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MEANING

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.

Definitions
the verification of assets implies an enquiry into the value, ownership and title; existence and possession; the presence of any charge on the assets. -Spicer and Pegler.

The verification of assets is a process by which the auditor substantiates the accuracy of the right hand side of the Balance sheet, and must be considered as having three distinct objects: a) the verification of existence of assets (b) the valuation of assets the authority of their acquisition.

In the London Oil Storage Co. Ltd. Vs. Sear Hasluck and co. (1904), it was held that it is the duty of an auditor to verify the existence of the assets stated in the balance sheet and that he will be liable for any damage suffered by the client if he fails to do so.

Important points
Comparing the ledger accounts with the balance sheet. Verifying the existence of the assets. Satisfying that they are free from any charge Assets were acquired for the business. To satisfy himself that the assets are in possession of the client.

According to the statement on Auditing Practices issued by the Research Committee the Auditors object are: 1. They exist; 2. They belong to the client 3. They are in possession of the client are person authorised by him. 4. They are not subject to lien 5. They are recorded in the balance sheet at proper amounts.

The manufacturing and other companies (Auditors Report) order, 1975 (social Audit order) Liabilities Cash, bills receivables and investment. Inclusion of assets not existing on the balance sheet date.

Existence of assets on date of balance sheet. Ownership of assets Possession of assets and verify charges Proper valuation and classification of assets Fair and true view of financial position. Deduct error and fraud. Proper accounting of assets Ensure assets are used for business.

VALUATION
Valuation is a part of verification which is very important for audit. The accuracy of balance-sheet depends upon the valuation. It is process of ascertaining the real price of the assets and liabilities. An auditor is not a valuer and cannot be expected to act as such. All that he can do is to verify the original cost price and to ascertain as far as possible that the current values are fair and reasonable and are in accordance with the accepted principles. - Lancaster

Cost price Replacement value Market value Realizable value Book value Break-up value and scrap value. obsolete

Fixed assets Current or floating assets Wasting assets Intangible assets Fictitious assets

General Principles
Focus is on the balance sheet. Ownership of the assets or liabilities The value of assets or liability The assets should be verified physically. Valuation Liability nature and extent Assets like cash and bills receivables should be personally examined.

Differences between verification and valuation


In case of verification auditor as to verify not only actual existence but also proper valuation. Verification of assets comes before valuation of assets. Verification of assets includes valuation also Auditor is entirely responsible auditor has to merely ensure that assets value shown in balance sheet are correct. valuation follows verification of assets. It is a part of verification of assets Auditor dont undertake work of determining value of assets

verification
Auditor guarantees that asset have been properly verified It is made on evidence such as title deeds, receipts, payment etc., It is a process by which auditor satisfy himself not only about existence, ownership title of asset, but that the asset is free from charge

valuation Does not give any guarantee as to accuracy. Auditor has to depend upon the certificate of the owners. Not only determining value of assets as appearing in balance sheet but critical examination of value

he is not a valuer and cannot be expected to act as such. All that he can do is to verify that original cost price and to ascertain as far as possible that the current values are fair and reasonable and are in accordance with the accepted commercial principles an auditor is not liable, if in the absence of suspicious circumstances, he relies on trusted officials of the company Kingston Cotton Mills Ltd.(1896)

He should be very careful and cautious. He should remember that that accuracy of profit and loss account and balance sheet depends on accuracy of valuation. He is not a valuer hence he has to rely on information available. Satisfy himself that the valuation of assets has been correctly made. It is fair and reasonable How far the principles of accounting have been adopted Whatever steps that are taken are accepted in the previous years.

Verification and valuation of assets


1.Property Freehold property: He should examine the title deeds in order to verify the correct position. For purchase price statement o f purchase received from client solicitors. Should see that the property is in the client name.

