Final

VERIFICATION ANDVALUATION OF ASSETS

AND LIABILITIES.

Meaning of Verification:Verification means the procedures normally carried out at the end, to confirm the ownership, calculations and existence of item at the balance sheet date. It also involves confirming the presentation in financial statements is in accordance with legislation.Many scholars said that –“The verification of assets implies an enquiry into the value, ownership and title existence and possession” –SPICER AND PEGLAR.“the verification of assets is a process by which the auditor substantiates the accuracy of the right hand side Balance Sheet, and must be considered as having three distinct objects:

a. The verification of existence of assets.b. The valuation of assets.c. The authority of their acquisition.

The verification of assets involves the following four point:

1. Comparing the ledger account 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.

2. Verifying their proper value 3. Assets were acquired for the business

PROBLEM IN THE VERIFICATION OF ASSETS:

1. It is not possible for an auditor to inspect each and every assets.2. 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 loss3. 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.4. 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.

MEANING OF VALUATION:

Valuation is a part of verification which is very importance for audit the accuracy of balance sheet depends upon the valuationValuation means to conform that all assets are shown in the balance sheet to their proper book valueProper book value means all assets should be shown with its cost price but estimated depreciation must be deducted from that.

PROBLEM IN THE VALUATION OF ASSETS:

The accuracy of the balance sheet and the estimated profits of concern depend upon the correct valuation of the assets and liabilities the term estimate is the main problem of valuation.Replacement value or Realization value would be considered to valuation of assets is another problem.The assets should be valued as for a going concern concept.Therefore the assets are valued taking into consideration the following: their original cost, the probable working life of the assets, breakup value of the assets, and the chances of the assets becoming obsolete

DIFFERENCE BETWEEN VERIFICATION AND VALUATION

1. In case of verification auditor as to verify not of only actual existence but as proper valuation.

2. Verification of assets includes valuation also.3. Auditor is entirely responsible 4. Auditor guarantees that asset have been properly verified5. It is process by which satisfy himself not only about existence, ownerships title of asset,

but that the asset is free from charge 6. Auditor has to merely ensure that assets value shown in balance sheet conduct 7. Valuation is part of verification of assets8. Auditor don’t undertake work of determining value of assets 9. Does not give any guarantee as to accuracy 10. Not only determining value of assets as appearing in balance sheet but critical

examination of value

VALUATION OF ASSETS DURING INFLATIONARY PERIODA problem which confirms an auditor is the inflationary period

1. Valuation of stock is not sufficient to meet the cost of replacing the same quantity of stock

2. The depreciation charges based on the historical cost of fixed assets will not provide sufficient amount required to meet the cost of replacing those assets if they are needed to be replaced later on;

To solve the above problems the following suggestion on have been made:

a. The fixed assets should be valued at replacement cost.b. The fixed assets should be written up according to the market price of asset

preventing on the balance sheet date.c. c. The index method of adjusting the accounts to reflect the changes in the purchasing

power of money should be followed

FIXED ASSETS:Fixed assets are those which are acquired for permanent equipment and not for resale in ordinary course of business .Fixed assets should be valued at cost price less depreciation in their value by consume.

FLOATING ASSETS:Floating assets are those which are acquired for resale or produced for the purpose of sale or converting them into cash, bills receivable etc.

INTANGIBLE ASSETS: 

Intangible assets are those assets which cannot be seen or touched, goodwill, copyright, patents, trademarks.

In his examination of such assets the auditor should determine the following:

1. The basis on which such assets were originally valued.

2. The reasonableness and adequacy of the amortization programmer or the write-off procedure.

3. Fair and adequate balance sheet present at

4. The accuracy, completeness and proper control of the income of arising from Ownership of such an asset as leasehold and paten

5. He must also determine whether such assets represent some benefit of privilege at the date of balance sheet.

 Auditor’s Position as Regards the Valuation of Asset:

From the above discussion it must have been clear to the reader that the correctness of the Profit and loss account and the balance sheet depends to a great extent on the correct valuation of the assets which is, however, a difficult problem. As has been pointed out above, the auditor is not a value or a technical hand to estimate the value of an asset.

Verification and Valuation of Different Kinds of Assets

1. Cash in hand

Sometimes the accountants accept a certificate from the management regarding the amount of cash in hand. This procedure is objectionable.

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, if there are different kinds of cash balance, petty cash balance, cash in till, etc, they should be counted simultaneously so that shortage in one account may not be up from cash in hand from other account, one cash balance may not do ‘extra duty’.

