The Bhopal School of Social Sciences

(Affiliated to Barkatullah University, Bhopal)

E-content Development
Study Material
For
AUDITING
UNIT-III
Module-2
VERIFICATION & VALUATION OF
ASSETS & LIABILITIES
([Link] Third Year)

Prepared by:
Dr. Binoy Arickal
Assistant Professor
Department of Commerce
BSSS, Bhopal
VERIFICATION & VALUATION OF ASSETS & LIABILITIES

Module-2
Index

S. No. Content
1. Introduction

2. Objectives

3. Verification & Valuation of various items

4. References
 VERIFICATION AND VALUATION
(Module-2)

VERIFICATION
MEANING AND DEFINITION
Verification means the procedures normally carried out at the year end, to confirm the ownership,
valuation and existence of items at the balance sheet date. In simple words verification means,
‘proving the truth or conformation.’

“The verification of assets implies an enquiry into the value, ownership and title, existence and
possession, and the presence of any charge on the assets.” -
Spicer and Pegler

VALUATION
MEANING AND DEFINITION
Valuation means to set the exact value of an asset on the basis of its utility. Valuation forms an
important part of the everyday audit. It is because the accuracy of balance sheet depends much upon
how correctly the estimation of the value of various assets and liabilities has been made. Both over-
valuation and under- valuation of assets and liabilities would exhibit wrong picture of the financial
affairs of a concern. The auditor has to see that the assets and liabilities appearing in balance sheet
have been exhibiting their proper value i.e. neither they have been over-valued nor under- valued.

METHODS OF VALUATION:
Cost price: The price which is paid for the acquisition of an asset is known as cost price, of course
the expenses incurred in the purchase of an asset and its installation in its cost price.
Market value: A value which an asset can fetch in the market when sold is known or termed as
Market value.
Replacement Value: It is a price at which a particular asset can be replaced. The assets such as
commission, freight etc. is included in such a value.
Book Value: A value at which an asset appears in the books of accounts is known as its book value.
It is usually the cost less depreciation written off so far.
Going Concern value or Conventional value or token value or Historical value: It is equivalent
to the cost less reasonable amount of depreciation written off. No notice is taken of any fluctuation
in the price of the assets. Reason for this is that these assets are acquired for use in the business and
not for sale.
Residual Value: A value which will be realized in the market and received from the sale of an asset
it is known as its realizable Value.
Scrap Value: A value which is obtained from the asset if it is sold as scrap.

OBJECTIVES OF VERIFICATION OF ASSETS.

The auditor’s objective with regards to verification of assets generally is to satisfy himself
about the following:

Existence: The physical verification of fixed assets is primarily the responsibility of the
management and not the auditor. In order to verify the existence of assets, he should examine the
records with reference to the documentary evidence and the internal controls.

Ownership: Ownership of the assets should be verified by examining the title deeds. In case the
title deeds are held by other persons such as solicitors or bankers, confirmation should be obtained
directly by the auditor through a request signed by the client. In case of assets without any document
to title, such as debtors, cash and work in progress, the auditor should verify the ownership by
designing audit procedures to ascertain the efficacy of internal control

Possession: The auditor should ascertain that the assets are in the possession of the client. If any
asset is in possession of any other person, it should be seen that
such possession has been duly authorized by the client.

Adequate disclosure of encumbrances or lien: The duty of an auditor with regards to such
disclosures is two fold firstly, he should adopt audit procedures to ascertain whether any asset is
subject to charge samples of some such procedures are representations obtained from the
management and confirmation obtained from the bank with regards to the purpose of holding
securities. Secondly, if a charge exists, the auditor should ensure its proper disclosure in the financial
statements.
Valuation and disclosure: The auditor should satisfy himself that the assets have been valued and
disclosed in the financial statement according to the generally accepted accounting principles and
statutory requirements, if any.

The objectives of an auditor in regard to verification of liabilities is generally to satisfy himself that
The balances appearing in the balance sheet are really liabilities.
Unrecorded liabilities, whether by accident or design, are brought into books.
They are properly valued, and
They are properly classified and disclosed as per statutory requirements or generally accepted
principles and policies.

VERIFICATION AND VALUATION OF DIFFERENT ASSETS

For the purpose of convenience we may divide the assets in the following categories
Intangible Assets. Viz., goodwill, patents, trademarks, copyrights etc.
Fixed Assets viz., land and building, plant and machinery, furniture and fixtures etc.
Floating assets viz., cash in hand and at bank, BR, stock in trade, sundry letters etc.