In case mortgaged property obtain a certificate from the mortgagee regarding the possession. Rented out- examine the receipt of rent particularly the receipt of the last rent collected. In case the property is acquired in the current year the cast may be verified with the help of bank pass book. He should obtain a certified copy of the valuation of the property from professional valuers or architect.

Lease hold property


Should examine the lease contract A lease exceeding one year is not valid unless it has been granted by a registered instrument. Should see term and conditions are properly complied with. Termination of lease on account of non-payment. He should examine the last receipt of the lease rent. Depreciation Sub-let

Property which is in the process of construction


Examine the certificate of the architect Allocation between revenue and capital expenditure is made correctly. Obtain a certificate from a responsible officer

PLANT AND MACHINERY


Machinery account Balances sheet Vouching Plant Register-cost, records about sales, provision for depreciation. Personal inspection Charges on the asset Valued at going concern value Shown in in balance sheet at cost depreciation. Repairs revenue account.

Furniture and fixtures


Furniture stock register On the date of balance sheet , the register has been properly balanced and shown in the B/S Lease Lease deed. Properly valued Depreciation

Good Will
It is valued at the time of purchase of the business In case of partnership firms In case of purchase of the business, the auditor should verify contract with the vendors. Revaluation of assets Partnership firm-Deed Goodwill is valued and shown in balance sheet at cost less amount written off.

Factors determining the value of goodwill


Location factors Nature of business Efficiency of management Past profits of a business Stability of a business Future prospects of business.

Circumstances
1. Sole trading concerns When it is sold Converted into partnership 2. Partnership firm Admission of a new partner Retirement and death of a partner. Amalgamation of partnership firm.

3. Joint stock company Amalgamation of companies Absorption External reconstruction Valuation of shares. Methods
Average profit method Capitalisation method Super profit method Annuity

Patents
Patent is stated in the balance sheet Patents are registered in the name of the client Patent rights 1.By purchase: fee is capital expenditure debited to patents account , renewal fees revenue expenditure. 2.By development and Research

If the client holds large number of patent or trade mark -The description of the patent -Registered number -Date of purchase Examine receipt for payment of fees. Renewal fees is paid each year. A patent has 16 years of time.

Valuation of asset
With the lapse of time, they lose their value Causes for depreciation are a)Lapse of time b)Obsolescence c) Going out of fashion.

Copy rights
An exclusive right to produce or reproduce a book The duration of the copyright is the lifetime of the author and fifty years after his death. The auditor should proceed with their verification similar to patents Agreement of author and client is to be examined. If there are many copyright with a business, the auditor should ask for schedule

Motor Vehicles
Separate account should be opened. Register is maintained check the registration books and licenses. Purchases and additions during the year He should check premium receipts. Fees paid for renewal should be properly entered. Depreciation.

Live stock
The auditor should check the asset with the help of certified inventory of all the animals. Separate registers are maintained. Valuation he should see that they are annually revalued and any loss on account of death or sale of an animal is written off.

Stores and spare parts


It consists of materials which are meant for consumption in the business and not for resale. While spare parts of the machinery are preserved to maintain it in proper order. Auditor should obtain an inventory of stores and spare parts duly certified by a responsible officer. He should count the stock himself and verify their existence. The loss on breakage or waste or duly writeen off. Stores and spares consumed.

Assets acquired on HPs or Installment agreement


It should be properly recorded. Each year installment has to be paid and so much of money paid in this connection is be recorded. The agreement should be examined. The interest paid on the unpaid balance should be charged to profit and loss account. Provision of depreciation should made.

INVESTMENTS
The authority of purchase of investment. The prices of investment be checked by reference to allotment letters or stock brokers bought note. Ensure that all investments are in the name of the client. The MOA and AOA of the company be examined. Approval of BOD.

City Equitable fire insurance company Ltd.: The auditor should try to inspect all securities. Examine the transfer Deed when no certificate has been issued . Inspect the bought note. If securities are held by any trustee on behalf of the company the Trust deed should be inspected. Should vouch the sale proceeds. Company brokers..

