Ravi Tryng Out to Finalise

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AprojectReportonVERIFICATIONOFASSETS&

LIABILITIES

SubmittedToMissBHAVANA

A.VCOLLEGEVASAI(W)SemesterV

T.Y.BBI(20010-11)


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GROUP MEMBERS

IVAN MENEZES 27

SRIRAJ NAIR 35

SHRADHA GODSE 10

MANALI GHARAT 08

HEMA BRAHME 01


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CONTENTS:

INTRODUCTIONTOAUDIT

AUDITSINACCOUNTINGTYPESOFAUDITOR

MEANINGOFVERIFICATION

SCOPE&OBJECTIVEOFVERIFICATION

SIXTEENPRINCIPLESOFVERIFICATIONVERIFICATIONOFTRANSACTIONS

VERIFICATIONOFSPECIFICASSETS

VERIFICATIONOFSPECIFICLIABILITIES


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INTRODUCTION TO AUDIT:ThegeneraldefinitionofanAUDITisanevaluationofa

person,organization,system,process,enterprise,projectorproduct.Thetermmostcommonlyreferstoauditsinaccounting,butsimilarconceptsalsoexistinprojectmanagement,qualitymanagement,andforenergyconservation.

Anexaminationandverificationofacompany'sfinancialandaccountingrecordsandsupportingdocumentsbya

professional,suchasaCertifiedPublicAccountant. AnauditisanIRSexaminationofanindividualorcorporationstaxreturn,toverifyitsaccuracy.Therearethreetypesofaudits:correspondenceaudits(theIRSmailsarequestforadditionalinformation),officeaudits(aninterviewisconductedatalocalIRSoffice),andfieldaudits(aninterviewisconductedatataxpayer'splaceofbusiness,foracorporatetaxreturn).Sincethereisalwaysthechanceofan

audit,expertsrecommendkeepinggoodrecordstosupportalltheinformationinareturn.Thereasondetailedandaccuratebookkeepingissoimportantisthattheburdenofproofisonthefiler,nottheIRS.
http://www.businessdictionary.com/definition/examination.htmlhttp://www.businessdictionary.com/definition/verification.htmlhttp://www.investorwords.com/992/company.htmlhttp://www.businessdictionary.com/definition/accounting-records.htmlhttp://www.businessdictionary.com/definition/supporting-document.htmlhttp://www.investorwords.com/815/Certified_Public_Accountant.htmlhttp://www.investorwords.com/2648/IRS.htmlhttp://www.businessdictionary.com/definition/examination.htmlhttp://www.businessdictionary.com/definition/individual.htmlhttp://www.investorwords.com/4913/tax_return.htmlhttp://www.businessdictionary.com/definition/accuracy.htmlhttp://www.businessdictionary.com/definition/type.htmlhttp://www.businessdictionary.com/definition/information.htmlhttp://www.businessdictionary.com/definition/office.htmlhttp://www.investorwords.com/2866/local.htmlhttp://www.businessdictionary.com/definition/field.htmlhttp://www.investorwords.com/623/business.htmlhttp://www.investorwords.com/6775/corporate_tax.htmlhttp://www.investorwords.com/6775/corporate_tax.htmlhttp://www.investorwords.com/4244/return.htmlhttp://www.businessdictionary.com/definition/expert.htmlhttp://www.businessdictionary.com/definition/accurate.htmlhttp://www.investorwords.com/541/bookkeeping.htmlhttp://www.businessdictionary.com/definition/burden-of-proof.htmlhttp://www.businessdictionary.com/definition/burden-of-proof.htmlhttp://www.businessdictionary.com/definition/filer.htmlhttp://www.businessdictionary.com/definition/filer.htmlhttp://www.businessdictionary.com/definition/burden-of-proof.htmlhttp://www.businessdictionary.com/definition/burden-of-proof.htmlhttp://www.investorwords.com/541/bookkeeping.htmlhttp://www.businessdictionary.com/definition/accurate.htmlhttp://www.businessdictionary.com/definition/expert.htmlhttp://www.investorwords.com/4244/return.htmlhttp://www.investorwords.com/6775/corporate_tax.htmlhttp://www.investorwords.com/6775/corporate_tax.htmlhttp://www.investorwords.com/623/business.htmlhttp://www.businessdictionary.com/definition/field.htmlhttp://www.investorwords.com/2866/local.htmlhttp://www.businessdictionary.com/definition/office.htmlhttp://www.businessdictionary.com/definition/information.htmlhttp://www.businessdictionary.com/definition/type.htmlhttp://www.businessdictionary.com/definition/accuracy.htmlhttp://www.investorwords.com/4913/tax_return.htmlhttp://www.businessdictionary.com/definition/individual.htmlhttp://www.businessdictionary.com/definition/examination.htmlhttp://www.investorwords.com/2648/IRS.htmlhttp://www.investorwords.com/815/Certified_Public_Accountant.htmlhttp://www.businessdictionary.com/definition/supporting-document.htmlhttp://www.businessdictionary.com/definition/accounting-records.htmlhttp://www.investorwords.com/992/company.htmlhttp://www.businessdictionary.com/definition/verification.htmlhttp://www.businessdictionary.com/definition/examination.html


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AUDITS IN ACCOUNTING:

Auditsareperformedtoascertainthevalidityandreliabilityofinformation;alsotoprovideanassessmentofasystem'sinternalcontrol. The goal of an audit is to express an opinion on theperson/organization/system(etc)inquestion,underevaluationbasedonworkdoneonatestbasis.Duetopracticalconstraints,an audit seeks to provide onlyreasonable assurancethat thestatements are free from material error. Hence, statisticalsamplingisoftenadoptedinaudits.Inthecaseoffinancialaudits,asetoffinancialstatementsaresaidtobetrueandfairwhentheyarefreeofmaterialmisstatements-aconceptinfluencedbybothquantitativeandqualitativefactors.

Audit is avitalpartofaccounting.Traditionally,auditsweremainly associated with gaining information about financial

systems and the financial records of a company or a business(seefinancial audit). However, recent auditing has begun toincludeother informationabout the system, suchas informationabout security risks, information systems performance (beyondfinancial systems), and environmental performance. Asa result,


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thereare now professionsconducting securityaudits, ISaudits,andenvironmental.

