Unit -3

Verification and Valuation

Of
assets and liabilities
Lalatendu Mishra
Jain University

Verification of assets and liabilities

At end of the year

To confirm the ownership, valuation and
existence

As per balance sheet

Establishing actual existence

Proper classification and valuation of the

assets and liabilities
Verification means providing the truth or
confirmation

Objectives of verification of Assets

Existence: physical verification, with reference

to documentary evidence
Ownership: examining title deed
Possession: in possession of others duly
authorized by the client
Adequate disclosure of encumbrance or lien:
Valuation and disclosure: valued and disclosed
in financial statements according to the GAAP
and statutory requirement

Verification of Plant and Machinery

Ascertain the existence and ownership :

-Plant register which contains detailed
particulars relating to various machines and
equipments ( for example, the name, type,
number, date of installation, name of the
vendor)

-original cost, rate and amount of depreciation,

-accumulated depreciation,addition and sales
from time to time

Verification of Plant and Machinery

-Insist of maintenance by the client
-may visit the factory periodically
- Verify sale of plant- evidence indicating
authorization to sell, invoice copy, carbon copy
or counterfoil of cash of cash receipt, journal
entries

Ascertain
the
possession
determination lien, if any

- plant is not usually subject to mortgage.

- floating charge on assets

and

Verification of Plant and Machinery

Examine the valuation and disclosure

-cost of acquisition less depreciation

-Addition: the cost of acquisition includes invoice
price, freight, duty, uploading charges and
installation cost
- if construction: the client, expenses on material
labor and other allocable overhead, certificate
from engineer

Verification of Plant and

Machinery
ascertain the profit or loss on sale of the
machinery has been calculated correctly and
disclosed properly in profit and loss account

Freehold land

Ascertain the existence and Ownership:

-title deed or purchase deed

-purchase during the year: the contract with the
vendor, approval of appropriate authority
-sale during the year:approval of appropriate
authority;broker's note or auctioneer's note or a
statement showing quotations

Freehold land

Ascertain the existence and Ownership:

-title deed or purchase deed

-purchase during the year: the contract with the
vendor, approval of appropriate authority
-sale during the year:approval of appropriate
authority;broker's note or auctioneer's note or a
statement showing quotations

Freehold land

Ascertain
the
possession
determination lien, if any

and

-the title deed should be in custody of owner

-Determine whether the land is free from any
charges(such as any tax-in-arrear)
- disclosed as liability in the balance sheet

Freehold land
Examination valuation and disclosure:
- non-depriciable asset:purchase price, brokers'
commission,stamp duty, registration duty, legal
charges
-any payment to municipality: laying of sewer etc.:
land improvement account
-land and building purchased as a package:
determine the value separately, appraisal report
by the valuer

Freehold land
- building demolished: cost of demolition should
be capitalised

Building Verification

Ascertainment the existence , ownership,

possession and determine lien etc.
Examine the valuation and disclosure

-cost less depreciation

- purchase price, the cost of alteration and
improvement
-if constructed: bill of contractor and architect
- construction work-in -progress; reference to the
architect certificate and contractor's certificate

Furniture and Fixture

Examine the existence and ownership:

-Furniture is a movable asset

-Fixture include items fitted to the wall or on
ground ex:fan, showcase, carpet and other
office equipment
- existence and ownership: stock register
-select random sample:stock number by physical
examination

Furniture and Fixture

- ask management to prepare stock inventory and
inventory and reconcile it with stock register and
reconcile with stock register
-verify: authorization, purchase invoice, stock
register and bank statement.

Ascertain the possession and determine

lien, if any
Examination valuation and disclosure

-cost less depreciation

Furniture and Fixture

- purchase invoice and voucher of expenses
-serviceable or lost should be written off to the
profit and loss account under proper authority

Patents
A patent is an exclusive right granted by the
Government to manufacturer and dispose off or
otherwise benefit from the result of the invention
of a product or process

Ascertain
existence,
possession :

ownership

and

-certificate or patent letter

-if purchased;seller's right should be examined
-schedule of patents

Patents
- renewal fees and receipts
- confirmation letter from the legal adviser as to
validity and existence of each patent

Examine the valuation and disclosure

-cost less amortization

-purchase price and the registration cost if
brought outright

Patents
--developed by the client in-house ;development
cost, legal charges including registration fees
and other direct cost
- written off over the legal term of its validity or
over its useful commercial life, whichever is
shorter. AS-26 10years

Copy Rights
Copyrights are rights for the reproduction and
sale of printed or otherwise produced writing,
drawings, musical compositions, maps, works
art and so forth.

