Topic: Verification and Valuation Of

Assets
& Liabilities

Syed Atta Hussain Shah

 Objectives

 Introduction

 Verification and Valuation

 Difference between Verification and Valuation

 Relationship between Verification and Valuation

 Classification of Assets

 Window Dressing

 Verification and Valuation of Assets

 Introduction

 One of most important duties of an Auditor is audit of

accounts of a concern, to verify the assets & liabilities
appearing in the balance sheet of business concern.
 Verification

 Verification of Assets is a enquiry into title

(ownership), existence, possession, Classification
and verify that assets are free from charge or not.
Advantages Of Verification

It display true and

actual position of
Balance Sheet

Proper recording of
Assets & Liabilities

Avoid manipulation of
accounts
 Valuation

 Meaning determine the current worth of something.

 Determining the value of the assets shown in the Balance

Sheet on the basis of generally accepted accounting
principles.

 If valuation of assets is not correct, than the financial

statements (B.S & P&L a/c ) can not be correct.

 Valuation is primary duty of Company officials.

Difference Between Verification & Valuation

 Verification is a final  Valuation is the initial

work. work and it need to
verification.

 Verification is the work  Valuation is the work of

of Auditor. concerned authority or
board (Company)

 Valuation is made
 Verification is made at
the end of the year. throughout the year
Relationship Between Verification and Valuation

 Valuation of assets is the part of verification, without

proper valuation of assets, verification is not possible.
 Verification includes apart from (except) valuation “the
examination of ownership right, the existence of the
assets in business & its freeness from any mortgage”.
 Verification and valuation of assets are almost
interdependent.
 Verification and valuation of assets is a combined
process by which the position of different assets
appearing in the balance sheet is examined.
 Window Dressing

 The fraud through manipulation of accounts is known as window

dressing because accounts are manipulated to show a wrong picture
of the profit or loss of the business and its financial affairs.

 It is action taken to improve the appearance of a company’s

financial statements .

 It may also be used when a company want to impress a lender for

qualify of a loan.

Example:

 Income of previous year may be recorded in the current year.

 Showing short term liabilities as long term liabilities.
 Classification of Assets

Cash
Current
Sundry Debtors
Assets Prepaid Expenses
Stock in trade

Preliminary Expenses Land & Building

Discount on issue of Fixed Plant & Machinery
Shares and Debentures
Fictitious
Assets
Asset Assets Fixtures & Furniture

Intangible
Goodwill Assets
Copyright
Patent & Trademark
 Fictitious Assets

 No physically existence
 No realizable value but represents actual cash
expenditure.
 The purpose of creating a fictitious assets is to
account for expenses those incurred at the time of
commencement.
i.e. Preliminary Expenses, discount on issue of
shares.
 Fictitious assets are written off as soon as possible
from earnings of the company.
 Intangible Assets

 Intangible assets are those assets which have no

physical existence.
 Can be realize
 They does not shows in the balance sheet until
purchased
 Example:
o Goodwill
o Patent rights
o Copyrights
o Trademarks
 Difference Between Intangible and Fictitious
Assets

Intangible Assets Fictitious Assets

 The intangible assets can  The fictitious can not be

be realize. realize.
 The intangible assets also  Fictitious assets are
don’t posses physical deferred revenue (future
existence like intangible
asset. revenue) expenditure
whose benefit is derived
 Goodwill does not appear
in the balance sheet over long period of time
except when it is actually  The fictitious assets
purchased. appear in balance sheet.
 Fixed Assets

 Assets which are purchased for long term use for the
purpose of producing or providing goods or service
and not for sale in the normal course of business
 Not easily converted into cash.
 Examples:
Land & buildings
Equipment.
Fixtures and Furniture
Plant and Machinery
 Land & Building

 Classified in two types

 Freehold Property

 Leasehold Property

 Freehold Property:
A property which is free from hold
(possession/Rights) .
This means that the property you are buying is
free from the hold of any body besides the owner.
That's why the owner enjoys complete ownership.
 Cont.

