The document discusses techniques for verifying assets and liabilities during an audit. It outlines six key techniques: 1) verifying physical existence, 2) assessing correct valuation, 3) confirming ownership, 4) ensuring proper disclosure, 5) identifying any charges on assets, and 6) checking for proper authorization of transactions. Specific procedures are described for different asset types, including obtaining certificates from management and third parties. The auditor must also consider events after the balance sheet date and obtain a management representation letter.

1. BY
Atta-ur-Rahman Arif

2. PURPOSE
 Verification enables an auditor to confirm the
result of Vouching about the ownership or
the existence of the assets and the liabilities.
 Essential to discharge the legal duties
imposed on the auditor by Companies
Ordinance sub-section 3 of section 255.
 Enable an auditor to submit the report
addressed to the shareholders.

3. SIX POINTS TECHNIQUES
1. Physical existence of an asset or liability
2. Asset or liability is correctly valued
3. Ownership of asset and liability
4. Correct disclosure of asset and liability
5. Assets suffering from charge
6. Proper authorisation of acquisition or
disposal of asset and liability

4. 1. PHYSICAL EXISTENCE
 Physical existence of an item will be varify by two
techniques:
 Actual count, weighing or measurement. For example:
cash must be counted by the auditor as on the date of
balance sheet.
 Documentary evidence and certified inventories duly
signed by responsible official of company, where first
technique is not practicable or feasible. For example:
bank balance is to be verified with reference to a
certificate obtained directly from the client’s bank

5. 1. PHYSICAL EXISTENCE (Contd…)
 Bank balances must to be verified by a certificate
 Investments held must be physically examined.
 Certificate for physical inventory count of fixed
assets must be obtained.

6. 2. CORRECT VALUATION
 It is the duty of auditor to check the valuation of the
asset with reference to any evidence.
 Where technical knowledge is involved he is entitled to
rely upon the information supplied to him by the skilled
and technical persons.
 Auditor should apply all possible tests to obtain
satisfaction that the asstes have been valued upon the
GAAP and in accordance with the 4th Scedule and 5th
Scedule of Companies Ordinance.

7. 2. CORRECT VALUATION (Contd…)
 Different basis is being used for valuation depending
upon the nature of business:-
 Fixed Assets: Acquired for earning income and not for
resale. For a going concern valued at Cost-Dep.
 Market value not considered b/c
 It does not affect their earning power
 Not considered at the time of replacement of asset
 Not realizable value except placed in market for resale.
 If sale at any point of time not treated as business
income.

8. 2. CORRECT VALUATION (Contd…)
 Current Assets: Which are required for the purpose of sale
and their subsequent conversion into cash e.g. Stocks,
Book debts, bank balance, cash on hand etc.
 Important points to be considered for valuation
 Cost or market price whichever is lower
 Temporarily fall in market price may be ignored
 Same principal adopted in subsequent years
 Depreciation must be provided in necessary
 Wasting Assets: Fixed nature assets consumed or
exhausted in the process of income e.g. mine
 Reduction in book value on estimation basis

9. 3. OWNERSHIP
 Auditor must satisfy himself that the ownership of
assets and liabilities which are shown on the balance
sheet is vested in his client.
 Techniques which enabling the auditor to acquire the
satisfaction on this point, depending upon the nature of
an asset or liability.
 For example the ownership of Investments is to be
verified either by the physically seeing the name of the
client on the share certificate or by seeing a
confirmatory certificate directly obtained from the
client’s banker.

10. 4. CORRECT DISCLOSURE
 Verify whether the information which is required by
law has in fact been given in the Balance Sheet on
which the auditor is submitting his report.
 Legal requirements are:
1. Disclosure requirements governing Companies are
contained in the 4th (Listed)and 5th (non-listed)
Schedule of Companies Ordinance 1984.
2. Disclosure requirements governing financial
statements contains in IAS 1.

