VERIFICATION AND VALUATION OF ASSETS

VERIFICATION OF ASSETS
According to the Statements of Auditing Practices issued by the ICAI, the auditor s objective in regard verification of assets is to satisfy himself thaty They exist; y They belong to the client; y They are in possession of the client or any

to

authorized by him;

y They

are not subject encumbrances or lien;

to

undisclosed

VERIFICATION OF ASSETS
y They are stated in the balance sheet

at proper amount in accordance with sound accounting principles; and
y They are recorded in the accounts

this will include scrap and waste).

TYPES OF ASSETS
y FIXED ASSETS y FLOATING OR CURRENT ASSETS y WASTING ASSETS y INTANGIBLE ASSETS y FICTITIOUS ASSETS

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In accounting. . these assets are shown at their book value (purchase price less depreciation). On a balance sheet.A long-term. 'fixed' does not necessarily mean 'immovable. more than one year is considered a fixed asset.' any asset expected to last. tangible asset held for business use and not expected to be converted to cash in the current or upcoming fiscal year is called fixed assets Fixed assets are not consumed or sold during the normal course of a business but their owner uses them to carry on its operations. or be in use for.

‡FREEHOLD LAND ‡LEASE-HOLD LAND ‡LAND AND BUILDINGS ‡LEASE HOLD BUILDINGS ‡OWNERSHIP FLATS ‡JOINTLY OWNED ASSETS ‡PLANT AND MACHINERY ‡FURNITURE .FIXTURES AND EQUIPMENT ‡TRANSPORTATION EQUIPMENT ‡PATENTS AND TRADEMARKS ‡COPYRIGHTS .

It should be clearly disclosed separately in the balance sheet. cost of options. which includes the purchase price. registration fees. broker s commission. VALUATION: Being a non-depreciable asset.A land tenure arrangement where the land is permanently owned and not leased. . legal charges and also clearing draining and other similar expenses. unpaid taxes. freehold land is shown at cost.

. in consideration of a price.e. VALUATION: Unlike freehold land.Leasehold land means tenancy of an immovable property held on lease. adequate to write off the total cost over the lease period. leasehold land is subject to diminution in value with the passage of time and as such depreciation should be provided thereon at a rate i. which implies a transfer of a right to enjoy such property for certain period or perpetuity.

. "there was a three story building on the corner". but it should be clearly disclosed in the balance sheet. "it was an imposing edifice. Depreciation should be provided even where the building is not used during the year that the market value is higher than the cost value.A structure that has a roof and walls and stands more or less permanently in one place. VALUATION: Building should be valued at cost less depreciation at a reasonable rate. Buildings owned by the client may have been either purchased or constructed during the year under audit.

The flats owned by the owner is called Ownership Flats. . Such flats or premises should be shown under fixed assets liable to depreciation. VALUATION: Ownership flats or premises being depreciable assets should be shown at cost less depreciation. together with the cost of the shares.

Plant or machinery if it is used for carrying on the business and is not stock in trade. VALUATION: Plant and machinery are generally valued at original cost less depreciation at reasonable rate to be calculated. Repairs and renewals should be charged to separate repairs and maintenance account. the business premises or part of the business premises. . After valuation it should be disclosed in the balance sheet.

Furniture refers to movable article in a dwelling house or a place of business. VALUATION: Furniture's. . Care should be taken to see that provision of depreciation is adequate keeping in view the working life of the asset given a variety of items to be found in this category. Fixtures mean chattels so affixed to land or building as to become a part of thereof. are valued at cost less depreciation at a reasonable rate. fixtures etc. Office equipment means office appliances.

These are to be valued at cost less depreciation. though movable assets are regarded as fixed assets because these are used for carrying on the business. station wagons and small buses used for pick up and delivery of goods and for transporting employees. trailers.Transportation equipment may consist of trucks of various sizes. VALUATION: Transportation vehicles. .

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These assets are continually turned over in the course of a business during normal business activity. sold. . or consumed either in a year or in the operating cycle (whichever is longer). without disturbing the normal operations of a business.Current assets are cash and other assets expected to be converted to cash.

Current Assets = Cash +Bank + Debtors + Bills Receivable + Short Term Investment + Inventory + Prepaid Expenses The phrase net current assets (also called working capital) is often used and refers to the total of current assets less the total of current liabilities. .

y CASH AND CASH EQUVIVALENTS y INVENTORIES y RECIEVABLES y SUNDRY DEBTORS y PREPAID EXPENSES y SHORT TERM INVESTEMENT .