 Leasehold Property:
 The property which is on lease (rent).
 The property (plot/flat/villa/mall/factories) which is
leased by the landlord for a certain period of time to the
lessee (tenant / leaseholder / renter / occupant /
dweller).
 The (tenant) have been given the right to use during that
specified time by the landlord.
 Generally, the lease varies from 30 to even 99 years (in
case of long term leases).
 The ownership of the property returns to the landlord
when the lease comes to an end.
 Verification of Freehold Property

 Auditor verify the title deed first of all.

 He should check that land is in the name of

the client.

 Note the area covered

 If deed is deposited as mortgage than auditor obtain

certificate for verification.

 Valuation of Freehold Property

 The cost of buildings should be depreciated at

appropriate value, depending upon the quality of their
structure and the use, which is being made of them.

 The auditor has to see the basis of revaluation & confirm

that same method has been used in past.

 Ensure that depreciation charged on building only not on

land (but in some cases depreciation can be charged on
land, in case of Location, structure & Quality).
 Verification of Leasehold Property

 Auditor examined the lease agreement / deed for

find out the amount of premium paid for period &
other term. i.e. lease period, maintenance,
insurance etc.
 Note the area covered
 Also confirm the write-off the
legal expense incurred for lease.
 Auditor should note down the
condition of lease check the
properly physically if possible
 Valuation of Leasehold Property

 The value of lease checked from lease deed.

 Valuation of property depend on the type of the property,

its structure and durability, on the situation size, shape,

outlook , width of roadways the quality of materials used
in the construction and present days prices of material.

 Auditor check if any maintains with reference (Bills) also

check physically if possible.

 Hire Purchase System

 Meaning: The hire-purchase system is a system under which the

purchase price is paid in a number of installments. As soon as the
contract is entered into and the first installment is paid the hire-
purchase acquires possession (not the ownership) of the goods.

 After the payment of the final installment, the hire-purchaser becomes

the full fledged owner of the goods. So long as he does not become the
owner, the installments paid by him are considered to be the payment
for hire. In case the hire-purchase fails to pay any particular
installment, the seller or vendor can the away the goods, and the
installment already paid become forfeited.
 Verification of Assets purchase under Hire
Purchase

 The hire purchase agreement should be inspected in

order to find out the term and conditions of
purchase.

 After the payment of the final installment, the

purchaser becomes the full fledged (with complete
control) owner of the goods
 Valuation of Assets purchase under Hire Purchase

 The auditor should see the hire purchase deed and

determine the price of asset.

 The calculation of the annual depreciation should be

based on the cash price of the asset and not on the
total installment value.
 Verification and Valuation of Investment

 Investment:
Money committed or property acquired for future
income.

The investment classified as under

a) Quoted Investment
b) Unquoted Investment
 Cont.

 Quoted Investment:
A company is said to be "listed", or "quoted”,
If its shares can be traded on a stock exchange.
i.e. Public Limited Companies .
 Cont.

 Unquoted Investment

A company is said to be “unlisted", or “unquoted” stocks that are

not listed on an stock exchange and so have no publicly stated ( price.
Investment which is difficult to value e.g. shares which have no stock
exchange listing

i.e. Private Company etc.

 Verification of Quoted Investment

 Check of authorization for the purchase of the investment. e.g. review of appropriate
board minute book (book which record the conclusion of meeting).
 Vouch the purchase to brokers contract note and share certificate to the cash
payment
 Examine the Share certificate to ensure that the type of security and number of
share agrees with investment account and that the share is held in the company with
its name.
 Use a share information service to determine the dividend which should have been
received during the year.
 Check that the investments are properly classified for Company Act disclosure
purposes.
 Valuation of Quoted Investment

 The auditor should satisfy himself that the

investment has been valued in the financial
statement in accordance with recognized
accounting policies and practices and relevant
statutory requirements.

 The auditor should examine whether in

computing the cost of investment, expenditure incurred on account of
transfer fees stamp duty, brokerage etc is included in the cost of
investments.
 Verification of Unquoted Investment

 Study the Memorandum of Association as an authority for such

investment.

 Where investments are in large numbers, the auditor should obtain the
schedule of securities certified by a senior officer of the company.