Examine existence, ownership and possession

generally purchased; original
surrendering in favour of the client

agreement

Copy Rights
-obtained schedule of copy right duly signed by
a responsible official of the client and verify
their existence.
Examine its valuation and disclosure:
Similar to that of the patents.

Trademarks

A trademark is a distinctive sign, symbol,

design or brand name established to enable the
purchaser to identify the product easily
Verify existence, ownership and possession

-certificate of registration issued by the office of

the Registrar of Trademarks
-Trade and Merchandise Marks Act,
governs trademarks in India

1999

Trademarks
- purchased-purchase agreement with the seller
-renewal fee receipt indicates the validity and
legal enforce ability of a trade mark
-schedule of trademarks signed by a responsible
officer of the client

Examine valuation and disclosure:

-cost less amortization

-purchase price

Trademarks
-developed by the client: cost of developing
outlays, design costs and other associated
direct cost
-amortized over the period of legal validity or
useful commercial life whichever is shorter;
AS-26

GOODWILL

Examine existence, ownership and

possession

-no consideration paid, no goodwill

-a business is acquired for a price which is in
excess of net assets acquired by the business
-can not be subjected to lien

Examine valuation and disclosure:

-cost less accumulated amortization

GOODWILL

Goodwill has value only so long as the firm,

that purchased it continues to earn above
normal net income.

Investment

Verification of existence, ownership,

possession and lien, if any

-legal requirement and made with in it authority

-investment register or schedule of investments
-physical inspection at the end of the year
-certificate obtained from third parties

Justification for keeping the investment in the

custody of third parties other than bank

Investment

Examine the valuation and disclosure:

- cost of investment includes purchase price,

brokerage, stamp duty, transfer fee etc.
-Current investment should be valued at the
lower of cost or fair value.
- unquoted shares: ascertain the fairness if
valuation method
-Long term investment should be valued at cost
-disclosure on balance sheet

Debtor

Ascertain the existence, ownership and

disclosure :

-schedule of debtors duly signed by the

responsible officer of the client
-inspect documents:: sales invoice, transporter's
receipt, credit memos etc.
- examine the realisability of debt as on date of
balance sheet: non-compliance of terms of
credit, debt under dispute / litigation, repeated
dishonour of cheques and so on

Debtor
-recompute the provision for bad and dobbt full
debt and compare with past periods
-bad debt written off:court order
-subsequent bad debt recovery: recorded in a
memorandum record
-communication directly: on the date of balance
sheet

Bills Receivable

Verify the opening balance of bills receivable:

audited balance sheet of the last year
Examine the relevant documentary evidence:
covering notes sent by the customer and the
same issued by the bank on discounting etc.
Physical verification of the bill: properly drawn,
stamped,duly accepted and not over due for
payment
If discounted: confirmation from the bank,
entries in cash book,

Bills Receivable

If dishonored: adequate provision made for the

recoverable amount, concerned party should
be informed
Bill matured and amount not received:
renewed

Inventories
Inventories consist of tangible items that are held
for sales or use in the production of goods and
service

Verify existence ownership and possession

-examine stock record: receiving report,

inspection report, material issue notes etc.
-physical count of inventory
-

Cash in hand

On the date of balance sheet

Presence of cashier

Check system of making payments and safety

arrangements
Cash in transit: proper documentary evidences
and correspondence

Cash at bank

Comparison of the balances as shown in the

cash book and the pass book

Preparation of bank reconciliation statement

Obtaining letter of confirmation from the bank

Separate certificate for different accounts

should be obtained
In case , there are accounts with more than
one bank, the auditor should verify them
individually

Debentures

Articles of association and memorandum of

association: power and limitation
Cash received from the issue of debentures:
cash book, bank statement, application and
allotment register of debenture holder

List of debenture holder

Debenture trust deed

Compliance with the provision of the

Companies Act

Debentures

Register of charges

Provisions regarding redemption

Trade Creditors / Sundry Creditors

Schedule of creditors
Purchase ledger: original invoices, credit notes
etc
Provisions of discount on creditors: reference
to creditors account

All purchases during the year

Hire purchase: conditions of the arrangement

Unpaid debt for long time: enquiry ;

misappropriation

Bills Payable

List of outstanding obligations

Confirmatory statements from the drawers
directly
Bill paid after the balance sheet should be
verified
Paid should not be shown as outstanding

Contingent Liability
Contingent liability refers to past transactions or
other events or conditions, that may arise in
consequence of one or more future events
- depends upon happening and non-happening
of an event
Example:
a) pending litigation against the entity
b)guarantees of third party obligation
c)discounted bill receivable
d)Membership of a company limited by