auditing unit 3
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Unit -3Verification and ValuationOf
assets and liabilities
Lalatendu MishraJain University
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Verification of assets and liabilities
At end of the year
To confirm the ownership, valuation andexistence
As per balance sheet
Establishing actual existence
Proper classification and valuation of theassets and liabilities
Verification means providing the truth or confirmation
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b!ectives of verification of Assets
Existence" physical verification, with referenceto documentary evidence
wnership" examining title deed
Possession" in possession of others dulyauthori#ed by the client
Ade$uate disclosure of encumbrance or lien"
Valuation and disclosure" valued and disclosedin financial statements according to the %AAPand statutory re$uirement
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Verification of Plant and &achinery
Ascertain the existence and ownership :
-Plant register which contains detailed
particulars relating to various machines and
e$uipments ' for example, the name, type,number, date of installation, name of the
vendor(
)original cost, rate and amount of depreciation, )accumulated depreciation,addition and sales
from time to time
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Verification of Plant and &achinery
)*nsist of maintenance by the client
)may visit the factory periodically
) Verify sale of plant) evidence indicatingauthori#ation to sell, invoice copy, carbon copy
or counterfoil of cash of cash receipt, !ournal
entries
Ascertain the possession and
determination lien, if any
) plant is not usually sub!ect to mortgage+
) floatin char e on assets
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Verification of Plant and &achinery
Examine the valuation and disclosure
)cost of ac$uisition less depreciation
)Addition" the cost of ac$uisition includes invoiceprice, freight, duty, uploading charges and
installation cost
) if construction" the client, expenses on material
labor and other allocable overhead, certificate
from engineer
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Verification of Plant and&achinery
ascertain the profit or loss on sale of themachinery has been calculated correctly anddisclosed properly in profit and loss account
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reehold land
Ascertain the existence and Ownership:
-title deed or purchase deed
)purchase during the year" the contract with thevendor, approval of appropriate authority
)sale during the year"approval of appropriateauthority-bro.er/s note or auctioneer/s note or a
statement showing $uotations
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reehold land
Ascertain the existence and Ownership:
-title deed or purchase deed
)purchase during the year" the contract with thevendor, approval of appropriate authority
)sale during the year"approval of appropriateauthority-bro.er/s note or auctioneer/s note or a
statement showing $uotations
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reehold land
Ascertain the possession anddetermination lien, if any
)the title deed should be in custody of owner
)0etermine whether the land is free from anycharges'such as any tax)in)arrear(
) disclosed as liability in the balance sheet
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reehold land
Examination valuation and disclosure:
) non)depriciable asset"purchase price, bro.ers/commission,stamp duty, registration duty, legal
charges)any payment to municipality" laying of sewer etc+"
land improvement account
)land and building purchased as a pac.age"determine the value separately, appraisal reportby the valuer
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reehold land
) building demolished" cost of demolition shouldbe capitalised
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1uilding Verification
Ascertainment the existence , ownership,possession and determine lien etc.
Examine the valuation and disclosure
)cost less depreciation
) purchase price, the cost of alteration andimprovement
)if constructed" bill of contractor and architect
) construction wor.)in )progress- reference to thearchitect certificate and contractor/s certificate
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urniture and ixture
Examine the existence and ownership:
)urniture is a movable asset
)ixture include items fitted to the wall or onground ex"fan, showcase, carpet and otheroffice e$uipment
) existence and ownership" stoc. register
)select random sample"stoc. number by physicalexamination
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urniture and ixture
) as. management to prepare stoc. inventory andinventory and reconcile it with stoc. register andreconcile with stoc. register
)verify" authori#ation, purchase invoice, stoc.register and ban. statement+
Ascertain the possession and determinelien, if any
Examination valuation and disclosure
)cost less depreciation
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urniture and ixture
) purchase invoice and voucher of expenses
)serviceable or lost should be written off to theprofit and loss account under proper authority
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Patents
A patent is an exclusive right granted by the%overnment to manufacturer and dispose off orotherwise benefit from the result of the invention
of a product or process Ascertain existence, ownership and
possession :
)certificate or patent letter
)if purchased-seller/s right should be examined
)schedule of patents
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Patents
) renewal fees and receipts
) confirmation letter from the legal adviser as tovalidity and existence of each patent
Examine the valuation and disclosure
)cost less amorti#ation
)purchase price and the registration cost ifbrought outright
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Patents
))developed by the client in)house -developmentcost, legal charges including registration feesand other direct cost
) written off over the legal term of its validity orover its useful commercial life, whichever isshorter+ A2)34 56years
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7opy 8ights
7opyrights are rights for the reproduction andsale of printed or otherwise produced writing,drawings, musical compositions, maps, wor.s
art and so forth+ Examine existence, ownership and possession
) generally purchased- original agreementsurrendering in favour of the client
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7opy 8ights
)obtained schedule of copy right duly signed bya responsible official of the client and verifytheir existence+
Examine its valuation and disclosure:2imilar to that of the patents+
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Trademar.s
A trademar. is a distinctive sign, symbol,design or brand name established to enable thepurchaser to identify the product easily
Verify existence, ownership and possession)certificate of registration issued by the office of
the 8egistrar of Trademar.s
)Trade and &erchandise &ar.s Act, 5999governs trademar.s in *ndia
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Trademar.s
) purchased)purchase agreement with the seller
)renewal fee receipt indicates the validity andlegal enforce ability of a trade mar.
