AprojectReporton

VERIFICATIONOFASSETS&
LIABILITIES

SubmittedTo
MissBHAVANA

A.VCOLLEGEVASAI(W)
SemesterV
T.Y.BBI(20010-11)

GROUPMEMBERS

IVANMENEZES27

SRIRAJNAIR35

SHRADHAGODSE 10

MANALIGHARAT 08

HEMABRAHME 01

CONTENTS:

INTRODUCTIONTOAUDIT

AUDITSINACCOUNTING

TYPESOFAUDITOR

MEANINGOFVERIFICATION

SCOPE&OBJECTIVEOFVERIFICATION

SIXTEENPRINCIPLESOFVERIFICATION

VERIFICATIONOFTRANSACTIONS

VERIFICATIONOFSPECIFICASSETS

VERIFICATIONOFSPECIFICLIABILITIES

INTRODUCTIONTOAUDIT:

ThegeneraldefinitionofanAUDITisanevaluationofa
person,organization,system,process,enterprise,projector
product.Thetermmostcommonlyreferstoauditsinaccounting,
butsimilarconceptsalsoexistinprojectmanagement,quality
management,andforenergyconservation.
Anexaminationandverificationofacompany'sfinancial
andaccountingrecordsandsupportingdocumentsbya
professional,suchasaCertifiedPublicAccountant.
AnauditisanIRSexaminationofanindividualor
corporationstaxreturn,toverifyitsaccuracy.Thereare
threetypesofaudits:correspondenceaudits(theIRSmailsa
requestforadditionalinformation),officeaudits(aninterviewis
conductedatalocalIRSoffice),andfieldaudits(aninterviewis
conductedatataxpayer'splaceofbusiness,foracorporate
taxreturn).Sincethereisalwaysthechanceofan
audit,expertsrecommendkeepinggoodrecordstosupportallthe
informationinareturn.Thereasondetailed
andaccuratebookkeepingissoimportantisthattheburdenof
proofisonthefiler,nottheIRS.

AUDITSINACCOUNTING:

Auditsareperformedtoascertainthevalidityandreliabilityof
information; also to provide an assessment of asystem'sinternal
control. The goal of an audit is to express an opinion on the
person/organization/system(etc)inquestion,underevaluation
basedonworkdoneonatestbasis.Duetopracticalconstraints,
an audit seeks to provide onlyreasonable assurancethat the
statements are free from material error. Hence, statistical
samplingisoftenadoptedinaudits.Inthecaseoffinancialaudits,
asetoffinancialstatementsaresaidtobetrueandfairwhenthey
arefreeofmaterialmisstatements-aconceptinfluencedbyboth
quantitativeandqualitativefactors.

Audit is a vital part ofaccounting. Traditionally, audits were

mainly associated with gaining information about financial
systems and the financial records of a company or a business
(seefinancial audit). However, recent auditing has begun to
include other information about the system, such as information
about security risks, information systems performance (beyond
financial systems), and environmental performance. As a result,
there are now professions conducting security audits, IS audits,
andenvironmental.

Infinancial accounting, an audit is an independent

assessment of the fairness by which a company's financial
statements are presented by its management. It is performed by
competent, independent and objective person(s) known as
auditorsoraccountants,whothenissueanauditor'sreportbased
ontheresultsoftheaudit.

Incost accounting, it is a process for verifying the cost of

manufactureorproductionofanyarticle,onthebasisofaccounts
asregardsutilizationofmaterialorlabourorotheritemsofcosts,
maintained by the company. In simple words the term cost audit
meansasystematicandaccurateverificationofthecostaccounts
and records and checking of adherence to the objectives of the
costaccounting.

The Definition forAuditing and Assurance Standard (AAS)

1byICAI- "Auditing is the independent examination of financial
information of any entity, whether profit oriented or not, and
irrespectiveofitssizeorlegalform,whensuchanexaminationis
conductedwithaviewtoexpressinganopinionthereon."

TYPESOFAUDITORS:

Auditorsoffinancialstatementscanbeclassifiedintotwo
categories:
Externalauditor/StatutoryauditorisanindependentPublic
accountingfirmengagedbytheclientsubjecttotheaudit,to
expressanopiniononwhetherthecompany'sfinancial
statementsarefreeofmaterialmisstatements,whetherdueto
fraudorerror.Forpublicly-tradedcompanies,externalauditors
mayalsoberequiredtoexpressanopinionoverthe
effectivenessofinternalcontrolsoverfinancialreporting.
Externalauditorsmayalsobeengagedtoperformother
agreed-uponprocedures,relatedorunrelatedtofinancial
statements.Mostimportantly,externalauditors,though
engagedandpaidbythecompanybeingaudited,areregarded
asindependentauditors.

ThemostusedexternalauditstandardsaretheUSGAASof
theAmericanInstituteofCertifiedPublicAccountants;andthe
ISAInternationalStandardsonAuditingdevelopedby
theInternationalAuditingandAssuranceStandardsBoardof
theInternationalFederationofAccountants.

Internalauditorsareemployedbytheorganizationtheyaudit.
Theyperformvariousauditprocedures,primarilyrelatedto
proceduresovertheeffectivenessofthecompany'sinternal
controlsoverfinancialreporting.Duetotherequirement
ofSection404oftheSarbanesOxleyActof2002for
managementtoalsoassesstheeffectivenessoftheirinternal
controlsoverfinancialreporting(asalsorequiredofthe
externalauditor),internalauditorsareutilizedtomakethis
assessment.Thoughinternalauditorsarenotconsidered
independentofthecompanytheyperformauditproceduresfor,
internalauditorsofpublicly-tradedcompaniesarerequiredto
reportdirectlytotheboardofdirectors,orasub-committeeof
theboardofdirectors,andnottomanagement,sotoreduce
theriskthatinternalauditorswillbepressuredtoproduce
favorableassessments.

