Verification and

Valuation of Assets
and Liabilities
By
Lt. Santhosh P. MBA,. M.Com,. PGD in Yoga., KSET.,
Faculty and NCC Officer
Department of Commerce and Management.
Acharya Tulsi National College of Commerce. Shivamogga.
Meaning
• Verification means proving the
correctness. One of the main work's of
auditor is verification of assets and
liabilities. Verification is the act of assuring
the correctness of value of assets and
liabilities, title and their existence in the
organization
DEFINITION
• According to Spicer and Pegler “The
verification of assets implies an inquiry into
the value, ownership and title, existence
and possession, the presence of any
charge on the assets
 OBJECTIVES OF VERIFICATION OF
ASSETS & LIABILITIES
• 1. Valuation of assets & liabilities :- The
auditor has to ensure that the assets &
liabilities have been shown at their correct
value .
• 2. Finding out the ownership & title of the
assets :- Verification certifies the ownership &
the title of the assets shown in balance sheet.
• 3. Detection of errors & frauds :- Verification
helps in detecting the frauds & errors in the
account books of the undertaking .
• 4.Certification of the arithmetical accuracy in
account books :- verification certifies
arithmetical accuracy of the books of
accounts. It shows the correct value of assets
and liabilities.
• 5.Represents true financial position:-
verification helps in check out whether
balance sheet exhibits a true and fair financial
position of the concern or not. It helps the
auditor to certify the fact whether the balance
sheet exhibits true and fair financial position.
• 6.Internal control :- to find out whether there is
an adequate internal control regarding
acquisition, utilization and disposal of assets.
Auditors duty regarding
verification
• Verification of Assets and Liabilities: The auditor
must confirm that the company’s assets and
liabilities exist, are accurately valued, and are
legally owned by the entity. This often involves
checking ownership documents, third-party
confirmations (like bank confirmations), and
physical inspections of assets.
• Verification of Transactions: Auditors verify that
the recorded transactions are genuine, properly
authorized, and correctly classified in the financial
records. They may review original source
documents, cross-check information, and ensure
compliance with applicable accounting standards.
• Verification of Financial Information: Auditors
ensure that financial statements reflect true
and fair views of the company’s financial
position and performance. This involves
checking that all figures align with supporting
documents and have been accounted for in
the correct period.
• Compliance Verification: Auditors must verify
that the organization complies with applicable
laws, regulations, and policies. This includes
verifying compliance with financial reporting
standards, tax laws, and regulatory guidelines.
• Internal Control Testing: Auditors review
the effectiveness of the company’s internal
controls over financial reporting. By
verifying internal controls, they assess
whether there are processes to prevent or
detect fraud and errors within the
organization.
• Disclosure Verification: Auditors ensure
that all required disclosures are included in
the financial statements, verifying that they
accurately represent any risks,
uncertainties, and financial obligations.
Position of an auditor in
valuation
• Verification
• It is the duty of auditor not only to verify the
physical existence and ownership of the
assets, but also its valuation as shown in the
balance sheet.
• Accuracy
• It is not sufficient for the auditor to check the
arithmetical accuracy of the assets appearing
in the balance sheet. Auditor should also make
enquiries through information and explanation
to know the correct state of affairs.
• Position of assets
• It is not enough for the auditor to compare the
items of the balance sheet with the books of
accounts. He should satisfy himself about the
actual position of the assets.
• Valuation
• Matters relating to the valuation of assets, the
auditor must adhere to the generally principles
of valuation, commercial practices and
accounting standards.
• Technicality
• An auditor is not a technical expert. He is not a
valuer. Therefore he need not to value each and
every assets himself. He needs to take the help of
technical expert or auditor may relay upon the
directors of the company or on the certificates of
other professionals in respect of the valuation of
assets.
• Careful assessment
• The auditor should be careful to see that assets
which are not existed, need not to be included in the
balance sheet and those which exist, it should not
be done any over valuation or undervaluation.
• Depreciation
• The auditor should ensure that adequate
depreciation has been charged on assets
before determining their current value.
• Financial Statement
• It is the responsibility of the management of
the company to use reasonable basis of
valuation of assets. Determine their correct
value and to show them accordingly in the
financial statement.
Role of an Auditor in
valuation of assets
• Disclosure requirements as per Companies act
• If there is any change in the method of accounting for
the year under audit, the change in the method of
accounting and the effect of such a change in the profit
of the year under audit is to be disclosed in the financial
statement
• Verification of main journals
• The adjustment entries and the closing entries are
passed through journal. A through verification of each
journal entry is necessary because a crafty entry may
entirely change the picture of the financial position of
the organisation.
• Disclosure Requirements
• If there is any change on the constantly followed method
of accounting, the effect of such change or departure on
the profit is to be disclosed in the financial statement.
Verification and valuation of
different items of assets
• The verification of assets and liabilities
involves checking their existence,
ownership, and possession, while valuation
is the process of determining their worth.
The following items requires physical
verification
• Land and Building
• Plant and Machinery
• Goodwill
• Investment
• Stock in trade.
 Land and Building
• Auditor should examine the title deed of the
land and building.
• Profit or loss on sale of it should be duly
adjusted in the account.
• Any additions to it should be carefully
examined by the auditor.
• Land means a long term asset that refers to the