2. Cash at Bank

To verify cash at bank, the auditor should examine the Bank Pass Book and compare it with the balance as shown by the bank column of the cash book.

The auditor should see that ‘cheques outstanding’ and cheques not yet collected are genuine and not made up in order to conceal the deficiency. If some of these cheques are more than six months old, he should make inquiries.

Cash on Fixed Deposits with the bank can be certified by examining the deposit receipt

3. LOANS

Loans against security of land and property

1. The auditor has not only to examine the loan account in the ledger, but he has to examine the documents relating to the security, promissory note or bond, acknowledgements by the parties, etc.

2. If the land or property has been mortgaged, the auditor should examine the mortgage deed and find out whether the mortgage is properly executed in favor of his client.

3. He should also examine the title deeds relating to the property4. He should inquire the rate of interest and the date on which it is payable.

Loan against Security of stock and shares

a) The auditor should get a list of such stock and shares which have been held as securityb) He should see that shares are transferred to his clientc) He should inspect such shares, etc, and see that they do not belong to his clientd) He should check the valuation of securities and find out the margin between the loan

and the present value of the security.

Loan against Security of Goods

a. Where loan has been advanced against a warehouse-keeper’s Receipt, such a receipt should be examined.

b. The value of the goods may be ascertained from market quotations, invoices, etc, in order to find out the value of the security.

c. He should examine the inspector’s report from time to time regarding the quantity of goods

d. If the goods are of perishable nature, he should examine the turnover of the stock.

Loan against Insurance Policy

a. Monitoring payment of premiumb. The auditor should see that the notice of assignment of the policy has been given to the

insurance company

Loan 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 security as the value of such a security depends on financial position.

4. Bills Receivable

The auditor should examine the impersonal Ledger or Bills Receivable Book with the bills receivable in hand. Some of the bills might have been sent out for collection in which case an inquiry should be made from the bank. It would be better if the auditor prepares a list of the bills thus:

a) Those which have been discounted earlier and the date of the maturity of which has not arrived at the date of the balance sheet in order to find out contingent liability

b) Those which have not been discounted should be entered in the second column and compared with the bills of hand

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.

Investments may be –

a) Registered Debentures, Stock and shares, Government securitiesb) Inscribed Stockc) Bear Bonds and share Warrants

Valuation of Investments

Having verified the existence of the investments, the auditor should now proceed to find out whether they are properly valued 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 such as Trust company, Finance company etc.

Method of Stock-taking

Stock is taken on the last day of the business year. A clerk goes to the warehouse. And calls out the number of items of each class of goods while another clerk goes on writing on sheets of papers the particulars of the goods and their quantity in the other column. These sheets are known as Stock Sheets. When all the goods in the warehouse are recorded, another batch of the two clerks check the work of the first batch to see that there is no mistake.

The stock sheet is now sent to a responsible official of the concern who jots down the rate of each item of goods at which they are to be valued.

Another clerk now calculates the value of each class of goods in hand. The calculations and castings are now checked by another clerk to avoid any miscalculation.

Every clerk and official who has a hand in the preparation of the stock sheet must put his initials for the work performed by him so that if later on any mistake is found in the stock sheet, the official concerned may be held responsible for the mistake.

The stock sheet is now signed by the General Manager or the Managing agent or the Partner, as the case may be the auditor should compare the stock sheets with the stock book, entry in the Trading Account and the Balance Sheet.

Precautions to be taken while taking stock

It may be that there are some goods which may not be in the physical possession of the client but legally his client is the owner of the goods, goods might have been purchased, the invoices

passed through the books of account but the goods might not have been delivered. The client is legally the owner of such goods and hence they must be included in the stock sheets. If there are not included in the stock sheets, the consequences will be that more purchases will be shown while closing stock shown at the date of the Balance Sheet will be less. The business will, therefore, show less profit than what actually is the case. Such goods must be treated as ‘goods in transit’.

Similarly stock which is at the branches or goods which are with the consignees or which are sent out on approval, or sale or return contract and when the buyer has not sent his approval or which are in the course of transit or are lying at the stock, etc., must be included in the stock sheets.

Again, it may so happen that the goods might have arrived but the relative invoice has not been passed through the books of account as it might not have been received by the time the books are closed. In such a case, such goods must not be included in the stock sheets unless the property in the goods has passed to his client when care should be taken that the corresponding liability is also included in the books of account, the invoice is passed through the books of account.