ThemostusedInternalAuditstandardsarethoseoftheInstitute
ofInternalAuditors.

Consultantauditorsareexternalpersonnelcontractedbythe
firmtoperformanauditfollowingthefirm'sauditingstandards.
Thisdiffersfromtheexternalauditor,whofollowstheirown
auditingstandards.Thelevelofindependenceistherefore
somewherebetweentheinternalauditorandtheexternal
auditor.Theconsultantauditormayworkindependently,oras
partoftheauditteamthatincludesinternalauditors.Consultant
auditorsareusedwhenthefirmlackssufficientexpertiseto
auditcertainareas,orsimplyforstaffaugmentationwhenstaff
arenotavailable.

Qualityauditorsmaybeconsultantsoremployedbythe
organization.

MEANINGOFVERIFICATION:

Verificationisaprocessbywhichanauditorsatisfieshimself
abouttheaccuracyoftheassetsandliabilitiesappearinginthe
balancesheetbyinspectionofthedocumentaryevidence
available.
confirmationoftheassetsandliabilitiesappearinginthebalance
sheet.

Thus,verificationincludesverifying

(i) theexistenceoftheassets;
(ii) legalownershipandpossessionoftheassets;
(iii) ascertainingthattheassetisfreefromanycharge;and
(iv) correctvaluation

Ofcourse,itisnotpossiblefortheauditortoverifyeachand
everyasset.ItwasheldinKingstonCottonMillscasethat"itisno
partofanauditor'sdutytotakestock.Noonecontendsthatitis.
Hemustrelyonotherpeopleforthedetailsofstockintradein
hand".

However,asperthedecisiongiveninMeKessonand
Robinscase(1939)theauditormustphysicallyinspectsomeof
theassets.Nowtheauditorhastoreportwhetherthebalance
sheetshowstrueandfairviewofthestateofaffairsofthe
company.Hence,heisrequiredtoverifyalltheassetsand
liabilitiesappearinginthebalancesheet.Incaseoffailure,the
auditorcanbeheldliablefordamages.

Accordingtothe'StatementofAuditingPractices'issuedbyICAI,

Theauditor'sobjectinregardtoassetsgenerallyistosatisfy
that

Theyexist;

Theybelongtotheclient;

They are in the possession of the client or persons

authorisedbyhim;

They are not subjected to undisclosed encum-

branchesorlien.

They are stated in the balance sheet at proper

amounts in accordance with sound accounting
principlesand

Theyarerecordedintheaccount."

Verificationincludesconfirmationofthe

following:

Thattheassetswereinexistenceonthedateofthebalance
sheet;

That the assets had been acquired for the purpose of

businessonly;

Thattheassetshadbeenacquiredunderaproperauthority;

Thattherightofownershipoftheassetsvestedinthe
organization;

SCOPEOFVERIFICATION

Verificationincludesconfirmationofthefollowing:

1.Thatthe assetswere inexistenceon the date ofthe balance

sheet;

That the assetshad beenacquiredforthe purposeofbusiness

only;

Thattheassetshadbeenacquiredunderaproperauthority;

That the right of ownership of the assets vested in the

organization;

That the assets were free from any charge; and that the assets
wereproperly
valuedanddisclosedinthebalancesheet.

OBJECTOFVERIFICATION:

Followingaretheobjectsofverificationofassetsandliabilities:

Toshowcorrectvaluationofassetsandliabilities.

Toknowwhetherthebalancesheetexhibitsatrueandfairview
ofthestateofaffairsofthebusiness.

Tofindoutwhethertheassetswereinexistence.

Tofindouttheownershipandtitleoftheasset.Todetectfrauds
anderrors.

Toverifythearithmeticalaccuracyofthebooksofaccounts.

To find out whether there is an adequate internal control

regardingacquisition,utilizationanddisposalofassets.

Toensurethattheassetshavebeenrecordedproperly.

While conducting verification following points should be

consideredbytheauditor:

Existence:

The auditor should confirm that all the

assets of the company are physically existing on the date

ofBalanceSheet.

Possession:

The auditor has to verify that the assets are in the
possessionofthecompanyonthedate ofBalanceSheet.

Ownership:

The auditor shouldconfirmthat theassetislegally
ownedbythecompany.

Chargeorlien:

Theauditorshouldverifywhethertheassetissubjecttoany
chargeorlien

Record:

Theauditorshouldconfirmthattheassetsandliabilities
arerecordedinthebooksandthereisnocomissionofany
assetorliability.

Auditreport:

UnderMAOCARO'88,theauditorhastoreportwhether
themanagementhasconductedphysicalverificationoffixed
assetsandstockandthedifferences,ifany,betweenthe
physicalinventory,andtheinventoryasperthebooks.

EventsafterBalanceSheetdate:

Theauditorshouldfindoutwhetheranyeventafterthe
dateofBalanceSheethasaffectedanyitemsofassetsand
liabilities.

SixteenPrinciplesofVerification:
Adequateandeffectiveverificationisanessentialelement
ofallarmslimitationanddisarmamentagreements.

