2. VERIFICATION OF ASSETS AND LIABILITIES
Verification means the proving the truth or
confirmation. It also involves confirming that
presentation in the financial statement is in
accordance with legislations. The examinations of
the books of account with a view to ascertaining
their arithmetical accuracy is not enough. The
auditor must verify that the various items
appearing in the balance sheet are in the
possession of the concern.
The following are the main objects of verification and valuation of
asset and liabilities.
The auditor has to certify whether the balance sheet shows a true
ad fair financial position and for this he has to verify the assets and
To certify the ownership and title of the assets appearing in the
To ascertain the existence of the particular assets appear in the
To verify the fact whether assets are free from charge or not.
To detect the frauds and irregularities, if any, in the books of
accounts of the concern.
To ensure the arithmetical accuracy of the books of accounts
To verify the ownership and possession of the assets.
4. VERIFICATION OF ASSETS
Verification is made on the basis of evidence such as the title deeds,
receipts of payments made etc.
In valuation an auditor has to depend upon the certificate of the
owners / directors.
Verification and valuation of different assets
Intangible Fixed Floating Fictions
Assets Assets assets assets
5. I. INTANGIBLE ASSETS
Goodwill is the value of reputation of the firm. It enables the firm to earn more than the normal rate of profit.
Goodwill has no physical existence as much. It does not diminish in value with use. It has the potentiality of self
growth. The value of Goodwill varies with the earning capacity of business. Goodwill should appear as an asset in the
balance sheet only when
It has been purchased (or)
The company has revalued whole of its assets and has raised a Goodwill account in the books (or)
In case of partnership, when a new partner is admitted or an old partner retires or dies, it becomes necessary to bring
goodwill or revalue it in the books of account or
When the company has succeeded in establishing a special reputation in the market because of its increasing sales
Where Goodwill has been purchased along with a running business, the same should be verified from the
agreement with the vendor showing the price paid for it. But when the amount is not specifically fixed, goodwill is
the amount paid for the purchase of the business over the net assets taken over.
It should be verified that the Goodwill has been recorded in the books of account only when some
consideration in money or its equal has been paid for. In case of 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 the
basis of provisions made in the partnership deed.
Goodwill should be valued at cost less amounts written off. It is no part of an auditor’s duty
to comment upon the price paid for Goodwill even though he considers it to be excessive. Sound
financial policies require that the amount of goodwill should be gradually written off over a reasonable
period of time.
A patent is an official document, which secures to an investor exclusive right for years to
make, use or sell his invention.
•The life of each patent is always fixed. The auditor can find out the list of all patents from
agreements or licenses.
•The auditor should call for a list of patents in existence and examine the particulars of such
patents with reference to their register number, date etc.
•The auditor has to find out the renewal fee paid and verify the same with the receipts for
payment. It is better if he inspects the patents personally.
•The patent right may be acquired either by purchase (or) through research. If patents are the
outcome of the research carried out by the business the expenditure incurred on research should
be capitalized as such.
•The auditor has to ascertain that the patents which have expired either in their legal term of
validity or in their working life have been written off.
Patents must be valued at cost less depreciation. There may be 3 causes of depreciation viz.
•Lapse of time
•The patented article going out of fashion
The patents should be written off in a period of 16 years after which the right automatically
lapses unless the term is extended where patents have been obtained in the name of some
employee of the firm, auditor must see that it is properly assigned in favor of firm.
7. •Copy right
A copy right is the exclusive legal right to produce or reproduce some kind of literary work. It is the
legal protection provided to an author by which the publication of his work by other is prohibited. The
period of copyright is for the life of the author and fifty years after his death.
While verifying copyrights, the auditor should note the following points.
•The auditor should examine the agreement between the author and the publisher.
•If there are many copy rights with a business the auditor should call for a schedules thereof from the client
and verify them for this schedule.
Generally the value of the copyright is not stable because copyrights lose their value by passage of
time. If the sale of the publication is very low or nil the copyright should be written off. In the balance sheet
copyright must be shown at cost less amounts written off from time to time.
“A trade mark is a distinctive mark attached to goods offered for sale in the market so as to distinguish the
same from similar goods and to identify them with a particular trader”.
Trademarks can be verified by examining the assignment deed duly endorsed by the office of the Register of Trade
Marks. Trade Marks can be acquired like copy rights. In case they have been purchased from others, the auditor
should vouch the expenditure incurred in connection with their acquisition.