cost of real property exclusive of the cost of
any constructed assets on the property.
• Building will be depreciated over their
useful life of the asset.
• Land and building further classified into
two types
• Freehold Property
• Leasehold Property
• Freehold Property
• It means the property is free from the hold of
anybody, the owner who enjoys complete
ownership.
• Auditors duty towards verification and
valuation of freehold property is listed below
• 1. where the free hold property has been
purchased, the auditor should examine the title
deeds. For Ex- Purchase deed, certificate of
registration etc. to verify the correct position.
• 2. when the property has been mortgaged, the
auditor should obtain a certificate from the
mortgagee regarding the possession.
• 3 when the property has been acquired in the
current year. Than the cost may be verified with
the help of the bank passbook. He should
vouch all the payments made in this
connection.
• 4 Auditor should see that the property account
should be shown in the balance sheet at cost
price including the legal and registration
charges less depreciation up to date.
• 5 Auditors should also see that a separate
account for land and building on which it is
constructed is maintained. It is necessary
because depreciation is provided for building
and not for the land.
Leasehold Property
• Lease hold is an accounting term for an
asset being leased. The asset is typically
property such as a building or space in a
building.
• The property which is on lease (Rent)
• The property which is leased by the landlord for
a certain period of time to lessee.
• Tenants have been given the right to use during
that specified time by the land lord.
• The ownership of the property returns to the
landlord when the lease comes to an end.
Autor’s duty
• The auditor should verify this by inspecting the
lease agreement or contract to find out values and
durations.
• He should see that the terms and conditions of
lease are properly complied.
• In case of property has been mortgaged. The
auditor should obtained a certificate from the
mortgagee regarding possession of title deed.
• Auditor should physically inspect the properties.
• The auditor should also note that proper provision
has been made for depreciation of lease problem
and for any possible claims arising there under.
Plant and Machinery
• A plant is an asset with a useful life of more
than one year that is used in producing
revenues in a business operations.
Auditor’s Duty
• When the machines are purchased in a
current accounting period. The invoices
and the agreement with the vendor should
be verified.
• The auditor should verify the plant register
in which particulars about the cost,
records about sales, provision for
depreciation etc.
• Auditor should prepare a list of each
machine from the plant register and should
get the list certified by the works manager.
• Auditor should see that plant and
machinery account is shown in the balance
sheet at cost less depreciation after
making proper adjustment.
• In case any plant and machinery scrapped,
destroyed or sold. Auditor should ascertain
that the profit or loss arising thereon has
been currently determined.
Goodwill
• It is an intangible asset.
• It represents earning capacity of a
business. A company running in a loss may
not having goodwill. This means the value
of goodwill fluctuates with increase or
decrease in the profit of the company.
Auditors duty towards
verification
• Ascertain that the company justified in
creating goodwill in its books of accounts.
• Where goodwill is generated in own
business, the auditors should verify the
particulars of expenses debited to goodwill
account.
Auditors duty towards
valuation
• Auditor should confirm himself that
goodwill has not been shown in excess of
its cost price.
• Examine that the sum paid for goodwill
does not exceed the difference between
the total purchase consideration and the
value of net tangible asset acquired.
• He should see that it is valued asper
method stated in partnership deed,
purchase or agreement.
• Goodwill may appear in the balance sheet
at cost less amounts written off.
• The amortisation period and method of
amortisation should be reviewed at the end
of each financial year.
• An intangible asset should be eliminated in
the books of accounts when no future
economic benefits are expected from its
use.
Verification and Valuation of
Investments
• An investment is a monetary asset purchased with
the idea that the asset will provide income in the
future or will later be sold at a higher price for a
profit. Investments include Government securities,
shares, debentures, etc.
• When the number of investments is very large, the
auditor should ask for a schedule of investments
held by the client containing various particulars
like name of the securities, date of purchase,
nominal value, cost price, market price, etc., and
examine the same.
• He should ensure that the investment asset has
been shown separately in the Balance Sheet.
• The investments are classified as
• (1) Quoted Investments,
• A company’s share is said to be “lists”, or “Quoted” if
its share can be traded on a stock exchange, i.e.,
Public Limited Companies.
• (2) Unquoted Investment
• A company share is said to be “unlisted” or
“unquoted” if its stocks that are not listed on a stock
exchange and so have no publicly stated price.
Quoted Investment
• Auditor's Duty in Verification
• 1. Verify the authorization for purchase of
investment. Auditor should review board minute
book (book which record the conclusion of
meeting) for authorization.
• 2. Vouch the entries in brokers contract note, share
certificate and cash book.
• 3. Examine the share certificate to ensure that the
type of security and number of share agrees with
investment account and that the share held in the
company with its name.
• 4. Verify that the investments are properly classified
and disclosed as stated in Companies Act.
• Auditor's Duty in Valuation
• 1. The auditor should satisfy himself that the
investment has been valued in the financial
statement in accordance with recognized
accounting policies and practices and relevant
statutory requirements.
• 2. The auditor should examine whether in
computing the cost of investment, expenditure
incurred on account of transfer fees, stamp
duty, brokerage etc., is included in the cost of
investment.
Unquoted Investments
• Auditor's Duty in Verification
• 1.Auditor should verify the Memorandum of
Association to ensure authority for purchase such
investment.

