AUDITING

Verification of Assets & Liabilities

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Meaning:
Verification means the proof of existence or confirmation of
assets and liabilities on the date of Balance Sheet. Verification
usually indicates verification of assets of any organisation, which
can be done by the examination of value, ownership, existence and
possession of any asset.

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Objectives:
 Valuation of assets & liabilities:
The auditor has to ensure that the assets & liabilities have
been shown at their correct value .
 Finding out the ownership & title of the assets:
Verification certifies the ownership & the title of the assets
shown in balance sheet.

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 Detection of errors & frauds:
Verification helps in detecting the frauds & errors in the
account books of the undertaking .
 Certification of the arithmetical accuracy in account books:
Verification certifies the arithmetical accuracy of the
accounts books.
 Balance Sheet exhibits a true & fair financial position:
It helps the auditor to certify the fact whether the balance
sheet exhibits a true & fair financial position of the concern.
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Principles for Verification of Assets:
 Acquisition of Individual Asset
The cost of asset acquired should be verified with their
purchase agreements or ownership rights and the receipts of the
seller in respect of the price paid.
 Acquisition of Group of Assets
Where an organisation has taken over the assets of a going
concern, the agreement of purchase should be inspected and that
the amount paid for them should also be ascertained.
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 Sale of Assets
When an asset is sold, its sale proceeds should be vouched
with respect to the reference to the agreement, containing the terms
and conditions of sale, counterfoil of the receipt issued to the
purchaser or any other evidence which may be available.

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 Depreciation
It is now obligatory for a company to provide for
depreciation out of profits in accordance with the provisions under
sub-section (1) of Section 205 of Companies Act, before any profit
can be distributed as dividend. The value of certain assets (viz.
plant and machinery) is also affected by an accident or by
obsolescence. Any asset that has been discarded, after such a
happening, should be shown in the Balance Sheet only at realisable
value.
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 Physical Verification of Fixed Asset
The existence of fixed assets, where practicable, should be
verified by physical inspection or by comparing the particulars of
assets as entered in the schedule attached to the Balance Sheet,
with the Asset Register and also reconciling their total value with
the general ledger balances.

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 Inspection of Current Assets and Investments
Wherever possible, all the securities and documents of title,
cash, negotiable instruments etc. representing the assets should be
inspected at the close of the last day of the accounting period.

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 Charges on Asset
It should be ascertained that no unauthorized charge has
been created against an asset and all the charges are duly registered
and disclosed.
Where shares or securities are lodged with a bank to secure
a loan or an overdraft, a certificate should be obtained from the
bank showing the nature of the charges, if any.

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Advantages of Verification of Assets and Liabilities:
 It avoids manipulation of accounts.
 It guards against improper use of assets.
 It ensures proper recording and valuation of assets.
 It exhibits true and fair view of the state of affairs of the
company.

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Differences between Verification and Valuation of Assets and
Liabilities:
 Meaning:
Verification means checking whether the assets shown in
the balance sheet are in the name of business, whether they exist or
not, whether there is any charge on it etc.
Valuation means determining the proper values of assets and
liabilities shown in the balance sheet.

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 Nature of Work:
Verification examines the assets & liabilities shown in
balance sheet.
Valuation examines the entries relating to the transactions
recorded in the account book.
Time:
Verification is made at the end of the financial year.
Valuation is done for the whole years transactions.

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 Purpose:
The purpose of verification is to check existence, ownership
and possession of assets.
The purpose of valuation is to determine the proper values
of assets as per generally accepted principles.

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Verification of Assets:
Goodwill:
Goodwill is considered as an intangible fixed asset. The
value that is shown in the Balance Sheet does not appear to be its
present value, because the present value of goodwill depends upon
a number of factors like financial position of the business, earning
capacity at present and its future trend etc. But in actual practice, it
is not valued at cost.

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Verification of Goodwill:
Goodwill is the excess of the price paid for a business as a
whole over the book value or the computed value or the agreed
value of all tangible assets purchased. It is not possible to be
verified physically; hence verification of goodwill means proper
checking of accounting entries passed for goodwill.