 Obtain the schedule of investment comprises for information about the

names of the securities / investment, date of their acquisition, nominal/
face value, cost price, book value paid up value market value, rates of
interest applicable, dates of interest due, tax deduction, etc. at the date
of balance sheet.
 Valuation of Unquoted Investment

 The auditor should examine the method adopted by

the organization for determining the market value of
such securities he should examine whether the
method of valuation of securities such as by entity is
one of the recognized methods of valuation of
securities. Such as breakup value method,
capitalization of yield method, yield to maturity
method etc.
 Verification of Contingent Assets

 A contingent asset is a possible asset which arise from future due to

occurrence of events that are not under an organizational control.

 Examples:
Receiving of bad debts
Refund of octroi (duty) paid for goods, which have been sent out later.
Uncalled share capital of company (uncalled share capital refers to the
amount of the nominal value of a share which is unpaid and has not
been called up by the company).
 Bank Overdraft

 Overdraft is an extension of credit from a lending

institution when an account reaches zero.

 An overdraft allows the individual to continue

withdrawing money even if the account has no funds
in it. Basically the bank allows a set amount of
money.
 Verification of Overdraft

 The auditor should see Memorandum of association

for borrowing power and limitation of company.
 He should examine the term and condition of
overdraft from the agreement between bank and
company.
 The auditor should examine the interest on overdraft
has been paid or not.
 Confirm & check the amount limit sanctioned by
bank
 Check if any security was offered as terms of
agreement
 Proposed Divided

 It is a way in which a company shares its profit to its

shareholder.
 It is given in percentage of the value of the share.
 It is declared in Company’s general meeting from
that day its became as liability.
 Verification of Proposed Divided

 Examine special provisions in the Memorandum or Article of

Association in respect of payment of dividends.

 Ascertain that it does not included unpaid (unclaimed) dividends,

which must be excluded from it and shown separately.

 See that the amount of proposed dividend recommended by the board

that must stated in the balance sheet.
 Contingent Liabilities

 Obligation which arises from future event.

 It is not to record contingent liabilities in the books
of account.
 A reference is made to them by way of a footnote to
the balance sheet.
Examples:
Guarantees
Pending labor disputes
 Verification f Contingent Liabilities

 Auditor should see that unknown and known such

liabilities are record into account on the date of
balance sheet.
 He should verify that such liabilities are shown on
the balance sheet by foot note.
 Auditor should obtain certificate from the
responsible officer (Accountant/Bookkeeper) that all
known liabilities been taken into account.
 Auditor should also check that sufficiently reserve
has been allocated for such liability which is likely to
result in a loss.
 Event occurring after the Balance Sheet

 Financial events that occur after the date of the

balance sheet, but before the date that the balance
sheet are issued.

Adjusting Events
Events
Non-Adjusting Events
 Adjusting Events

 Those events that provide further evidence about the

existed at the end of reporting is called adjustment
event.
Example:
A loss on a trade receivable account which is
confirmed by the insolvency of a customer which
occurs after the balance sheet date.
A fraud during the accounting period is detected
after the balance sheet date but before the approval .
 Non-Adjusting Events

 Those events that provide that reflect the end of

reporting period.

Examples:
A decline in market value of investment between the
balance sheet date and the date on which the
financial statement are approved.
 Prior Period and Extraordinary Item and Change in
Accounting Policies

 Prior (past) Period:

The financial accounting term prior period
adjustment refers to either a correction to a existing
period’s financial statement.

Prior period generally used in association with

adjustments made in the revenue or expenses of the
current accounting year to reflect a new accounting
policy or error corrections.
 Extraordinary Item
These are income statement item that are
unusual in nature and infrequent in occurrence.

Example:
Loss from an earthquake and loss from a country
taking over a company’s oil refinery.
 Accounting Policies:
Accounting policy are the specific principles,
bases convention rules and practice applied by an
entity in presenting financial statements.

 Change in accounting policies

According to IAS8 The International Accounting
Standard code has power to select and change
accounting policy, accounting for change in
estimates reflecting correction of prior period.