Which of the following statements is correct valuation is a part of verification?

Verification means "proving the truth" or "confirmation". Verification is an auditing process in which auditor satisfy himself with the actual existence of assets and liabilities appearing in the Statement of Financial position.[1] Verification is usually conducted through examination of existence, ownership, title, possession, proper valuation and presence of any charge of lien over assets.

Thus, verification includes verifying:[2]

  1. The existence of the assets and liabilities.
  2. Legal ownership and possession of the assets
  3. Correct valuation, and
  4. Ascertaining that the asset is free from any charge

Verification in an audit process can be done offsite or onsite. Offsite verification[3] means verification by checking documents, official records, photos and by questioning staff responsible or otherwise trusted to be a reliable source for the facility in verification. Onsite verification[4] means the verifying party is physically visiting the facility, getting introduced into due facts about it on the site where the facility is located and operated. The process may be regulated by law in certain countries.

Objectives[edit]

Objectives of Verification are:[2]

  1. To show correct valuation of assets and liabilities.
  2. To know whether the balance sheet exhibits a true and fair view of the state of affairs of the business
  3. To find out the ownership and title of the assets
  4. To find out whether assets were in existence
  5. To detect frauds and errors, if any
  6. To find out whether there is an adequate internal control regarding acquisition, utilization and disposal of assets.
  7. To verify the arithmetic accuracy of the accounts
  8. To ensure that the assets have been recorded properly
  9. To know whether the assets are mentioned above is used in the company

References[edit]

  1. ^ http://accountlearning.blogspot.com/2012/02/concept-of-verification-and-valuation.html Definition of Verification
  2. ^ a b Tourism, Bcom. "VERIFICATION AND VALUATION". Academia.edu.
  3. ^ https://apparelcoalition.zendesk.com/hc/en-us/articles/360002369512-7-Protocol-for-Offsite-Verification-.
  4. ^ https://apparelcoalition.zendesk.com/hc/en-us/articles/360002389151-6-Protocol-for-Onsite-Verification.


Verification means the inspection of assets appearing in financial statements, whether the assets are according to legislation or not. Verification of assets and liabilities are done to confirm the following −

  • Existence
  • Ownership
  • Proper valuation
  • Possession
  • Freedom from encumbrances
  • Proper recording

Objectives of Verification

Following are the objectives of Verification −

  • Confirmation about the existence of assets through physical verification.

  • Legal and official documents relating to assets are checked to confirm the ownership of assets.

  • It is confirmed that assets are free from any charge of lien.

  • Proof regarding proper valuation of assets.

  • To confirm that assets are properly accounted for in the books of accounts.

Vouching and Verification

Both are considered to be same thing but there are lots of difference between vouching and verification.

Vouching relates to confirmation of the correctness and authenticity of accounting entries as appeared in the books of accounts whereas verification confirms the existence, ownership and valuation of assets as appears in the balance sheet. The Auditor’s duty is not only vouching the entries appearing in the books because vouching cannot prove the existence of the related asset or liabilities at the balance sheet date.

Verification of Liabilities

Following are the objectives of verification of liabilities −

  • Creditors reflect a true position as to liabilities of the business.

  • All liabilities are disclosed in the balance sheet whether recorded in the books or not.

  • Value of liabilities is according to the generally accepted accounting principles.

  • Liabilities are properly classified and disclosed in the balance sheet.

Confirmation and Verification

Let us now understand what confirmation and verification is.

Confirmation

Auditor requires confirmation from third party and management about any fact or figure. Few of the examples in which the Auditor requires confirmations are as follows −

  • Confirmation from debtors about balances.

  • Confirmation from creditors about balances.

  • Confirmation from banks about bank balances, fixed deposits, interest accrued, overdraft or cash credit limit balance, etc.

  • Confirmation from financial institutions about loan and interests.

  • Confirmation from management about contingent liabilities, etc.

Verification

Verification means inspection of assets by the Auditor and it includes identification, weighing and counting of assets. Following items require physical verification −

  • Land and Building
  • Plant and Machinery
  • Stock-in-hand
  • Stores and consumables
  • Investments
  • Securities
  • Cash-in-hand
  • Bills receivable

Thus, confirmation and verification are altogether different processes of audit and both are equally important too.