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Auditor’s Duty Regarding Verification:
 The goodwill as recorded in the books of account should be
properly examined and the same is to be verified with the
Balance Sheet.
 If goodwill is created on account of purchasing a running
business, the auditor should verify it with the contract made
between the client and the vendor.

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 Sometimes, management intends to capitalize the current
expenditure, which is usually high. The auditor should raise
objection to this practice.
 The auditor should ensure that as required by Accounting
Standard-10 for fixed assets, goodwill has been recorded in the
books only when some consideration in money or moneys has
been paid for.

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 Patent:
A patent is an official document, which secures to an
investor exclusive right to make, use and sell his invention.
 Verification of Patent:
Actual patent should be physically verified by the auditor
and it should be seen that it has been duly registered. In case of
joint registration of the patent with an individual, who might have
developed the patented article, it should be seen that a registered
assignment by the individual in favour of the company has been
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 Auditor’s Duty Regarding Verification:
 The auditor should check the Patent Register in order to verify that
it has been properly included therein.
 The auditor should also ensure that the legal life of the patent has
not yet been expired.
 The latest renewal certificate of the patent should also be verified
by the auditor.
 The patent may also be subject to litigation about its little. A
certificate from the solicitors of the company should be obtained to
ensure that it is free from encumbrances.
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Building:
Verification:
 The auditor should examine the title deed of buildings to see
whether the client holds the title on the Balance Sheet date.
 If the building has been mortgaged, the title deed will be in the
possession of the mortgagee from whom a certificate should be
obtained.
 He should see the appropriate lease deed, if the building is
leasehold, to ascertain the cost, amortization, etc.
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 He should also ensure that all conditions in the lease deed have
been fulfilled by the client.
 The auditor should see the relevant particulars of buildings have
been entered in the fixed assets register maintained by the client.

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Plant and Machinery:
Verification:
 The auditor should call for the plant register or detailed break up schedule of
plant and machinery.
 In the case of a company, the management is duly bound to physically verify
the plant and machinery and the auditor should ask for the related working
papers for his examination.
 The additions and disposals during the year should be verified by reference
to the purchase invoices
 The auditor should verify some of the important items of plant and
machinery on test check basis.
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Furniture and Fixtures:
Verification:
 The auditor should ascertain whether a register is maintained for furniture
and fixtures detailing the nature of the item, its acquisition cost, location,
code number etc.
 He should also verify whether the furniture and fixtures bear on them the
code numbers allotted.
 He should inquire whether physical verification of the furniture and fixtures
has been carried out by the management and if so, he should examine the
working papers.
 The auditor should verify physically some of the important items of furniture
and fixtures on test check basis.
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Quoted Investment:
 The auditor should physically inspect the investments. It should
be physically verified at the last date of the accounting year.
 The auditor should assure himself that the title of the
investments is in the name of the client only.
 The purchase and sale of investments should be verified with
reference to the broker’s contract note, bill of costs etc.

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 If the amount of purchases or sales of investments are
substantial, the auditor should check the price with reference to
stock exchange quotations.
 He should also confirm that the relevant provisions of the
CARO, 2003 have been duly complied with in this regard.

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Unquoted Investments:
Verification:
 The auditor should ascertain the power of the enterprise to make
investments by examining the Memorandum of Association in
case of investment by a company to ensure that the investments
are not ultra-vires the company.
 He should also ascertain that all the legal formalities relating to
purchase of investments have been duly complied with.

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● Where investments are in large numbers, the auditor should
obtain the schedule of securities certified by a senior officer of
the company.
● The auditor must verify the whole of the investment at one time.
Investments are of a negotiable character and their verification
at the same time removes the danger of their substitution for
others.