Infinancial accounting, an audit is an independentassessment of the fairness by which a company's financialstatementsarepresentedbyitsmanagement. Itisperformedbycompetent, independent and objective person(s) known asauditorsoraccountants,whothenissueanauditor'sreportbasedontheresultsoftheaudit.

Incost accounting, it is a process for verifying the cost ofmanufactureorproductionofanyarticle,onthebasisofaccountsasregardsutilizationofmaterialorlabourorotheritemsofcosts,maintainedbythecompany.Insimplewordsthetermcostauditmeansasystematicandaccurateverificationofthecostaccountsand recordsandchecking of adherence to theobjectives of thecostaccounting.

The Definition forAuditing and Assurance Standard (AAS)1byICAI- "Auditing is the independentexamination of financialinformation of any entity, whether profit oriented or not, andirrespectiveofitssizeorlegalform,whensuchanexaminationisconductedwithaviewtoexpressinganopinionthereon."


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TYPES OF AUDITORS:

Auditorsoffinancialstatementscanbeclassifiedintotwocategories:

External auditor /Statutory auditorisanindependentPublicaccountingfirmengagedbytheclientsubjecttotheaudit,toexpressanopiniononwhetherthecompany'sfinancial

statementsarefreeofmaterialmisstatements,whetherduetofraudorerror.Forpublicly-tradedcompanies,externalauditorsmayalsoberequiredtoexpressanopinionovertheeffectivenessofinternalcontrolsoverfinancialreporting.Externalauditorsmayalsobeengagedtoperformotheragreed-uponprocedures,relatedorunrelatedtofinancialstatements.Mostimportantly,externalauditors,thoughengagedandpaidbythecompanybeingaudited,areregardedasindependentauditors.

ThemostusedexternalauditstandardsaretheUSGAASoftheAmericanInstituteofCertifiedPublicAccountants;andtheISAInternationalStandardsonAuditingdevelopedby
http://en.wikipedia.org/wiki/External_auditorhttp://en.wikipedia.org/wiki/Statutory_auditorhttp://en.wikipedia.org/wiki/Statutory_auditorhttp://en.wikipedia.org/wiki/Public_accountinghttp://en.wikipedia.org/wiki/Public_accountinghttp://en.wikipedia.org/wiki/Financial_statementshttp://en.wikipedia.org/wiki/Financial_statementshttp://en.wikipedia.org/wiki/Publicly-traded_companieshttp://en.wikipedia.org/wiki/Internal_controlshttp://en.wikipedia.org/wiki/Financial_reportinghttp://en.wikipedia.org/w/index.php?title=Independent_auditor&action=edit&redlink=1http://en.wikipedia.org/wiki/GAAShttp://en.wikipedia.org/wiki/American_Institute_of_Certified_Public_Accountantshttp://en.wikipedia.org/wiki/International_Standards_on_Auditinghttp://en.wikipedia.org/wiki/International_Standards_on_Auditinghttp://en.wikipedia.org/wiki/American_Institute_of_Certified_Public_Accountantshttp://en.wikipedia.org/wiki/GAAShttp://en.wikipedia.org/w/index.php?title=Independent_auditor&action=edit&redlink=1http://en.wikipedia.org/wiki/Financial_reportinghttp://en.wikipedia.org/wiki/Internal_controlshttp://en.wikipedia.org/wiki/Publicly-traded_companieshttp://en.wikipedia.org/wiki/Financial_statementshttp://en.wikipedia.org/wiki/Financial_statementshttp://en.wikipedia.org/wiki/Public_accountinghttp://en.wikipedia.org/wiki/Public_accountinghttp://en.wikipedia.org/wiki/Statutory_auditorhttp://en.wikipedia.org/wiki/External_auditor


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theInternationalAuditingandAssuranceStandardsBoardoftheInternationalFederationofAccountants.

Internalauditorsareemployedbytheorganizationtheyaudit.Theyperformvariousauditprocedures,primarilyrelatedtoproceduresovertheeffectivenessofthecompany'sinternalcontrolsoverfinancialreporting.DuetotherequirementofSection404oftheSarbanesOxleyActof2002formanagementtoalsoassesstheeffectivenessoftheirinternalcontrolsoverfinancialreporting(asalsorequiredoftheexternalauditor),internalauditorsareutilizedtomakethis

assessment.Thoughinternalauditorsarenotconsideredindependentofthecompanytheyperformauditproceduresfor,internalauditorsofpublicly-tradedcompaniesarerequiredtoreportdirectlytotheboardofdirectors,orasub-committeeoftheboardofdirectors,andnottomanagement,sotoreducetheriskthatinternalauditorswillbepressuredtoproducefavorableassessments.

ThemostusedInternalAuditstandardsarethoseoftheInstituteofInternalAuditors.

Consultantauditorsareexternalpersonnelcontractedbythefirmtoperformanauditfollowingthefirm'sauditingstandards.Thisdiffersfromtheexternalauditor,whofollowstheirownauditingstandards.Thelevelofindependenceistherefore

somewherebetweentheinternalauditorandtheexternalauditor.Theconsultantauditormayworkindependently,oraspartoftheauditteamthatincludesinternalauditors.Consultantauditorsareusedwhenthefirmlackssufficientexpertisetoauditcertainareas,orsimplyforstaffaugmentationwhenstaffarenotavailable.
http://en.wikipedia.org/wiki/International_Auditing_and_Assurance_Standards_Boardhttp://en.wikipedia.org/wiki/International_Federation_of_Accountantshttp://en.wikipedia.org/wiki/Internal_auditorhttp://en.wikipedia.org/w/index.php?title=Section_404&action=edit&redlink=1http://en.wikipedia.org/wiki/Sarbanes_Oxley_Acthttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Managementhttp://en.wikipedia.org/wiki/Institute_of_Internal_Auditorshttp://en.wikipedia.org/wiki/Institute_of_Internal_Auditorshttp://en.wikipedia.org/wiki/Consultanthttp://en.wikipedia.org/w/index.php?title=Auditing_standards&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Auditing_standards&action=edit&redlink=1http://en.wikipedia.org/wiki/Consultanthttp://en.wikipedia.org/wiki/Institute_of_Internal_Auditorshttp://en.wikipedia.org/wiki/Institute_of_Internal_Auditorshttp://en.wikipedia.org/wiki/Managementhttp://en.wikipedia.org/wiki/Board_of_directorshttp://en.wikipedia.org/wiki/Sarbanes_Oxley_Acthttp://en.wikipedia.org/w/index.php?title=Section_404&action=edit&redlink=1http://en.wikipedia.org/wiki/Internal_auditorhttp://en.wikipedia.org/wiki/International_Federation_of_Accountantshttp://en.wikipedia.org/wiki/International_Auditing_and_Assurance_Standards_Board


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Qualityauditorsmaybeconsultantsoremployedbytheorganization.

