Verification And Valuation Of Assets 212q5a

Question# 01: What do you mean by ‘Verification’? Distinguish between Verification and Valuation of Assets. Question# 02: What are the problems that we find while evaluating our assets? How to overcome this problem? Question# 03: Describe the different modes of Valuation of Assets and Liabilities.

Answer to the Question no. 1 Verification: There are several meanings of the term ‘Verification’. These are

 A confirmation of truth or authority    

The evidence for such a confirmation A formal assertion of validity Establishment of the correctness of a theory, fact An inspection of something, etc.

Therefore, Verification is intended to check that a product, service, or system that meets a set of initial design requirements, specifications, and regulations. In the development phase, verification procedures involve performing special tests to model or simulate a portion, or the entirety, of a product, service or system, then performing a review or analysis of the modeling results. In the post-development phase, verification procedures involve regularly repeating tests devised specifically to ensure that the product, service, or system continues to meet the initial design requirements, specifications, and regulations as time progresses. It is a process that is used to evaluate whether a product, service, or system complies with regulations, specifications, or conditions imposed at the start of a development phase. Verification can be in development, scale-up, or production. This is often an internal process.

Verification and Valuation of Assets: Meaning of Verification of Assets: Verification means the proof of existence or confirmation of assets and liabilities on the date of Balance Sheet. Verification usually indicates verification of assets of any organization, which can be done by the examination of value, ownership, existence and possession of any assets. So, verification is a process which includes: i. ii. iii. iv.

Valuation of assets at its proper value Ownership and title of the assets Confirmation about the existence of the assets and Satisfaction about the condition that they are free from any charge or mortgage.

Meaning of Valuation of Assets: Valuation of assets means the examination of the accuracy and propriety of the valuation of those assets, which are shown in the Balance Sheet of any concern at the end of the financial year.

So, valuation is an operation which includes: i. ii. iii. iv. v.

Obtaining all the necessary information regarding valuation Analyzing all the figures available Confirming the fact that the valuation i8s being determined on the basis of generally accepted conventions and ing principles Ensuring the consistency of the methods followed for the valuation from year to year and Obtaining an opinion regarding the accuracy of valuation

Difference between Verification and Valuation: Valuation of assets is a part and parcel of verification. Without proper valuation of assets, verification is not possible. Verification includes, apart from valuation, the examination of ownership right, the existence of the asset in the business and its freeness from any sort of charge or mortgage.

Answer to the Question no. 2 Problem of Verification Without proper verification of assets and liabilities, it is not possible for the auditor to certify the Balance Sheet as it exhibits a true and fair view of the state of affairs of the business. It will never be possible on the part of the auditor to perform the function in his responsibility and in accordance with his own knowledge and expertise. For example, if the auditor is required to the stock-in-trade at the end of the ing period, it will take weeks and months to complete this work. Not only that, the auditor will have to take help of experts in this field. In addition to that, there are certain assets which have no physical existence in appearance, namely goodwill, patent, copyright, trademarks etc. In these cases, the auditor has to conduct verification on the basis of available documents.

Problem of Valuation The various problems which an auditor faces while conducting valuation of assets and liabilities are stated below:

Character of the Assets: In some cases, it is not possible to identify the character of the asset for the purpose of valuation as whether it is fixed asset or current asset. The mode of valuation process of fixed asset is different from the mode of valuation process of current assets, e.g... Investments.

Use of Assets In some situations, the same asset is available for sale and again is used in the organization. The valuation process also depends on the nature of use of the concerned assets, e.g., stock of furniture. Estimated Life The life of the fixed assets is not certain. The valuation of these assets is made on the basis of estimated life of the assets. However, the determination of estimated life is not an easy task Eventual Problems It is not possible for the auditor to take into consideration the events occurring after Balance Sheet date, which have the effect on valuation of assets. Lack of Information The auditor may not be in possession all the relevant information, which is required to be considered by the auditor in the determination of the value of assets.

To solve the problems, the following suggestion can be made: 1. The fixed assets should be valued at replacement cost. 2. The fixed assets should be written up according to the market price of the assets prevailing on the balance sheet date. 3. The stock-in-trade should be valued at the market price and depreciation should be provided on the value of the stock so arrived at. 4. The index method of adjusting the s to reflect the changes in the purchasing power of money should be followed.