Sec 49 0f the companies act. The auditor should also obtain a complete schedule of all such investments made in the shares and debentures of a subsidiary.

Registered stocks, debentures or bonds and shares and Government securities. Inscribed stocks. Bearer bonds and share warrants. VALUATION OF INVESTMENT

The methods of stock taking should be examined. He should obtain a list of instruction issued . A few items should be checked in the rough stock sheet. Total and balances of stock sheets should be examined with the help of valuation sheets The principles and bases followed. Valuation is done on the basis cost price or market price which ever is less Goods inward registrar should be examined. The goods sold on or prior to the closing day Goods not related to business are not recorded. The percentage of gross profit to sales of the current year

METHOD OF STOCK TAKING


PRECAUTIONS TO BE TAKEN There may be some goods which may be legally in the ownership of the client but not actually in his possession. Balance of unsold stock at the branches Goods received but not entered in the financial books should be included. Goods sold but not delivered to the buyer

I hereby certify that the value and the quantity of stock as entered in the stock sheet on December 31 2010, are correct. The goods included in the stock-sheet are the property of the concern. The goods have been properly valued and adequate provision has been made for old and obsolete goods. The basis of valuation of stock is the same as in the previous year. Finally checked and approved by. Managing Director.

It should take place at the close of business on the last day of the accounting period. The work of calling out quantities and description of the goods and the making of the entries should be done by senior clerks. Such entries should be thoroughly checked. A responsible officer should enter the price on the stock sheet. Additions should be done by another clerk and their checking should be independently done. Stock taking sheet should be initialized.

Unit cost or actual cost Average cost method FIFO LIFO Base stock method Standard cost Adjusted selling price.

Raw material Semi-finished goods Finished goods Goods on consignment Goods with customers under hire purchase agreement. Goods of plantation products.

In the case of kingston cotton mills(1986) it was held that it is not the duty of the auditor to take the stock, and that he is not guilty of negligence if he accepts the certificate of a responsible official in the absence of suspicious circumstances. Points to be considered: The auditor is not a valuer; It is not his duty to take stock. If he has some suspicion in his mind as regards the valuation of stock he should rely on the certificate of a responsible official.

Physical verification of stock-in-trade The first guiding legal cases are Kingston Cotton Mills Case (1896) and Irish Woollen Co. Ltd. Vs. Tyson and others (1900) American accountants have not accepted the principles in view of McKesson and Robbins case. The Westminster Road Construction and Engineering Co. Ltd.(1939)case and the Deputy Secretary, Minister of Home affairs vs. S.N. Dass Gupta (1955)

The Institute of C.A. of India


Attendance of the auditor at stock taking Examination of records Confirmation with third party.

Verifying the valuation of the stock in-trade. As to the cost the auditor must satisfy himself that they have been calculated on some acceptable method. Should see that the stock sheets are duly signed. Goods with consignee are not valued at selling price Examine the purchase and sale ledger. Depreciation

Sundry Debtors
Should see that debts disclosed in balance sheet are recoverable. Obtain certified statement of types of debt. The balance of the sales ledger should be checked with the schedule of the book debts . Written of debt In case of hire purchase debts Debts due by the directors or other officers In case of debts in a foreign currency

ACCORDING TO THE COMPANIES ACT


Debts considered good in respect of which the company is fully secured. Debts considered bad or doubtful. 1. the age of debts 2. Regular payments 3. Heavy dishonored bills 4. Noting on the accounts 5. Comparison of bad debts, budgeted and actual.

Bills Receivables
Bills receivables should be compared and counted Some times the bills might have mature and honoured subsequent to the date of the balance sheet He should see the bills are properly drawn, stamped and accepted Discounted bills should be examined. If bills have been deposited with the bank for safe custody or for security of loan, they should be verified.