MEANING OF VERIFICATION:Verificationisaprocessbywhichanauditorsatisfieshimself

abouttheaccuracyoftheassetsandliabilitiesappearinginthebalancesheetbyinspectionofthedocumentaryevidenceavailable.confirmationoftheassetsandliabilitiesappearinginthebalancesheet.Thus,verificationincludesverifying

(i) theexistenceoftheassets;(ii) legalownershipandpossessionoftheassets;(iii) ascertainingthattheassetisfreefromanycharge;and(iv) correctvaluation

Ofcourse,itisnotpossiblefortheauditortoverifyeachand

everyasset.ItwasheldinKingstonCottonMillscasethat"itisno

partofanauditor'sdutytotakestock.Noonecontendsthatitis.Hemustrelyonotherpeopleforthedetailsofstockintradeinhand".

However,asperthedecisiongiveninMeKessonandRobinscase(1939)theauditormustphysicallyinspectsomeof


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theassets.Nowtheauditorhastoreportwhetherthebalancesheetshowstrueandfairviewofthestateofaffairsofthecompany.Hence,heisrequiredtoverifyalltheassetsandliabilitiesappearinginthebalancesheet.Incaseoffailure,the

auditorcanbeheldliablefordamages.

Accordingtothe'StatementofAuditingPractices'issuedbyICAI,

Theauditor'sobjectinregardtoassetsgenerallyistosatisfythat

Theyexist;

Theybelongtotheclient;

They are in the possession of the client or persons

authorisedbyhim;

They are not subjected to undisclosed encum-branchesorlien.

They are stated in the balance sheet at properamounts in accordance with sound accountingprinciplesand

Theyarerecordedintheaccount."


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Verification includes confirmation of the

following :

Thattheassetswereinexistenceonthedateofthebalance

sheet;

That the assets had been acquired for the purpose ofbusinessonly;

Thattheassetshadbeenacquiredunderaproperauthority;

Thattherightofownershipoftheassetsvestedintheorganization;


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SCOPE OF VERIFICATION

Verification includes confirmation of the following:

1.Thattheassetswereinexistenceonthedateof thebalance

sheet;

Thattheassetshadbeenacquiredforthepurposeofbusinessonly;Thattheassetshadbeenacquiredunderaproperauthority;

That the right of ownership of the assets vested in theorganization;

Thattheassetswerefreefromanycharge;andthattheassets

wereproperlyvaluedanddisclosedinthebalancesheet.

OBJECT OF VERIFICATION:

Following are the objects of verification of assets and liabilities:

Toshowcorrectvaluationofassetsandliabilities.Toknowwhetherthebalancesheetexhibitsatrueandfairview

ofthestateofaffairsofthebusiness.


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Tofindoutwhethertheassetswereinexistence.Tofindouttheownershipandtitleoftheasset.Todetectfrauds

anderrors.Toverifythearithmeticalaccuracyofthebooksofaccounts.

To find out whether there is an adequate internal controlregardingacquisition,utilizationanddisposalofassets.

Toensurethattheassetshavebeenrecordedproperly.

While conducting verification following points should be

considered by the auditor:

Existence:

The auditor should confirm that all theassets of the company are physically existing on the dateofBalanceSheet.

Possession: The auditor has to verify that the assets are in thepossessionofthecompanyonthedate ofBalanceSheet.

Ownership: The auditor shouldconfirmthat theassetislegally

ownedbythecompany.

Charge or lien:


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Theauditorshouldverifywhethertheassetissubjecttoanychargeorlien

Record :

Theauditorshouldconfirmthattheassetsandliabilities

arerecordedinthebooksandthereisnocomissionofanyassetorliability.

Audit report:

UnderMAOCARO'88,theauditorhastoreportwhetherthemanagementhasconductedphysicalverificationoffixedassetsandstockandthedifferences,ifany,betweenthephysicalinventory,andtheinventoryasperthebooks.

Events after Balance Sheet date :

Theauditorshouldfindoutwhetheranyeventafterthe

dateofBalanceSheethasaffectedanyitemsofassetsandliabilities.


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Sixteen Principles of Verification:

Adequateandeffectiveverificationisanessentialelementofallarmslimitationanddisarmamentagreements.

Verificationisnotanaiminitself,butanessentialelementintheprocessofachievingarmslimitationanddisarmamentagreements.

Verificationshouldpromotetheimplementationofarmslimitationanddisarmamentmeasures,buildconfidenceamongStatesandensurethatagreementsarebeingobservedbyallparties.

Adequateandeffectiveverificationrequiresemploymentof

differenttechniques,suchasnationaltechnicalmeans,internationaltechnicalmeansandinternationalprocedures,includingon-siteinspections.


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Verificationinthearmslimitationanddisarmamentprocesswillbenefitfromgreateropenness.

Armslimitationanddisarmamentagreementsshouldincludeexplicitprovisionswherebyeachpartyundertakesnottointerferewiththeagreedmethods,proceduresandtechniquesofverification,whentheseareoperatinginamannerconsistentwiththeprovisionsoftheagreementandgenerallyrecognizedprinciplesofinternationallaw.

Armslimitationanddisarmamentagreementsshouldincludeexplicitprovisionswherebyeachpartyundertakesnottousedeliberateconcealmentmeasureswhichimpedeverificationofcompliancewiththeagreement.

Toassessthecontinuingadequacyandeffectivenessoftheverificationsystem,anarmslimitationanddisarmament

agreementshouldprovideforproceduresandmechanismsforreviewandevaluation.Wherepossible,time-framesforsuchreviewsshouldbeagreedinordertofacilitatethisassessment.