Answer to the Question no. 3 Verification and valuation of Different Kinds of Assets: 1. Cash in Hand: The auditor should visit the business house at the close of the financial period or on the following morning and actually count the cash in hand and compare it with the balance in hand as shown by the cash book. This should be done in the presence of the cashier and if there is any shortage his certificate should be obtained. 2. Cash at Bank: To cash at bank, the auditor should examine the Bank Book and compare it with the balance as shown by the bank column of the cash book. The auditor should also see that the ‘checks’ outstanding’ and ‘checks’ not yet collected’ are genuine and not made

up in order to conceal the deficiency. If some of these checks are more than six months old, he should make inquiries.

3. Loans: 

Loans against Security of Land and Property:

The auditor has not only to examine the loan in the ledger, but he has to examine the documents relating to the security, promissory note or bond, acknowledgements by the parties. If the land or property has been mortgaged, the auditor should examine the mortgage deed. He should examine the title deeds relating to the property. He should enquire the rate of interest and the date on which it is payable. He should see that the mortgage is duly ed. He should see whether has the power to mortgage the property and borrow money. 

Loans against Security of Stock and Shares:

The auditor should get a list of such stock and shares which have been held as security. He should see that such shares are transferred to his client. He should inspect such shares and see that they do not belong to his client. The auditor should get a written acknowledgement from the borrower regarding the amount of loan on the date of the balance sheet or examine the agreement. 

Loans against Security of Goods:

Where loan has been advanced against a ‘Godown-keeper’s receipt, such a receipt should be examined. He should see that the warehouse rent has been paid by the borrower. He should examine the inspector’s report from time to time regarding the quantity of goods. 

Loans against Insurance Policy:

Last receipt for the payment of the paid should be examined. The auditor should see the notice of assignment of the policy has been given to the insurance company. 

Loans against Personal Security:

In case the loan has been granted against the personal security, the auditor should make an inquiry regarding the financial position of the surety as the value of such as security depends on his financial position. He should also see that no charge in the of loan has been made as such a course will discharge the security and the client loses that security.

4. Bills Receivable: The auditor should examine the Impersonal ledger or Bills Receivable Book with the bills receivable on hand. Some of the bills might have been sent out for collection in which case an inquiry should be made from the bank. While examining the bills, the auditor should see that they are properly drawn, stamped, duly accepted and that they are not overdue. In case there is any doubt about the payment of the bill on the due date, sufficient provision be made.

5. Investments: If there are a large number of investments, as in the case of banks and insurance companies, the auditor should ask for a schedule of investments held by his client. The schedule should give full particulars of the investments, e.g., name of investment, the cost price, the market price, book value, date on which the investment was acquired, rate of interest payable and the dates of the payment on interest, tax deducted and so on and compare these with the records in the books of his client. 

Valuation of Investments:

Having verified the existence of the investments the auditor should now proceed to find out whether they are properly valued at the date of the balance sheet. The basis of the valuation of investments in the balance sheet will, to a large extent, depend upon the purpose for which they are held. If they are held by Trust Company, the object of which is to earn dividends and interest and distribute such dividends and interest amongst the shareholders, such investments are to be treated as fixed assets and, therefore, even permanent fall in their value may be ignored, of course, subject to Articles of Association and the Memorandum of Association of the trust Company.

6. Stock-in-hand: The correctness of the profit and loss of a concern depends, to a great extent, upon the correctness of the value of the stock of goods in hand at the close of the period. The auditor has, therefore, not only to the existence of the stock in hand but he has also the see that it is valued according to certain accepted principles of ancy. The auditor should insist upon the maintenance of stock book, if it has not already been maintained. We may summarize the duties of auditor regarding the stock-in-hand:

   

The auditor should compare the prices with the original and independent data. Discounts, duties, freight and insurance should also be taken into consideration. Ascertain that obsolete, damaged or slow moving stock has been properly valued. He should investigate material changes, if any, in the inventory from the commencement and he close of the year.  He should check the computation of extensions.

Method of costing: The auditor must have definite idea about the cost price and the market price in order to value the closing stock properly. The following are the different methods of finding out the cost price of the stock of goods: o o o o o

Unit cost method or actual cost method. Average Cost method. First in, First out (FIFO) Method. Last in, first out (LIFO) Method. Base Stock Method.

o Standard Cost Method.

