ERIFICATION AND

ALUATION OF ASSETS AND LIABILITIES 9

CHAPTER

Mesning nd Defnitton ofeiicaioa -Sub-fnctions ofVeriication -0biectives

fleifcsion - Distincton betaeen Vouching nd Verification - Valuation of
Ases nd Lizbilitis - Veifñcon of Diñerent Tpes of Assets - Verifcation
nd lauaia ofLibiliis-Continget Li2bilities

EANING AND DEFINITION OF VERIFICATION

The e viñcaion refers to confrmaion or proving the truth It denotes the procedures
ied out at the end of the period unde audit in order to confimtheowzership, vauation,
eiseoce of 2ssets and lizbilities at the date of the Balace Sheet. The term verification
laies vaaien also. Witù this introducion, we shall now see some of the
defnitions for the
ifcation as below:
Definition of Spicer and Pegler: Accoding to Spicer and Pegler, "The verification of assets
Ss qiry ino tie vale, owrership and itle, existence and possession, and the presence

Definition of Lancaster: In the words of Lancaster, "The vertication of assets is a process

ict the cuditor sabstantiates the cOcracy of the right hand side of the balance shett, and
t be cosidered as having tree distinct objects
(c) serifcanon of the xistence of asses,
6) che vclation of assets, cnd
{ci horiry of theracquisition".
Fromthe sbove definitions, it is clear thst verification isa brozde term and includes
be ssets and liabilities also. valuation
W$-FUNCTIONS OF VERIFICATION
Ibe vernfication function involves the following four
sub-functions:
. lo ee that all assets and all liabilities are cleariy stated in the
2
lo sce that they are in exiStence on the date of the
Balance Sheet.
Balance Sheet
*.lo sce thaf the assets were acquired for the business and are
free from any chrge or
4.
3ortgage and they are in the namc of the client.
To see wbether both the assets and
labiiities are accuraely valuei
DBJECTIVES OF VERIFICATION
he rrain obËectuves of
veification ue as below:
 VERIFICATION AND VALUATION OF ASSETS AND LIABILITIES
141