The same thing is done in case of bank balance. money orders.It is the most liquid asset. .. and negotiable instruments (e. bank drafts).g. deposit accounts. which includes currency. VALUATION: The total cash remained in hand at the end of the accounting is taken into account. cheque.

Raw materials and supplies are stated at purchase price. or those goods and materials themselves. this value is used. Production cost includes direct expenses as well as an appropriate portion of material and production overheads. .. . y The valuation of inventories is based on a physical inventory count as of the balance sheet date. If the comparable selling value is lower. while finished goods and work in process are valued at production cost.y Inventory is a list for goods and materials. held available in stock by a business.

VALUATION : Valuation of inventories can be done in 3 ways.LAST IN FIRST OUT AVERAGE METHOD FIFO and AVERAGE is commonly used methods for valuation of the inventories.FIRST IN FIRST OUT LIFO . last selling price of the last stock . y y y FIFO . Or it can be valued at the price at which last stock was sold out i.e.

VALUATION: accuracy of the amount of bills can be verified by the reference to a certain schedule of b/r in hand and related to individual ledger accounts.is an amount awaiting receipt of payment.Accounts receivable (A/R) is one of a series of accounting transactions dealing with the billing of a customer for goods and services he/she has ordered receivable . the auditor should also discus with the client about the .

y Collectivity of each bill and review the bills which are for material sums or have matured or been renewed . y Where the bills have been retired after the balance sheet date . And if bills are endorsed the risk of credit is transferred to the endorsee and the accounts thereof should be eliminated and no contingent liability need to be shown. the same should be verified by reference of cash book .

. In other words. these are the expenses which have been paid during the accounting period for which the final accounts are being prepared but they relate to the next period. it will be treated as expenses of the coming years and not the year in which it is paid.Prepaid expenses are those expenses which have been paid in advance. As the benefit of such expenses are received in the subsequent years.

. This account contains any investments that a company has made that will expire within one year. For the most part.An account in the current assets section of a company's balance sheet. these accounts contain stocks and bonds that can be liquidated fairly quickly.

. This means that a company can afford to invest excess cash in stocks and bonds to earn higher interest than what would be earned from a normal savings account.y Most companies in a strong cash position have a short-term investments account on the balance sheet. which is always in a strong cash position. had short-term investments totaling approximately $32 billion at the end of 2005. Microsoft.

which it contains. in proportion to.VALUATION OF WASTING ASSETS MEANING: An asset that diminishes in value by reason of. Examples: Mines. collieries etc. is called as a wasting asset. oil wells. . the extraction or removal of a natural product such as ores. oil and timber.

It is reduced by the amount of yearly depletion calculated on the basis of the total cost and the number of recoverable units.VALUATION: The value of wasting assets waste away with use. rather than depreciating with time and use. in addition to the original cost of land. The cost of a wasting asset includes. title cost as also exploration. The asset as such is irreplaceable and it has a useful life limited to the period over which it is economically feasible to extract the substance on which the value of the asset depends. . development and carrying charges up to such time as commercial production begins.

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as it stays with the company as long as the company continues operations. goodwill and brand recognition are all common intangible assets in today's marketplace. it would have a limited life and would be classified as a definite asset. An intangible asset can be classified as either indefinite or definite depending on the specifics of that asset. copyrights. trademarks. However. . with no plans of extending the agreement. A company brand name is considered to be an indefinite asset. Corporate intellectual property (items such as patents.DEFINITION: y Intangible assets can be define a non-physical claim to future value or benefits. business methodologies). if a company enters a legal agreement to operate under another company's patent.

TYPES OF INTANGIBLE ASSETS y GOODWILL y TRADEMARKS y PATENTS y COPYRIGHTS .

good customer relations. Goodwill is based on the company's reputation and customer loyalty. It is usually described as the difference between the sales price of a company and the value of its tangible assets. Goodwill = Purchase Price Market Value of Assets . good employee relations and any patents or proprietary technology.MEANING OF GOODWILL Goodwill typically reflects the value of intangible assets such as a strong brand name.

VALUATION OF GOODWILL Goodwill represents the difference between the overall business valuation. and the aggregate book value of the individual net assets carried in the balance sheet. y AVERAGE PROFIT METHOD y SUPER PROFIT METHOD y CAPITALISATION MEHTOD . arrived at on the foregoing basis.

If in any year there is an exceptional opportunity or an exceptional expense or absence of expense . the profit for the year has to be so adjusted as to get it free from such exceptional influences.AVERAGE PROFIT METHOD Under this method goodwill is valued on the basis of an agreed number of years purchase of the average maintainable profit. .