Selling goods which have not been delivered to the buyer at the date of the balance sheet should not be included in the stock sheets.

If the precautions enumerated above are not taken, errors are certain to occur and, therefore, the whole of the work of stock taking should be done under the supervision of a responsible official.

The Basic Principles of the Valuation of Stock-in-trade:

We can use various types of methods for the valuation of stock-in-trade. The methods are given below:

1. Cost Method or Actual Cost Method

If goods have been purchased in different lots and the present stock can be identified as to which consignment it belongs to, there will be no difficulty in finding out the cost price of such stock as the invoices or the cash memos will show the cost price of different consignments which have remained unsold on the date of the balance sheet. This method is known as ‘Unit

Cost’. According to this method, each article, batch, parcel of consignment is valued at its individual cost.

2. Average Cost Method

Stock may be valued at the average cost of various consignments purchased from time to time during the course of the year, plus the cost of operating stock, less the sales. The average should be “weighted average” by taking into account quantity and cost. It should not be arithmetic average.

This method has the merit of taking into consideration the violent fluctuations in the purchase price of the goods from time to time during the year under audit. This method is suitable for manufacturing company.

3. First in, First out (FIFO) Method

The whole of the stock is valued at the rate of the latest consignment purchased which is in hand at the time of taking the stock on the assumption that the latest purchases have not been sold, the goods are sold in the order in which they are purchased. This method known as the ‘first in first out’, for short, the ‘fifo’ method. Under this system the unsold stock as a reasonable close relation to the replacement price.

4. Last in, First out (LIFO) Method

The whole of the stock is valued at the rate at which the earliest purchases made on the assumption that the latest purchases are sold first and the unsold stock represents the earliest purchases. This method is known as the ‘last in first out’, or ‘lifo’ method. This method does not appeal to common sense. Every businessman would try to sell those goods which were received quickly so that they may not become stale. Another defect of the ‘Lifo’ method is that the stock appears in the balance sheet at a figure which has no relation to replacement cost or its realizable value.

5. “Base Stock” Method

Under this method it is supposed that a certain minimum or basic quantity of the material for carrying on the business is always essential to be in stock and that the quantity remains the same almost every year except when there are abnormal times. This quantity of stock is more or less fixed just like plant and machinery or any other such asset. The advocates of this method of valuation of stock say that such stock should not be valued at “cost price or the market price whichever is lower” method but should be valued at “normal long period price” as if it were a machine. In case, the quantity of the stock is more than the “basic quantity”, the excess of the quantity may be valued at “cost price or market price whichever is lower”.

Advantages of this Method

A. No violent fluctuations in the gross profits even though there may be changes in the price level of the materials

B. Comparison of gross profit of two periods separated by a long time can give a true picture of the business

C. Even if on account of rise in the price of stock, the stock is valued on the “Base Stock” method, the balance sheet will not show the position of the concern better than what it is. Hence there is no harm if the closing stock is valued at the “Base Stock” method.

D. Lot of calculations will not have to be made every year.

Disadvantages of this Method

A. This method of valuation is not possible for every class of industry where variety of raw materials are used in the process of manufacture.

B. Suitable for America not EnglandC. This method is more or less like the “Lifo” method.

6. Standard Cost Method

Under this method, the stock is valued at pre-determined or budgeted cost per unit. This method of valuation of stock is finding favor with the manufacturers who produce goods on large scale.

7. Adjusted-Selling Price Method

Under this method, the stock at the close of the year is valued at the market price out of which the normal profit and the cost of disposing of the goods are deducted. The remaining balance is the value of the stock for the purpose of trading account and the balance sheet.

MARKET VALUE

There are two aspects of the Market Value.

A. Replacement Value: The amount which would be required to purchase the same kind of goods which are in stock at the date of the balance sheet, the cost of replacing the stock at the date of the balance sheet should be considered as the ‘Market Price’ of the goods. It is applied only when Replacement Cost would be less than the actual cost.

B. Market Value: The estimated net amount that the goods would realize when sold, after deducting the estimated expenses such allowances, selling and distributing changes, etc. would be the market value of the stock or in other words realizable value.