140 PRACTICAL AUDITIE

possession, and titleeof the assets appearing in the
reliesFrom the above
ontrusted
discussion, it is clear that in the
oficials of the company an auditor is absence
of
suspicious circurnstances,
not liable. However, it does not meanifthat
hewillbefreefrom his liability if assets are incorrectly valued|by the officers of th.company as i
be
Exminine the ownership,
Ascertainng the existence of the assets
Verifing the fact whether assets are
appearing in the Balance Sheet
free from charge or not.
Balance Shec atitstothe
management. An auditor is no doubt concerned with values set
certify that final accounts reveal a true and fair view ofagainst the asscts,
the state of affairsbecause
if any, in the books of accounts of the concern ltimatelyheisto an auditor should lexercise reasonable care and sk1ll, of the
Detecting the frauds and
ircgularities, concerm.
Therefore,
valuation from the technical experts, and
aralyse all the figures criticall:.
books of accounts. basis of satisfy
Ensuring the arithmetical accuracy of the assetsshown
inQuire in the Balance Sheet are properly valued in accordance withhimself
intothe that the differers
the generally acceptc
AND VERIFICATION conventions and accounting principles. If he is satisfied with the methods of valuation of th
DISTINCTION BETWEEN VOUCHING
given in Table 9 1 Assets,he is free frombis liability. It has been observed, "Financial accounts are largely a matte
The ponts of differcnce berween vouching and verification are judgement and opinion, not a matter of certainty. The balance sheet can
convention, neve
but only afairest possible estimates of the financial conditions"
of realIfinancialposition,
SNo. BASES OF DIFFERENCE VOUCHING
VERIFICATION showthe
auditor can never
claim that the Balance Sheet is absolutely correct.
Nature of Work Vouching checks the entries |Verification examines the a An
1.
as to the transactions recorded|and
in the books of account.
liabilities given in h
Balance Sheet.
Kinds of Values
Some of the
interpretations that are used i in the valuation of assets are given below:
Basis of Examination Vouching is based only on the Verification is based not onl
documentary examination. on documentary examinatioa . Cost Price: Cost price refers to the price paid for the acquisition of an asset. It include
but also it carries on physical of an asset and its installation
inspection. he expenses incurred in the purchase
Market Value: Market value is the value, which an asset can fetch in the market when so!
Pernod Vouching is done for the Verification is done at the cnl
whole year. of the year only. 3, Replacement Value: Replacement value is a price at which a particular asset can
freight, etc.
Uuity Factor Vouching indicates that a Verification certifies the
particular asset must belexistence ofassets and liabilitis
replaced. It includes expenses like commission,
appears in the books of accounts. Usual
4. Book Value: This is the value at which an assetwritten
possessed by the concern. at Balance Sheet date. depreciation off so far.
Valuzt1on Vouching does not primarily| Verification includes valuation assets appcar in the books at cost minus
concerned with valuation. also in its scupe. 5. Realisable Value: Realisable value is one, which will be realised in the market and receiv
Personnel Involved Auditclerk does vouching of The auditor himself doe from the sale of an asset. It is normally used in the valuation of existing assets.
books of accounts. verification.
Concern Value or Historical Value: It is also called commercial value or tok
6. Going
value. It is equivalent to the cost less a reasonable amount of depreciati
TABLE 9.1 - DIFFERENCE BETWEEN VOUCHING AND VERIFICATION value or conventional
Written ofT.
scr
which may be obtained from the asset if it is sold as
VALUATION OF ASSETS AND LIABILITIES 7. Scrap Value: It refers to the value.
The terrn valuation refers to the critical examination and testing of determined values of asse5 Basls of Valuation
by tue auditor based on generally accepted accounting principles and conventions. The accurs) While valuing the assets the auditor
must keep in mind the following points:
of the Balance Shect and Profit and Loss Account depends very much upon the valuation ofasea
sndiiabiliies in a proper nanner. Both under valuation and over valuation of assets and liabite 1. Original cost of the assets.
would exhibit a wrong prcture about the financial position of the concerm. Hence, the auditor shou Z. Expected working life of the assets.
see whether allhe assets and liabilities are shown in uhe Balance Sheet at their proper valu. 3 Wear and tear of the assets.
Audiior's Duty regarding Valuation of Asseis & Liabiltiles 4. Scrap value of the assets.
An zud1tor is not a valuer and he cannot be expected to act as such. Actually, the propi S. Chances of the assets becoming obsolete.
or responsible ofhcials of the concern who have a practical knowledge of such assets Methods of Valuatlon categories as shown bel
valuatioas. An auditor's duty is confined to testing the valuations as far as he can and in ths underfive main
For the purpose of valuation, assets are classified
satisfying tum with the position shown to be corect. In Kingston Cotton Mills Co. Case, 1
I. Fixed Assets.
heid hat Although it is no par of anauditor s duty to value the assets and liabilities, yet he 2
exercise rasonable shll and care in scrulinising tle basis of valuation. tle should testguaranlee
the acehthe Current Assets.
f the sglues put by the officers of the business ln any cuse, the auditor cannot
zcCAraC of the valuation'
 149