Intangible assets:
Goodwill:

Verification: Where goodwill has been purchased along with a running business, the same should
be verified from the agreement with the vendor showing the price paid for it. But when the amount
is not specially fixed, the goodwill is the amount for the purchase of the business over the net assets
taken over.
It should be verified that the goodwill has been recorded in the books of accounts only when some
consideration in money or its equal has been paid for.
In case of partnership the auditor should verify the changes made in the goodwill account from time
to time on the basis of provisions made I the partnership deed.

Valuation: Goodwill should be valued at a cost less amounts written off.

Patents:
Verification: The Auditor should examine the patents with the help of certificate which have
granted such patent rights. The auditor should also ensure that the patents are registered in the name
of client

Valuation: patents must be valued at cost less depreciation. The patents should be written off in a
period of sixteen years after which the right automatically lapses unless the term is extended.

Copyrights:
Verification: In verifying the copyrights, auditor should inspect the agreement between the auditor
and the publisher.
Valuation: Generally the value of the copyright is not stable because copyrights lose their value by
passage of time. In the balance sheet copyright must be shown a cost less amounts written off from
time to time.

Trademarks:
Verification: Trademarks can be verified by examining the assignment deed duly endorsed by the
office of the registrar of trademarks. In case they have been purchased from others, the auditor
should vouch the expenditures incurred in connection with their acquisition e.g. registration fees,
payments made to designers etc.
Valuation: The valuation method is the most suitable method valuation of trademarks. it should be
seen that trademarks are properly valued and shown in balance sheet.

Fixed Asset:
Freehold land and building:
Verification: The auditor should examine the title deeds to ensure that they are in the name of the
client. Any addition or sale during the year should be carefully examined.
Valuation: Freehold land being a no depreciable asset is generally shown at cost which includes the
purchase price, broker’s commission, registration fees, legal charges etc. Any payments made to
Municipality Corporation or improvement trust as developmental charges should be included in the
cost. If market realizable value is taken as basis for valuation of freehold land the same should be
disclosed clearly in the balance sheet
Valuation of buildings: Buildings should always be valued at cost less depreciation at a reasonable
rate. Actually, the market or realized value of the buildings
keeps on fluctuating. Therefore, it should be taken into account while valuing the buildings.

Leasehold property:
Verification: The auditor should inspect the lease agreement to find out the value and duration. The
auditor should see that lease agreement is registered with the registrar and certificate testing to the
validity of the same.
Valuation: Leasehold land and buildings are to be valued at cost less depreciation which should be
sufficient writes it off completely during the period of lease

Plant and machinery:

Verification: Auditor should commence the process of verification by obtaining a schedule of plant
and machinery certified by responsible officer of the concern.
Valuation: For valuing the plant and machinery, the auditor should prepare a list of each machine
from the plant register and should get the list certified by the woks manager. The auditor should see
the plant and machinery account is shown in the balance sheet at cost less depreciation after making
proper adjustments regarding new purchases of machinery and sale of older machinery during the
year.

Floating Assets:
Cash in hand:
Verification: The auditor should verify the cash in hand by actually counting it
on the date of balance sheet.
Cash at Bank:
Verification: The auditor should verify cash at bank by comparing the balance shown in cash book
and pass book. In verifying the bank balance the auditor should also prepare bank reconciliation
statement to ascertain the correct position.
Stock in trade:
Verification: It is practically impossible for auditor to physically verify each item of the stock in
hand because of various reasons i.e. limited time and the lack of technical knowledge. Therefore the
auditor has to rely upon test checks to ascertain the accuracy of stock in trade
Valuation: The stock in trade being a floating asset should be valued at cost price or market price
whichever is less.
The cost price can be calculated from any of the following methods
Unit cost method
Average cost method
Investments:
First in first out method (FIFO)
Last in first out method (LIFO)
Highest In first out (HIFO)
Base stock method
Adjusted selling price method
Standard cost method.
VERIFICATION: The auditor should verify the details of the schedule of investment by applying
tests e.g. financial journals and newspapers should be consulted for checking the market rates. The
securities themselves may be consulted or the broker’s notes may be examined for checking the cost
etc. The auditor should verify the amount of interest or dividends ass have already have been
declared before the date of the balance sheet, should be taken into account as outstanding ones.

Valuation: If investments are to be held as a fixed asset for the purpose of earning interest/dividend;
these are to be valued at cost which includes brokerage and stamp duty paid in regard there to.
But if the investments are held as current assets, these assets should be valued at cost or market price
whichever is less. The auditor may come across the situations where the market Value is much
below the cost of acquisition of investments. Ordinarily he should ignore a temporarily fall in the
market value, but where the fall in value seems to be of a permanent nature, he should see that
adequate depreciation is provided by passing the required entries.