• 2.Where investments are in large numbers, the

auditor should obtain the schedule of securities
certified by a senior officer of the company.

• 3.Obtain the schedule of investment comprises for

information about the name of the securities /
investment, date of their acquisition, nominal/ face
value, cost price, book value, paid up value market
value, rate of interest applicable, dates of interest
due, tax deduction, etc., at the date of Balance
Sheet.
• Auditor’s Duty in Valuation
• 1.The Auditor should examine the method
adopted by the organization for determining the
market value of such securities.
• 2.The Auditor should examine whether the
method of valuation of securities by entity is
one of the recognized methods of valuation
viz., breakup value method, capitalization of
yield method, yield to maturity method etc.
Stock in trade
• It is the life blood of the business. Therefore
the value of stock in trade has to be properly
determined for ascertaining profit or loss for
the year and also to disclose a true and fair
financial position of the concern.
• Stock in trade normally includes
• Raw materials
• Work in progress
• Semi finished goods
• Finished goods
• Consumable stores and spare parts
• Loose tools.
• Raw materials
• Raw materials from a major input into the production.
They are required to carry out production activities,
for example steel, copper, rubber, cotton, wool ETC.
• Work in progress
• The work in progress is that stage of stocks, which
are in between raw materials and finished goods. It
means the total value of unfinished production at the
end of each financial period.
• Semi finished goods
• Goods in a semi finished conditions on the date of
balance sheet should be valued at cost of raw
materials plus a reasonable proportion of factory
overheads or production overheads.
• Finished goods
• These are the goods, which are ready for the despatch.
The stock of finished goods provides a buffer between
the production and the market.
• Consumable stores and spare parts
• Spare as the name suggests, refers to additional or
extra to what is required for ordinary use.
• These are purchased for reducing the idle time of
machineries and other auxiliary processes in case of
sudden breakdowns.
• Loose tools.
• These are the part of current assets, and will be
typically found on any balance sheet that may be
produced for the business and this is expected to be
used within the next 12 months.
Auditors Duty in Verification
• 1. Evaluation of accounting and internal
control system
• The auditor should study and evaluate the
accounting system and internal controls relating to
inventories. This would facilitate him in determining
the nature, timing and extend of procedure to be
carried out by him. The auditor should review the
following aspects of internal control.
• Custody
• Records
• Authorization
• Insurance
• Slow moving stock
• 2. Examine Existence of Stock
• Ensuring that staffs involved are both
knowledgeable about the stock and independent of
the day to day handling or recording of the stock.
• Issue of written stock taking instructions regarding
counting procedures and clearly defining the
responsibilities of all staff involved.
• Computing and checking calculations and additions
on stock sheets.
• Continuous or periodic agreement of physical
checks with records and all materials difference
investigated.
• 3.verify stock records.
• He should ensure that stock records are
properly maintained and must verify receipts
and issues of materials.
• He must also verify that inspection reports and
stock sheets are authorised by a responsible
person.
Auditors duty in valuation
• Auditor should ensure that stock in trade is
valued at cost price or market price which
ever is lower on the date of balance sheet.
Verification and Valuation of
Liabilities
• It involves ensuring the following.
• All the liabilities have been clearly stated on the
liability side of the balance sheet.
• All the liabilities related to business itself.
• They are correct and authorised.