3. Wasting Assets.
RACTICAL AUb VERIFICATION,AND VALUATION OF ASSETS AND LIABILITIES

VERIFICATION OF DIFFERENT TYPES OF ASSETS

143
4. Fictinous Assets.
$. Intangiblc Assets. discuss the procedure, which the auditor follows while
Weshall now verifying various assets
those assets, which1are purchased for
1. Fixed Assets: Fixed assets are the pernanent separately.
continuously used in the
the industrial concerms. They are
these
concerns. Earnings of
assets remains so 1. FixedAssets
depend upon these assets. The utility of
resale in the ordinary course of
long as they are he co are calledcapital assets. They are
condition. They are neither meant for These assets required permanently for the conduct of the
totaly or partially in the business. business nor conu business. They are not purchased1for re-sale. We shall now analyse the
verification of these assets.
Plant & machinery, land &building, furniture, etc. are some of the 1) Goodwill
examples offixed
them. land is not subjected to depletion in value and so it is usually valued at cost Goodyilllis an intangible asset. Itis the value of the reputation of the firm It enables
fixed assets are valued at historical value because they are acquired for the
and put to ther repeated uses. They are valued at cost less a reasonable
tprice. The
running of :abu
earn morethantheenormal rate ofprofit. It has no physical existence as such. It does notthediminish
fim to
in value with use. It has the potentiality of self-growth. It can be raised merely by book entries.
and any fluctuation in their market value is not considered for their depreciFurattihoern, wita
valuation. Goodwillissocalculated and shown in the Balance Sheet only under the following circumstances:
gong to be continuously used, their realisable value is also need not be taken into as tht 1. Attthe Time of its Purchase: The amount of goodwill is equal to the ditference between
2. Current Assets: Current assets are those assets, which can't be put to account. ihe total purchase price paid for the business and the net assets (ie., Assets - liabilities)
They are also called as floating assets or circulating assets. They are meant for constant t purchased.
resale.
either purchased or produced or processed for the purpose of sale. Closing stock, bills They At the Time of Revaluationof Whole of Assets: Sometimes,companies revalue vvhole
book debts, cash. bank balance, etc. are some of the examples of floating assets. Curreat of their assets and raise goodwill account in their books. In such cases also, the goodwill
such as book debts, bills receivable, etc., are normally valued at book value. In case ofbonki so raised will be shown in the Balance Sheet.
a provision is made for bad and doubtful debts. Raw materials and
semi-manufactured po. 3, At the Time of Writing off the Capital Loss or the Debit Balance of Proßt&Loss
valued at cost. The closing stock of goods is valued at the date of the Balance Sheet eitherats. Account: Sometimes, the goodwill acquired by the company and witten off as such has
price or market price whichever is lower. been later brought back to accounts to write off the debit balance in the Proft &Los
3. Wasting Assets: Wasting assets such as mines, quarries, oil wells, etc. are offixed na
account or the capital loss which the company incurred subsequently.
4, At the time of Admission, Retirement or Death of a Partner in case of Partnership
Wasting assets are found in certain industries only. If we look at the terms of the decision of Firms: In case of partnership fims, goodwill is calculated and shown in the books when
case of Lee V. Nauchatel Asphalte Co. Ltd. (1889) it appears that there is no anew partner is admitted or an old partner dies or retires.
necessit
provide depreciation on wasting assets. But as a matter of principle, the theory
case does not hold good. Wasting assets exhaust by working and propounded in In case of purchase of the business, the auditor should verify it with the help of the agreement
hence the process invo made with the vendor, which shows the price paid for it. However, if the amount ofgoodwillis not
depletion of the capital employed. Hence, a charge should necessarily be made to maintaib
capital employed so as to exhibita true and fair value of the assets for the specifcally mentioned, it is to be treated as the difference betveen the purchase price paid for the
purpos of costaccout business and the net assets taken over.
However, it is difficult to ascertain how much of the mine is exhausted and how
remains more. Hence, wasting assets are shown in the Balance Sheet at much mi In case of revaluation of assets, which has raised the goodwill acount in the books of a
their original valu company, the auditor should refer the basis on which the assets have been revalued While in the
provision is made for depreciation or depletion on the basis of their estimated
exhaustion. case of goodwill, which has been wIiten off but later brought back to write offcapital loss or the
4. Fictitious Assets: Fictitious assets are debit balance of Profit & Loss Account, he should investigate the period over which the goodwill
those
though, of course, money is spent on them The examplesassets, of such
which are not physically vs
Was written off. He should also ascertain the amount of goodwill. He should also see whether
in a new company, special advertising assets are- preliminaryexp
expenses, development expenses, debenture debtors as well as shareholders approved it by passing necessary resolutions in ther meeing.
issue expenses, discount on issue of shares, discoun Deed. He may also verify the
of expenditure not represented by actual share issue expenses. etc. These items are realy n he case of partnersiip firm, he should verify the Partnership
values and so have no exchange value. Cianges made in the goodwi!l account from time to time based on the provisions made in the
5. Intangible Assets:
in their concrete form. Intangible assets do not have thei form. Hence, they
are nol Partnership Deed.
However, they
assets. They are actually fixed assets are equally valuable for a business concern like any o 2) Patents
patents, copyrights, trademarks, etc., arethough they do not have any concrete form. Godw exclusive right for years to make, use
more or less treated as fixed assets for some of the examples of this kind of assets. Theye ralent is an officialdocument, which gives an inventor
depreciation. The valuation basis must be
the purpose of Invention. It must be valued at cost less right
valuation. of 20 yearssafer which the
specified in the Balance Sheet. It should be written offin a periodperiod expired and the remaining
the
automatically lapsess unless the term is extended. He must note
 142