The renewal payment receipts must also be vouched. Auditor should carefully note that proper distinction is made
between the capital and revenue expenditure. Any expenditure incurred in the acquisition of the trade mark should
be treated as a capital expenditure, while the renewal charges should be treated as revenue expenditure.
The valuation method is the most suitable method of valuation of trade marks. It should be seen that
trademarks are properly valued and shown in the balance sheet.
8. II. FIXED ASSETS
•Land and Buildings
Almost all the business or industrial undertakings own land & building as common
premises. For verification and valuation purposes, auditor should distinguish between the
freehold property and the lease hold property.
A. Free hold Land and Buildings
•Verification: The auditor should examine the title deeds to ensure that they are in the name
of the client. The title deeds should cover all the land and buildings shown in the basic of
•Mortgaged Property: The auditor should obtain a certificate from the mortgages or their
solicitor to the effect that the title deeds are in their possession.
•Auditor’s Responsibility: The auditor should obtain a certificate from the client’s legal
advisor confirming the validity of the title of the client to the property.
•Valuation of Freehold Land: It is generally shown at cost which includes the purchase
price, broker’s commission, registration fees, legal charges etc. if market or realizable value is
taken as the basis for valuation of freehold land, the same should be clearly disclosed in the
•Valuation of Buildings: Buildings should always be valued at cost less depreciation at a
reasonable rate. Depreciation should be provided even where the buildings have not been used
during the year.
•For Building under Construction: If the building is under construction auditor should
verify its debit balance with the help of the architect’s certificates as well as the contractor’s
receipts for the amount paid. To be on the safe side, auditor should obtain a certificate from a
responsible official to that effect.
9. B. Lease holds Property
When the Land or building is acquired by a business concern for a fixed duration on lease, the property is
said to be leasehold. Auditor should see that separate accounts are maintained for freehold and lease hold
Verification: Auditor should take the following steps to verify the leasehold property. He should inspect the
lease agreement to find out value and duration. The auditor should see that the lease agreement is registered
with the Registrar and certificate testifying to the validity of the same has been secured from the client’s legal
advisor. Auditor should see that the terms and conditions of the lease are property complied with. In such a
case, the auditor should make full enquiries to ensure that the property is still continuing with the concern. He
should also examine the last receipt of the payment of rent. In case the property is sub-let, the auditor should
examine the agreement with sub-lesser.
Valuation: Leasehold Land & Buildings are to be valued at cost less depreciation which should be sufficient
to write it off completely during the period of the lease.
•Plant and Machinery
These should be verified by personal inspection and with reference to the original documents which
served as the basis for the entries, such as purchase orders, vendor’s invoices, contracts, requisitions,
construction reports etc. plant register which is generally maintained by big concerns to keep a detailed
record of plant and machinery such as the following should be carefully inspected.
•Name and description of machine.
•Number of machinery
•Location of plant
•From who purchased
•Date of installation
•Cost of installation and other items of expenditure to be capitalize
•Rate and the method of depreciation.
10. •Amount of depreciation provision.
•Repair information, such as date, cost and nature and
•Other information concerning the plants and machinery
The auditor should follow the following procedure for the verification of plant & machinery.
•Existence: The auditor should see some of the main plants by visiting the factory and he should tally them
with the plant register.
•Ownership: The auditor should see the copy of purchase contract, invoice, receipts and purchase order.
•Valuation: Any addition made in (or) any deduction made from it during the year should be carefully
examined and the auditor should see that such deductions or additions are proper.
•Plant Register: The auditor should inspect the four details of the machinery by tallying with plant register.
•Pledge: If the concern has taken some loan by way of pledging the plant and machinery then the auditor
should inspect the conditions of loan, amount, rate of interest etc.
•Certificate: If the machinery is manufactured by the client then the auditor should obtain a certificate from
the concerned auditor for cost verification.
•Profit on Sale: If any plant (or) machinery is sold out during the year then the profit (or) loss on the sale of
machinery shown in the profit and loss account should be carefully verified.
Furniture, Fixtures, Fittings and office equipment
Furniture is a movable asset and can easily be removed from one place to another. e.g. Chair, table
Fixture is an asset so affixed to land or to a building as to become in fact a part thereof e.g. science
laboratories in a college, furniture to which the scientific apparatus is attached is usually kept as fixed
to the ground.