11. 5. ASSETS SUFFERING CHARGE
 Ownership of an assets is of two types Clean, Charge
 Charge means:
 Mortgage (given the right to the mortgagee to sold the property
through court in case of non-payment by the mortgager, to
realize his dues. If the sale proceeds are insufficient, mortgager
will remain personally liable for the payment of the debt)
 Pledge ( It is bailment of goods as security for the payment of a
debt. It can be made of moveable property alone. The borrower
must be in possession of the moveable property under a legal
right)
 Pawn: Something given as security for a loan
 Lien: The right to retain the lawful possession of the property of
another until the owner fulfills a legal duty to the person holding
the property

12.  Steps to taken to know whether as assets if suffering from
charge:
 Obtain certificate from management whether asset shown in
Balance sheet free from any charge, if so then details must
by obtained.
 Enquire about the nature of charge
 Examine the object of holding any security
 Scrutiny of the register of mortgage and charges are
required to be maintained under section 125 of the
ordinance
 Securities are in safe custody, it could be ascertained by
taking certificate from bank, investment co.
5. ASSETS SUFFERING CHARGE (Contd…)

13.  The duty of an auditor to adopt such ways and means
whereby he ascertains whether an asset of the company
is suffering from charge or not.
 Whether the nature of the charge is indicated in the
Balance sheet .
 If the management does not agree to mention the nature
of charge in the balance sheet, he must qualify his report
to the shareholders.
 Section 121 requires that mortgages and charges created
by a company must be registered.
5. ASSETS SUFFERING CHARGE (Contd…)

14. 6. PROPER AUTHORISATION
 The auditor must acquaint with the relevant clauses
affecting the auditor as liad down in the memorandum
and articles of association.
 Auditor must examine and use the documentary
evidence which establishes a proper authorisation for
complete verification of the entries made in the books
of accounts.

15. Verification of Assets not in possession
 In following cases auditor has recourse to client’s banker
for verification
 Balance of Accounts
 Bills under discount and not matured
 Bills held by bankers for collection
 Title deeds, Securities, investments, held for safe custody
 Balances of loans, Overdrafts, limits and nature of charge

16. Verification of Assets not in possession
 Necessary certificates obtained from
 Officials
 Certified inventory of Plant and Machinery
 Certified stock Sheets
 Certified lists of bad or doubtful debts
 List of all outstanding liabilities
 Third Parties
 Bankers: Balance of accounts, overdraft
 Agents: Cash balances
 Mortgagors: Title deeds

17. Events occurring after the closing date
 Auditor has to report that the balance sheet exhibits a
true and correct view of the state of affairs of the firm at
a particular date.
 Should also take care of the events occurring after the
closing date
 Liabilities: Amounts of contingent liabilities
 Provision for taxation
 Fixed assets: Acquiring and consideration was not
determined as of closing date
 Debtors: Subsequent realization and adjustments
 Stock in Trade: Establish realizable value

18. REPRESENTATION LETTER
 Representation by Management as Audit Evidence
is a title of ISA 580, which explains rational,
documentation, written representation, action to be
taken.
 Auditor should obtain evidence that management
acknowledges its responsibility for appropriate
presentation of financial statements
 These representations either unsolicited or in
response of specific inquiries.

19. REPRESENTATION LETTER
 If relate to matters which are material to the financial
statements then auditor should
 Seek corroborative audit evidence from sources inside or
outside the entity
 Evaluate whether the representation made by
management appear reasonable and consistent with other
audit evidence obtained
 Consider whether the individuals making representations
can be expected to be well informed in matter.

20. REPRESENTATION LETTER
 Auditor can document in his working paper evidence
of management's representation
 To avoid misunderstanding representation must be
in writing
 Letter should be address to Auditor, contain the
information requested by him
 Should be dated the same date as the auditor’s report
on the financial statements.
 Should the signed by the members of management
who have primary responsibility

21. ANALYTICAL PROCEDURES
 Used to describe the analysis of significant ratios and trends including the
resulting investigation of usual fluctuations and items. ISA 520 deals with
nature of analytical review procedures.
 These procedures include
 Comparable information for prior periods
 Anticipated results (Budget, forecast)
 Similar industry information
 These procedures are used to
 Assist auditor in planning the nature, timing and extent of auditing
procedure
 When Substantive test to obtain
 Overall review of the financial information at final stage.