verificatio and valuation

8/6/2019 Verificatio and Valuation

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Verification and Valuation of Assets and

Liabilities: Meaning of verification

Verification means proving the truth or confirmation. Mostimpartment duties of an auditor in connection with theaudit of accounts of a concern is to verify the assets andliabilities appearing in the balance sheet and i.e. assets hasor not mortgage or pledge or disposed of . He has not onlyto examine the arithmetical accuracy and bona fide of thetransactions in the book of account by vouching only, but

he has also to see that the assets as recorded in the balancesheet actually exist. Finally to prove the physical existencewithout having or not any pledge or mortgage.


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Significance of verificationT

he most important duties of an auditor in connection withthe audit of the accounts of a concern is to verify the assetsand liabilities appearing in the balance sheet. The auditorshould pay a surprise visit and actually count the cash inhand to prevent the cashier to borrow money and make up

the deficiency which was due to embezzlement in the past.To prevent the fraud, the auditor will do well to get acertificate regarding the balance at the bank directly fromthe bank. If the land or property has been mortgage, theauditor should examine the mortgage deed and find outwhether the mortgage is properly executed in favor of hisclient. If the liabilities are overstated or understated thebalance sheet shall not represent a true and fair view of thestate of affairs of the company. So verification is required to

present companys true and fair information.


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Way of verification of Assets1. Comparing the ledger accounts with the balance

sheet.

2. Verifying the existence of the assets on the date ofthe balance sheet.

3. Satisfying that they are free from any charge ormortgage.

4. Verifying their proper value5. Assets were acquired for the business not for any

individuals.


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Problem in the verification of assets

y It is not possible for an auditor to inspect each andevery assets, e.g., stock.

y The auditor does not verify any books of account orany document which he was not required to examine

and if consequently his client suffer any loss.y It may not be for the auditors to visit the branch,

because the branch should be instructed to deposit thecash in the bank on the balance sheet date.

yAn auditor is to verify the existence of assets stated inthe balance sheet and he will be for any damagesuffered by the client if he fails in his duty.


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Valuation of assets and LiabilitiesyValuation means to conform that all assets are shown

in the balance sheet with their proper book value.Proper book value means All assets should be shown

with its cost price but estimated depreciation must be

deducted from that. The accuracy of the balance sheetand the estimated profits of a concern depend uponthe correct valuation of the assets and Liabilities and itis made by owner or accountant. Auditor has simply to

apply test to prove the correctness of that valuation.Finally valuation of assets and liabilities means to

present actual figure after deducting all required.


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Problems in the valuation of assetsThe term estimated is the main problem of valuation.

Replacement value or Realizable value would beconsidered to valuation of assets is another problem.

What would be the scrape value or breakup value ?Answer is difficult because it is estimated.

So, Assets are valued after taking into considerationfollowing five factors: a) their original cost b) The

estimated working life of the assets c)the wear andtear of the assets d) breakup value of the assets ande)the chances of the assets becoming obsolete.


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Mode of valuation of fixed assets

Fixed assets are to be valued at original or historical cost lesstotal depreciation written off up to the date of the balancesheet. They are valued at what is known as a going concernvalue or conventional value or token value. The reasonsfor their principle are that these assets are acquired for

running the business and not for the purpose of resale. Nonotice is taken of any fluctuation in their price as thefluctuation does not effect the earning capacity of theassets of the business. They are not valued at the saleable

value. As mentioned above, current replacement orrealizable value is not taken into account while valuing thefixed assets. Therefore; they should not be valued at theprice they would fetch(obtain) at the date of balance sheet,if they are sold.


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Floating assets or current assets and the mode

of their valuation

Floating assets are those which are acquired for resale or produced for thepurpose of sale or converting them into cash, e.g., bills receivable, etc.They are either or acquired cash or acquired with a view to converting

them into cash. They should never be valued at more than theiroriginal cost as it would mean taking into consideration a fictitiousprofit to the date of the balance sheet because they have not been soldas yet. Moreover, it is possible that later on when they are sold; themarket price may be lower. In the valuation of the floating assets we do,take into consideration the market fluctuation.


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Intangible assetsIntangible assets are those assets which cannot be seen or

touched but it has sales value. e.g. , goodwill, copyright,patents, trademarks. Normally it is valued at the time ofsale of business. In his examination of such assets , theauditor should determine the following -

1

. Basis of originally valued;the reasonableness and adequacyof the amortization program or the write-off procedure.

2. Fair and adequate balance sheet presentation

3. The accuracy, completeness and proper control of theincome arising from the ownership of such an assets asleasehold and patents.

4. He must see that such assets are shown properly and fairlyin the financial statement and follow the GAAP to record.

5.The basis on which such assets were originally valued. And,

they should be shown separately


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Valuation of tangible assets

1. They should be shown at cost price unless they had been acquired in anon cash transaction in which case they must be shown at fair marketprice.

2. They are the least liquid of all assets since most of them are unsaleableunless the business or a part of it is sold.


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Verification of liabilities

If the liabilities are overstated or understated the balance sheet shall notrepresent a true and fair view of the state of affairs of the company.Similarly the profit and loss account will be incorrect.

1. Capital:Although capital is not the liability of a company, still itshould be verified to enable an auditor to give a certificate in regard tothe correctness of the balance sheet. The auditor should examinecash book, pass book and minute book to find out the number anddifferent classes of share issued.

2. Outstanding expenses: The auditor should get a certificate from aresponsible official to see that all expenses for the current year areincluded and that the payment for each expenses such as interest,discounts, salaries, wages, legal expenses, which have not been paidare included.


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Verification of liabilities (Continued)

y Trade creditor: The auditor should ask for a schedule of the creditorsand check it with the purchase ledger which in its turn may be checked

with the books of original entry with the purchase invoices, credit

notes, goods inward book, return outward book, bills payable book,cash book etc.

y Loans: If interest on the loan has not been paid, he should see that it isshown as a liability. If loan has been secured by mortgaging anyproperty, it should be indicated in the balance sheet.

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