Fittings are fitted on the walls. E.g. electric fittings on walls.
Office equipment means office appliances e.g. typewriters, accounting machines, computers and
other similar items.
The auditor should take the following points into consideration while making verification of furniture and
•He should verify furniture & fittings with the help of various invoices held in support thereof.
•Any more items of furniture purchased during the period should be physically examined.
•He should also check the amount of depreciation charged.
•It should be noted that any expense incurred in relation to the purchase of these items should be capitalized.
•He should see that the net figure of furniture after depreciation is shown in the balance sheet.
•Auditor should examine furniture stock register thoroughly to check each items of expenditure purchased, rate of
depreciation, present value shown in the balance sheet.
The assets are valued at cost less depreciation at a reasonable rate. The auditor should enquire into the methods
of charging depreciation because the amount of depreciation will depend upon the use of assets.
Motor vehicles account is to be separately maintained. If the number of motor vehicles is very
large, a separate register as plant Register can be maintained.
While making verification of motor vehicles, the auditor should consider the following points.
The auditor should check up the book value of motor vehicles from the balance sheet and see if a separate
account is maintained for this asset.
In case company keeps a large number of motor vehicles, a separate register for this purpose may be
maintained on the lines of plant Register maintained for plant and machinery. Such a record would be of
great use to the auditor.
He should examine the registration books, licences etc of each motor vehicle maintained.
The auditor should check the name of the owner of the vehicles and see if it is in the name of his client.
He should also check the rate of depreciation on vehicles and their mileage run.
The auditor should see the insurance premium receipts of vehicles, road tax receipts etc.
Valuations are to be valued at cost less depreciation. The auditor should verify the adequacy of the
depreciation. It is a common practice for motor vehicles to be written off over the mileage they are expected
III. FLOATING ASSETS / CURRENT ASSETS
•Cash in hand
•The auditor should visit the business premises of his client at the close of the financial period and actually
count all the balances of cash and compare them with the balances as shown.
•If it is not possible for him to pay a visit on the closing date of the year, he should pay a visit on a
subsequent day and verify the cash balance upto that date.
•Alternatively he may ask his client to deposit the whole of the cash in hand on the closing day into the
Banks. By doing so the entire cash will be counted automatically.
•In case of the outstation branches, he should obtain certificates from the respective branch managers in
respect of cash balances with these branches at the end of the year.
•In case, the cash balance kept in the business comparatively more than that of the previous years, he should
ascertain the reasons for keeping such large cash balances and inform the facts to the management.
•Cash at Bank
In verifying the bank balance, the auditor should take the following steps.
•Comparison of the balances as shown in the cash book and the pass book
The auditor should compare the balances as shown in the pass book with the balance as shown in the cash
•Preparation of Bank Reconciliation Statement
Many types of frauds can be detected with the help of Bank Reconciliation Statement.
•Obtaining a letter of confirmation from the bank.
It is possible that fictitious pass book may be presented to the auditor. In such a suspicious situation, he
should obtain a letter of confirmation or a certificate directly from the bank. In absence of this he can check
accounts himself in the bank ledger.
13. •Separate Certificates for different accounts should be obtained
Auditor should obtain separate certificates for fixed deposit account, current account, savings
bank a/c from the bank.
•In case there are accounts with more than one bank, the auditor should verify them
Bills Receivable denotes a broad category of formal documents of indebtedness
including promissory notes and acceptance receivable.
Steps taken by the auditor to verify the bills receivables
The auditor should examine the Bills receivable book and prepare a schedule of all those
bill receivables which have not matured before the date of the preparation of the balance
The auditor should vouch the cash received as shown in the cash book. For the bills
discounted after the date of balance sheet but before the date of audit cash received
should be vouched with the entry passed in the cash book and bills receivable book.
The auditor should see that a note for the contingent liability is mentioned at the foot of
the balance sheet. The auditor should also see that a proper provision has been made in
If bills have been deposited with banks either for safe custody or for security of a loan,
they should be verified on the basis of certificates obtained from the banks.
Bills which were dishonored before the date of the balance sheet and not renewed
should not be shown as bills receivable, but should be included in the sundry debtors.