Verificationisnotanaiminitself,butanessentialelementin
theprocessofachievingarmslimitationanddisarmament
agreements.

Verificationshouldpromotetheimplementationofarms
limitationanddisarmamentmeasures,buildconfidence
amongStatesandensurethatagreementsarebeing
observedbyallparties.

Adequateandeffectiveverificationrequiresemploymentof
differenttechniques,suchasnationaltechnicalmeans,
internationaltechnicalmeansandinternationalprocedures,
includingon-siteinspections.

Verificationinthearmslimitationanddisarmamentprocess
willbenefitfromgreateropenness.

Armslimitationanddisarmamentagreementsshouldinclude
explicitprovisionswherebyeachpartyundertakesnotto
interferewiththeagreedmethods,proceduresand
techniquesofverification,whentheseareoperatingina
mannerconsistentwiththeprovisionsoftheagreementand
generallyrecognizedprinciplesofinternationallaw.

Armslimitationanddisarmamentagreementsshouldinclude
explicitprovisionswherebyeachpartyundertakesnottouse
deliberateconcealmentmeasureswhichimpedeverification
ofcompliancewiththeagreement.

Toassessthecontinuingadequacyandeffectivenessofthe
verificationsystem,anarmslimitationanddisarmament
agreementshouldprovideforproceduresandmechanisms
forreviewandevaluation.Wherepossible,time-framesfor
suchreviewsshouldbeagreedinordertofacilitatethis
assessment.

Verificationarrangementsshouldbeaddressedattheoutset
andateverystageofnegotiationsonspecificarmslimitation
anddisarmamentagreements.

AllStateshaveequalrightstoparticipateintheprocessof
internationalverificationofagreementstowhichtheyare
parties.

Adequateandeffectiveverificationarrangementsmustbe
capableofproviding,inatimelyfashion,clearand
convincingevidenceofcomplianceornon-compliance.
Continuedconfirmationofcomplianceisanessential
ingredienttobuildingandmaintainingconfidenceamongthe
parties.

Determinationsabouttheadequacy,effectivenessand
acceptabilityofspecificmethodsandarrangementsintended
toverifycompliancewiththeprovisionsofanarmslimitation
anddisarmamentagreementcanonlybemadewithinthe
contextofthatagreement.

Verificationofcompliancewiththeobligationsimposedbyan
armslimitationanddisarmamentagreementisanactivity
conductedbythepartiestoanarmslimitationand
disarmamentagreementorbyanorganizationattherequest
andwiththeexplicitconsentoftheparties,andisan
expressionofthesovereignrightofStatestoenterintosuch
arrangements.

Requestsforinspectionsorinformationinaccordancewith
theprovisionsofanarmslimitationanddisarmament
agreementshouldbeconsideredasanormalcomponentof
theverificationprocess.Suchrequestsshouldbeusedonly
forthepurposesofthedeterminationofcompliance,care
beingtakentoavoidabuses.

Verificationarrangementsshouldbeimplementedwithout
discrimination,and,inaccomplishingtheirpurpose,avoid
undulyinterferingwiththeinternalaffairsofStatepartiesor
otherStates,orjeopardizingtheireconomic,technological
andsocialdevelopment.

Tobeadequateandeffective,averificationregimeforan
agreementmustcoverallrelevantweapons,facilities,
locations,installationsandactivities.

WhatVerificationofAssetsandLiabilitiesincludes
SocialSecuritynumber:
DeterminewhetheranameandassociatedSocial
SecuritynumbermatchthedataintheSocialSecurity
Administrationsrecords
Taxreturns:
Ensurethatincometaxdatasubmittedbyapplicants
areaccurateandfreefromfraud
Undisclosedliabilities:
Refreshacreditreportpriortoclosingtoidentify
additionaldebtorcreditinquiries
Employment:
Confirmanapplicantsemploymentstatus,aswellas
lengthofemployment,salary,andposition
Deposit:
Reviewassetspriortoapprovingaloanbyfindingout
howlonganaccounthasbeenopen,itscurrentstandingand
balance,andifanyoverdraftshaveoccurred
Mortgage:
Receivemortgagepaymenthistory,balance,and
monthlypaymentamountforanexistingmortgage
Rent:
Assesstheabilityoftheapplicanttomakeamonthly
mortgagepaymentbasedonmonthlyrentpaymenthistory
Lease:
Determinetheoutstandingliabilityofarentertoa
landlord

Insurance:
Determinecoverageforanassetoract

VERIFICATIONOFTRANSACTION:

THEADUITORSHOULDBEEXAMINETHEFOLLOWING
ASPECTS:

LegalAspects:
o Seewhetherthelegalrequirementsgoverningthe
entity,relatingtoinvestments,havebeencompliedwith,
alongwithanyotherconditionsrelatingtoinvestments
whichrestrict,qualifyorabridgetherightofownership
and/ordisposalofinvestments.

Documents:
o Ensurethatthetransactionsforthepurchase/saleof
investmentsaresupportedbydueauthorityand
documentation

Adjustments:
o Whereinvestmentshavebeenpurchasedorsold
cum/exdividend/interest/rights/bonusseewhether
properadjustmentsinthisregardhavebeenmadein
thecost/salesvalueofsecuritiespurchasedorsold

Rights:
o Examinetheoffercontainedintheletterofrights,in
caseofarightsissue.Wheretherightshavebeen
renouncedorotherwisedisposedofornotexercised,
examinetherelveevantdecisionoftheappropriate
authorityinthisbehalf,asalsothatthesaleproceeds,if
anyhavebeenduelyaccountedfor.