Loans
Against the security of land and property Against the security of stock and shares Against the personal security of the borrower against the security of insurance policy Against the security of goods

Against the security of land and property


Examine the documents relating to the security. If the land or property is mortgaged If it is a second mortgage, he should see that the first mortgagee has been duly informed. Examine title deed relating to the property. The amount of loan and the date should be inquired into. The rate of interest and the date on which it is payable. Should see the property is insured against fire and examine the last receipt for the premium paid. Should see the mortgage is duly registered.

Loans against security of stock and shares


Should obtain a list of stock and share which have been held as security and transferred in favour of client. Examine the concerned document to find out the value The amount of loan advanced must be confirmed from the borrower on the balance sheet date. See whether the security is easily marketable Partly paid shares should not be accepted as security,

Loan against security of goods


Godown-keepers receipts should be examined. See that the warehouse rent has been paid by the borrower; It has been advanced against goods in transit, railway receipts or bills of ladings etc duly endorsed in favour of his client. the value of the goods may be ascertained from the market quotations He should examine quality control report If the goods are of perishable nature, he should examine the turnover of the stock.

Verification of liabilities
The liabilities shown in the balance sheet are actually payable. All liabilities are properly recorded The recorded liabilities are payable for the legitimate operations of the business, the nature and extent of contingent liabilities has been disclosed in the balance sheet by way of foot note.

Capital
Partnership firm the auditor should examine the agreement. In JSC- MOA , AOS, cash book, pass book and the minutes book of Board of directors In case of new company.
Forfeiture of shares The calls in arrears All the requirements of schedule VI of the companies act in connection with the share capital.

In case of sole proprietors

Loans
The auditor must ascertain the borrowing power of the company. Should see any restriction on the borrowing power of the officers is not exceeded. see agreement pertaining to the borrwings. In case of secured loan When debentures are issued having a charge on the asset. Examine the entry in mortgage register.

Sec 227 (IA)


It is necessary for an auditor to find out the purpose or purposes for which the loans have been raised. He should also confirm whether the loans so raised have been fully utilised. In case BOD, the auditor should ascertain the amount of OD and the conditions on which the overdraft has been secured by his client. it is always advisable to get confirmation from the lending institutions.

Trade Creditors
Should take a balance of trade creditors duly signed by the authorised officer of the organisation. Obtain confirmatory statement from the creditors. Examine the invoices sent by the suppliers, and an inward Goods Book. Test checking. Compare percentage of gross profit with P.Y If debts have not been paid for a long time. For any purchases return, he should examine the returns outward Book

Outstanding Liabilities for expenses


Obtain certificate from the authorised officer of the company stating that accounts are maintained. He should ascertain the accuracy of the accounting records and test the calculations.

Bills payable
These are acknowledgements of debt payable. Get a statement of bills payable and compare with the B.P book. Examine the cash book for bills already met after balance sheet date and before audit. Examine bank pass book and cash book. Ensure bill already paid are not recorded as outstanding.

Contingent liabilities
A future uncertain liability which is dependent on the happening of some other event. Liabilities which have not arisen upto the date of the balance sheet, but may arise out of contingent contracts such liabilities are called as contingent Liabilities.

Contingent liability categories


Liabilities in respect of which a provision has been made: Ex: claims which in the opinion of directors are likely to become legal obligations and as such provisions have been made for such claims. Those not provided for by the management: Ex: BOE discounted, Claims against company not acknowledged as debit etc.

The auditor should check various C.L For liabilities for which no provision has been made in the books while preparing B/S it should be shown under the heading C.L not provided for. The auditor should note down such liabilities while auditing the various books of accounts of a company. Make enquires regarding such liabilities if they have not shown in the balance sheet.

Examples
Liability on bills discounted but not matured on the date of balance sheet. For damages claimed by staff for accidents where the case is before the law of court for decision, Liability under a guarantee Liability on calls on partly paid shares