Verificationarrangementsshouldbeaddressedattheoutsetandateverystageofnegotiationsonspecificarmslimitationanddisarmamentagreements.

AllStateshaveequalrightstoparticipateintheprocessofinternationalverificationofagreementstowhichtheyareparties.


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Adequateandeffectiveverificationarrangementsmustbecapableofproviding,inatimelyfashion,clearandconvincingevidenceofcomplianceornon-compliance.Continuedconfirmationofcomplianceisanessentialingredienttobuildingandmaintainingconfidenceamongtheparties.

Determinationsabouttheadequacy,effectivenessandacceptabilityofspecificmethodsandarrangementsintendedtoverifycompliancewiththeprovisionsofanarmslimitation

anddisarmamentagreementcanonlybemadewithinthecontextofthatagreement.

Verificationofcompliancewiththeobligationsimposedbyanarmslimitationanddisarmamentagreementisanactivityconductedbythepartiestoanarmslimitationanddisarmamentagreementorbyanorganizationattherequestandwiththeexplicitconsentoftheparties,andisanexpressionofthesovereignrightofStatestoenterintosucharrangements.

Requestsforinspectionsorinformationinaccordancewiththeprovisionsofanarmslimitationanddisarmamentagreementshouldbeconsideredasanormalcomponentoftheverificationprocess.Suchrequestsshouldbeusedonly

forthepurposesofthedeterminationofcompliance,carebeingtakentoavoidabuses.

Verificationarrangementsshouldbeimplementedwithoutdiscrimination,and,inaccomplishingtheirpurpose,avoidundulyinterferingwiththeinternalaffairsofStatepartiesor


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otherStates,orjeopardizingtheireconomic,technologicalandsocialdevelopment.

Tobeadequateandeffective,averificationregimeforanagreementmustcoverallrelevantweapons,facilities,locations,installationsandactivities.

What Verification of Assets and Liabilities includes

Social Security number:

DeterminewhetheranameandassociatedSocialSecuritynumbermatchthedataintheSocialSecurityAdministrationsrecords

Tax returns:

Ensurethatincometaxdatasubmittedbyapplicants

areaccurateandfreefromfraud

Undisclosed liabilities:

Refreshacreditreportpriortoclosingtoidentifyadditionaldebtorcreditinquiries

Employment:

Confirmanapplicantsemploymentstatus,aswellaslengthofemployment,salary,andposition

Deposit:


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Reviewassetspriortoapprovingaloanbyfindingouthowlonganaccounthasbeenopen,itscurrentstandingandbalance,andifanyoverdraftshaveoccurred

Mortgage :

Receivemortgagepaymenthistory,balance,andmonthlypaymentamountforanexistingmortgage

Rent:

Assesstheabilityoftheapplicanttomakeamonthlymortgagepaymentbasedonmonthlyrentpaymenthistory

Lease:

Determinetheoutstandingliabilityofarentertoalandlord

Insurance:

Determinecoverageforanassetoract


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VERIFICATION OF TRANSACTION:

THE ADUITOR SHOULD BE EXAMINE THE FOLLOWING

ASPECTS :

Legal Aspects:

o Seewhetherthelegalrequirementsgoverningthe

entity,relatingtoinvestments,havebeencompliedwith,

alongwithanyotherconditionsrelatingtoinvestments

whichrestrict,qualifyorabridgetherightofownershipand/ordisposalofinvestments.

Documents:

o Ensurethatthetransactionsforthepurchase/saleof

investmentsaresupportedbydueauthorityand

documentation

Adjustments:

o Whereinvestmentshavebeenpurchasedorsold

cum/exdividend/interest/rights/bonusseewhether

properadjustmentsinthisregardhavebeenmadein

thecost/salesvalueofsecuritiespurchasedorsold


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Rights:

o Examinetheoffercontainedintheletterofrights,in

caseofarightsissue.Wheretherightshavebeenrenouncedorotherwisedisposedofornotexercised,

examinetherelveevantdecisionoftheappropriate

authorityinthisbehalf,asalsothatthesaleproceeds,if

anyhavebeenduelyaccountedfor.

Bonus:

o

Verifytheintimationstotheentityregardingsuchissue,

withaviewtoascertainingtherecieptandrecordingof

thrrequisitenumberofsharedbytheentity.

Market Value:

o Wheretheamountofpurchaseorsaleofinvestment

aresubstantialcheckthepricepaid/receivewithreferencetothestockexchangetationwhereavailable

onorabovethedateofpurchaseofsale.


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VERIFICATION OF SPECIFIC ASSETS

Land and Buildings:

SometimesthetwoassetsareshowntogetherintheBalanceSheet.Nevertheless,theirledgeraccountsshouldalwaysbeseparatedparticularlyinviewofthefactthatbuildingsaresubjecttodepreciationwhilelandingeneralisnot.

Ifthebuildinghasbeenbuiltorisinthecourseofconstruction,underacontracttheauditorshouldverifythedebitbalanceoftheaccountbyreferencetothearchitect'scertificate,aswellasthecontractor'sreceiptsforamountspaid.

Ifthebuildinghasbeenconstructedbytheclient'sownorganisation,itwillbenecessaryfortheauditortoverifythatthebasisuponwhichcostofmaterials,wagesandthe

supervisionchargedhavebeenallocatedtotheaccount,isreasonable.Theexpenseschargedshouldincludealltheexpenditurenecessarytobringthebuildingintoexistenceandtomakeithabitable.Asasafeguardagainstanymistakearisingintheexpenseschargeabletotheasset,theauditorshouldobtainacertificatefroma


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responsibleofficialinrespectoftotalexpenditureincurredontheconstructionofthebuildinguptothedateoftheBalanceSheet.Theamountofexpenditure,wherepossible,shouldalsobecomparedwiththeestimatedcost

ofconstructionwhichmayhavebeenpreparedbyanarchitectorreceivedwiththetenders,ifany,invitedforconstruction.Ifthereisamaterialdiscrepancyintheamountofactualandestimatedexpenditure,causesthereofshouldbereviewed.