Bonus:
o Verifytheintimationstotheentityregardingsuchissue,
withaviewtoascertainingtherecieptandrecordingof
thrrequisitenumberofsharedbytheentity.

MarketValue:
o Wheretheamountofpurchaseorsaleofinvestment
aresubstantialcheckthepricepaid/receivewith
referencetothestockexchangetationwhereavailable
onorabovethedateofpurchaseofsale.

VERIFICATIONOFSPECIFICASSETS

LandandBuildings:
Sometimesthetwoassetsareshowntogetherinthe
BalanceSheet.Nevertheless,theirledgeraccounts
shouldalwaysbeseparatedparticularlyinviewofthefact
thatbuildingsaresubjecttodepreciationwhilelandin
generalisnot.
Ifthebuildinghasbeenbuiltorisinthecourseof
construction,underacontracttheauditorshouldverifythe
debitbalanceoftheaccountbyreferencetothearchitect's
certificate,aswellasthecontractor'sreceiptsforamounts
paid.
Ifthebuildinghasbeenconstructedbytheclient'sown
organisation,itwillbenecessaryfortheauditortoverify
thatthebasisuponwhichcostofmaterials,wagesandthe
supervisionchargedhavebeenallocatedtotheaccount,
isreasonable.Theexpenseschargedshouldincludeall
theexpenditurenecessarytobringthebuildinginto
existenceandtomakeithabitable.Asasafeguardagainst
anymistakearisingintheexpenseschargeabletothe
asset,theauditorshouldobtainacertificatefroma
responsibleofficialinrespectoftotalexpenditureincurred
ontheconstructionofthebuildinguptothedateofthe
BalanceSheet.Theamountofexpenditure,where
possible,shouldalsobecomparedwiththeestimatedcost
ofconstructionwhichmayhavebeenpreparedbyan
architectorreceivedwiththetenders,ifany,invitedfor
construction.Ifthereisamaterialdiscrepancyinthe
amountofactualandestimatedexpenditure,causes
thereofshouldbereviewed.

PlantandMachinery

IntheabsenceofaPlantRegistercontainingdetailed
particularsofvariousarticlesofmachineryandequipment,
showingseparatelyoriginalcost,additiontoandsalesfromit
fromtimetotime.Itisnotnormallypracticablefortheauditor
toverifytheexistenceofsuchassets.Theauditorsshould
thereforeinsistonaPlantRegisterbeingmaintainedwhere
thevalueandvarietyofmachineryandplantaresubstantial
incomparisonwiththetotaiassetsofthebusiness.
Wheresucharegisteriskept,itiscustomarytoprepareat
theendofeachyearastatementfromthePlantRegister
showingopeningbalance,saleandadditiontheretoduring
theyearinrespectofvariousitemsofmachineryandplant.
ItstotalisthenreconciledwiththebalanceintheGeneral
Ledger.
Thecostofaddition,ifany,isverifiedwiththeinvoiceof
machinerysuppliedtogetherwithevidenceinrespectof
otherincidentalexpenseschargeabletotheaccount,
includinginstallationexpenses.Ifanyoftheaddition
representsthecostofmachinerymanufacturedbythe
concernwithitsownmaterialandbyitsownlabour,the
basisonwhichtheexpenditurehasbeenallocatedshouldbe
verified.Inaddition,acertificateisobtainedfromthe
engineerresponsibleforthemanufactureoftheplant
confirmingthetotalcostofmanufacture.
Incaseanyitemormachineryhasbeenscrapped,destroyed
orsoldtheauditorshouldascertainthattheprofitorloss
arisingthereonhasbeencorrectlydeterminedwhichhas
eitherbeendisclosedintheProfitandLossAccountor
creditedtotheCapitalReserve.Inappropriate
circumstances,acertificateshouldbeobtainedfromasenior
officialthatthishasbeendone.
Thoughitisthedutyofthemanagementtoensurethatfixed
assetsareinexistence,theauditoralsoshould,periodicaily,
physicallyexaminevariousitemsofplantandmachineryand
otherfixedassets,say,onceineverythreeorfiveyears,
dependinguponthesizeoftheconcern.
Certaincompanies,forconvenienceofinspectionattachto
eachunitofplantandmachineryametallicdiscbearingthe
numberatwhichitisshowninthePlantRegister.
Whenanassethasbeenrevalued,depreciationshouldbe
providedontherevisedvalueandnotonthehistoricalvalue.