Methods used in the Valuation of Different Kinds of Goods

A. Raw Materials: There are the materials which are purchased for the purpose of manufacturing goods. Such materials must be valued at the net invoice price, the cost price plus a reasonable proportion of freight, duty etc., in connection therewith. Sufficient provision should be made for any fall in the value of these materials. If such raw materials have been purchased in different lots and they can be distinguished from one another, there will be no difficulty in assessing their value. If the price of finished goods, in which such raw materials are used, goes down, calculation should be made by taking into accounts the expenses of manufacture and find out whether it would result in a profit. If not, the depreciation of raw materials should be written off.

B. Semi-manufactured goods: It may so happen that at the date of the balance sheet, some goods might be in the process of manufacture, they have not been completely manufactured. In such a case, they are valued at cost price of the raw materials used, plus a proportionate amount of wages and a percentage to cover establishment charges relating to manufacture as per the certificate given by the departmental manager. The auditor should also examine cost sheets.

C. Finished Goods The cost price of the finished goods which have been purchased is the purchase price, the invoice price and the direct expenditure, carriage inward, custom duty, dock charges, etc. The goods which have been manufactured by the concern, are valued like the semi manufactured goods as explain above, the cost of the raw materials and proportionate expenses of manufacture. The auditor should refer to the Cost Accounts if they are maintained. He should also see that such finished goods are not valued at a higher price than the price of such goods prevailing in the market.

D. Stores: There are goods, other than those described above, which may be in hand at the date of the balance sheet. Stores are not held for sale in the original form. Such goods are oil, tallow, grease, dyes, fuel, etc. These stores must not be included in the list of stock in hand. They should be shown separately and those stores which had been consumed during the process of manufacture must be put on the debt side of the manufacturing accounts of the particular period to arrive at the correct cost of production.

E. Spare Parts: The spare parts are used for the upkeep of the plants and machinery. The auditor should get a list of such spare parts from the Works Manager whenever such parts are used, the plant and machinery account should be debited.

F. Goods on Consignment: Sometimes goods are sent out to agents to be sold on behalf and at the risk of the consignor. It may so happen that at the date of the balance sheet, the whole of the consignment or a part of it may not have been sold. In such a case the unsold stock has to be verified and valued for the purpose of incorporation in the balance sheet of the consignor. The auditor should ask for a certificate from the consignee to ascertain the amount of stock with him if he is not satisfied by examining the Account Sales.

G. Goods on Approval If the goods have been sent out on approval and they have not been approved of till the date of the balance sheet, they should not be treated as ‘sales’ but should be considered as ‘stock’ with the customers or stock on approval. If the date, by which the customer ought to have sent his approval, has expired and he has not sent his approval, the goods may be treated as sold. In such a case, the auditor should inspect the contract with the customer. The unapproved goods must be valued at cost price less damages, if any, caused during the course of transit. In no case should such goods be valued at higher than the market price.

H. Stock of Plantation Products: In the case of plantations, tea, rubber, coffee, etc., the annual accounts are usually prepared after the crop is sold out. The companies usually value the closing stock at an expected sale price in the subsequent year less the estimated selling expenses. The object is to know the profit or loss on the crop although it might not have been sold at the date of the balance sheet. If this basis is adopted, the fact should be clearly indicated in the accounts.

The duty of an auditor in connection with Stock-in-trade

The duty of an auditor in connection with stock be summarized as follows:

1. To verify the existence of stock

2. To check the ownership of the stock

3. To see that the stock is properly valued

The auditor must be cautious that no manipulations have been made by the management in accounts by resorting to undesirable practices with regard to determination of physical quantity of stock, or inclusion of stock over which the entity does not have owner ship or incorrect valuation of stock. The following methods may be used to distort the true and fair value of stock:

a) Incorrect additions and calculation in the Stock Sheetsb) Incorrect valuation of the closing stock in the Stock Sheetsc) Inclusion of such stocks of goods in Stock Sheets as have been purchased but the

relative invoices for which have not been passed through the purchases book.d) Inclusion of such goods as tools, furniture, etc. in the Stock Sheets.e) To overvalue the stock, by not providing depreciation on obsolete, damaged, out-of-

fashion goods, etc.f) Inclusion of those goods in Stock Sheets which have been sold and passed through the

Sale Book but which have not been delivered to the buyer.

Physical verification of stocks:

Physical verification of stocks is the primary responsibility of the management of the entity. Justice Lindlay in the case of Kingston cotton Mills Co. Ltd. (1896) said it is no part of an auditor’s duty to take stock. It would be quite fair for the auditor to get the certificate from the management. As a matter of disclosure, the auditor may sate in his report that the stock is accounted as valued and certified by the management.