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Furniture and Fittings:
Verification:
 The auditor should ascertain whether a register is maintained for furniture
and fixtures detailing the nature of the item, its acquisition cost, location,
code number etc.
 He should also verify whether the furniture and fixtures bear on them the
code numbers allotted.
 He should inquire whether physical verification of the furniture and fixtures
has been carried out by the management.
 The auditor should verify physically some of the important items of furniture
and fixtures on test check basis.
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Bills Receivable:
Verification:
 The auditor should examine the Bills Receivable Book and prepare a
schedule of all those bills receivable that have not yet matured.
 When the bills are kept for collection in bank, then the auditor shouldobtain a
detailed certificate from the bank to ascertain the clear position about the
bills.
 For bills that are discounted or endorsed but remain outstanding at the time
of audit, bills should be maintained as a footnote of the Balance Sheet.
 The bills that have been dishonored before the due date of the Balance Sheet
should not be included in the Balance Sheet as ‘bills receivable in hand’.
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Cash in Hand:
Verification:
 The most common practice in verifying cash balance is to obtain a certificate
from the accountant about the actual cash balance in hand.
 The auditor should verify the cash in hand by actually counting it on the
close of the business on the date of the Balance Sheet.
 In certain cases, the client maintains an unduly large balance of cash in hand
consistently. In those cases, the auditor should make a surprise check to
ascertain whether the actual cash in hand agrees with the balances as shown
by the books.
 As far as cash in transit is concerned, the auditor should verify this balance
with the help of proper documentary evidences
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Cash in Hand:
Verification:
 The most common practice in verifying cash balance is to obtain a certificate
from the accountant about the actual cash balance in hand.
 The auditor should verify the cash in hand by actually counting it on the
close of the business on the date of the Balance Sheet.
 In certain cases, the client maintains an unduly large balance of cash in hand
consistently. In those cases, the auditor should make a surprise check to
ascertain whether the actual cash in hand agrees with the balances as shown
by the books.
 As far as cash in transit is concerned, the auditor should verify this balance
with the help of proper documentary evidences
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Depreciation:
Auditor’s Duty:
 The auditor has to see which method of depreciation is followed.
 The auditor will check that depreciation has been provided at the rates not
less than the rates specified in Schedule XIV to the Companies (Amendment)
Act.
 He will also see that the method of depreciation and the rate of depreciation,
which are not in accordance with Schedule XIV, have been duly disclosed.
 The auditor should ensure that the provision for depreciation on additions,
deletions etc. during the accounting year have been made on pro rata basis.

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 He will see that the amount of depreciation written off has been clearly
disclosed in the profit and loss account.
 He should see that the accounting policy of the company has clearly stated
the method of depreciation in use.
 The auditor should satisfy himself that adequate amount of depreciation has
been provided.
 He will see the same method of charging depreciation is being followed year
after year.

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Debentures:
Verification:
 The auditor should go through the Memorandum of Association and Articles
of Association of the company in order to determine the extent of borrowing
power of the company
 A prospectus must have been issued and filed with the Registrar of
Companies.
 Balances from the Register of Debenture holders will have to be extracted
and the total amount received from Debenture holders to be tallied with the
total of Debenture Account in the general ledger.

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 The auditor should also examine a copy of the debenture bond to ascertain
the terms and conditions on which the debentures have been issued, the
particulars of assets charged as security and the method of redemption.
 If the debentures are mortgaged debentures, the debentures trust deed should
be studied by the auditor

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Borrowings:
Verification:
 If the company grants any loan against the security of land and
buildings, the auditor should examine the Memorandum and Articles
of Association of the entity to see whether it is empowered to lend
money against land and property.
 If the borrower is a limited company, the auditor should also ascertain
that borrowing company has borrowed within its borrowing limits.
 If the land or property has been mortgaged the auditor should first
examine the Mortgage Deed

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 The auditor should also see that the mortgage is duly registered.
 Reconcile the borrowings listing to the general ledger and trial
balance.
 Perform testing on the movement of the borrowing is important for
the auditor to ensure the balance of the borrowing is tight to its
supporting document.