LeaseholdProperty
Variousstepsinvolvedintheverificationofleaseholdrightsare
statedbelow:
Inspecttheleaseorassignmentthereoftoascertainthe
amountofpremium,ifany,forsecuringthelease,andits
termsandconditions;andthattheleasehasbeenduly
registered.Aleaseexceedingoneyearisnotvalidunless
ithasbeengrantedbyaregisteredinstrument(section
107oftheTransferofPropertyAct,1882).
Ascertainthatalltheconditions,thefailuretocomplywith
whichmightresultintheforfeitureorcancellationofthe
lease,e.g.,paymentofgroundrentontheduedates,
insuranceofproperty,itsmaintenanceinasatisfactory
stateofrepairs,etc.prescribedbythelease,arebeing
dulycompliedwith.
Examinethecounterpartofthetenants'agreements,if
partoftheleaseholdpropertyhasbeensublet.
Makecertainthatdueprovisionsforanyclaimthatmight
ariseunderthedilapidationclauseontheexpiryofthe
leasehasbeenmade,and,ifnosuchprovisionhasbeen
made,drawtheclient'sattentiontothematter.
Ensurethattheoutlayaswellasanylegalexpenses
incurredtoacquiretheleasewhichareshownasanasset
intheBalanceSheetare'tieingwrittenoffataratewhich
couldcompletelywipeofftheassetovertheunexpired
termofthelease.
Aleaseholdproperty,evenwherenopremiumhasbeen
paidforitsacquisition,maysometimecometohavea
considerablevalue.Insuchacase,itmaynotbe
advisabletocontinuetoshowtheassetasifithasno
valueNevertheless,wheretheleaseholdrightshavebeen
revaluedthatfactshouldbeclearlyshownonthebalance
sheettilltheaccounthasbeencompletelywrittenoff.
IntangibleAssets:
AnIntangibleAssetisanidentifiablenon-monetaryasset,
withoutphysicalsubstance,heldforuseintheproduction
orsupplyofgoodsorservices,forrentaltoothers,orfor
administrativepurposes.Enterprisesfrequentlyexpend
resources,orincurliabilities,ontheacquisition,
development,maintenanceorenhancementofintangible
resourcessuchasscientificortechnicalknowledge,
designandimplementationofnewprocessesorsystems,
licenses,intellectualproperty,marketknowledgeand
trademarks(includingbrandnamesandpublishingtitles).
Commonexamplesofitemsencompassedbythesebroad
headingsarecomputersoftware,patents,copyrights,
motionpicturefilms,customerlists,mortgageservicing
rights,fishinglicences,importquotas,franchises,
customerorsupplierrelationships,customerloyalty,
marketshareandmarketingrights.Goodwillisanother
exampleofanitemofintangiblenaturewhicheitherarises
onacquisitionorisinternallygenerated.Ifanitemcovered
doesnotmeetthedefinitionofanintangibleasset,
expendituretoacquireitorgenerateitinternallyis
recognisedasanexpensewhenitisincurred.However,if
theitemisacquiredinanamalgamationinthenatureof
purchase,itformspartofthegoodwillrecognisedatthe
dateoftheamalgamation(seeparagraph55).
Someintangibleassetsmaybecontainedinorona
physicalsubstancesuchasacompactdisk(inthecaseof
computersoftware),legaldocumentation(inthecaseofa
licenceorpatent)orfilm(inthecaseofmotionpictures).
Thecostofthephysicalsubstancecontainingthe
intangibleassetsisusuallynotsignificant.Accordingly,
thephysicalsubstancecontaininganintangibleasset,
thoughtangibleinnature,iscommonlytreatedasapartof
theintangibleassetcontainedinoronit.
Insomecases,anassetmayincorporatebothintangible
andtangibleelementsthatare,inpractice,inseparable.In
determiningwhethersuchanassetshouldbetreated
underAS10,AccountingforFixedAssets,orasan
intangibleassetunderthisStatement,judgementis
requiredtoassessastowhichelementispredominant.
Forexample,computersoftwareforacomputercontrolled
machinetoolthatcannotoperatewithoutthatspecific
softwareisanintegralpartoftherelatedhardwareandit
istreatedasafixedasset.Thesameappliestothe
operatingsystemofacomputer.Wherethesoftwareisnot
anintegralpartoftherelatedhardware,computer
softwareistreatedasanintangibleasset.

Patterns,Dies,LooseTools,etc.
Severalentitieshavelargeinvestmentsinsuchassets
whichhavearelativelyshortusefullifeandlowunitcost.
Evidently,itisadifficultmatter,underthecircumstances,
toprepareaseparateaccountforeachsuchassets
althoughacarefuicontroloversuchpropertyisnecessary.
Ontheseconsiderations,someentitieschargeoffsmall
toolsandothersimilaritemstoProductionAccountasand
whentheyarepurchasedanddonotplaceanyvalueon
theunusedstockontheBalanceSheet.Nevertheless,a
recordofissuesandreceiptsoftoolstoworkmeniskept,
asacheckonthesamebeingpilferedanda
memorandumstockaccountofdiesandpatternsisalso
maintained.Inotherconcerns,thecostoftools,dies,etc.
purchasedisdebitedtoappropriateassetsaccount,and
aninventoryoftheunuseditemsattheendoftheyearis
preparedandvalued;thesumtotalofopeningbalance
andpurchasereducedbythevalueofclosingstock,as
disclosedbytheinventory,ischargedofftoProduction
Accountinrespectofsuchassets.Ontheotherhand,
someconcernscarrysuchassetsattheirbookvaluesat
theendofthefirstyearandchargeoffthecostofallthe
purchasesinthesubsequentyeartotheProduction
Accountonthepleathattheyrepresentcostof
replacement.

Themostsatisfactorymethod,however,isthatof
preparinganinventoryofserviceablearticles,attheclose
ofeachyear,andrevaluingtheassetsonthisbasis,the
variousarticlesincludedintheinventorybeingvaluedat
cost.Care,however,shouldbetakentoseethatthe
inventorydoesnotincludeanywornoutordefective
articlesthelifeofwhichhasalreadyrunout.
Furniture,FittingsandFixtures:
Thecostoftheseassetsshouldbeverifiedbyreferenceto
theinvoicesofsuppliers.Alltheexpenditureincidentalto
theirpurchasealsoshouldbedebitedtotheappropriate
assetaccount.