Verification of Liabilities:
Capital:
In case of firm, the auditor should verify the liability on account of the capital with the help of
partnership deed; pass book and the cash book.
In case of a company auditor should examine the memorandum of association to verify the
information as to the maximum capital the company is authorized to raise. He should also ascertain
the amount of called up in respect of each class of shares and also ascertain how many shares of
each class are allotted as fully paid. Auditor should also specify the sources from which the bonus
shares are issued i.e. capitalization of profits are reserves for share premium accounts. He should
also ensure that capital profit, if any on issue of forfeited shares, has been transported to capital
reserve.

Debenture:
The auditor should note the following points while verifying the depreciation:
Debenture trust deed’ should be inspected and with its help, the debenture account in the ledger
should be examined.
If necessary, the auditor can obtain a certificate from the debenture holders.
Since the debentures are supposed to be redeemed, the auditor should see the arrangements for their
redemption.
The debenture may be issued at par or at premium.
The auditor should see the details as given in the Register of Mortgages and charges.

Trade creditors:
The First task the auditor is to ask for schedule of creditors.
The purchase ledger should be checked with the books of original entry, invoices and credit notes
etc.
Discount on creditors should be checked with reference to creditor’s account.
If any debt Is found unpaid for a longer period of time any enquiry should be made since it is possible
that instead of paying to the creditor the amount might have been misappropriated

Loans:
The auditor should examine the loan agreement in order to ascertain the terms of loan, amount of
loan and period and the nature of the loan. In case the loans are overdrafts have been taken from a
bank an agreement with the bank and a certificate to that effect should be obtained and examined.

Outstanding liabilities for expenses:

The auditor should obtain a certificate from responsible officer of the company stating that all
outstanding liabilities for expenses incurred have been brought into account.
The auditor can verify those items of expenses which usually constitute outstanding liabilities.
E.g. salaries payable, legal expenses, rent, wages, audit fees etc.

Reserves and Funds:

The auditor should examine and verify that whether the decision to create reserve or fund is dictated
by needs and circumstances of business and relevant legal provisions and check the relevant entries
in books of accounts and check the entries passed for the purpose in the profit and loss appropriation
account.
Income Received in Advance
The auditor should examine the schedules of income received in advance and ensure that these are
fully disclosed in the balance sheet
The auditor duty is to examine whether interest, rent, installments etc, received in advance should
be classified as liability and shown as such in the balance sheet.

DISTINCTION BETWEEN VOUCHING, VERIFICATION AND VALUATION

Vouching Verification Valuation

Meaning Vouching is a process of Verification is a process Valuation is a process

comparing the entries in which proves the which certifies the correct
the books of accounts existence, ownership value of the assets and
with the bonafide and title to the assets liabilities at the date of
vouchers balance sheet.
Subject matter Vouching is made of the Verification on the Valuation is also made of
entries recorded in the other hand is made of assets and liabilities
books of original entry assets and liabilities appearing in the balance
and their posting in the appearing in the balance sheet at the end of the
ledger sheet at year
the end of the year
By Whom Vouching is done by the Verification on the Valuation on the other
senior auditor and audit other hand is done by hand is done by the
clerks. the auditor himself or auditor himself or his
his associates
associates
When Vouching is done after Verification on the Valuation on the other is
the entry of transactions other is done at the end done at the end of the
in the account books of the financial year financial year when the
when the final accounts final accounts are to be
are to be prepared
prepared
Evidence In vouching , bonafide Verification is made on In valuation an auditor
vouchers are sufficient the basis of evidence has to depend upon the
evidence for vouching such as the title deeds, certificates of the
receipts and payments owners/directors.
etc.
Questions:
1. Verification is something more than the valuation of assets and liabilities. Explain.
2. What do you mean by Verification and Valuation.
3. How would you verify Goodwill and Stock in trade.
4. Differentiate between Verification, Vouching and Valuation.
References:
1. Ahuja, Ram(2003), Research Methods, Rawat Publications, NewDelhi,pp.l93-194.
2. American Institute of Certified Public Accountants (AICPA) (2002), ‘The Enron Crisis:
The

3. AICPA, The Profession & The Public Interest: A Brief History of Self-Regulation’,
New York,NY: AICPA.

4. Arel, Barbara and others, (2005) ‘Audit Firm Rotation and Audit Quality’, The CPA
Journal, [Link]

5. Carmichael, D.R(1978),‘Has the Accounting Profession Lost Control of its Destiny?’

KansasIV, pp.75-94.

6. Chattopadhya,P.(2008), ‘Corporate Mis-Govemance’, LAA Research Foundation.

Chaudhuxy,Priya Ranjan(2001), ‘The Structure of Company Accounts in India’,
Corporate Financial Reporting, University of Calcutta,p.46.

7. [Link]
auditing/9789332501379/xhtml/[Link]