Plant and Machinery

IntheabsenceofaPlantRegistercontainingdetailedparticularsofvariousarticlesofmachineryandequipment,showingseparatelyoriginalcost,additiontoandsalesfromitfromtimetotime.Itisnotnormallypracticablefortheauditortoverifytheexistenceofsuchassets.TheauditorsshouldthereforeinsistonaPlantRegisterbeingmaintainedwherethevalueandvarietyofmachineryandplantaresubstantialincomparisonwiththetotaiassetsofthebusiness.

Wheresucharegisteriskept,itiscustomarytoprepareattheendofeachyearastatementfromthePlantRegistershowingopeningbalance,saleandadditiontheretoduringtheyearinrespectofvariousitemsofmachineryandplant.ItstotalisthenreconciledwiththebalanceintheGeneralLedger.

Thecostofaddition,ifany,isverifiedwiththeinvoiceofmachinerysuppliedtogetherwithevidenceinrespectofotherincidentalexpenseschargeabletotheaccount,includinginstallationexpenses.Ifanyoftheadditionrepresentsthecostofmachinerymanufacturedbytheconcernwithitsownmaterialandbyitsownlabour,the


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basisonwhichtheexpenditurehasbeenallocatedshouldbeverified.Inaddition,acertificateisobtainedfromtheengineerresponsibleforthemanufactureoftheplantconfirmingthetotalcostofmanufacture.

Incaseanyitemormachineryhasbeenscrapped,destroyedorsoldtheauditorshouldascertainthattheprofitorlossarisingthereonhasbeencorrectlydeterminedwhichhaseitherbeendisclosedintheProfitandLossAccountorcreditedtotheCapitalReserve.Inappropriatecircumstances,acertificateshouldbeobtainedfromaseniorofficialthatthishasbeendone.

Thoughitisthedutyofthemanagementtoensurethatfixed

assetsareinexistence,theauditoralsoshould,periodicaily,physicallyexaminevariousitemsofplantandmachineryandotherfixedassets,say,onceineverythreeorfiveyears,dependinguponthesizeoftheconcern.

Certaincompanies,forconvenienceofinspectionattachtoeachunitofplantandmachineryametallicdiscbearingthenumberatwhichitisshowninthePlantRegister.

Whenanassethasbeenrevalued,depreciationshouldbeprovidedontherevisedvalueandnotonthehistoricalvalue.


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Leasehold Property

Various steps involved in the verification of leasehold rights are

stated below:

Inspecttheleaseorassignmentthereoftoascertaintheamountofpremium,ifany,forsecuringthelease,anditstermsandconditions;andthattheleasehasbeendulyregistered.Aleaseexceedingoneyearisnotvalidunlessithasbeengrantedbyaregisteredinstrument(section107oftheTransferofPropertyAct,1882).

Ascertainthatalltheconditions,thefailuretocomplywithwhichmightresultintheforfeitureorcancellationofthelease,e.g.,paymentofgroundrentontheduedates,insuranceofproperty,itsmaintenanceinasatisfactorystateofrepairs,etc.prescribedbythelease,arebeingdulycompliedwith.

Examinethecounterpartofthetenants'agreements,ifpartoftheleaseholdpropertyhasbeensublet.

Makecertainthatdueprovisionsforanyclaimthatmightariseunderthedilapidationclauseontheexpiryoftheleasehasbeenmade,and,ifnosuchprovisionhasbeenmade,drawtheclient'sattentiontothematter.

Ensurethattheoutlayaswellasanylegalexpensesincurredtoacquiretheleasewhichareshownasanasset


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intheBalanceSheetare'tieingwrittenoffataratewhichcouldcompletelywipeofftheassetovertheunexpiredtermofthelease.

Aleaseholdproperty,evenwherenopremiumhasbeen

paidforitsacquisition,maysometimecometohaveaconsiderablevalue.Insuchacase,itmaynotbeadvisabletocontinuetoshowtheassetasifithasnovalueNevertheless,wheretheleaseholdrightshavebeenrevaluedthatfactshouldbeclearlyshownonthebalancesheettilltheaccounthasbeencompletelywrittenoff.

Intangible Assets

AnIntangibleAssetisanidentifiablenon-monetaryasset,withoutphysicalsubstance,heldforuseintheproductionorsupplyofgoodsorservices,forrentaltoothers,orforadministrativepurposes.Enterprisesfrequentlyexpendresources,orincurliabilities,ontheacquisition,development,maintenanceorenhancementofintangibleresourcessuchasscientificortechnicalknowledge,designandimplementationofnewprocessesorsystems,

licenses,intellectualproperty,marketknowledgeandtrademarks(includingbrandnamesandpublishingtitles).Commonexamplesofitemsencompassedbythesebroadheadingsarecomputersoftware,patents,copyrights,motionpicturefilms,customerlists,mortgageservicingrights,fishinglicences,importquotas,franchises,customerorsupplierrelationships,customerloyalty,marketshareandmarketingrights.Goodwillisanotherexampleofanitemofintangiblenaturewhicheitherarisesonacquisitionorisinternallygenerated.Ifanitemcovereddoesnotmeetthedefinitionofanintangibleasset,expendituretoacquireitorgenerateitinternallyisrecognisedasanexpensewhenitisincurred.However,iftheitemisacquiredinanamalgamationinthenatureof


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purchase,itformspartofthegoodwillrecognisedatthedateoftheamalgamation(seeparagraph55).

Someintangibleassetsmaybecontainedinoronaphysicalsubstancesuchasacompactdisk(inthecaseof

computersoftware),legaldocumentation(inthecaseofalicenceorpatent)orfilm(inthecaseofmotionpictures).Thecostofthephysicalsubstancecontainingtheintangibleassetsisusuallynotsignificant.Accordingly,thephysicalsubstancecontaininganintangibleasset,thoughtangibleinnature,iscommonlytreatedasapartoftheintangibleassetcontainedinoronit.

Insomecases,anassetmayincorporatebothintangible

andtangibleelementsthatare,inpractice,inseparable.IndeterminingwhethersuchanassetshouldbetreatedunderAS10,AccountingforFixedAssets,orasanintangibleassetunderthisStatement,judgementisrequiredtoassessastowhichelementispredominant.Forexample,computersoftwareforacomputercontrolledmachinetoolthatcannotoperatewithoutthatspecificsoftwareisanintegralpartoftherelatedhardwareanditistreatedasafixedasset.Thesameappliestotheoperatingsystemofacomputer.Wherethesoftwareisnotanintegralpartoftherelatedhardware,computersoftwareistreatedasanintangibleasset.