Valuation of Assets and Liabilities

Valuation means estimation of various assets and liabilities. It is the duty of Auditor to confirm that assets and liabilities are appearing in the balance sheet exhibiting their proper and correct value. In the absence of proper valuation of assets and liabilities, they will exhibit either overvalued or under-valued.

It is therefore required for an Auditor to exercise reasonable care and skill to analyze the basis of valuation from technical experts and satisfy himself that assets shown in Balance-sheet are properly valued accordance with the generally accepted conventions and accounting principles.

Components of Valuation

Methods of valuation of assets are as hereunder −

  • Cost Price − This is the cost price paid at the time of acquisition of assets plus the freight charges, octroi charges, and commissioning and installation charges, etc. to bring that asset in usable condition.

  • Book Value − This is the value as appearing in the books of accounts; the cost price less depreciation.

  • Realizable Value − A Value which can be realized from the sale of assets.

  • Market Value − A value which the asset can fetch at the time of sale.

  • Replacement Value − A value on which an asset can be replaced.

  • Conventional Value − It means the cost price less depreciation written off ignoring any kind of fluctuation in the price.

  • Scrap Value − If the asset is not in working condition and sold as scrap, then the sale value of asset is scrap value.

Basis of Valuation

Auditor should ensure that the basis of valuation is correct and reliable. He should keep in mind the process of valuation which is as follows −

  • Original cost
  • Expected working hours of the assets
  • Wear and tear expenses
  • Scrap value
  • Chances of asset become obsolete

Fixed asset is valued at cost price less depreciation and current assets should be valued at cost or market price whichever is less.

Vouching, Verification and Valuation

In vouching, accounting entries are checked with the bona-fide vouchers.

  • Verification proves the existence, ownership and title of assets.

  • Valuation certifies the correct value of asset.

  • Vouching is done after original entry in the books of accounts.

  • Verification and valuation are done at the end of the financial year.

  • Vouching is done by Senior Auditor and Audit Clerk.

  • Verification and valuation are done by the Auditor himself.

  • Bonafide vouchers are sufficient evidence for vouching

  • For Valuation Auditor has to depend upon certification from owner/partner/director.

  • Verification is done by physical verification, title deeds and receipt of payment, etc.

We will now discuss the verification and valuation of Copyright −

Copyright

Copyright provides legal protection and legal rights to an author by which the publication of his work by another is prohibited. Copyright remains with the author for lifetime and even 50 years after his death.

  • The Auditor should examine the agreement between the author and the publisher.

  • If there are numbers of copyright with the same publisher. Auditor should ask for the schedule of copyrights.

Copyrights lose their value over a passage of time; hence the value of copyright is not stable. In case where the sale of publication is very low or nil, value of copyright should be written off.

Value of copyright in the Balance-sheet will be shown as cost less the value written off.

Verification and Valuation of Fixed Assets

We will discuss the verification and the valuation of different fixed assets −

Verification of Freehold Land and Building

  • Auditor should examine the title deed of the land and building.

  • Land and building shown in the books should be according to the title deed.

  • Profit or loss on sale of it should be duly adjusted in the account.

  • Any addition to it should be carefully examined by the Auditor.

Verification of Mortgage Property

  • The Auditor should confirm that there should be no second or third mortgage on it.

  • The Auditor should obtain certificate from mortgagee that title deed is in his possession.

  • The Auditor cannot be held responsible if there is any defect of title. The Auditor can only verify that title deed apparently in order and in the name of client.

  • If Auditor feels necessary he can obtain certificate from legal advisor about the validity of title deed of the client.

Valuation of Building

  • Building should always be valued at cost less depreciation.

  • Although the market value of building may be much higher than the cost, still depreciation on building should be provided.

  • Depreciation will be provided even if building is not in use.

  • Market or releasable value should not be taken into account because both are fluctuating.

Verification of Freehold Land

  • Freehold land is a non-depreciable asset, hence it will be shown at cost.

  • Cost includes legal charges, registration fees, purchase price and broker commission, etc.

