verification and valuation of assets & liabilities

Q.1 What do you understand by verification and valuation of assets & liabilities?
Ans Verification and Valuation of Assets & Liabilities
In the process of certifying that balance sheet shows true and fair view of financial position ,auditor has to verify all items appearing in the balance sheet .The correctness of P&L & B/S greatly depends upon correctness of assets and liabilities appearing in B/S This process of checking of assets and liabilities is known as verification.
According to spicier & Pegler “The verification of assets implies an enquiry in to the value, ownership & title, existence & possession and presence of any charge on the asset. Hence the process of verification includes –the following:-
1. Reconciling balance of asset/liability shown in B/S with relevant books.
2. See physical existence of asset on the date of B/S
3. Assets are owned by the organization and are in its possession.
4. Assets have been acquired for business.
5. Assets are free from any charge other than which has been shown in B/S.
6. They have been shown on proper value in B/S
While verifying liabilities auditor has to satisfy himself that
(i) All liabilities have been recorded in the balance sheet
(ii) They are related to the business
(iii) They are fully authorized &
(iv) They have been correctly valued
Which verifying assets & liabilities, auditor has to keep in mind following precautions.
(i) Fraudulent pledging of shares & securities.
(ii) Substitution of assets.
(iii) Un due inflation in value or creating fictitious assets in B/S.Valuation: Valuation is an essential part of verification which means enquiry in to the true and faire value of asset shown in the B/S. For this purpose, different types of assets are valued on different prices. Brief details of different prices are given below:-
(i) Cost price: - Price at which purchased. However in case of fixed assets, all direct expanses on these assets are included in cost price.
(ii) Market price :- Price prevalent in market
(iii) Book value :- Value shown in books
(iv) Realizable value-:- value which can be realized on selling the asset.
(v) Replacement value: - Amount involved in replacing as asset.
(vi) Going concern value:- Also known as use value which means original cost less depreciation.



Q.2 What is the legal position of an auditor regarding verification and valuation of assets? Support your answer with leading case laws in this regard.
Ans: Auditor’s position about valuation of assets
1. Auditor is not valuer – valuation is the job of management.
2. Auditor has to enquire about fairness of valuation which is primarily done by the management. However he has to see available evidence, can seek advice of specialist, see that valuation has been done according to applicable rules/norms & certificate from officers.
3. Any Suspicion about valuation need to be mentioned in the audit report.
Keeping in view above guidelines auditor should move to verification & valuation of different assets such as investment in shares &securities, debtors, fixed assets, closing stock which may consists of raw material, work in progress and finished products.
Rules laid down in leading cases as regards verification and valuation of assets & liabilities by auditor.
Name of the case :- Kingston cotton Mills-1896
Facts of the case :- This mill was indulging in fraud for several years during 1890 to 1893. In the head of closing stock in B/S, it was mentioned that “Closing stock as per manager’s certificate”. Auditor did not examine the correctness of the stock. Due to overvaluation of stock, fictitious profit was created and as a result dividend was also distributed on the inflated profit .A case was filed against the auditor for non performing the duty with care and caution and auditor should indemnity the company for improper disbursement of dividend .
Decision/judgment - It is not the duty of auditor to count the stock. In this case he relied on the certificate of manager who is a trusted and tried servant


of the company. Auditor need to be care full if there is a suspicion. However, auditor is expected to work with reasonable skill and care.
Rules for auditor: - Without any reason for suspicion auditor cannot be made liable for not tracing out ingenious and carefully laid schemes of fraud perpetrates by a tried servant of the company.
Name of case: - Irish Woolen Co. 1900
Facts of the case: - Goods purchased on credit were includes in stock while entry of invoices were not made. As a result stock was inflated and liabilities were suppressed. Adequate provision for bad debts was also not made. Due to this profit was inflated and dividend was paid out of capital for which auditor was accused for negligence.
Judgment: - For under valuation of liabilities, auditor was held liable as it could have been detected in the process of getting confirmation from creditors . For overvaluation /inflation of stock, auditor is not liable as auditor is not expected to take stock.
-Auditor cannot be held liable for not providing adequate provision for bad debts.
Rules for Auditor :-
1- It is not the duty of auditor to take stock
2- If the auditor is incapable to discover concealment of invoices, he is guilty of negligence.
3- Auditor does not insure himself against errors and frauds which mean that he has to try his level best to detect errors and frauds during audit.
Name of Case: - Westminster Road construction & Engineering co.1932
Facts of the Case: - liquidator of the company filed a suit against directors and auditor for recovering of dividend paid as dividend was paid out of fictitiou profit as a result of overvaluation of stock and undervaluation/suppressing liabilities
Judgment: Auditor is guilty of misfeasance if he fails to detect omission in liabilities. He was also held guilty for not detecting overvaluation of stock (work in progress)