Verification and Valuation of Stock: o Physical verification of Stock:  Attendance of auditor during physical verification of stocks.  Examination of records.  Verification and confirmation: From third party. o Ensuring the ownership over the Stock. o Valuation of Stock: The auditor should see that the goods are properly valued. For the purpose of finding out the cost price, he will have to refer to the original invoices, cost s and market prices, which can be ascertained, form the financial papers, etc. he should see that the basic principles regarding the valuation of the stock are correctly followed.

7. Fixed Assets: The usual method of the valuation of fixed assets is the cost price less deprecation. It has been suggested that during the inflationary period, the replacement cost method should be followed while valuing the assets on the balance sheet date.

8. Books Debts: The auditor should see that the debts as shown in the balance sheet are recoverable. If they are doubtful, provision should be made for them. If they are bad, i.e., they are irrecoverable, they should not be shown on the assets side. If the auditor does not pay attention to these points, the balance sheet which he certifies to show a “true and fair view” may be wrong and he might be held liable for damages.

9. Endowment Policies: The auditor should physically inspect the policies and see that the payable has been paid and that the policy has not lapsed.

10. Patents Rights and Trade Marks: If the client holds large number of patents or trademarks the auditor should ask him to prepare a schedule giving. The description of patent, ed numbers, the dates on which they were acquired, the unexpired period. The auditor should examine the receipts for the payments of the fees. He should also see that the renewal fee has been paid each year at the right time.

11. Copy Right: Copy Right must be revalued at the date of balance sheet. If the publication does not command any sale, the copyright should be written off.

12. Furniture and Fixtures: The auditor should this item with the help of invoices. Any addition made during the year should be verified in the usual way. Any expenses incurred in the purchase of these assets should be debited to the Furniture . The auditor should see that proper depreciation is provided and that the net figure is shown in the balance sheet.

13. Plant and Machinery: This item is also verified by reference to the original invoices, correspondence, etc. The auditor should see that plant and machinery is properly depreciated.

14. Loose Tool, Patterns, and Dies: The auditor should examine the list of the loose tools. He should see that the list has been certified by a responsible officer.

15. Property: The auditor is not competent to examine the title deed relating to a property. In such a case he should insist upon the client to get a certificate regarding their validity from the solicitor. A certificate form an architect, surveyor or an engineer will also serve the purpose of the valuation of the property. The property may be (a) Freehold property (b) Lease hold property. In both case the auditor should examine the title deeds relating to the property.

16. Goodwill: Goodwill is defined as the assessed value of the reputation of a business or as the difference between the purchase price and the net assets which are purchased and the excess amount so paid, represents the goodwill acquired by the business. It is intangible asset. It value depends upon the earning capacity of the business and fluctuates accordingly. In case the Directors have debited the profit and loss and credited the amount to the goodwill , the auditor should object to this step especially when the action taken is likely to prejudice the interest on any class of shareholders. He should mention this fact in his report to the shareholders if such a step has been taken.

Verification and valuation of Different Kinds of Liabilities: 1. Capital: Although capital is not the liability of a company, still it should be verified to enable an auditor to give a certificate in regard to the correctness of the balance sheet. The auditor should examine the Memorandum of Association and the Articles of Association of the company. He should also examine the Cash Book, Book and Minutes Book of the Board of Directors to find out the number and different classes of shares issued.

2. Reserve s and Funds: For the audit of these two items, the auditor should examine the Minutes Books of directors meeting.

3. Debentures and Mortgage: The auditor should enquire in to powers of the company to borrow money.

4. Trade Creditors: The auditors should ask for schedule of the creditors and 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 Books, Return Outward Book, Bill Payable Book, and Cash Book. The Auditor should see that all Purchase during the year have been included in the purchases and especially purchases made at the close of the year.

5. Bills Payable: The auditor should this item form Bills payable Book and the Bills Payable . The Bills payable already paid should be checked from the Cash Book and examine the returned bills payable. To see the genuineness of the bills payable in hand on the date of balance sheet, the auditor should check the cash book of the succeeding year as to whether any payment has been made in respect of such bills.

6. Outstanding Expenses: The auditor should get a certificate from a responsible official to see that all expenses for the current year are included and the payment for each expenses such as interest, discounts, salaries have not been paid are included.

7. Loans: Reference may be made to the agreement and correspondence for getting the loan. If interest on the loan has not been paid, he should see that it is shown as a liability. In case of bank overdraft, the agreement with the bank and the security offered should be examined.

8. Contingent Liability: The auditors should consider the circumstance and the situation about the occurrence of that type of liabilities.