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Patterns D ies Loo se Tools etc.

Severalentitieshavelargeinvestmentsinsuchassetswhichhavearelativelyshortusefullifeandlowunitcost.Evidently,itisadifficultmatter,underthecircumstances,toprepareaseparateaccountforeachsuchassetsalthoughacarefuicontroloversuchpropertyisnecessary.

Ontheseconsiderations,someentitieschargeoffsmalltoolsandothersimilaritemstoProductionAccountasandwhentheyarepurchasedanddonotplaceanyvalueon

theunusedstockontheBalanceSheet.Nevertheless,arecordofissuesandreceiptsoftoolstoworkmeniskept,asacheckonthesamebeingpilferedandamemorandumstockaccountofdiesandpatternsisalsomaintained.Inotherconcerns,thecostoftools,dies,etc.purchasedisdebitedtoappropriateassetsaccount,andaninventoryoftheunuseditemsattheendoftheyearispreparedandvalued;thesumtotalofopeningbalanceandpurchasereducedbythevalueofclosingstock,as

disclosedbytheinventory,ischargedofftoProductionAccountinrespectofsuchassets.Ontheotherhand,someconcernscarrysuchassetsattheirbookvaluesattheendofthefirstyearandchargeoffthecostofallthepurchasesinthesubsequentyeartotheProduction


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Accountonthepleathattheyrepresentcostofreplacement.

Themostsatisfactorymethod,however,isthatofpreparinganinventoryofserviceablearticles,atthecloseofeachyear,andrevaluingtheassetsonthisbasis,thevariousarticlesincludedintheinventorybeingvaluedatcost.Care,however,shouldbetakentoseethattheinventorydoesnotincludeanywornoutordefectivearticlesthelifeofwhichhasalreadyrunout.

Furniture Fittings and Fixtures:

Thecostoftheseassetsshouldbeverifiedbyreferencetotheinvoicesofsuppliers.Alltheexpenditureincidentaltotheirpurchasealsoshouldbedebitedtotheappropriateassetaccount.

Further,theauditorshouldcarefullyscrutinisethedetailsofthecostofadditionsdebitedtotheseaccountssoastoascertainthatonlythecostofgenuineadditionshasbeendebitedtosuchaccounts.

Inthecaseofassetsinregardtowhichthereisadangerofiossthroughpilferage,thereshouldbeasatisfactory

systemofstockcontroloverthem.

ItrequiresthateacharticleoffurnitureisenteredinaStockRegisterbeforeitspriceispaidandthestock


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numberunderwhichitisenteredispaintedoveritalsothatattheendofeachperiod,aninventoryispreparedandreconciledwiththeStockRegisterandcostofallthearticleswhichbecomesunserviceableorhavebeenlostis

writtenoffunderproperauthority.

Bills Receivable:

Ifpossible,theauditorshouldattendonthelastdayoftheaccountingperiodtoinspectthebillsinhandandagreetheirtotalwiththebalanceintheBillsReceivableAccount.Ifverificationispostponedtillsometimeaftertheexistenceofthebillswhichhadmaturedinbetweenthetwodatesshouldbeverifiedwiththeentriesinrespectofcashcollectedforthem.IfsomebillswerediscountedafterthedateoftheBalanceSheet,thecollectionoftheirproceedsshouldbeverified.IfanybillsweredishonoredafterthedateoftheBalanceSheet,theauditorshouldascertainwhatportion,ifany,oftheamountwillnotberecoveredandensurethatprovisionforthesamehasbeenmade.Whereanewbillisreportedtohavebeentakeninlieuofabillwhichhasmatured,theauditor

shouldinspectthebill.WhereanumberofbillsarefoundtohavebeendiscountedbeforethecloseoftheyeartheauditorshouldseethattheamountofthebillssodiscountedisshownasacontingentliabilityontheBalanceSheet.Ifsomeofthebillsarewithbankersfor


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collection,theauditorshouldobtainacertificatefromthem.

Generally,itwillbethedutyoftheauditortoensurethatthebillswereproperlydrawnandstampedandthattheywerenotdishonoured.Wheresomeofthebillsweredishonoured,theauditorshouldensurethattheyhavebeennotedandprotested.

Verification of Specific Liabilities:

Verification of Liabilities

The term liability in its usual and ordinarysense refers

to a state of being under legal obligation. Like verificationand valuation of assets,verification of liabilities is an equally importantaspect of auditing. If liabilities are

not properly verified and valued, thebalance sheet of a business enterprise will notexhibit a true and fairview of its state of affairs. Therefore, the auditor should see

thatliabilities are genuine and duly authorized. He must obtain a certificatefrom a

responsible official of the client, stating that to the best of hisknowledge and belief:1.All liabilities, whether for purchase or expense or on any other

account existing at the date of the balance sheet, have beenincluded in the books of accounts.

2.All the contingent liabilities have either been disclosed in a footnote to the balance sheet or have been provided for. Re

Westminster Road Construction and engineering Co. Ltd. (1932),

it was held that all the expense and liabilities which thecompany could be expectedto have incurred had been dulyrecorded in the books of accounts. While delivering

thejudgment in the case, Justice Bennett Observed:It was settled law that an auditor did not discharge his duty if he merely saw

that the balance sheet accurately represented what was shown by the books on the

material date. If the auditor found that a company in the course of its businesswasincurring liabilities of a particular kind, and that the creditors sent in their


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invoices after an interval, and that liabilities of the kind in question must have been

incurred during the accountancy period under audit, and that when he was makinghis audit a sufficient time had not elapsed for the invoices relating to such

liabilities to have been received and recorded in the companys books, it became

his duty to make specific inquiries as to the existence of such liabilities and alsobefore he signed a certificate as to the accuracy of the balance sheet, to go through

the invoice files of the company, in order to see that no invoices relating toliabilities had been omitted.