4
Wast1ng Assets.
Ficnbous Assets.
PRACTICALA VERIFICATION
AND VALUATIONI OF ASSETS AND LIABILITIES

VERIFICATION OF pIFFERENT TYPES OF

now
ASSETS
143

discuss the procedure, which the auditor follows while verifying various assets
Intangible Asscts.
$. assets arcthose
assets, which are purchased for Weshall
1. Fixed Acsets: Fixed continuously used in the concerms. the perman separately.
che industrial
concems. They are
assets. The utility
depend upon these neither meant for resale
of these assets remains so long as
the ordinary course of Earnitnhgeys of t
ae in v
1. .FlxedAssets
are called I capital assets. They are required permanently forthe conduct of the
condition. They are
totally or partially in the
business.
building, furniture, etc. are some of the
ibusiness DoT e
Theseassets
business. They
are not purchasedfor re-sale. We shall now analysethe verification ofthese assets.

Plant & machinery, land &

them. land is not subjected to
depletion in value and so it is usually examplecosts of fuxed n
valued.at 1)
GoodwilI
Goodwill is an
intangible asset. It is the value ofthe reputation of the fim It enables the fim to
historical value because they are acquired for the price, than theenormal rate
ofprofit. It has no physical existence as such. It does not diminish
fixed assets are valued at
They are valued at cost lesssa reasonable Tunning of ab earn more It has the potentiality of 'self-growth. It can be raised merely by book entries.
and put to their repeated uses.
and any fluctuation in their market value is not depr
considered for their valuation
realisable value is also need not be taken
eciation w
her,axaodwill
use.
invalue
with
is calculatcd and shown in
the Balance Sheet only under the following circumstances:
Time of its Purchase: The amount of goodwill is equal to the ditference between
going to be continuously used, their into ac oum A+ +he Assets - liabilities)
2. Current Assets: Current assets are those assets,
which
can't be put to be total purchase price paid for the business aad the net assets (i.e.,
resalcones.tam
They are also called as floating assets or circulating assets. They are
purchased.
mtant for companies revalue wvhole
either purchased or produced or processed for the purpose of sale. Closing stock, bills
T At theTime of Revaluation of Whole of Assets: Sometimes,
2.
oftheir assets and raise goodwill account in ther books. In such cases also, the goodwill
book debts, cash, bank balance, etc. are some of the examples of floating assets c Balance Sheet.
such as book debts. bills receivable, etc., are nomally valued at book value, In case SO raised will be shown in the
At the Time of Writing off the Capital Loss or the Debit Balance of Profit & Loss
aprovision is made for bad and doubtful debts. Raw materials and semi-manufachiral Account: Sometimes, the goodwill acquired by the company and written off as such has
valued at cost The closing stockofgoods is valued at the date of the Balance Sheeteithe debit balance in the Profit & Loss
price or merket price whichever is lower. been later brought back to accounts to write off the subsequently.
account or the capital loss which the company incurred
of Partnership
3. W2sting Assets: Wasting assets such as mines, quarries, oil wells, etc. are At the time of Admission, Retirement or Death of a Partner in case
Wasting 2ssets are found in certain industries only. If we look at the terms of the offixed
n
decision
4.
goodwill is calculated and shown in the books when
Firms: In case of partnership firms,partner
case of Lee V. Nauchatel Asphalte Co. Ltd. (1889) it appears dies or retires.
that there is no neces a new partner is admitted or an old
provide depreciation on wasting assets. But as a matter ofprinciple, the theory verify it with the help of the agreement
case does not hold good. Wasting assets exhaust propoundel: In case ofpurchase of the business, the auditor should if the amount ofgoodwill is not
by working and hence the process in made with the vendor, which shows the price paid for it. However,
depletion of the capital employed. Hence, a charge should treated as the difference between the purchase price paid for the
capitalemployed so as to exhibit atrue and fair value of the necessarily be made to maintai Specifically mentioned, it is to be
assets for the purpos of costacon business and the net assets taken over.
Howeve. it is difficult to ascertain how much of the mine is goodwill account in the books of a
