The document discusses verification and valuation of assets and liabilities. It describes the auditor's role in verifying the existence, ownership, classification, and valuation of assets and liabilities. Key aspects of verification include examining documentary evidence, testing internal controls, and confirming physical existence, ownership, and proper use of assets. Valuation involves determining the exact value of assets based on original cost, depreciation, and factors like useful life. Specific guidance is provided on verifying types of assets like fixed assets, investments, stock, debtors, creditors, and bills payable.

1. VERIFICATION AND VALUATION OF
ASSETS AND LIABILITIES
Verification
•It means proving the truth or confirmation.
•The auditor has to certify that such assets
i) Exist with the business
ii) Are the property of the client
iii)Are valued in proper figures on particular date.
Verification is to establish
i)Existence of the actual items of assets and liabilities
ii)ownership and possession of assets and
iii) Proper classification and valuation of both assets and liabilities.
Verification includes
 Existence
 Valuation
 Ownership
 Possession
 Charge
 Use

2. Verification of assets involve
To compare the ledger accounts of assets with the b/s
To verify the physical existence of assets as on the date of b/s
To confirm the assets were acquired for the business purpose only.
To confirm the assets are really owned by the business concern
To confirm that the assets are free from any charge.
Valuation of assets
It is an important part of verification.
It means testing the exact value of an asset on the basis of its utility.
It is done after deducting depreciation.
Points to be considered while valuing assets
Original cost, the working life, wear and tear and the break up value and
the chances being obsolete.

3. FIXEDASSETS
•F.A are acquired for permanent use and continuous service by them for a
long time.
•They are used for earning profits.
•(example) land and building, plant, machinery, furniture etc.,
•Land is peculiar in the sense that it is not subjected to depletion in value by
its use. Hence its value is done in cost price.
•Remaining assets are depreciable in nature and they are valued in going
concern value.
•He should verify the assets by examining the documentary evidence and by
evaluating the internal control system in operation.
•Also find the amount of depreciation provided during the current year.

4. WASTINGASSETS
•W.A are of fixed nature and are depleted gradually in the process of
earning income.
•Examples: mines, oilwells
•Its value should be reduced each year to the extent of the estimated
amount by which as a result of exhaustion such assets have diminished in
value.
•W.A are shown in its original cost and provision is made for depreciation or
depletion on the basis of their estimated exhaustion.

5. BILLS RECEIVABLE
•To verify the b/r the auditor should call for a certified schedule of bills in hand.
•It should be checked by reference to the accounts in the General Ledger.
•He should examine each bill to see that is properlu drawn, signed by the
acceptor and is also properly drawn.
Points to be considered if auditing is conducted after last day of the financial
year.
•Bills subsequently met should be verified by vouching the cash received and
entered in the cash book.
•Bill discounted should be examined by way of entries in the cash book and
bills receivable book.
•If bills have been kept in the bank for safe custody, it should be verified on the
basis of a certificate obtained from the bank concerned which may be
regarded as good evidence.
•If the bills have been retired before the date of the balance sheet, the
proceeds should be checked by reference to the cash book.

6. INVESTMENTS
When the number of investments are large, the auditor should insist upon
asking for a schedule of investment held by the client and verify the existence
in one sitting.
It should include name of the security, date of purchase, normal value, cost
price, market price at the date of the b/s.
It should be examined by reference to relevant ledger accounts and properly
shown in the b/s.
He should inspect to verify the existence of investments.
If it is deposited in bank for safe custody, he should obtain a certificate from
the bank giving details about all securities so kept.
He should also ensure that the securities are free from any charge.

7. PATENTS
The auditor should examine the patents and verify them with the help to
certificates which have granted such patent rights.
He should see the asset is clearly stated in the b/s and it is registered in the
name of the client.
1. Patent rights are acquired in two ways
a) By purchase
 If patents are purchased, the fees paid for purchasing such rights should
be treated as capital expenditure and the renewal fees should be debited
to the profit and loss account.
b)By development and research
 If patents are created by the client by doing research, it should be seen
that the money spent on research is of capital nature and should be
debited to patents account.
 So the assignment of purchase or patent agents accout should be
examined.
 If it is first year, the auditor should check the cost and duration for which
such rights are to last from the relevant accounts.
 If the numbers of patents are large, he can call for a schedule from the
client (To be continued….)

8. Patents
The renewal fees should be vouched with the help of receipts so received.
The patents should be written off in a period of 14 years after which the
right lapses unless the term is extended.