• They are shown in the balance sheet as their
actual figures.
Bills Payable
• It refers to bill of exchange. BP means bills
accepted for credit purchases made. The
amount on the bills are payable on the due
dates, it is current liability.
Auditor’s duty
• The auditor should obtain a schedule of bills
payable and its total should be compared with
the bills payable book and bills payable
account.
• The bills paid after the balance sheet date
should be examined with the entries passed in
the cash book.
• The auditor should obtain conformation
statement from the drawers directly with the
permission of his client
• Auditor should verify unpaid bills and check
the subsequent payments with the cash book.
Sundry Creditors
• A person who gives a benefit without
receiving money or money’s worth
immediately but to claim in future is a
creditor.
• Creditors are shown as a current liability in
the balance sheet.
Auditor’s duty in verification
• Verify books of prime entry:- the posting in
purchase ledger are to be checked for part of
a year.
• Verify statement of accounts:- the balances
shown in the credit of suppliers account are to
be verified with the statement of accounts
obtained from the creditors.
• Verify credit entries :- the credit entries
relating to discounts, returns, rebates etc.
made in the suppliers account are to be
verified with the statement of accounts
obtained from them.
• Accounting of purchase returns:- the
return outwards book is to be compared
with the ledger accounts and confirm that
all the returns are supported by the credit
notes of the suppliers.
• Purchases of subsequent year:- the
purchase invoices relating to the period
immediately following the close of the year,
are to be verified to ensure that they do not
relate to the period under audit.
• Obtain reasons for outstanding balance:-
the balances outstanding for a long period
is to be probed and reasons for the same
are to be found out.
Contingent liabilities
• Are those liabilities, which may or may not
arise in the future for payment. The auditor
should ensure that all known and unknown
liabilities have been accounted in the
books of accounts and have been shown in
the balance sheet.
• Ex.
• Liabilities on BR discounted and not matured.
• Liabilities on account of partly paid calls.
• Liabilities on arrears of dividend on cumulative
preference shares.
 Auditor's Duty in Verifying
Contingent Liabilities

• 1. Ensure Creation of Adequate Provision:

• The auditor should ensure that proper provision
has been made for certain liabilities, for example,
liability which arise on account of litigation and if
he is not satisfied, the fact should be stated in the
report.
• 2. Disclosure in Balance Sheet:
• In respect of certain liabilities for which no
provision has been made in the books, for
example, Bills Receivable which has been
discounted, arrears of accumulated fixed dividend
etc. The auditor should verify that such liabilities
are disclosed as foot note in the Balance Sheet.
• Liabilities on BR discounted and not matured.
• If BR are discounted with a bank and the money so
received from it is made use of, the entire money
will be refunded to the bank if the acceptor does
not make any payment on the date of maturity.
• Liabilities for calls on partly Paid Shares
• The amount called on shares held and paid should
be verified from the cash book and the liability for
the amount uncalled should be ascertained.
• Liability in respect of arrears of dividend
on cumulative preference shares
• The auditor should examine the articles of
association which should lay down rules in this
regard and due provision should be made for
such a liability.
Auditor’s duty in valuation
• The auditor should examine the director's
minute book, correspondence made with
the legal advisors and the information
obtained from the officials of the business.
• He has to ensure that proper provision has
been made for all such liabilities and if he
is not satisfied, he should maintain the fact
in his report.