The document discusses the verification and valuation of assets and liabilities by auditors. It provides details on: 1) The meaning and objectives of verification as confirming ownership, valuation and existence of balance sheet items. Valuation involves determining asset and liability values based on accounting standards. 2) Methods for verifying key assets like land and buildings, plant and machinery, goodwill, investments, and stock. This includes checking title deeds, purchase documents, depreciation, and physical verification. 3) Guidelines for auditors to value assets based on historical cost less depreciation and ensure liabilities are properly valued according to accounting principles. Auditors must also adhere to relevant accounting and valuation standards.

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ABHISHEK D K, COMMERCE LECTURER.
UNIT 4:
VERIFICATION AND VALUATION OF ASSETS AND
LIABILITIES:
Verification:
Meaning:
It is a process carried out to confirm the ownership, valuation and existence of items at the
Balance Sheet date.
Definition:
It is defined as “a process by which the auditor substantiates the accuracy of the items in the
Balance Sheet and must be considered as having three distinct objects, i.e., verification of the
existence of assets and liabilities, the valuation and authority of the same”.
Valuation:
Meaning/Definition:
Valuation is an act of determining the value of assets and liabilities and critical examination
of these values on the basis of normally accepted accounting standards.
Valuation of assets and liabilities are to be made by the authorized officer and the duty of
auditor is to see whether they have been properly valued or not.
An auditor should consider original cost, expected working life, wear and tear and scrap
value regarding the assets while making valuation of assets and similarly the rate of interest,
credit terms, settlement procedures, etc. of liabilities.
Auditor’s position as regards the valuation of assets:
1. It is the duty of the auditor not only to verify the physical existence and ownership of
the asset, but also it valuation as shown in the Balance Sheet.
2. He should not only check the arithmetical accuracy of the assets appearing in the
Balance Sheet but should also make inquiries through information and explanation to
know the correct state of affairs.

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3. The auditor has to be very careful and cautious while examining the valuation of
various assets such as inventory, bills receivable, accounts receivable, etc.
4. As far as fixed assets are concerned, the same are valued on the basis of their
historical costs less proper amount of depreciation.
5. An auditor may rely on the directors of the company or on the certificates of other
professional in respect of valuation of the assets, provided he uses reasonable care and
skill.
6. In matters relating to valuation of assets, the auditor must adhere to the GAAP of
valuation, commercial practices and accounting standards.
7. The auditor should ensure that adequate depreciation has been charged on assets
before determining the current value.
8. The auditor should state the basis of valuation of assets in the Balance Sheet as
certified by the directors or engineers, architect, etc. as the case may be.
Objectives of Verification and Valuation:
The following are the various objectives of verification and valuation:
1. To certify the ownership:
The objective of verification is to certify the ownership. The document deeds,
vouchers and agreements, etc. can obtain the real ownership.
2. Position of assets:
To see that the assets are mortgaged or pledged for borrowing money to know the
actual position of assets.
3. Existence of assets:
To ascertain the existence of the assets stated in the record through physical checking.
4. Detect fraud:
To find out any fraudulent act is applied in the valuation of assets like overvaluation
or undervaluation. Further, the assets acquired on lease may be recorded as a
permanent asset or vice-versa.
5. Verify possession:
To check the possession of the assets and to see that the assets are used for the
business only and not for any other vested interest.

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6. True and fair view:
To determine the true and fair view of financial statements and confirm that the
financial statements are kept in accordance with the provisions.
7. Method of depreciation:
To examine that the proper method of depreciation is followed and are in accordance
with the accounting principle.
8. Valuation of assets:
To check the assets are valued properly considering its cost of purchase, provision for
replacement, life, break-up value, etc.
9. Valuation of liabilities:
To verify that the management have valued the liabilities in accordance with
accounting principles.
10. Evaluation methods:
To check the methods of evaluation are on compliance and substantiate tests are
applied while recording them in the financial statements.
11. Recording methods:
To determine the method of recording assets and liabilities in a Balance Sheet. The
auditor has check that all types of assets are recorded separately and the depreciation
is deducted and the value of asset is charges according to the rule.
12. Internal Control:
To evaluate the internal control system is effectively applied or not.
13. Arithmetical accuracy:
To check the arithmetical accuracy in recording of all transactions. Their posting,
totalling, sub-totals, addition and depreciation, etc.
14. Treatment of items:
The objective of the verification is to check that the different items have been treated
correctly as the treatment of the taxes and discount, etc.
15. Current period:
To check that the transactions of the business are related to the current year for which
the audit work is being done.