  • Payment made to improvement trust or Municipal Corporation for water, sewerage, road, development charges, etc. it will also be included in the cost of the freehold land.

  • If the basis of valuation of it is market value or realizable value, it should be clearly mentioned in the balance sheet.

Verification of Building under Construction

  • Auditor should verify the architect certificate and contractor receipt for the amount paid.

  • Auditor should obtain a certificate from a responsible officer to that effect, if the staff of client is also engaged in its construction.

Verification of Leasehold Property

There should be separate accounting for freehold and leasehold property. Leasehold property is acquired for fix duration on lease. The Auditor should consider the following −

  • Inspection of lease agreement for value and duration.

  • Lease agreement should be registered with the registrar.

  • Terms and condition of the lease should be properly complied for.

  • The Auditor should examine the last receipt of rent to ensure the lease agreement is in continuation without any break due to nonpayment of rent.

Verification and Valuation of Current Assets

We will now discuss the verification and valuation of a few important current assets, cash and bank balance and sundry debtors.

Cash-in-hand

Cash-in-hand is verified by actual counting of cash. Cash-in-hand should be verified at the close of the business or on the date of the balance sheet. Counting of cash must be done in the presence of cashier. If physically verification of cash is not feasible for an Auditor due to branch located abroad or in remote area, the Auditor should ask the cashier to deposit all his Cash-in-hand in bank account on the last date.

It is the primary duty of an Auditor to verify the cash-in-hand and in case of non verification, the Auditor will be held responsible for breach of his duty. If there is heavy cash balance in hand at any time, the Auditor should immediately inform the management beforehand.

If the cashier is made accountable for payment to employees or others, the Auditor should carefully verify the same.

Cash at Bank

The Auditor needs to consider the following points for verification of cash at bank −

  • The Auditor should prepare a bank reconciliation of account as on date. With the help of it, the Auditor will clearly come to know the status about the cheque issued but not yet presented in the bank and cheques deposited in the bank but not yet cleared. There are many kinds of frauds which are detectable through preparation of bank reconciliation of account.

  • The Auditor should obtain different certificates from banks for different types of accounts like current account, fixed deposit account, savings account, overdraft account or cash credit account, etc.

  • The Auditor should obtain a letter of confirmation of bank balances directly from banks.

  • The Auditor should compare the bank balance as per the bank book and the pass book.

  • If payments are deposited in foreign banks under exchange control regulation it should be verified by the Auditor.

Sundry Debtors

The Auditor is concerned with obtaining sufficient audit evidence to corroborate the management’s assertion regarding the following −

  • All amounts are recorded in respect of outstanding debtors as at date of Balance sheet.

  • Valuation of debtors is appropriate and properly applied.

  • That all the debtors are disclosed, classified and described in accordance with recognize accounting policies and practices.

The verification process of the debtors involves the following −

Examination of Records

  • Auditor should satisfy himself about the validity, accuracy and recoverability of debtors’ balance.

  • Excessive discount allowed or bad debts written off should be verified.

Direct Confirmation Procedure

  • Direct communication with debtors is the best way to ascertain whether the balances are accurate, genuine and undisputed.

  • Debtors from whom confirmation of balances is required, the method of requesting confirmation is to be determined by the Auditor.

  • Confirmation procedure may be carried out within a reasonable period from the end of the year.

  • Replies received from debtors should be carefully gone through and in case, where balances do not agree, client should be asked to investigate.

  • The Auditor must pay special attention to those balances for which confirmation is not received. They might be fictitious or made to conceal a fraud.

Steps for Verification

  • Book debts can be verified by the books of accounts and those should be supported by sale documents.

  • Book balances should be sent to debtors directly for confirmation. It will establish the existence of book debts.

  • Ownership of book debts can be verified with the sales documents and the sales ledger.

  • Debtors should enquire about any type of dispute with customers about discount, claim etc.

Steps for Valuation

  • Debtor’s ledger should be supported by sales ledger.

  • Auditor should obtain list of book debts, bad debts written off and for provision for doubtful debts.

  • Sundry debtors should be valued at realizable value.

  • Confirmation of balances shows that valuation of debtors is correct.