In the light of the above decision, it can beinferred that it is quite essential for an auditor to see that:

All liabilities have been clearly stated in the balance sheet;

All he liabilities stated in the balance sheet relate to the

business itself;

They represent genuine and duly authorized transactions; and

No item of liabilities has been omitted, under or over-stated, i.e.,

all liabilities appear at their actual figures in the balance sheet.

It should also be noted that liabilities are not valued like assets. Therefore, it wouldbe sufficient on the part of auditor to satisfy himself about the correct disclosure of

information in respect of every item appearing in the liabilities side of the balancesheet of a business concern.


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Verificationofliabilitiesmaybecarriedoutbyemployingthefollowingprocedures:

ExaminationofRecords

DirectConfirmationProcedure

ExaminationofDisclosure

AnalyticalReviewProcedures

ObtainingManagementRepresentations


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LOANS BORROWINGS:

Theauditorshouldsatisfyhimselfthattheloansobtainedare

withintheborrowingpowersoftheentity.

Theauditorshouldcarryoutanexaminationoftherelevantrecordstojudgethevalidityandaccuracyoftheloans.

Inrespectofloansandadvancesfrombanks,financialinstitutionsandothers,theauditorshouldexaminethatthebookbalancesagreewiththestatementsofthelenders.Heshouldalsoexaminethereconciliationstatements,ifany,preparedbytheentityinthisregard.

Theauditorshouldexaminetheimportanttermsintheloanagreementsandthedocuments,ifany,avidencingchargein

respectofsuchloansandadvances.Heshouldparticularlyexaminewhethertherequirementsoftheapplicablestatueregardingcreationandregistrationofchargeshavebeencompliedwith.


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Incasethevalueofthesecurityfallsbelowtheamountoftheloanoutstanding,theauditorshouldexaminewhethertheloanisclassifiedassecuredonlytotheextentofthemarketvalueofthesecurity.

Whereshort-termsecuredloanshavebeendisclosedseparatelyfromothersecuredloans,theauditorshouldverifythecorrectnessoftheamountofsuchshort-termloans.

Whereinstallmentoflong-termloansfallingduewithinthe

nexttwelvemonthshavebeendisclosedinthefinancialstatementstheauditorshouldverifythecorrectnessoftheamountofsuchinstallments.

Theauditorshouldexaminethehirepurchaseagreementsforthepurchaseofassetsbytheentityandensurethecorrectnessoftheamountsshownasoutstandingintheaccountsandalsoexaminethesecurityaspect.Futureinstallmentsunderhirepurchaseagreementsforthepurchaseofassetsmaybeshowedassecuredloans.

Thedifferedpaymentcreditsshouldbeverifiedwithreferencetotheimportanttermsintheagreement,includingduedatesofpaymentsandguaranteesfurnishedbythebanks.Theauditorshouldalsoverifythehundies/billsacceptedseparately.


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Creditors Other Current Liability:

Theauditorshouldchecktheadequacyofcut-offprocedures

adoptedbytheentityinrelationtotransactionsaffectingthecreditoraccounts.Forexample,theauditormayexaminethedocumentsrelatingtoreceiptofgoodsfromsuppliersduringafewdaysimmediatelybeforetheyear-endedandverifythattherelatedinvoiceshavebeenrecordedaspurchasesofthecurrentyear.

Theauditorshouldcheckthetotalofthecreditorsbalancesagreeswiththerelatedcontrolaccount,ifany;thedifference,ifany,shouldbeexamined.

Theauditorshouldexaminethecorrespondenceandotherrelevantdocumentaryevidencetosatisfyhimselfaboutthevalidity,accuracyandcompletenessofcreditors/acceptance.

Theauditorshouldverifythatinthecaseswhereincomeis

collectedinadvanceforservicestoberenderedinfuture,theunearnedportion,notapplicabletotheperiodunderaudit,isnotrecognizedasincomeoftheperiodunderauditbutisshowninthebalancesheetasapartofcurrentliabilities.


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Whileexaminingscheduleofcreditorsandotherschedulessuchasthoserelatingtoadvancepayments,unclaimed

dividendsandotherliabilities,theauditorshouldpayspecialattentiontothefollowingaspects:

LongOutstandingItems

Unadjustedclaimsforshortsupplies,poorquality,discount,

commission,etc.

Liabilitiesnotcorrelated/adjustedagainstrelatedadvances

Authorizationandcorrectnessoftransfersfromoneaccount

toanother.

Basedonthisexaminationaforesaid,theauditorshould

examinewhetheranyadjustmentsinaccountsarerequired.

Incasethereareanyunusualpaymentsaroundtheyear-end,theauditorshouldexaminethemthoroughly.Inparticular,theauditorshouldexamineiftheentriesrelatingtoanysuchpaymentshavebeenreservedinthesubsequentperiod.

Theauditorshouldreviewsubsequenttransactionstoidentify/confirmmaterialliabilitiesoutstandingatthebalance

sheetdate.


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Provisions:

Thetermprovisionmeansamountsretainedbywayofproviding

fordepreciationinvalueofassetsorretainedbywayofprovidingforanyknownliabilitytheamountofwhichcannotbedeterminedwithsubstantialaccuracy.Provisionsincludethoseinrespectofdepreciationordiminutioninthevalueofassets,productswarranties,servicecontractsandguarantees,taxesandlevies,gratuity,proposeddividend,etc.Theguidancenote,however,doesnotdealwithprovisionsfordepreciationordiminutioninthevalueofassets.

