VERIFICATION AND VALUATION OF ASSETS AND LIABILITIES
- 1. Verification and Valuation of Assets and Liabilities Mr.N.Devaram Assistant Professor Sri Ramakrishna College of Arts & Science
- 2. DEFINITION - Verification According to Spicer and Pegler “The verification of assets implies an inquiry into the value, ownership and title, existence and possession, the presence of any charge on the assets.
- 3. Valuation The process of determining the value of an asset or company. There are many techniques for valuation, and it is often partially objective and partially subjective. The valuation of assets is therefore an attempt to ensure the equitable distribution of the original outlay over the period of the assets usefulness.”
- 4. VERIFICATION & VALUATION OF ASSETS 1. Intangible Assets. Viz., goodwill, patents, trademarks, copyrights etc. 2. Fixed Assets viz., land and building, plant and machinery, furniture and fixtures etc. 3. Floating assets viz., cash in hand and at bank, BR, stock in trade, sundry letters etc.
- 5. Intangible assets: Goodwill Verification: Where goodwill has been purchased along with a running business, the same should be verified from the agreement with the vendor showing the price paid for it. But when the amount is not specially fixed, the goodwill is the amount for the purchase of the business over the net assets taken over. Valuation: Goodwill should be valued at a cost less amounts written off. Average Profit Method , Super Profit Method, Capitalization Method, Discounted Cash Flow Method.
- 6. Patent Verification: The Auditor should examine the patents with the help of certificate which have granted such patent rights. The auditor should also ensure that the patents are registered in the name of client Valuation: patents must be valued at cost less depreciation. The patents should be written off in a period of sixteen years after which the right automatically lapses unless the term is extended.
- 7. Copyrights Verification: In verifying the copyrights, auditor should inspect the agreement between the auditor and the publisher. Valuation: Generally the value of the copyright is not stable because copyrights lose their value by passage of time. In the balance sheet copyright must be shown a cost less amounts written off from time to time.
- 8. Trademarks Verification: Trademarks can be verified by examining the assignment deed duly endorsed by the office of the registrar of trademarks. In case they have been purchased from others, the auditor should vouch the expenditures incurred in connection with their acquisition e.g. registration fees, payments made to designers etc. Valuation: The valuation method is the most suitable method valuation of trademarks. it should be seen that trademarks are properly valued and shown in balance sheet.
- 9. Fixed Asset: Freehold land and building Verification: The auditor should examine the title deeds to ensure that they are in the name of the client. Any addition or sale during the year should be carefully examined. Valuation: Freehold land being a no depreciable asset is generally shown at cost which includes the purchase price, broker’s commission, registration fees, legal charges etc. Any payments made to Municipality Corporation or improvement trust as developmental charges should be included in the cost. If market realizable value is taken as basis for valuation of freehold land the same should be disclosed clearly in the balance sheet
- 10. Valuation of buildings: Buildings should always be valued at cost less depreciation at a reasonable rate. Actually, the market or realized value of the buildings keeps on fluctuating. Therefore, it should be taken into account while valuing the buildings
- 11. Leasehold property: Verification: The auditor should inspect the lease agreement to find out the value and duration. The auditor should see that lease agreement is registered with the registrar and certificate testing to the validity of the same. Valuation: Leasehold land and buildings are to be valued at cost less depreciation which should be sufficient writes it off completely during the period of lease
- 12. Plant and Machinery Verification: Auditor should commence the process of verification by obtaining a schedule of plant and machinery certified by responsible officer of the concern. Valuation: For valuing the plant and machinery, the auditor should prepare a list of each machine from the plant register and should get the list certified by the woks manager. The auditor should see the plant and machinery account is shown in the balance sheet at cost less depreciation after making proper adjustments regarding new purchases of machinery and sale of older machinery during the year.
- 13. Floating Assets: Cash in hand: Verification: The auditor should verify the cash in hand by actually counting it on the date of balance sheet. Opening balance of cash + Cash Inflows – Cash Outflows = Closing Balance of Cash
- 14. Cash at Bank: Verification: The auditor should verify cash at bank by comparing the balance shown in cash book and pass book. In verifying the bank balance the auditor should also prepare bank reconciliation statement to ascertain the correct position.
- 15. Stock in trade: Verification: It is practically impossible for auditor to physically verify each item of the stock in hand because of various reasons i.e. limited time and the lack of technical knowledge. Therefore the auditor has to rely upon test checks to ascertain the accuracy of stock in trade Valuation: The stock in trade being a floating asset should be valued at cost price or market price whichever is less. The cost price can be calculated from any of the following methods
- 16. Investments: Verification: The auditor should verify the details of the schedule of investment by applying tests e.g. financial journals and newspapers should be consulted for checking the market rates. The securities themselves may be consulted or the broker’s notes may be examined for checking the cost etc. The auditor should verify the amount of interest or dividends ass have already have been declared before the date of the balance sheet, should be taken into account as outstanding ones. Valuation: If investments are to be held as a fixed asset for the purpose of earning interest/dividend; these are to be valued at cost which includes brokerage and stamp duty paid in regard there to.
- 17. Verification of Liabilities: Capital: In case of a company auditor should examine the memorandum of association to verify the information as to the maximum capital the company is authorized to raise. He should also ascertain the amount of called up in respect of each class of shares and also ascertain how many shares of each class are allotted as fully paid. Auditor should also specify the sources from which the bonus shares are issued i.e. capitalization of profits are reserves for share premium accounts. He should also ensure that capital profit, if any on issue of forfeited shares, has been transported to capital reserve.
- 18. Debenture: Debenture trust deed’ should be inspected and with its help, the debenture account in the ledger should be examined. If necessary, the auditor can obtain a certificate from the debenture holders. Since the debentures are supposed to be redeemed, the auditor should see the arrangements for their redemption. The debenture may be issued at par or at premium. The auditor should see the details as given in the Register of Mortgages and charges.
- 19. Trade creditors: The First task the auditor is to ask for schedule of creditors. The purchase ledger should be checked with the books of original entry, invoices and credit notes etc. Discount on creditors should be checked with reference to creditor’s account. If any debt is found unpaid for a longer period of time any enquiry should be made since it is possible that instead of paying to the creditor the amount might have been misappropriated.
- 20. Loans: The auditor should examine the loan agreement in order to ascertain the terms of loan, amount of loan and period and the nature of the loan. In case the loans are overdrafts have been taken from a bank an agreement with the bank and a certificate to that effect should be obtained and examined.
- 21. Outstanding liabilities for expenses: The auditor should obtain a certificate from responsible officer of the company stating that all outstanding liabilities for expenses incurred have been brought into account. The auditor can verify those items of expenses which usually constitute outstanding liabilities. E.g. salaries payable, legal expenses, rent, wages, audit fees etc.
- 22. Reserves and Funds: The auditor should examine and verify that whether the decision to create reserve or fund is dictated by needs and circumstances of business and relevant legal provisions and check the relevant entries in books of accounts and check the entries passed for the purpose in the profit and loss appropriation account.