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Verification of Assets and Liabilities
Verification and valuation of Different Kinds of Assets:
1. Cash in Hand: 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.
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 also see that the ‘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.
3. Loans: Loans against Security of Land and Property: 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. If the land or property has been mortgaged, the auditor should examine the mortgage deed. He should examine the title deeds relating to the property. He should enquire the rate of interest and the date on which it is payable. He should see that the mortgage is duly registered. He should see whether has the power to mortgage the property and borrow money. Loans against Security of Stock and Shares:
4. The auditor should get a list of such stock and shares which have been held as security. He should see that such shares are transferred to his client. He should inspect such shares and see that they do not belong to his client. The auditor should get a written acknowledgement from the borrower regarding the amount of loan on the date of the balance sheet or examine the agreement. Loans against Security of Goods: Where loan has been advanced against a Godown keeper’s receipt, such a receipt should be examined. He should see that the warehouse rent has been paid by the borrower. He should examine the inspector’s report from time to time regarding the quantity of goods. Loans against
Insurance Policy: Last receipt for the payment of the premium paid should be examined. The auditor should see the notice of assignment of the policy has been given to the insurance company. Loans 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 surety as the value of such as security depends on his financial position. He should also see that no charge in the terms of loan has been made as such a course will discharge the security and the client loses that security.
4. Bills Receivable: The auditor should examine the Impersonal ledger or Bills Receivable Book with the bills receivable on hand. Some of the bills might have been sent out for collection in which case an inquiry should be made from the bank. While examining the bills, the auditor should see that they are properly drawn, stamped, duly accepted and that they are not overdue. In case there is any doubt about the payment of the bill on the due date, sufficient provision be made.
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. The schedule should give full particulars of the investments, e.g., name of investment, the cost price, the market price, book value, date on which the investment was acquired, rate of interest payable and the dates of the payment on interest, tax deducted and so on and compare these with the records in the books of his client.
- Valuation of Investments: Having verified the existence of the investments the auditor should now proceed to find out whether they are properly valued at the date 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. If they are held by Trust Company, the object of which is to earn dividends and interest and distribute such dividends and interest amongst the shareholders, such investments are to be treated as fixed assets and, therefore, even permanent fall in their value may be ignored, of course, subject to Articles of Association and the Memorandum of Association of the trust Company.
6. Stock-in-hand: The correctness of the profit and loss account of a concern depends, to a great extent, upon the correctness of the value of the stock of goods in hand at the close of the period. The auditor has, therefore, not only to verify the existence of the stock in hand but he has also the see that it is valued according to certain accepted principles of accountancy. The auditor should insist upon the maintenance of stock book, if it has not already been maintained.
7. Fixed Assets: The usual method of the valuation of fixed assets is the cost price less deprecation. 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.
8. Books 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, i.e., they are irrecoverable, they should not shown 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.
9. Endowment Policies: The auditor should physically inspect the policies and see that the premium payable has been paid and that the policy has not lapsed.
10. Patents Rights and Trade Marks: If the client holds large number of patents or trade marks the auditor should ask him to prepare a schedule giving : The description of patent, registered numbers, the dates on which they were acquired, 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.
11. Copy Right: 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.
12. 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.
13. 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.
14. Loose Tool, Patterns, Dies etc,: The auditor should examine the list of the loose tools. He should see that the list has been certified by a responsible officer.
15. 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 (a) Freehold property (b) Lease hold property. In both case the auditor should examine the title deeds relating to the property.
16. 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.
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. Debentures and Mortgage: 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 Liability: The auditors should consider the circumstance and the situation about the occurrence of that type of liabilities.
