VERIFICATION AND

VALUATION 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
loss
3. 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 valuation
Valuation means to conform that all assets are shown in the balance sheet
to their proper book value
Proper book value means all assets should be shown with its cost price but
estimated depreciation must be deducted from that.

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 verified
5. 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 assets
8. Auditor dont 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

PERIOD
A 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:
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
a.

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 writeoff 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
at the date of balance sheet.

benefit of privilege

Auditors 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 property
4. 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 security
b) He should see that shares are transferred to his client
c) He should inspect such shares, etc, and see that they do not belong to his
client
d) 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-keepers 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 inspectors 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 premium
b. 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 securities
b) Inscribed Stock
c) 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 England
C. 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:

B.

Market 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.
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:

C.

Finished Goods

D.

Stores:

E.

Spare Parts:

F.

Goods on Consignment:

G.

Goods on Approval

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.
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.
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.
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.
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.
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 Sheets
b) Incorrect valuation of the closing stock in the Stock Sheets
c) 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 auditors 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 stockin-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:

a)

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.

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 toon theday 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 debtors
personal security.
c. Debts considered doubtful or bad, and
d. 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.