of the company. Auditor need to be care full if there is a suspicion. However, auditor is expected to work with reasonable skill and care.
Rules for auditor: - Without any reason for suspicion auditor cannot be made liable for not tracing out ingenious and carefully laid schemes of fraud perpetrates by a tried servant of the company.
Name of case: - Irish Woolen Co. 1900
Facts of the case: - Goods purchased on credit were includes in stock while entry of invoices were not made. As a result stock was inflated and liabilities were suppressed. Adequate provision for bad debts was also not made. Due to this profit was inflated and dividend was paid out of capital for which auditor was accused for negligence.
Judgment: - For under valuation of liabilities, auditor was held liable as it could have been detected in the process of getting confirmation from creditors . For overvaluation /inflation of stock, auditor is not liable as auditor is not expected to take stock.
-Auditor cannot be held liable for not providing adequate provision for bad debts.
Rules for Auditor :-
1- It is not the duty of auditor to take stock
2- If the auditor is incapable to discover concealment of invoices, he is guilty of negligence.
3- Auditor does not insure himself against errors and frauds which mean that he has to try his level best to detect errors and frauds during audit.
Name of Case: - Westminster Road construction & Engineering co.1932
Facts of the Case: - liquidator of the company filed a suit against directors and auditor for recovering of dividend paid as dividend was paid out of fictitiou profit as a result of overvaluation of stock and undervaluation/suppressing liabilities
Judgment: Auditor is guilty of misfeasance if he fails to detect omission in liabilities. He was also held guilty for not detecting overvaluation of stock (work in progress)
26
Rules for Auditor: - Auditor has to ensure that all liabilities have been included in the B/S and with the help of relevant vouchers, he has to check/ensure that work-in –progress has not be overvalued.
Name of the case: -Commission of Income Tax V/S G.M.Dandekar-1952
Facts of the case :-Sh. G.M.Dandekar C.A. audited the accounts of A. Mohd. & Co. and besides audit, also filled income tax return or behalf of his customer. A Mohd.& Co. used to maintain two sets of accounts one for regular and other for black money transaction. Black money sale was used to be recorded in dispatch books which were not shown to the auditor. Income tax commission lodged a complaint against G.M. Dhandekar holding him guilty of gross negligence and asked for strucking off his name form the membership of Institute of Charted Accountants India.
The discipline committed of the ICAI found Mr.Dandekar quility.
Judgment of Madras High court
This matter was heard by Madras High Court under section-9 of ICA 1 schedule and held that G.M.Dandikar was not guilty of professional misconduct and he cannot be disqualified from the membership of ICAI.
Rules :-Auditor is not liable to third party
C.A in this case represented as a lawyer in civil case.

On Verification and Valuation of Assets & Liabilities

A company of which you are working as a statutory auditor has borrowed Rs. 1 crore from Punjab National Bank. Interest payable at the yearend i.e. 31.03.12 is Rs.25 lakhs. Bank has also given notice that on the overdue loan, penal interest of Rs. 10 lakh would also be payable by the company. This company has made on application to the Punjab National Bank for rescheduling the loan & waiver of part of interest. This application is still pending with the bank & in the hope of interest waiver, provision for payable interest has not been provided by the company.You are at the stage of finalizing audit report and position regarding this rescheduling and interest waiver is still in suspense. How you would deal this issue and what comments you would make in audit report in this regard?