If the bills have been retired before the date of the balance sheet, the proceeds thereof
should be checked by reference to the cash book.
14. •Sundry Debtors
According to the companies Act, 1956 the book debts of a company should be shown as under.
•Debts considered good in respect of which the company is fully secured
•Debts considered good for which the company holds no security other than the debtor’s personal
•Debts considered doubtful (or) bad.
The following procedure should be adopted to verify the book debts.
•The auditor should ascertain whether there is a good internal check system regarding credit
•He should ensure that the sales, collection, discount etc have been properly recorded in the book.
•He should enquire about cut-off procedure adopted by his client.
•He should check the postings into the sales ledger and see that the trade discounts allowed have
•He should obtain a certified schedule of all debts and compare it with the ledger accounts.
•He should see that the debtors balance do not include the value of goods sent on ‘Sale or return’
or ‘Consignment’ basis.
•The instalments due on goods sold under ‘Hire purchase system’ should be treated as book debts.
•He should see that the good debts shown in the balance sheet are recoverable and are shown at
their realizable value.
•He should see that proper provision has been made for doubtful debts, discount etc.
•Debts written off as bad should be vouched by reference to the Director’s minute book.
•He should contact debtors directly through correspondence to verify the balance due from them.
•Debts due by the officers of the company should be stated separately.
•Lastly, he should see that the debtors have been shown properly in the balance sheet and as
15. What is Provision?
Provisions means “any amount written off or retained by way of providing depreciation,
or diminution in the value of assets or for providing any known liability of which the
amount cannot be determined with substantial accuracy.” -
The Institute of Chartered Accountants of India
Debiting Profit and Loss account, provisions are created and shown either by
deduction on the assets side or on the liabilities side under relevant subheads in the
Provision for bad and doubtful debts, provisions for repair & renewals, provision for
discounts and depreciation are the most common examples of provision.
What are Reserves?
Reserve is an appropriation of profit and on the other hand, provision is a charge
against profit. Reserves are not meant to meet out contingencies or liabilities of
business. Reserve increases working capital of a company to strengthen the
financial position. There are two types of reserves −
Capital reserve is not readily available for distribution as dividends among the
shareholders of the company and it is created only out of capital profit of the
company; this works like premium on issue of shares or debentures and Profit
prior to incorporation.
16. Revenue Reserve
Revenue reserves are readily available for distribution of profit as dividend to the
shareholders of the company. Some of the examples of revenue reserves are - general
reserve, staff welfare fund, dividend equalization reserve, debenture redemption
reserve, contingency reserve, and investment fluctuation reserves.
Auditor’s Duty Regarding Capital Reserves
Auditor should examine the following −
Capital reserve can be created out of capital gains only.
If the Article of the company permitted, capital reserve can be utilized for the
distribution of dividends.
Capital reserve should be shown separately from revenue reserve and general reserve
in the balance sheet.
17. Secret Reserves
Banking companies, insurance companies and electricity companies create
secret reserves, where public confidence is required. In this case, to create secret
reserve assets are shown at lower cost or liabilities at higher value; following
examples will help you understand how this is done −
By undervaluing goodwill or stock.
By excessive depreciation.
By creating excessive provisions.
Showing free reserves as creditors.
By charging capital expenditure to profit and loss account.
Auditor’s Duty Regarding Secret Reserves
Duties of Auditors regarding secret reserves are as follows −
Creation of secret reserve is not permitted by the Companies Act.
Only Banking Company, Insurance Company and Electricity companies are
allowed to create secret reserve.
In some cases where the creation of secret reserves is allowed under the
Companies Act, the Auditor should examine the necessity of creating such a
reserve. If the Auditor is satisfied he need not to qualify his report.
18. General and specific Reserves
Specific reserves are created and utilized for the purpose only for which they are created
like dividend equalization reserve and debenture redemption reserve.
General reserves are created for any future contingency or to utilize at the time of
expansion of business. The purpose behind the creation of general reserve is to strengthen
the financial position of the company and to increase the working capital.
Auditor’s Duty Regarding General Reserves
There is no liability on the Auditor’s part to report on the creation, adequacy or inadequacy
of such reserve. He may advice to the management towards the long term interests of the
Auditor’s Duty Regarding Specific Reserves
The Auditor should examine that specific reserve should not be available for distribution as
this reserve is meant to meet out specific liabilities only.