Further,theauditorshouldcarefullyscrutinisethedetails
ofthecostofadditionsdebitedtotheseaccountssoasto
ascertainthatonlythecostofgenuineadditionshasbeen
debitedtosuchaccounts.

Inthecaseofassetsinregardtowhichthereisadanger
ofiossthroughpilferage,thereshouldbeasatisfactory
systemofstockcontroloverthem.

Itrequiresthateacharticleoffurnitureisenteredina
StockRegisterbeforeitspriceispaidandthestock
numberunderwhichitisenteredispaintedoveritalso
thatattheendofeachperiod,aninventoryisprepared
andreconciledwiththeStockRegisterandcostofallthe
articleswhichbecomesunserviceableorhavebeenlostis
writtenoffunderproperauthority.

BillsReceivable:
Ifpossible,theauditorshouldattendonthelastdayofthe
accountingperiodtoinspectthebillsinhandandagree
theirtotalwiththebalanceintheBillsReceivableAccount.
Ifverificationispostponedtillsometimeafterthe
existenceofthebillswhichhadmaturedinbetweenthe
twodatesshouldbeverifiedwiththeentriesinrespectof
cashcollectedforthem.Ifsomebillswerediscounted
afterthedateoftheBalanceSheet,thecollectionoftheir
proceedsshouldbeverified.Ifanybillsweredishonored
afterthedateoftheBalanceSheet,theauditorshould
ascertainwhatportion,ifany,oftheamountwillnotbe
recoveredandensurethatprovisionforthesamehas
beenmade.Whereanewbillisreportedtohavebeen
takeninlieuofabillwhichhasmatured,theauditor
shouldinspectthebill.Whereanumberofbillsarefound
tohavebeendiscountedbeforethecloseoftheyearthe
auditorshouldseethattheamountofthebillsso
discountedisshownasacontingentliabilityonthe
BalanceSheet.Ifsomeofthebillsarewithbankersfor
collection,theauditorshouldobtainacertificatefrom
them.

Generally,itwillbethedutyoftheauditortoensurethat
thebillswereproperlydrawnandstampedandthatthey
werenotdishonoured.Wheresomeofthebillswere
dishonoured,theauditorshouldensurethattheyhave
beennotedandprotested.

VerificationofSpecificLiabilities:

Verification of Liabilities

The term liability in its usual and ordinarysense refers
to a state of being under legal obligation. Like verificationand valuation of assets,
verification of liabilities is an equally importantaspect of auditing. If liabilities are
not properly verified and valued, thebalance sheet of a business enterprise will not
exhibit a true and fairview of its state of affairs. Therefore, the auditor should see
thatliabilities are genuine and duly authorized. He must obtain a certificatefrom a
responsible official of the client, stating that to the best of hisknowledge and belief:
1.All liabilities, whether for purchase or expense or on any other
account existing at the date of the balance sheet, have been
included in the books of accounts.
2.All the contingent liabilities have either been disclosed in a foot
note to the balance sheet or have been provided for. Re
Westminster Road Construction and engineering Co. Ltd. (1932),
it was held that all the expense and liabilities which thecompany could be expected
to have incurred had been dulyrecorded in the books of accounts. While delivering
thejudgment in the case, Justice Bennett Observed:
It was settled law that an auditor did not discharge his duty if he merely saw
that the balance sheet accurately represented what was shown by the books on the
material date. If the auditor found that a company in the course of its business
wasincurring liabilities of a particular kind, and that the creditors sent in their
invoices after an interval, and that liabilities of the kind in question must have been
incurred during the accountancy period under audit, and that when he was making
his audit a sufficient time had not elapsed for the invoices relating to such
liabilities to have been received and recorded in the companys books, it became
his duty to make specific inquiries as to the existence of such liabilities and also
before he signed a certificate as to the accuracy of the balance sheet, to go through
the invoice files of the company, in order to see that no invoices relating to
liabilities had been omitted.
In the light of the above decision, it can be
inferred that it is quite essential for an auditor to see that:

All liabilities have been clearly stated in the balance sheet;

All he liabilities stated in the balance sheet relate to the
business itself;

They represent genuine and duly authorized transactions; and

No item of liabilities has been omitted, under or over-stated, i.e.,
all liabilities appear at their actual figures in the balance sheet.

It should also be noted that liabilities are not valued like assets. Therefore, it would
be sufficient on the part of auditor to satisfy himself about the correct disclosure of
information in respect of every item appearing in the liabilities side of the balance
sheet of a business concern.

Verificationofliabilitiesmaybecarriedoutbyemployingthe
followingprocedures:

ExaminationofRecords

DirectConfirmationProcedure

ExaminationofDisclosure

AnalyticalReviewProcedures

ObtainingManagementRepresentations

LOANS&BORROWINGS:

Theauditorshouldsatisfyhimselfthattheloansobtainedare
withintheborrowingpowersoftheentity.

Theauditorshouldcarryoutanexaminationoftherelevant
recordstojudgethevalidityandaccuracyoftheloans.

Inrespectofloansandadvancesfrombanks,financial
institutionsandothers,theauditorshouldexaminethatthe
bookbalancesagreewiththestatementsofthelenders.He
shouldalsoexaminethereconciliationstatements,ifany,
preparedbytheentityinthisregard.

Theauditorshouldexaminetheimportanttermsintheloan
agreementsandthedocuments,ifany,avidencingchargein
respectofsuchloansandadvances.Heshouldparticularly
examinewhethertherequirementsoftheapplicablestatue
regardingcreationandregistrationofchargeshavebeen
compliedwith.