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Floating Assets:
Floating assets are those assets that are continually changing in their quantity and or value,
such as amount of accounts receivable, cash, inventory, outstanding shares, etc.
Verification and Valuation of Assets:
1. Land and Buildings:
 In case of land and buildings, the auditor should verify the title deeds. If he is
doubtful about it, then he may refer the matter to the solicitors of the company.
 If the property is mortgaged, then he should take the certificate from the mortgagee to
that effect.
 To verify the value of land, its cost price should be considered.
 To know the original cost of the property, he should verify the transfer deed.
 In case of building valuation, builder’s receipts and depreciation should be considered.
a. Verification of freehold Land and Building:
1. The auditor should verify the title deeds first.
2. He should check that the building is in the name of the client.
3. He should vouch the addition made during the year in the building or land.
4. If any land or building is sold during the year, he should vouch such sales.
5. He should also verify that profit or loss on such sale is recorded correctly.
6. He should also check the depreciation of the property.
b. Verification of leasehold Land and Building:
1. The auditor should verify the leasehold property by verifying the lease terms.
2. He should note down the conditions of lease and check the property physically if
possible.
3. He should also verify the amount of debt received against the mortgage property and
the duration period.
4. Lease rent should be debited to the revenue account.
5. He must verify the last receipt of the rent payment.
6. In case of lease, the repairs on building and depreciation, etc. should be debited to
revenue account.

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The following are the main ways by which the auditor can verify the land and building:
1. Title deed:
The auditor should check the title agreement / deed to examine the ownership and
purchase price of land and buildings.
2. Confirmation:
The auditor can also verity it by the consult of the lawyer. The auditor can determine
the title of ownership. Because, it can be sold by the power of attorney or any other
way. The auditor has to determine the true ownership of assets.
3. Purchases:
The management can purchase the land and building for the expansion of the business
activities. The auditor has to verity the agreement and payment vouchers for this
purchase.
4. Sale of buildings:
In the same way, the management can also sell the land or buildings. The auditor
should examine the sale deed, the amount received and also the date of sale. In the
same line, he has to check the entry of sale of land and buildings in the books of
accounts.
5. Profit or loss:
The sale of land and buildings may result in profit or loss. The auditor has to check
that these details are correctly recorded or not.
6. Construction cost:
Sometimes, the management can construct any additional building.
7. Leased building:
Sometimes, the management can get building from the owners at lease for a specific
time period. The agreement of lease is made and the amount is also settled. The
auditor has to check the period and amount of lease.
8. Depreciation:
The auditor has to verity that the amount of depreciation charged is according to the
provisions of relevant Act.
9. Expenses of improvement:

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When the management is made any expenses which are related to the improvement of
the land and building, it is added in the cost of such assets. In this case, the auditor
has to verify that such types of expenses are really capital in nature.
10. Certificate of mortgage:
Sometimes, when the management is in need of loan for the survival of business, he
can arrange loan against the land and buildings. In this case, a mortgage deed is
signed by the borrower with the lender. While verifying, the auditor can ask for the
mortgage certificate from the banker.
2. Plant and Machinery:
This item is also verified by reference to the original invoices, correspondence, etc. The
auditor should see that the plant and machinery is properly depreciated and all relevant
details are recorded with documentary evidence from time to time.
Verification procedure:
1. Physical existence:
For the verification of the plant and machinery, it is necessary that the auditor should
verify the physical existence of the asset and confirm with the quantity and quality of
the machinery installed at the factory.
2. Purchases:
The auditor can also check the vouchers to know the purchase of plant and machinery.
It is helpful to check the nature of machinery, date of purchase, its amount and also its
entry in the books of accounts.
3. Ownership:
The auditor can also check the ownership of the machinery by checking the vouchers /
invoices and other related documents.
4. Buying authority:
The management can only buy the machinery for the business purpose by the
approval of general manager or the owner of business. Hence, the auditor should
check the purchase policy and other relevant details to ensure that these assets are
acquired accordingly.
5. Additional purchase:

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The management can also purchase the additional plant and machinery. It must be
recorded in the books of accounts and in the register of the plant and machinery. The
auditor has to check the vouchers, date of purchase and also the amount, etc.
6. Sale of machinery:
The management can sell the plant and machinery under certain situations. In this
case, the auditor has to check the register of plant and machinery, vouchers of sale of
plant, their amount and also the date.
7. Manufacture the machinery:
Sometimes, the management may manufacture the machinery at its premises. Then,
the cost of material, labour and overhead is added in the machinery. The auditor has
to check the vouchers, which determine the cost of machinery manufactured.
8. Checking of balance:
The auditor has to check the opening and the closing balances of plant and machinery
account with the help of previous year and current year books of accounts.
9. Profit or Loss:
When the management sells the plant and machinery, there may be some profit or loss.
The auditor has to check that this is written in the books of accounts accurately.
10. Depreciation:
The auditor has to check that the rate and method of depreciation is done according to
the legal provisions from year to year.
3. Goodwill:
 Goodwill is defined as the monetary value attached to the reputation of a business or
as the difference between the purchase price and the net assets which are purchased
and the excess amount so paid.
 It is an invisible or intangible asset.
 Its value depends upon the earning capacity of the business and fluctuates accordingly.
 Its value will increase with rise in profits and will decrease with fall in profits.
 It is not subject to depreciation or depletion. However, it can be written off as it
cannot be shown in balance sheet for long time.

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 In case, the directors have debited the profit and loss account and credited the amount
to goodwill account, the auditor should object to this step especially when the action
taken is likely to prejudice the interest on any class of shareholders. He should
mention this fact in his report to the shareholders if such a step has been taken.
 He should see that the goodwill is never appreciated in the books.
Verification of the Goodwill:
Goodwill is verified as under:
1. If goodwill is purchased along with a running business, it has to be verified whether
the agreement with the vendor shows the price paid for it.
2. If the amount paid for goodwill is not mentioned, it should be taken as the difference
between the purchase consideration paid for and the actual value of the assets taken
over.
3. When the goodwill is created in the books by revaluating the assets, the auditor
should examine the basis on which the assets have been revalued and satisfy himself
that the amount of goodwill shown in the books of the company is proper.
4. In case of the partnership firm, the partnership deed should be duly verified by the
auditor. He may also verify the changes made in the goodwill account from time to
time on basis of provisions made in the partnership deed.
5. The auditor should verify that the goodwill is valued and shown in the balance sheet
at cost less amount written off.
4. Verification of Investments:
Investments include government securities, shares or debentures of a company held by the
entity for the accretion of wealth.
The auditor should take the following steps in verifying such investments:
1. The auditor should insist the client to prepare a schedule of investments held by the
client. Eg: name, date of purchase, nominal value, cost price, market price of the
securities at the date of balance sheet.
2. He should inspect the investment register with reference to relevant documentary
evidence such as allotment letters, brokers, notes, statements issued by depository, etc.