Now we calculate the normal average annual trading profit after tax . but before charging interest on debentures and long term loans and also preference dividend. The number of year to be taken for consideration depends upon the nature of the business. Ascertain the average capital employed during a year. .SUPER PROFIT METHOD Under this method super profit is ascertained . the steady and fluctuating nature of profits and also the goodwill. For this take the total of the closing real assets of the concern as revalued. Goodwill is valued at a few years purchase of the super profit of the concern.

From this average profit reasonable managerial remuneration should also be deducted. The profit as obtained after the above adjustments is to be compared with the reasonable return on the average capital employed.If the former exceeds the latter the balance represents the super profit .A few years purchase of the super profit is taken as the value of goodwill. . calculated at the rate of return earned by similar businesses .

Now the value of goodwill will be the total value of business minus its net assets. y Capitalisation of super profit : Under this method the average super profit capitalised at a certain rate of interest and this capitalised amount becomes the value of goodwill. . the net assets is greater there will be no goodwill.CAPITALISATION METHOD y Capitalisation of Average Profit: Under this method the average annual profit is to be ascertained after providing for reasonable management remuneration . however. rather there is bad will. If. This profit should be capitalized at the rate of reasonable return to find out the total value of business.

it should be calculated with reference to the period of expected benefit but in no case more than the life of the patent or trademark which is usually 16 yrs. use or sell his inventions. A trademark is a distinctive mark attached to goods offered for sale in the market. .A patent is an official document which secures to the inventor an exclusive right for term of years to make . VALUATION: Patents and Trademarks should be shown at cost less depreciation.

The rate of depreciation should be based on calculation as to the period of expected substantial sales of the copyrighted work.A copyright is the exclusive legal right to reproduce. publish and sell the matter and form. . musical or artistic work. VALUATION: Copyright is shown at cost less the amount written off as depreciation from time to time. of literary.

FICTITIOUS ASSETS .

DEFINTION Asset created by an accounting entry (and included under assets in the balance sheet) that has no tangible existence or realizable value but represents actual cash expenditure. Fictitious assets are written off as soon as possible against the firm's earnings. . The purpose of creating a fictitious asset is to account for expenses (such as those incurred in starting a business) that cannot be placed under any normal account heading.

memorandum and articles of association and prospectus should be examined.Verification and valuation of fictitious assets Preliminary expenses The statutory report. The broad details of amounts constituting preliminary expenses are: . The auditor should see that only items connected with the flotation and promotion of the company are included under this head of account.

debentures. y Engineer and valuer fees for valuing assets intended to be acquired. y Cost of preparing and printing share certificates. y Cost of preparing and printing memorandum and articles of association. trust deed. y Cost of preparing all preliminary expenses including stamp duties. etc. y Cost of preparation. statutory and statistical books and common seal of the company. printing and publication of prospectus. letters of allotment. . y All legal and professional charges in respect of promotion and formation of the company.y Legal cost of registering the company y Stamp duty and fees paid on the authorized capital. y Fees and stamp duties paid on the documents filed with the registrar of joint stock companies. y Cost of the first set of books of accounts.

Brokerage The amounts paid in respects of brokerage should be verified as under: y The provisions of the ARTICLES OF association should be inspected. y The relevant portion of the prospectus dealing with the item of brokerage should be studied. y The entitlement should be verified by the study of the above documents and with the application forms marked by the broker. y The broker s receipt should be checked and the directors minutes should be examined for authorization of the payment. .

payee s acknowledgement and the calculation of the amount should be checked y If shares have been allotted against the consideration of underwriting commission. y The amount paid should be separately shown in the balance sheet until written off. y If the said commission has been paid in cash. .Underwriting commission y It will be verified as given in the following steps y The terms of underwriting commission should be verified from the articles of association. prospectus and agreement with the underwriter's). y It should be seen that the limits laid down by the controller of capital issues in respect of underwriting commission are not exceeded. the relevant entries should be checked.

Deferred revenue expenditure Where any heavy expenditure in the nature of revenue is incurred. . The following are some of the examples. it is usual to allow such an expenditure to be temporarily capitalized and to be spread equally over number of years for which it is anticipated that benefit would be reaped by the business. the benefit of which is likely to extend beyond the financial year in which it takes places.

y Deferred revenue expenditure will be verified by the auditor in line with verification and valuation of other fictitious assets. buildings. Etc. of non-recurring nature.y Abnormal heavy amount of advertising expended in any one year to popularize a new product. . y Cost of removal of business to a more convenient place. y Exceptional repairs of plant.

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