Incasethevalueofthesecurityfallsbelowtheamountofthe
loanoutstanding,theauditorshouldexaminewhetherthe
loanisclassifiedassecuredonlytotheextentofthemarket
valueofthesecurity.

Whereshort-termsecuredloanshavebeendisclosed
separatelyfromothersecuredloans,theauditorshould
verifythecorrectnessoftheamountofsuchshort-term
loans.

Whereinstallmentoflong-termloansfallingduewithinthe
nexttwelvemonthshavebeendisclosedinthefinancial
statementstheauditorshouldverifythecorrectnessofthe
amountofsuchinstallments.

Theauditorshouldexaminethehirepurchaseagreements
forthepurchaseofassetsbytheentityandensurethe
correctnessoftheamountsshownasoutstandinginthe
accountsandalsoexaminethesecurityaspect.Future
installmentsunderhirepurchaseagreementsforthe
purchaseofassetsmaybeshowedassecuredloans.

Thedifferedpaymentcreditsshouldbeverifiedwith
referencetotheimportanttermsintheagreement,including
duedatesofpaymentsandguaranteesfurnishedbythe
banks.Theauditorshouldalsoverifythehundies/bills
acceptedseparately.

Creditors&OtherCurrentLiability:

Theauditorshouldchecktheadequacyofcut-offprocedures
adoptedbytheentityinrelationtotransactionsaffectingthe
creditoraccounts.Forexample,theauditormayexaminethe
documentsrelatingtoreceiptofgoodsfromsuppliersduring
afewdaysimmediatelybeforetheyear-endedandverifythat
therelatedinvoiceshavebeenrecordedaspurchasesofthe
currentyear.

Theauditorshouldcheckthetotalofthecreditorsbalances
agreeswiththerelatedcontrolaccount,ifany;thedifference,
ifany,shouldbeexamined.

Theauditorshouldexaminethecorrespondenceandother
relevantdocumentaryevidencetosatisfyhimselfaboutthe
validity,accuracyandcompletenessofcreditors/acceptance.

Theauditorshouldverifythatinthecaseswhereincomeis
collectedinadvanceforservicestoberenderedinfuture,the
unearnedportion,notapplicabletotheperiodunderaudit,is
notrecognizedasincomeoftheperiodunderauditbutis
showninthebalancesheetasapartofcurrentliabilities.

Whileexaminingscheduleofcreditorsandotherschedules
suchasthoserelatingtoadvancepayments,unclaimed
dividendsandotherliabilities,theauditorshouldpayspecial
attentiontothefollowingaspects:

LongOutstandingItems

Unadjustedclaimsforshortsupplies,poorquality,discount,
commission,etc.

Liabilitiesnotcorrelated/adjustedagainstrelatedadvances

Authorizationandcorrectnessoftransfersfromoneaccount
toanother.

Basedonthisexaminationaforesaid,theauditorshould
examinewhetheranyadjustmentsinaccountsarerequired.

Incasethereareanyunusualpaymentsaroundtheyear-
end,theauditorshouldexaminethemthoroughly.In
particular,theauditorshouldexamineiftheentriesrelating
toanysuchpaymentshavebeenreservedinthesubsequent
period.

Theauditorshouldreviewsubsequenttransactionsto
identify/confirmmaterialliabilitiesoutstandingatthebalance
sheetdate.

Provisions:

Thetermprovisionmeansamountsretainedbywayofproviding
fordepreciationinvalueofassetsorretainedbywayofproviding
foranyknownliabilitytheamountofwhichcannotbedetermined
withsubstantialaccuracy.Provisionsincludethoseinrespectof
depreciationordiminutioninthevalueofassets,products
warranties,servicecontractsandguarantees,taxesandlevies,
gratuity,proposeddividend,etc.Theguidancenote,however,
doesnotdealwithprovisionsfordepreciationordiminutioninthe
valueofassets.

Theauditofprovisionsprimarilyinvolvesexaminingthe
reasonablenessandadequacyoftheamountsprovidedfor.The
auditorshouldalsoexaminethattheprovisionsmadearenotin
excessofwhatisreasonablyrequired.

ProvisionforTaxesandDuties:

Theadequacyoftheprovisionfortaxationfortheyear
shouldbeexamined.Thepositionregardingtheoverall
outstandingliabilityoftheentityasthedateofbalancesheet
shouldbereviewed.Inrespectofassessmentscompleted,
revisedorrectifiedduringtheyear,theauditorshouldexamine
whethersuitableadjustmentshavebeenmadeinrespectof
additionaldemandsorrefunds,asthecasemaybe.Similarly,he
shouldexaminewhetherexcessprovisionsorrefundshavebeen
propelyadjusted.Therelevantordersreceiveduptothetimeof
auditshouldbeconsideredand,onthisbasis,itshouldbe
examinedwhetheranyshortprovisionshavebeenmadegood.If
thereisamaterialtaxliabilityforwhichnoprovisionismadein
theaccounts,theauditorshouldqualifyhisreportinthisrespect
evenifthereservesareadequatetocovertheliability.

ProvisionforGratuity:

Theauditorshouldexaminewhethertheentityisrequiredto
paygratuitytoitsemployeesbyvirtueoftheprovisionsofthe
PaymentofGratuityAct,1972intermsofagreementwith
employeesand,ifso,whetherprovisionforaccuringgratuity
liabilityhasbeenmadebytheentity.Theauditorshouldexamine
theadequacyofthegratuityprovisionwithreferencetothe
actuarialcertificateobtainedbytheentity.Incasetheentityhas
notobtainedsuchanactuarialcertificate,theauditorshould
examinewhetherthemethodfollowedbyitforcalculatingthe
accuringliabilityforgratuityisrational.