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Bills or Trade Payable:
Verification & Valuation Process:
 The auditor should get a statement of bills payable and compare it
with the Bills Payable Book and Bills Payable Account.
 For the bills, which have been met after the date of the Balance Sheet
but before the date of audit, he should examine the Cash Book and
Bank Pass Book.
 The bills payable already paid should be checked from the cash book
and the auditor should examine the returned bills payable.

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 He should also ensure that the bills which have been paid are not
recorded as outstanding.
 He should get confirmation in respect of amounts due on the bills
accepted by the client that are held by them.
 He should reconcile the total of the bills payable outstanding at the
end of the year with the balance in the Bills Payable Account.

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Advances to Suppliers:
Verification:
 Vouch whether the suppliers are the vendors or the genuine
suppliers. Obtain the list of suppliers of the entity if maintained
 Check whether the suppliers are related parties. Verify the
documents of the agreement or contract.
 Check whether the goods have actually been received after the
end of the period by tracing in the subsequent period.

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 Verify whether proper authority approval in sanctioning
advance payments to the suppliers was there.
 Verify the internal controls in respect of the advances to the
suppliers
 At year end, seek direct confirmation from the suppliers who
have these advances still outstanding.

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Contingent Liability:
A contingent liability is not an actual liability, but which
will become a liability on the happening of an event in future. It
may be converted into actual liability on an uncertain event in the
future.

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Audit Procedure with regard to Contingent Liability:
● Inspect the minutes book of the company to identify all contingent
liabilities existing at the end of the year,
● Scrutinize the lawyers’ bill to ascertain unreported contingent
liabilities,
● Examine correspondence with the bank in respect of bill discounted
but not yet matured,
● Examine bank letters to ascertain guarantees given on behalf of other
companies or individuals.

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● Scrutinize correspondence with suppliers, customers, lawyers etc. to
ascertain the existence of contingent liabilities,
● Check the investments in the shares made by the client to identify the
liabilities on partly paid up shares,
● Find out the arrears of preference dividend on cumulative preference
shares, and
● Obtain a certificate from the management that the known contingent
liabilities have been included in the accounts and they have been
properly disclosed.

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Subsequent Events:
A subsequent event is an event that occurs after a reporting
period, but before the financial statements for that period have been
issued or are available to be issued. Depending on the situation,
such events may or may not require disclosure in an organization's
financial statements.

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Auditor’s Responsibilities:
 Up to the date of the audit report
Until this point the auditor must perform procedures to identify
events that need to be either adjusted or disclosed in the financial
statements.
 Between the date of the audit report and publishing the accounts
During this period the auditor need not perform procedures but, if
they identify any adjustments or disclosures that need to be made in the
financial statements they must take appropriate action.

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The two types of subsequent events are noted below.
 Additional Information
An event provides additional information about conditions
in existence as of the balance sheet date, including estimates used
to prepare the financial statements for that period.
Ex: Lawsuit and Bad Debts.
 New Events
An event provides new information about conditions that
did not exist as of the balance sheet date.

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Examples of situations that do not trigger an adjustment:
 A business combination
 Changes in the value of assets due to changes in exchange rates
 Destruction of company assets
 Entering into a significant guarantee or commitment
 Sale of equity
 Settlement of a lawsuit where the events causing the lawsuit
arose after the balance sheet date

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Audit Procedures to test Subsequent Events:
1. Inquiries with Management:
 Whether there are any new commitments, borrowings, or
guarantees
 Whether there have been any:
 Sales or destruction of assets
 Issues of shares/debentures or changes in business
structure
 Developments involving risk areas, provisions, and
contingencies
 Major events
 Litigations or claims
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2. Other Procedures:
 Review management procedures for identifying subsequent
events to ensure that such events are identified.
 Read minutes of general board/committee meetings and enquire
about unusual items.
 Obtain evidence concerning any litigation or claims from the
company's solicitors
 Obtain written representation that all events occurring
subsequent to the period-end which need adjustment

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