)schedule of trademar.s signed by a responsibleofficer of the client
Examine valuation and disclosure:
)cost less amorti#ation
)purchase price
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Trademar.s
)developed by the client" cost of developingoutlays, design costs and other associateddirect cost
)amorti#ed over the period of legal validity oruseful commercial life whichever is shorter-A2)34
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%0:*;;
Examine existence, ownership andpossession
)no consideration paid, no goodwill
)a business is ac$uired for a price which is inexcess of net assets ac$uired by the business
)can not be sub!ected to lien
Examine valuation and disclosure:
)cost less accumulated amorti#ation
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%0:*;;
%oodwill has value only so long as the firm,that purchased it continues to earn abovenormal net income+
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*nvestment
Verification of existence, ownership,possession and lien, if any
)legal re$uirement and made with in it authority
)investment register or schedule of investments
)physical inspection at the end of the year
)certificate obtained from third parties
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*nvestment
Examine the valuation and disclosure:
) cost of investment includes purchase price,bro.erage, stamp duty, transfer fee etc+
)7urrent investment should be valued at thelower of cost or fair value+
) un$uoted shares" ascertain the fairness if
valuation method);ong term investment should be valued at cost
)disclosure on balance sheet
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0ebtor
Ascertain the existence, ownership anddisclosure :
-schedule of debtors duly signed by the
responsible officer of the client)inspect documents"" sales invoice, transporter/s
receipt, credit memos etc+
) examine the realisability of debt as on date ofbalance sheet" non)compliance of terms ofcredit, debt under dispute = litigation, repeateddishonour of che$ues and so on
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0ebtor
)recompute the provision for bad and dobbt fulldebt and compare with past periods
)bad debt written off"court order
)subse$uent bad debt recovery" recorded in amemorandum record
)communication directly" on the date of balance
sheet
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1ills 8eceivable
Verify the opening balance of bills receivable"audited balance sheet of the last year
Examine the relevant documentary evidence"
covering notes sent by the customer and thesame issued by the ban. on discounting etc+
Physical verification of the bill" properly drawn,stamped,duly accepted and not over due for
payment *f discounted" confirmation from the ban.,
entries in cash boo.,
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1ills 8eceivable
*f dishonored" ade$uate provision made for therecoverable amount, concerned party shouldbe informed
1ill matured and amount not received"renewed
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*nventories
*nventories consist of tangible items that are heldfor sales or use in the production of goods andservice
Verify existence ownership and possession)examine stoc. record" receiving report,
inspection report, material issue notes etc+
)physical count of inventory)
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7ash in hand n the date of balance sheet
Presence of cashier
7hec. system of ma.ing payments and safety
arrangements
7ash in transit" proper documentary evidencesand correspondence
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7ash at ban. 7omparison of the balances as shown in the
cash boo. and the pass boo.
Preparation of ban. reconciliation statement
btaining letter of confirmation from the ban. 2eparate certificate for different accounts
should be obtained
*n case , there are accounts with more thanone ban., the auditor should verify themindividually
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0ebentures Articles of association and memorandum of
association" power and limitation
7ash received from the issue of debentures"
cash boo., ban. statement, application andallotment register of debenture holder
;ist of debenture holder
0ebenture trust deed 7ompliance with the provision of the
7ompanies Act
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0ebentures 8egister of charges
Provisions regarding redemption
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Trade 7reditors = 2undry 7reditors 2chedule of creditors
Purchase ledger" original invoices, credit notesetc
Provisions of discount on creditors" referenceto creditors account
All purchases during the year
>ire purchase" conditions of the arrangement ?npaid debt for long time" en$uiry -
misappropriation
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1ills Payable ;ist of outstanding obligations
7onfirmatory statements from the drawersdirectly
1ill paid after the balance sheet should beverified
Paid should not be shown as outstanding
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7ontingent ;iability
7ontingent liability refers to past transactions orother events or conditions, that may arise inconse$uence of one or more future events
) depends upon happening and non)happeningof an event
Example"
a( pending litigation against the entityb(guarantees of third party obligation
c(discounted bill receivable
d(&embership of a company limited by
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