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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)*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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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.


)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


)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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Documents

Auditing Unit 3