remains more. Hence, wasting assets are shown exhausted and how much m In case of revaluation of assets, which has raised the have been revalued. While in the
assets
provision is made for depreciation or depletion oninthethebasis
Balance Sheet at their original vaz company, the auditor should refer the basis on which the
brought back to write off capital loss or the
4. Fictitious Assets: of their estimated exhauston case of goodwill, which has been wnuten off but later investigate the period over which the goodwill
Fictitious assets are those assets. which are debit balance of Profit & Loss Account, he should
though, of course, money is spent on thern not physicaly should also ascertain the amount of goodwill. He should also see whether
in a new
company, special advertising The examples ofsuch assets are- preliminary e was written off. He
debtors as well as shareholders approved it by passing necessary resolutions in their meeting.
issue expenses, expenses, development expenses, debenture discout
of expenditure notdiscount on issue of shares, share issue the Partnership Deed. He may also verify the
expenses, etc. These items are1reallyi
represented by actual values and so have no In the case ofpartnersiip firm, he should verify
time time based on the provisions made in
to the
5.
Intangible Assets: Intangible assets exchange value. Cnanges made in the goodwi!| account from
in their concrete do not have
form However. thei they are not vs Partnership Deed.
assets. They 2re actually fixed I they are equally valuable for aform. Hence, concern like any 2) Patents
patents, copyTights, trademarks. , assets though they do not business
have any Concrete fom. Good gives an inventor exclusive right for years
to make, use
more or less treated as fixed assetselc.,for theare some of the examples ralent is an oflicial document, which The valuation basis must be
of this kind of assets. Th cost less depreciation.
purpose of sel nis invention. It must be valued at offin a period of20 years after which the right
valuation. Peclned in the Balance Sheet. It should be written
extended. He must note the period expired and the remaining
Onatically lapses unless the term is
142 VERIFICATIONI AND VALUATIONI OF ASSETS AND LIABILITIES 143
3 Wasting Asscts. VERIFICATION OF DIFFERENT TYPES OF ASSETS
Fictitious Assets.
5.1. Intangible Assets. We shallInow discuss the procedure, which the auditor
Fixed Assets: Fixed asscts arcthose assets, which are purchased for the pemanent ty
separately.
follows while verifying various assets
concerne
continuously used in the
he industrial
concems. They are
The utility of these asscts remains so long Earnings of he cone
as they
1. Fixed Assets
depend upon these assets.
condition. They are neither meant
for resale in the ordinary course of
business arenor in wot These assets are called capital assets. They are
ess They are not purchased for re-sale. We shallrequired permanently for the conduct of the
totally or partially in the business. consUr now analyse the verification of these assets.
furniture, etc. are some offthe examples of fixed, 1) Goodwill
Plant &machinery, land &building,
them, land is not subjected to depleion
fixed assets are valued at historical
in value and so it is usually vvalued at costp
value because they are acquired for
the
cost less a reasonable running
tpice. asThe's.o
of
Goódwill is an intangible asset. Itis the value of the reputation of the firm It
more than the normal rate of profit. It has no physical enables the firm to
and put to theiu repeated uses. They
and any fluctuation in their market value is
are valued at
not considered for their depreciFurther,
valuation.
value is also need not be taken into
abusite
ation wilta
,as
ale with use. It has the potentiality of self-growth. Itexistence
luillis calculated and shown in the Balance Sheet onlycan
as such. It does not diminish
be raised merely by book entries.
under the following
accountth,eye
going to be continuously used, their realisable
1 At the Time of its Purchase: The amount of circunstances:
2. Current Assets: Current assets are those assets, which can't be put
to the total purchase price paid for the business goodwill is equal to the ditference between
called as floating assets or circulating constant
assets. They are mtant for purchased.
and the net assets (i.e., Assets - liabilities)
They are also
either purchased or produced or processed for the purpose of sale. Closing resale.
stock, bills They a 2 At the Time of Revaluation of