Therefore, it would appear that even such a qualified report in regard to stock-in-trade will not relieve the auditor of his liability.

Spicer and Pegler in their book on auditing in 1961 Edition wrote “…..the decision in the case of Kingston Cotton Mills was taken more than a century back. At that time the skill and care required of an auditor probably was not very exacting standard as it is today.”

There is no provision in the Companies Act to empower the auditor to physically examine the assets (cash, investments, stock-in-hand) with a view to discharge his duties honestly. The only power which is given to an auditor in this respect is given S.227 which lays below:

The auditor of a company has a right to access, at all times, to the books, accounts and vouchers of the company.

She/he is entitled to require from the officers of the company such information and explanation as the auditor may think necessary for the performance of his duties as auditor.

a) Attendance of auditor during physical verification of stocks: It would be appropriate for the auditor to present himself or depute his assistants at the time of physical verification of the stocks. The auditor should see that the physical verification of the stock is conducted in a systematic manner. Necessary written instructions should be given to the persons engaged in stock taking regarding the procedures and methods to be followed in stock taking. During the stock taking the auditor must ask the client to stop movement of goods till the completion of the physical verification.

b) Examination of records: The auditor should study the internal control prevailing the organization regarding purchases, sales, and maintenance of stock and stock-taking. It is necessary that good internal checks should be introduced for stock-taking. Auditor should check every physical count sheets signed by the person who counted the stocks. He must check the additions, multiplications, carry-over etc. in the stock sheets.

c) Verification of confirmation: Sometimes, stock may lie with the third parties in which case the physical verification may not be easily possible. For example, goods may lie with fabricators for certain processing or with consignee etc. In this case the auditor should see that it is within usual business of the entity to have the stocks lying with such parties.

Ensuring the ownership over the Stocks:

The auditor should verify that the stocks reflected in balance sheet belong to the client. Stocks held by the entity as consignee or agent of another person should be excluded from value of stock. The auditor should pay particular attention to cut-off transactions. That is, he must check goods inward notes and invoices of certain days prior to and subsequent to the date of closing of accounts.

Valuation of Stocks:

The basic principles of valuation of stocks are detailed in Accounting Standard 2 (AS-2) of the institute of Chartered Accountants. Accordingly the stocks must be valued at the lower of cost and market price. Certain inventories like spares, maintenance supply etc. may be valued at cost, however. The cost of goods must be ascertained correctly. The duties of the auditor with regard to valuation of stocks are summarized hereunder:

1. The auditor should see that the goods are properly valued.2. He should find out whether the calculations, additions and castings in the Stock Sheets

are correct.3. He should see that proper provision is made for depreciation of the damaged, obsolete,

out-of-fashion stock etc. 4. He should see that the same basis of valuation is followed year after year to enable

comparison of profit in different years.5. He should see that the stock sheets are signed by a responsible official and certificate is

appended to the Stock Sheet thus: “I certify that the quantities, prices and calculations by which the stock-in-hand amounting to to…on the…day of… has arrived at, are correct….”

6. He should see that the goods with the consignees or at branches or on approval, etc. are not valued at selling prices.

7. He should compare the percentage of gross profit to turnover for the previous two or three years and inquire into any considerable fluctuation, if any.

8. He should compare the Stock Sheet of the previous year with the current year and if there is a considerable difference in the closing stock of the two periods he should enquire into the matter.

9. He should examine the Purchases and Sales Books, Goods Returned Inward and Outward Books and the Stock Book for the last one week or so to ascertain that the goods purchased and sold before the close of the financial year are recorded both in the Purchase and Sales Books as well as in the Stock Book.

10. The auditor should see that the stock-in-trade is shown in the balance sheet of a company according to Schedule VI, Part I of the Companies Act.

a) The mode of valuation of stock-in-trade and work-in-progress should be stated.b) The amount of raw materials be stated separately.c) Whether there is a change in the mode of valuation of the stock from previous year.

Valuation of fixed assets:

The usual method of the valuation of fixed assets is the cost price less depreciation. But the problem may arise when it is desired to replace the assets during the inflation period. 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. They should be valued according to the amount required to replace the asset. This method was in vogue in the past. It was followed by the public utility undertaking.

Difficulties under this method:

Unless the asset is to be replaced within a short period, it is difficult to accurately estimate the replacement value of the asset after a very long time. Many calculations will have to be made.