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3. He should check the adjustment made in the cost of acquisition or sales value of the
security in case of ex-dividend / interest / right / bonus or in case of cum-dividend /
interest / right / bonus purchase or sales.
4. He should carry out physical examination of securities on the last day of balance sheet
or a date close to it.
5. He should examine statements and certificates issued by the depository or custodian
for the scrips held by them.
6. He should obtain certificates from third parties in case they hold investments owned
by the client. In such cases, he should insist on the physical inspection of securities.
7. The authority of purchase or sale of investments should be examined with the Board’s
proposal and they are within the authority given by the Memorandum or Articles of
Association.
Valuation and Disclosure of Investments:
1. The auditor should compare valuation practices against those prescribed by
recognized accounting principles, (AS – 13) specially with regards to the
determination of cost of investments, classification of investments into long-term
investments (to be valued at cost) and current investments (to be valued at lower of
cost or fair value).
2. He should examine whether investments have been disclosed in balance sheet
according to recognized accounting principles and relevant statutory requirements, if
any.
5. Stock-in-hand:
 The correctness of the profit and loss account of a concern depends to a greater extent
upon the correctness of value of the stock of goods in hand at the close of the period.
The auditor has, therefore, not only to verify the existence of the stock in hand but he
has also to see that it is valued according to certain accepted principles of accountancy.
 The auditor should insist upon the maintenance of stock book, if it has not already
been maintained.
The duties of the auditor regarding stock-in-hand as follows:

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ABHISHEK D K, COMMERCE LECTURER.
1. The auditor should compare the prices with the original and independent data.
2. Discounts, duties, freight and insurance should also be taken into consideration by the
auditor.
3. He should ascertain that obsolete, damaged or slow moving stock has been properly
valued.
4. He should investigate material changes, if any, in the inventory from the
commencement and at the close of the year.
5. He should check the computation of extensions.
Methods of costing:
1. Unit cost method or actual cost method.
2. Average cost method.
3. First-in-First-out (FIFO) method.
4. Last-in-First-out (LIFO) method.
5. Base stock method.
6. Standard cost method.
Verification and Valuation of Stock:
1. Physical verification of stock:
a. Attendance of auditor during physical verification of stocks.
b. Examination of records.
c. Verification and confirmation from third party.
2. Ensuring the ownership over the stock.
3. Valuation of stock:
a. The auditor should see that the goods are properly valued.
b. For the purpose of finding out the cost price, he will have to refer to the
original invoices, cost accounts and market prices, which can be ascertained
from the financial papers, etc.
c. He should see that the basic principles regarding the valuation of the stock are
correctly followed.
Verification and Valuation of Liabilities:

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1. Trade Creditors:
a. The auditor should ask for schedule of the creditors and check it with the
purchase ledger which in turn may be checked with the books of original entry
with the Purchase Invoices, Credit Notes, Goods Inward Books, Return
Outward Book, Bills Payable Book and Cash Book.
b. The auditor should see that all purchases during the year have been included in
the purchases and especially purchases made at the end of the year.
c. He may also ask a statement of accounts from creditors to check the accuracy
of accounts and to see that the amount actually payable to them is not
misappropriated.
2. Bills Payable:
a. The auditor should verify this item form Bills Payable Book and the Bills Payable
Account.
b. The Bills Payable already paid should be checked from the Cash Book and
examine the returned Bills Payable.
c. To see the genuineness of the Bills Payable in hand on the date of Balance Sheet,
the auditor should check the Cash Book of the succeeding year as to whether any
payment has been made in respect of such bills. In case of any doubt, he may
request the drawer to provide related details.
3. Contingent Liability:
Contingent liability is a liability which may or may not arise in the future unless it is
quite negligible, its existence should be disclosed by appropriate foot-note in the
position statement.
According to the relevant provisions of the Companies Act, disclosure of contingent
liability need only be made through a foot-note in the position statement specifying
the amount involved.
Examples for Contingent Liabilities:

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Liability under a guarantee, liabilities arising out of litigation in respect of certain
special rights like Patent Rights, Trademarks, etc., liabilities for penalties under
forward contracts, etc.
 The auditors should consider the circumstance and the situation about the occurrence
of that type of liabilities.
 He should verify the various contracts entered into by the company and assess the
likelihood of contingent liability arising and the same has been accounted and shown
in the position statement.
 He should obtain a certificate from the management to that all contingent liabilities
are disclosed in the financial statements and be sure they may materialize in future.
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