Theauditofprovisionsprimarilyinvolvesexaminingthereasonablenessandadequacyoftheamountsprovidedfor.Theauditorshouldalsoexaminethattheprovisionsmadearenotinexcessofwhatisreasonablyrequired.Provision for Taxes and Duties:

Theadequacyoftheprovisionfortaxationfortheyear

shouldbeexamined.Thepositionregardingtheoveralloutstandingliabilityoftheentityasthedateofbalancesheetshouldbereviewed.Inrespectofassessmentscompleted,revisedorrectifiedduringtheyear,theauditorshouldexaminewhethersuitableadjustmentshavebeenmadeinrespectofadditionaldemandsorrefunds,asthecasemaybe.Similarly,he


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shouldexaminewhetherexcessprovisionsorrefundshavebeenpropelyadjusted.Therelevantordersreceiveduptothetimeofauditshouldbeconsideredand,onthisbasis,itshouldbeexaminedwhetheranyshortprovisionshavebeenmadegood.If

thereisamaterialtaxliabilityforwhichnoprovisionismadeintheaccounts,theauditorshouldqualifyhisreportinthisrespectevenifthereservesareadequatetocovertheliability.Provision for Gratuity:

Theauditorshouldexaminewhethertheentityisrequiredto

paygratuitytoitsemployeesbyvirtueoftheprovisionsofthePaymentofGratuityAct,1972intermsofagreementwithemployeesand,ifso,whetherprovisionforaccuringgratuityliabilityhasbeenmadebytheentity.Theauditorshouldexaminetheadequacyofthegratuityprovisionwithreferencetotheactuarialcertificateobtainedbytheentity.Incasetheentityhasnotobtainedsuchanactuarialcertificate,theauditorshouldexaminewhetherthemethodfollowedbyitforcalculatingtheaccuringliabilityforgratuityisrational.

Provision for Bonus:

Inthecaseofprovisionforbonus,theauditorshouldexaminewhethertheliabilityisprovidedforinaccordancewiththepaymentofBonusAct,1965and/oragreementwiththeemployeesorwardofcompetentauthority.Wherethebonus

actuallypaididinexcessoftheamountrequiredtobepaidaspertheprovisionsoftheapplicablelaw/agreement/award,theauditorshouldspecificallyexaminetheauthorityforthesame.Provisions for dividends:


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Theauditorshouldexaminethatdividendsareprovidedfor

asperapplicableprovisionsoftherelevantlawsandrulesframedthereunder,relevantagreementsandresolutions.

Other Provisions:

Whereprovisionsaremadeforliabilitiesthatmayariseon

accountofproductwarranties,servicecontracts,performancewarranties,etc.theauditorshouldexaminetheprovisionsmadeareinaccordancewithaccountingstandard(AS)4,contingenciesandeventsoccurringafterBalanceSheetdateissuedbytheinstituteofchartedaccountantsofIndia.Theauditorshouldalsoexaminethereasonablenessofthebasisadoptedforquantifyingtheprovisionwithreferencetotherelevantagreements.


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Share Capital

Capital is not the liability of the company sofar as the going concernprinciple is concerned. Still, the auditor isrequired to verify its correctness so that

he can report on thecorrectness of the balance sheet.The steps to be taken for verifying the sharecapital of the company covering

several phases has been enumeratedas below:

Check the authorized sharecapital with the relevant clause of

the Memorandum of Association.

Obtain a list of shareholders, check with the register of members,and verify the capital account.

Obtain a schedule showing the movement during the year in the

above account. Verify entries in respect of the additions on the

account of issue of new shares.

The following work in this respect should be carried out:

See that the allotment of the shares has been madecomplying with the legal provisions.

See that the issuing capital does not exceed the authorized

capital.

Examine resolution of the Board in respect of allotment ofthe shares.

Vouch the money received on applications and allotmentand on calls, if any,

with the counterfoil of the receipt book,bank statement and advices andother relevant availableevidence.


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If in accordance with the provisions of the Memorandumand Articles of

Association and prospectus, the directorsare required to take up theirqualification shares, see thatcompany has received the required amount.

In case where the shares were allotted for considerationother than cash,

examine the contract constituting theallottees title to the shares and thedirectors minutes

If the shares were issued at a premium, see that premiumhad been shownseparately and not under the share capital.

If the shares were issued at the discount the auditor shouldsee that it was duly

authorized and in accordance with theprovisions of the Act. In this regard,

the auditor shouldsatisfy himself in respect of the following matters:

It was a subsequent issue of the shares since the

first issue cannot be at discount.

The issue of share at discount was authorized by an

ordinary resolution passed in a general meeting ofthe company.

The resolution stated the maximum rate of thediscount at which shares were issued.

Not less than one year must, at the date of issue

have elapsed since the date of the company was

entitled to commence business.

The shares to be issued at discount must be issued

within the six months after the date on which the

issue is sanctioned by the Board.

Every prospectus shall contain particulars of the

discount allowed on the issue of shares or so muchof that discount as has notbeen written off on thedate of issue of the prospectus.

In the case of forfeiture of shares, the auditor should satisfy


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himself on the following points:

(a)The procedure as laid down in the Articles relating to

forfeiture of shares were followed i.e., the forfeiture waspermitted by the Articles

of the company and the DirectorsResolution forfeiting the shares was passed.

(b)Examine the entries in the books of accounts for theforfeiture of shares, and ensure that the necessary

adjustments were made in the register of members.

(c)Where the forfeited shares were sold or re-issued, see that

the issue of such shares was authorized by the directors andthe amount of discountdid not exceed the amount alreadyreceived thereon from the defaulting

shareholders.

(d)Any capital profit or re-issue of forfeited shares should betransferred to the capital reserve.

5.If shares were allotted to the foreign nationals, examine thepermission given by the related legal authorities.

6.Where the company has issued redeemable preference shares,verify the terms on which they were issued with prospectus.

7.Examine the rights attaching to the various types of shares in theArticles of Association of the company.


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Debentures:

Examine the Memorandum and Articles ofAssociation of the company to

ascertain its borrowings powers and theextent and mode of borrowings. If the

directors are empowered toborrow on behalf of the company, examine thedirectors minutesregarding the issue of debentures and the mortgage of thecompanysproperty. A copy of debentures creating and evidencing the

chargeshould be inspected and the receipts of money should be dulyvouched. Any

redemption should be vouched with the minutesauthorizing the redemption.

Bills Payable:

The method of verification of bills payable

should include the following steps:

1. Obtain a schedule of bills payable. Check it with bills payablebook.

2.Check casts of the schedule.

3.Examine the unpaid bills. Trace their subsequent payments into

the cashbook of succeeding period.

4.Verify to see that as far as possible there are no bills payable left

out and not entered in the books of accounts.

5.Obtain confirmation from the parties to whom bills of large

amount, if any, have been issued.


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6.Verify the calculation of the interest on bills payable.

7.if bills payable were issued out of a regular counterfoil book, go

through the running number of bills issued and examine the

counterfoils with the bills payable register.