Book 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, they are irrecoverable, they should not show 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.

According to Companies Act Schedule VI, Part I, the sundry debts should be shown as under:

a. Debts considered good and in respect of which the company is fully secured.b. For this the company holds no security other than the debtor’s personal security.c. Debts considered doubtful or bad, andd. Less provision.

Endowment Policies:

Sometimes Endowment Policies are taken out to provide funds for redeeming some liability falling due at later date or to replace an asset later on. The most common form of such policies is Sinking fund Policies for the redemption of Debentures. The auditor should physically inspect the policies and see that the premium payable has been paid and that the policy has not lapsed.

Patent Rights and Trade Marks:

The Patent Rights and Trade Mark are verified by examining the certificates granting such rights or marks.

If the client holds large number of patents or trademarks the auditor should ask him to prepare a schedule giving:

 (a)The description of patent, (b) registered numbers, (c) the dates on which they were acquired, (d) 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.

Copyright:

This is a sole right to produce or reproduce a book or an article. The life of copyright is the lifetime of the author and fifty years after his death. Actually the value of the copyright is not very firm because they lose their value by lapse of time. 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.

Assets in a Foreign Country:

If documents relating to property in a foreign country are at the head office, the auditor should examine them. However, if they are not available, a certificate from the local auditor should be sought for and examined. The auditor should see that the certificate discloses in clear terms that the assets are free from any charge. The auditor should mention this fact in his report.

Furniture and Fixtures:

The auditor should verify 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 account. The auditor should see that proper depreciation is

provided and that the net figure is shown in the balance sheet. The auditor should see that whenever a piece of furniture is purchased an entry is made in Furniture Stock Register.

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. If plant and machinery is kept abroad, the auditor should get a certificate from the local auditor with regard to the machinery.

Loose Tools, Patterns, Dies, etc.:

Such assets have such short useful life and the value per unit is also low. Hence no separate account in maintained for each unit. There is a danger of pilferage of such assets and therefore proper supervision over these should be exercised. The auditor should examine the list of the loose tools. He should see that the list has been certified by a responsible officer.

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:

Freehold property: The auditor should examine title deeds relating to the property. If any property has been purchases during the year, it should be examined.

Lease hold property: Lease deed should be examined to find out its value and duration. In both cases the auditor should examine the title deeds relating to the property.

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 account and credited the amount to the goodwill account, 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. It does not depreciate even with the lapse of time.

Sometimes goodwill is created by incurring very heavy expenditure in introducing a new invention in the market. Such expenditure is capitalized and this is called ‘deferred goodwill’.

The company law does not compel a company to show goodwill at its realizable value. It is usually shown at cost less any sum written off.

The auditor should see that the goodwill is never appreciated in the books of a company.

Verification of Liabilities:

Verification of liabilities is also as important as the verification of assets. 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.

The verification of liabilities is much easier than their valuations.

Verification and valuation of Different Kinds of Liabilities:

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, Pass Book and Minutes Book of the Board of Directors to find out the number and different classes of shares issued.

Reserve Accounts and Funds:

For the audit of these two items, the auditor should examine the Minutes Books of directors meeting.

Debenture and Mortgages:

The auditor should enquire into powers of the company to borrow money.

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.

Bills payable:

The auditor should verify this item form Bills payable Book and the Bills Payable Account. 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.

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.

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.

Contingent Liabilities:

The duty of an auditor is to see that all known and unknown liabilities are brought into account at the date of the Balance Sheet. “A contingent Liability in a balance sheet is a possible future liability arising from one or more business acts preceding the date of the balance sheet. The auditors should consider the circumstance and the situation about the occurrence of that type of liabilities.

VERIFICATION OF LIABILITIES:

Verification of liabilities is also important as the verification of assets. 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.

The verification of liabilities is much easier than their valuations.

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, Pass Book and Minutes Book of the Board of Directors to find out the number and different classes of shares issued.

2. Reserve Accounts and Funds:

For the audit of these two items, the auditor should examine the Minutes Books of directors meeting.

3. Debenture and Mortgages:

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 verify this item form Bills payable Book and the Bills Payable Account. 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 Liabilities:

The duty of an auditor is to see that all known and unknown liabilities are brought into account at the date of the Balance Sheet. “A contingent Liability in a balance sheet is a possible future liability arising from one or more business acts preceding the date of the balance sheet. The auditors should consider the circumstance and the situation about the occurrence of that type of liabilities.