Whole of
book debts, cash, bank balance, etc. are some of the examples of floating assets. receiab of their assets and raise goodwill account inAssets: Sometimes, companies revalue whole
Cuurrent
such as book debts, bills receivable, etc., are normally valued at book value. In case of book assa so raised will be shown in the Balance Sheet.
their books. In such cases also, the goodwill
a provision is made for bad and doubtful debts. Raw materials and semi-manufactured goods z 3. At the Time of Writing off the Capital Loss or the
Debit Balance of Profit & Loss
valued at cost. The closing stock ofgoods is valued at the date ofthe Balance Sheet eitherat Account: Sometimes, the goodwill acquired by the
price or market price whichever is lower. been later brought back to accounts to write of thecompany and written off as such has
debit balance in the
3. Wasting Assets: Wasting assets such as mines, quarries, oil wells, etc. are of fxed nohe account or the capital loss which the company incurTed subsequently. Profit & Loss
4. Atthe time of Admission, Retirement or Death of a
Wasting assets are found in certain industries only. If we look at the terms of the decision af
Firms: In case of partnership firms, goodwill is calculatedPartner in case of Partnership
case of Lee V. Nauchatel Asphalte Co. Ltd. (1889) it appears that there is no necessiy anew partner is admitted or an old partner dies or retires. and shown in the books when
provide depreciation on wasting assets. But as a matter of principle, the theory propounded in t
case does not hold good. Wa_ting assets exhaust by working and hence In case of purchase of the business, the auditor should verify it with the help
of
the process invoh
depletion of the capital employed. Hence, a charge should necessarily be made to maintain b made with the vendor, which shows the price paid forit. However, if the amount of the agreement
goodwill is not
capital employed so as to exhibit a true and fair value of he assets for the purpos of cost specifically mentioned, it is to be treated as the difference between the purchase price paid for the
accountra business and the net assets taken over.
However, it is difficult to ascertain how much of the mine is exhausted and how much mina
remains more. Hence, wasting assets are shown in the Balance Sheet at In case of revaluation of assets, which has raised the goodwill account in the books of a
their original value an company, the auditor should refer the basis on which the assets have been revalued While in the
provision is made for depreciation or depletion on the basis of their estimated
4. Fictitious Assets: Fictitious assets are
exhaustion. case of goodwill, which has been writen off but later brought back to write off capital loss or the
those assets, which are not physically visih, debit balance uf Profit &Loss Account, he should investigate the period over which the goodwill
though, of course, money is spent on them The
in a new company, special examples of such assets are- preliminary expensd was written off. He should also ascertain the amount of goodwill. He should also see whether
issue expenses, discount on advertising
issue of
expenses, development expenses, debenture discount debtors as wellas shareholders approved it by passing necessary resolutions in their meeting.
of expenditure not represented by shares, share issue expenses, etc. These items are realy a In the case of partnersiuipfirm, he should verify the Partnership Deed. He may also verify the
actual values and so have no exchange
5. Intangible Assets: value. Changes made in the goodwilaccount from time to time based on the provisions made in the
in their concrete form. Intangible assets do not have theiu form. Hence, they are Partnership Deed.
However, they are
assets. They are actually fixed assets equally valuable for a business concern like B
not
2) Patents
patents, though they do not bave any concrete form. ou
more or copyrights,
less treated astrademarks, etc., are some of the
fixed assets for the purpose of examples of this kind of assets. 109 Patent is an oticial document, which gives an inventor exclusive right for years to make, use
valuation. or sell his invention. It must be valued at cnst less depreciation. The valuation basis must be
Specified in the Balance Sheet. It should be written off in aperiod of 20 years afler which the right
auomatically lapses unless the term is extended. He must note the period expired and the remaining