Verification and Valuation of Fictitious Assets

We will now discuss the verification and valuation of the following fictitious assets −

Preliminary Expenses

Preliminary expenses are incurred at the time of formation and commencement of company. These expenses are of capital nature and include stamp duties, registration fees, cost of printing, legal costs, etc. These expenses are shown in the balance sheet. These expenses are written off during a span of time of 3 to 10 years. The Auditor should verify that un-written amount is shown in the balance sheet.

Discount on Issue of Shares/Debentures

The Auditor should see that the discount on issue of shares/debenture should be written off as early as possible and the balance amount should be shown in the balance sheet.

Verification and Valuation of Liabilities

Let us now understand the verification and valuation of liabilities −

Trade Creditors

Auditor should take the following important steps for the verification and valuation of Trade Creditors −

  • Auditor should collect schedule of creditors and that should tally with ledger balances.

  • Purchase ledger should be checked and verified with purchase register, purchase invoices and debit notes etc.

  • Auditor should verify the discount received or receivable from creditors.

  • Auditor should minutely check the purchase of first month and last month of the financial year to avoid any possibility of booking purchases of current year to next year or last year purchase to current financial year.

  • Auditor should pay special attention on any unpaid amount stands in ledger of creditor since long. It might be possible that amount has misappropriated by the any official and balance stands as it is in books of accounts.

  • Confirmation of balances should be done directly by the Auditor and if there is any kind of discrepancy that might be sorted out.

  • Auditor should carefully study the hire purchase agreement to verify the purchases made on the basis of Hire-Purchase.

Loans

The Auditor should verify the following important points for verification and valuation of Loans −

  • The Auditor should verify the amount of loan, type of loan, rate of interest and repayment terms, etc.

  • He should collect and examine the agreement and certificate from bank in case loan is granted by any Bank or financial institutions.

  • He should obtain balance confirmation from party from whom loan is accepted by the organization other than bank.

  • Interest calculation should be duly checked by the Auditor according to agreement.

  • Amount of interest due but not paid during the current financial year should be duly accounted for in books of accounts and should be shown as current liabilities.

  • In case of company, the Auditor examines the borrowing power, register of charges and created charge should be registered with the Registrar of Companies.

Capital

Capital of a partnership firm can be verified through partnership deed, Bank book, cash book, etc. Capital of a company can be verified through following −

First Audit

  • In case of first audit, Memorandum of Association and Article of Association should be examined to know the maximum authorized capital.

  • To verify the classes, number of shares issued, amount due on calls, amount received and pending amount of calls, the Auditor should examine the minute book, cash book and bank book.

  • Examining of vendor agreement if shares are allotted to vendors.

Subsequent Audit

The Auditor should consider the following points for subsequent audits −

  • Any addition in capital by fresh issue should be according to Sections 61, 64 and 66 of the Companies Act-1956.

  • Authorized capital to be shown separately in the balance sheet.

  • Issued and subscribed capital should be shown separately according to each class of shares.

  • Shares allotted of each class as bonus shares along with source of issue.

  • Amount of unpaid calls from Directors and others.

  • Capital account should be shown as Equity Capital, if only one class of share is issued.

  • Ascertain the amount called up in respect of each class of shares.

  • The number of shares being allotted without payment being received in pursuant to contract.

  • Date of redemption should be clearly shown with the earliest date of redemption, where company has issued redeemable preference shares.

  • If any amount received earlier against forfeited shares that should be shown separately after adding it to share capital.

  • Capital profit on issue of forfeited shares should be transferred to capital reserve account.

Which of the following is correct valuation is a part of verification?

Verification proves the existence, ownership and title of assets. Valuation certifies the correct value of asset. Vouching is done after original entry in the books of accounts. Verification and valuation are done at the end of the financial year.

Is valuation a part of verification?

Valuation is done for the whole years transactions . 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.

Is valuation part of Auditors duty?

Valuation is no part of auditor's duty Was this answer helpful?

Is valuation and verification same?

Verification deals with the examination of the ownership rights, their existence and possession together with valuation. Conversely, Valuation is all about ascertainment of the actual worth of the assets and liabilities of an enterprise in monetary terms, which the enterprise depicts in the Balance Sheet.