9. Stock in trade
It requires a lot of care and caution on the part of the auditor.
If there is effective internal check system, the possibilities of errors and frauds
are minimized.
The following points are to be kept in mind while verifying the stock in trade
The method of stock taking should be examined.
He should obtain a list of instructions issued in connection with stock in trade.
Few items can be checked in the rough stock sheets.
The totals and balances should be checked.
The value of different items of stock should be examined with the help of
valuation sheets, invoices etc.,
The principles and bases followed in the valuation of stock should be examined
to ensure that they are those followed in previous years.
It should be checked that valuation of stock is done on the basis of cost price or
market price whichever is less.
The goods inward register should be examined and it should be seen that the
goods received on the closing day or earlier have been included in the stock.
Con….

10. Goods sold on or prior to the closing day have not been included in the stock.
It should also be ensured that the goods not related to the business have not
been recorded in the stock.
The following precautions may be taken by the auditor while valuing stock:
There may be some goods which may be legally in the ownership of the client
but not actually in his possession such goods must be included in stock sheets.
Goods sent to branches or agents on approval or return basis for which
approval has not been received should be entered in stock sheets.
Goods received but not entered in financial books should not be included in the
goods shown in stock sheets.
Goods sold but not delivered to the buyer and the goods which are in the stock
of the client as an agent should not also be included in the closing stock.
For valuing the stock, the principle to be followed in that either at cost price or
at market price whichever is less.

11. Freehold property
Freehold land
 He should compare the ledger accounts with the b/s to ensure
that freehold land is separately shown in the b/s.
He should examine the title and should see that the asset is in the
name of the client.
He should verify the sale if a part of it has been sold out during
the course of the year.
If it is purchased, he should examine correspondence and brokers
note.
Usually land appears at cost in the b/s.

12. Freehold building
 Auditor should ensure that freehold land and building are shown in
separate accounts.
 When it is shown separately, depreciation should be provided.
 If it is constructed by the client, he should examine the certificate
obtained from the contractor and the architect.
 If it is mortgaged, examine the certificate obtain from the mortagee.
 If title deeds are with the banker for safe custody, he should see that
they are only for safe custody and not for loan.
 Freehold property should be valued at cost less depreciation.

13. LEASEHOLD PROPERTY
When an asset is acquired by the business for a duration of lease, the property is
said to be leasehold.
The auditor should see that separate accounts are maintained.
When the lease has been registered with the registrar, he should see the
condition of the lease.
Provision for depreciation has to be made.
The annual charge for depreciation will be arrived at by dividing the total cost by
the term of the lease.

14. Sundry creditors
o the auditor should vouch the purchase book and the purchases return book with
the help of invoices and check the postings into the ledger.
oHe should obtain a list of creditors from the client and check it with reference to
the balances of ledger accounts.
oHe should inspect goods inward book to ensure that the goods purchased have
actually been received.
oHe should check outstanding bills payable at the date of the b/s
oHe should compare the % of gross profit to purchases with that of previous year
to verify the correctness of purchases.

15. LOANS
•The auditor should verify the existence of loans. He should examine the correspondence
and contracts.
•He should see whether interest on loan has been either paid to date or recorded as
unpaid in the book of accounts.
•He should check the registrar of mortgages maintained by the company.

16. DEBTORS
It may be classified into a) good debts b)doubtful c)good for which no security other than personal
security.
He should examine the schedule of debtors with the help of responsible official and see that
proper provision has been made for doubtful debts.
Debts written off as bad should be vouched by reference to necessary vouchers for which the
auditor should examine directors minute book.
He should contact debtors through correspondence to verify the money received from debtors.
The following points should be borne in mind while verifying the debtors:
1. the age of debts: it must be viewed in relation to the terms of credit allowed by the company.
2. Regular payments: if payments are erratic and balances are increasing the accounts should be
considered as doubtful.
3. Heavy dishonoured bills: it is always a sign of weakness and similarly returned cheques and
renewed bills should be viewed with suspicion that such details are doubtful.
4. Noting of the accounts: accounts such as “in solicitors hands”, “in liquidation”,
“address unknown” clearly indicate that the accounts are doubtful.
5. A comparison of budgeted and actual bad debts: it is a basis for considering debts, bad debts,
doubtful or good. Such a comparison can be made for a number of years and the opinion be
formed accordingly.

17. PLANT AND MACHINERY
1) The assets is to be verified and entries have to be vouched by reference to original
invoices, correspondence etc.,
2) The auditor should examine plant register in which cost, a record about sales,
provision for depreciation are available.
3) He should compare the schedule with the register.
4) If part of the asset has been purchased during the year, the relevant voucher and
invoices should be verified.
5) If the asset is mortgaged, he should look into the details given in the plant register.
6) It is valued at going concern value and cost less depreciation.

18. BILLS PAYABLE
•The auditor should obtain a schedule of b/p and its total should be
compared with the bills payable book and the bills payable account.
•The bills paid after the b/s date should be examined with the entries
passed in the cashbook.