the freehold property are shown separately in the balance sheet under the head fixed asset He should also see that freehold property are shown cost less depreciation In case freehold property is shown in the balance sheet in market value, the auditor must see that they are clearly mentioned in the balance sheet.

2). Leasehold property 

Lease hold property refers to land and building acquired by a business for a fixed period on lease. While undertaking the verification and valuation of lease hold property an auditor should observe the following points.

1. Examine the lease deed He should examine the lease deed to ascertain the cost of leasehold property, the duration of the lease, terms and condition of the lease.
2. Registered If the lease is for more than one year the auditor should see that the lease deed is registered.
3. Amount capitalized He should see that amount paid for lease property is capitalized.
4. Examine the receipt for the lease He should see that the lease rent is paid regularly and lease is existing. For this purpose he should examine the last receipt of the payment of rent.
5. Examine the agreement with subtenant He should see that the agreement with the subtenant is if it is sublet to others.
6. Addition to lease hold property: - Verified with relevant vouchers that see that amount paid is capitalized.
7. Repairs and Renewals: - See that it is charged to revenue.
8. Provision for depreciation 
9. Shown in the balance sheet

 3). Plant and machinery

While undertaking the verification and valuation of plant and machinery an auditor should observe the following points.

1. Examine the plant register He should examine the plant register if it is maintained by concern.
2. Examine the schedule of plant and machinery He should call for and examine the schedule of plant and machinery signed by the engineer.
3. Verify the plant and machinery purchased He should verify the plant and machinery verified, plant and machinery purchased with the original invoice - and agreement with the ventures.
4. Check the plant register with plant and machinery account To ensure plant and machinery account and satisfy himself as to the value of plant and machinery.
5. Addition to the plant machinery 
6. Sale and plant and machinery 
7. Repairs and renewals
8. Provision for depreciation 
9. Shown in the balance sheet

4). Furniture and fixtures 

While undertaking the verification and valuation of furniture and fixtures an auditor should observe the following points.

1. Examine furniture stock register
2. Verify the price of furniture purchased with invoices and receipts
3. Physical verification He should verify the physical existence of furniture by personal inspection.
4. Addition to the furniture and fixture
5. Sale of furniture and fixtures
6. Provision for depreciation
7. Method of depreciation He should enquire into the method of depreciation as the amount on depreciation depends upon the use of the asset and the method of depreciation adopted.
8. Unserviceable furniture written off He should see that the unserviceable furniture and fixtures are written off under proper authority.
9. Shown in the balance sheet

- Go through this video and understand the concepts here. 

- Understand through this doc details about Patents, Copyrights & Trademarks.