Verification and Valuation of Assets and
Liabilities:
Meaning of verification
Verification means ‘proving the truth’ or ‘confirmation’. Most
impartment duties of an auditor in connection with the
audit of accounts of a concern is to verify the assets and
liabilities appearing in the balance sheet and i.e. assets has
or not mortgage or pledge or disposed of . He has not only
to examine the arithmetical accuracy and bona fide of the
transactions in the book of account by vouching only, but
he has also to see that the assets as recorded in the balance
sheet actually exist. Finally to prove the physical existence
without having or not any pledge or mortgage.
Significance of verification
The most important duties of an auditor in connection with
the audit of the accounts of a concern is to verify the assets
and liabilities appearing in the balance sheet. The auditor
should pay a surprise visit and actually count the cash in
hand 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 a
certificate regarding the balance at the bank directly from
the bank. If the land or property has been mortgage, the
auditor should examine the mortgage deed and find out
whether the mortgage is properly executed in favor of his
client. If the liabilities are overstated or understated the
balance sheet shall not represent a true and fair view of the
state of affairs of the company. So verification is required to
present company’s true and fair information.
Way of verification of Assets
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Comparing the ledger accounts with the balance
sheet.
Verifying the existence of the assets on the date of
the balance sheet.
Satisfying that they are free from any charge or
mortgage.
Verifying their proper value
Assets were acquired for the business not for any
individuals.
Problem in the verification of assets
 It is not possible for an auditor to inspect each and
every assets, e.g., stock.
 The auditor does not verify any books of account or
any document which he was not required to examine
and if consequently his client suffer any loss.
 It may not be for the auditors to visit the branch,
because the branch should be instructed to deposit the
cash in the bank on the balance sheet date.
 An auditor is to verify the existence of assets stated in
the balance sheet and he will be for any damage
suffered by the client if he fails in his duty.
Valuation of assets and Liabilities
 Valuation 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 sheet
and the estimated profits of a concern depend upon
the correct valuation of the assets and Liabilities and it
is 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.
Problems in the valuation of assets
The term estimated is the main problem of valuation.
Replacement value or Realizable value would be
considered 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 consideration
following five factors: a) their original cost b) The
estimated working life of the assets c)the wear and
tear of the assets d) breakup value of the assets and
e)the chances of the assets becoming obsolete.
Mode of valuation of fixed assets
Fixed assets are to be valued at original or historical cost less
total depreciation written off up to the date of the balance
sheet. They are valued at what is known as a “going concern
value” or “conventional value” or “token value”. The reasons
for their principle are that these assets are acquired for
running the business and not for the purpose of resale. No
notice is taken of any fluctuation in their price as the
fluctuation does not effect the earning capacity of the
assets of the business. They are not valued at the saleable
value. As mentioned above, current replacement or
realizable value is not taken into account while valuing the
fixed assets. Therefore; they should not be valued at the
price they would fetch(obtain) at the date of balance sheet,
if they are sold.
Floating assets or current assets and the mode
of their valuation
Floating assets are those which are acquired for resale or produced for the
purpose 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 their
original cost as it would mean taking into consideration a fictitious
profit to the date of the balance sheet because they have not been sold
as yet. Moreover, it is possible that later on when they are sold; the
market price may be lower. In the valuation of the floating assets we do,
take into consideration the market fluctuation.
Intangible assets
Intangible 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 of
sale of business. In his examination of such assets , the
auditor should determine the following 1. Basis of originally valued;the reasonableness and adequacy
of the amortization program or the write-off procedure.
2. Fair and adequate balance sheet presentation
3. The accuracy, completeness and proper control of the
income arising from the ownership of such an assets as
leasehold and patents.
4. He must see that such assets are shown properly and fairly
in 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
Valuation of tangible assets
1. They should be shown at cost price unless they had been acquired in a
non cash transaction in which case they must be shown at fair market
price.
2. They are the least liquid of all assets since most of them are unsaleable
unless the business or a part of it is sold.
Verification of liabilities
If the liabilities are overstated or understated the balance sheet shall not
represent a true and fair view of the state of affairs of the company.
Similarly the profit and loss account will be incorrect.
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2.
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
cash book, pass book and minute book to find out the number and
different classes of share issued.
Outstanding expenses: The auditor should get a certificate from a
responsible official to see that all expenses for the current year are
included and that the payment for each expenses such as interest,
discounts, salaries, wages, legal expenses, which have not been paid
are included.
Verification of liabilities (Continued)
 Trade creditor: The auditor should ask for a 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 book, return outward book, bills payable book,
cash book etc.
 Loans: If interest on the loan has not been paid, he should see that it is
shown as a liability. If loan has been secured by mortgaging any
property, it should be indicated in the balance sheet.