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Verification and Valuation of Assets – Part 1

Key Takeaways:

  • Understand the difference between Verification and Valuation in auditing.
  • Learn the procedures to verify major fixed assets: land & building, plant & machinery, and investments.
  • Grasp practical methods such as physical inspection, examination of title deeds, and bases of valuation for exam-focused preparation.
Verification and Valuation of Assets – Part 1
Verification and Valuation of Assets – Part 1
(Auditing)

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Every audit assignment demands more than just a review of numbers. It requires a careful examination of whether the assets shown in the accounts truly exist, belong to the business, and are valued accurately. Let's proceed methodically, focusing on the most commonly tested fixed assets, while also building your conceptual foundation.

Verification and Valuation: Meaning and Distinction

a. Verification

Verification is the process by which the auditor checks the existence, ownership, possession, and proper disclosure of assets as shown in the Balance Sheet. It answers questions like: Does this asset really exist? Is it owned by the business? Has it been disclosed as per accounting standards?

b. Valuation

Valuation refers to determining the correct value at which an asset should be shown in the financial statements. This involves assessing whether the value recorded reflects the fair or realizable value, based on principles like cost, market value, or another appropriate basis.

Aspect Verification Valuation
Purpose Establish existence, ownership, and disclosure Ascertain correct monetary value
Method Physical inspection, documents, certificates Accounting standards, market data, appraisals
Responsibility Auditor Management, reviewed by auditor

Verification of Fixed Assets

a. Land & Building

Auditors must verify both the existence and ownership of land and buildings. This typically involves:

  • Physical Inspection: Personally visiting the site to confirm existence and condition.
  • Title Deeds: Examining original sale deeds, title deeds, or lease agreements to confirm legal ownership. If properties are mortgaged, obtain confirmation from the lender.
  • Valuation Basis: Checking that land is shown at cost or revalued amount, and buildings are recorded after adjusting for depreciation. For revalued assets, auditors should review the basis and credentials of the valuer.
  • Disclosure: Ensuring that any encumbrance (like a mortgage) is properly disclosed in the financial statements.

b. Plant & Machinery

Verification of plant and machinery is crucial, as these assets often form a significant part of a firm's capital. The auditor should:

  • Physical Verification: Conduct or observe periodic stock-taking of machinery. If continuous, check records for updates and disposals.
  • Document Review: Scrutinize purchase invoices, import documents, and installation certificates. For leased assets, verify lease agreements.
  • Valuation Check: Ensure machinery is valued at cost less accumulated depreciation. For revalued machinery, examine the valuer's report and rationale.
  • Work-in-Progress: Confirm that partially installed machinery is classified correctly and not depreciated prematurely.

c. Investments

Investment verification covers both ownership and valuation, requiring careful documentation:

  • Physical Inspection: Check physical certificates for shares, debentures, and bonds. For dematerialized securities, obtain statements from depositories.
  • Ownership Confirmation: Review transfer deeds and confirm investments are registered in the company’s name.
  • Valuation: Quoted investments should be valued at cost or market value, whichever is lower, as per accounting standards. Unquoted investments may need independent valuation or reference to recent transactions.
  • Income Review: Cross-check dividends or interest received with investment records for completeness.

Physical Inspection Procedures

Physical inspection is at the heart of verification. For fixed assets, this means:

  • Visiting the location of the asset.
  • Checking the asset’s condition, serial numbers, and identification marks.
  • Verifying the asset with fixed asset registers or schedules maintained by the company.

For investments, physical inspection extends to counting certificates or verifying demat statements. The auditor should be alert to signs of impairment or obsolescence.

Title Deeds and Documentation

Original title deeds provide the ultimate proof of ownership. Whenever possible, auditors should:

  • Examine deeds kept in safe custody (e.g., banks or law firms).
  • Request certified copies if originals are not available.
  • Ensure that properties shown as owned are not, in fact, under dispute or subject to encumbrances not disclosed.

Valuation Basis: Cost, Market Value, and Beyond

Auditors should check whether assets are valued on an appropriate basis. Commonly used methods include:

  • Cost: Original purchase price plus incidental expenses, less depreciation (for most fixed assets).
  • Market Value: Used for investments and revalued assets. Requires reliable market quotations or professional valuation.
  • Net Realizable Value: Sometimes relevant for assets held for sale.

Auditor's role is to challenge management's assumptions and ensure consistency with accounting policies and standards.

If a company claims a large goodwill balance but hasn’t acquired any new businesses.
Should this be shown in the accounts?
No, auditors must ensure only purchased goodwill is recognized, and it must be tested for impairment annually.

Example

Suppose an auditor is asked to verify the company's investment in government bonds:

  1. Obtain the investment register and note down the details of government bonds held.
  2. Physically inspect the bond certificates or obtain a statement from the depository for demat holdings.
  3. Check that the bonds are registered in the company’s name and not pledged or encumbered, unless disclosed.
  4. Verify the cost of acquisition from purchase invoices or broker notes.
  5. Obtain market quotations as of the balance sheet date and ensure valuation is at cost or market value, whichever is lower.
  6. Cross-check the interest received with the bond terms and confirm with the bank statement.

By following these steps, the auditor ensures both verification and valuation have been properly addressed, providing assurance to stakeholders.



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