ProvisionforBonus:

Inthecaseofprovisionforbonus,theauditorshould
examinewhethertheliabilityisprovidedforinaccordancewith
thepaymentofBonusAct,1965and/oragreementwiththe
employeesorwardofcompetentauthority.Wherethebonus
actuallypaididinexcessoftheamountrequiredtobepaidasper
theprovisionsoftheapplicablelaw/agreement/award,theauditor
shouldspecificallyexaminetheauthorityforthesame.

Provisionsfordividends:

Theauditorshouldexaminethatdividendsareprovidedfor
asperapplicableprovisionsoftherelevantlawsandrulesframed
thereunder,relevantagreementsandresolutions.

OtherProvisions:

Whereprovisionsaremadeforliabilitiesthatmayariseon
accountofproductwarranties,servicecontracts,performance
warranties,etc.theauditorshouldexaminetheprovisionsmade
areinaccordancewithaccountingstandard(AS)4,contingencies
andeventsoccurringafterBalanceSheetdateissuedbythe
instituteofchartedaccountantsofIndia.Theauditorshouldalso
examinethereasonablenessofthebasisadoptedforquantifying
theprovisionwithreferencetotherelevantagreements.

Share Capital

Capital is not the liability of the company sofar as the going concern
principle is concerned. Still, the auditor isrequired to verify its correctness so that
he can report on thecorrectness of the balance sheet.
The steps to be taken for verifying the sharecapital of the company covering
several phases has been enumeratedas below:
Check the authorized share capital with the relevant clause of
the Memorandum of Association.
Obtain a list of shareholders, check with the register of members,
and verify the capital account.
Obtain a schedule showing the movement during the year in the
above account. Verify entries in respect of the additions on the
account of issue of new shares.

The following work in this respect should be carried out:

See that the allotment of the shares has been made
complying with the legal provisions.

See that the issuing capital does not exceed the authorized
capital.

Examine resolution of the Board in respect of allotment of
the shares.

Vouch the money received on applications and allotmentand on calls, if any,
with the counterfoil of the receipt book,bank statement and advices and
other relevant availableevidence.

If in accordance with the provisions of the Memorandumand Articles of
Association and prospectus, the directorsare required to take up their
qualification shares, see thatcompany has received the required amount.

In case where the shares were allotted for considerationother than cash,
examine the contract constituting theallottees title to the shares and the
directors minutes

If the shares were issued at a premium, see that premiumhad been shown
separately and not under the share capital.


If the shares were issued at the discount the auditor shouldsee that it was duly
authorized and in accordance with theprovisions of the Act. In this regard,

the auditor shouldsatisfy himself in respect of the following matters:

It was a subsequent issue of the shares since the
first issue cannot be at discount.

The issue of share at discount was authorized by an
ordinary resolution passed in a general meeting of
the company.

The resolution stated the maximum rate of the
discount at which shares were issued.

Not less than one year must, at the date of issue
have elapsed since the date of the company was
entitled to commence business.

The shares to be issued at discount must be issued
within the six months after the date on which the
issue is sanctioned by the Board.

Every prospectus shall contain particulars of the
discount allowed on the issue of shares or so muchof that discount as has not
been written off on thedate of issue of the prospectus.

In the case of forfeiture of shares, the auditor should satisfy
himself on the following points:

(a)The procedure as laid down in the Articles relating to
forfeiture of shares were followed i.e., the forfeiture waspermitted by the Articles
of the company and the DirectorsResolution forfeiting the shares was passed.

(b)Examine the entries in the books of accounts for the
forfeiture of shares, and ensure that the necessary
adjustments were made in the register of members.

(c)Where the forfeited shares were sold or re-issued, see that
the issue of such shares was authorized by the directors andthe amount of discount
did not exceed the amount alreadyreceived thereon from the defaulting
shareholders.

(d)Any capital profit or re-issue of forfeited shares should be
transferred to the capital reserve.

5.If shares were allotted to the foreign nationals, examine the
permission given by the related legal authorities.

6.Where the company has issued redeemable preference shares,
verify the terms on which they were issued with prospectus.

7.Examine the rights attaching to the various types of shares in the
Articles of Association of the company.
























Debentures:

Examine the Memorandum and Articles ofAssociation of the company to
ascertain its borrowings powers and theextent and mode of borrowings. If the
directors are empowered toborrow on behalf of the company, examine the
directors minutesregarding the issue of debentures and the mortgage of the
companysproperty. A copy of debentures creating and evidencing the
chargeshould be inspected and the receipts of money should be dulyvouched. Any
redemption should be vouched with the minutesauthorizing the redemption.


Bills Payable:

The method of verification of bills payable
should include the following steps:

1. Obtain a schedule of bills payable. Check it with bills payable
book.

2.Check casts of the schedule.

3.Examine the unpaid bills. Trace their subsequent payments into
the cashbook of succeeding period.

4.Verify to see that as far as possible there are no bills payable left
out and not entered in the books of accounts.

5.Obtain confirmation from the parties to whom bills of large
amount, if any, have been issued.

6.Verify the calculation of the interest on bills payable.

7.if bills payable were issued out of a regular counterfoil book, go
through the running number of bills issued and examine the
counterfoils with the bills payable register.