Fixed Asset: Verification & Valuation
I. Tangible Asset
1. Freehold land and building:
Verification: The auditor should examine the title deeds to ensure that they are
in the name of the client. Any addition or sale during the year should be carefully
examined.
Valuation: Freehold land being a no depreciable asset is generally shown at cost
which includes the purchase price, broker’s commission, registration fees, legal charges
etc. Any payments made to Municipality Corporation or improvement trust as
developmental charges should be included in the cost. If market realizable value is taken
as basis for valuation of freehold land the same should be disclosed clearly in the
balance sheet
Valuation of buildings: Buildings should always be valued at cost less
depreciation at a reasonable rate. Actually, the market or realized value of the buildings
keeps on fluctuating. Therefore, it should be taken into account while valuing the
buildings.
2. Leasehold property:
Verification: The auditor should inspect the lease agreement to find out the
value and duration. The auditor should see that lease agreement is registered with the
registrar and certificate testing to the validity of the same.
Valuation: Leasehold land and buildings are to be valued at cost less
depreciation which should be sufficient writes it off completely during the period of
lease
3. Plant and machinery:
Verification: Auditor should commence the process of verification by obtaining
a schedule of plant and machinery certified by the responsible officer of the concern.
Valuation: For valuing the plant and machinery, the auditor should prepare a list
of each machine from the plant register and should get the list certified by the woks
manager. The auditor should see the plant and machinery account is shown in the
balance sheet at cost less depreciation after making proper adjustments regarding new
purchases of machinery and sale of older machinery during the year.
II. Intangible assets:
1. Goodwill:
Verification: 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 specially fixed, the goodwill is the amount 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
accounts only when some consideration in money or its equal has been paid for.
In case of partnership the auditor should verify the changes made in the goodwill
account from time to time on the basis of provisions made I the partnership deed.
Valuation: Goodwill should be valued at a cost less amounts written off.
2. Patents:
Verification: The Auditor should examine the patents with the help of certificate
which have granted such patent rights. The auditor should also ensure that the patents
are registered in the name of client
Valuation: patents must be valued at cost less depreciation. The patents should
be written off in a period of sixteen years after which the right automatically lapses
unless the term is extended.
3. Copyrights:
Verification: In verifying the copyrights, auditor should inspect the agreement
between the auditor and the publisher.
Valuation: Generally the value of the copyright is not stable because copyrights
lose their value by passage of time. In the balance sheet copyright must be shown a cost
less amounts written off from time to time.
4. Trademarks:
Verification: Trademarks can be verified by examining the assignment deed duly
endorsed by the office of the registrar of trademarks. In case they have been purchased
from others, the auditor should vouch the expenditures incurred in connection with
their acquisition e.g. registration fees, payments made to designers etc.
Valuation: The valuation method is the most suitable method valuation of
trademarks. it should be seen that trademarks are properly valued and shown in
balance sheet.
Current Asset :Verification and Valuation
1. Cash in hand:
Verification: The auditor should verify the cash in hand by actually counting it
on the date of the balance sheet.
2. Cash at Bank:
Verification: The auditor should verify cash at bank by comparing the balance
shown in cash book and pass book. In verifying the bank balance the auditor should also
prepare a bank reconciliation statement to ascertain the correct position.
3. Stock in trade:
Verification: It is practically impossible for auditor to physically verify each item
of the stock in hand because of various reasons i.e. limited time and the lack of technical
knowledge. Therefore the auditor has to rely upon test checks to ascertain the accuracy
of stock in trade
Valuation: The stock in trade being a floating asset should be valued at cost
price or market price whichever is less.
The cost price can be calculated from any of the following methods
a. Unit cost method
b. Average cost method
c. First in first out method (FIFO)
d. Last in first out method (LIFO)
e. Highest In first out (HIFO)
f. Base stock method
g. Adjusted selling price method
h. Standard cost method.
4. Investments:
Verification: The auditor should verify the details of the schedule of
investment by applying tests e.g. financial journals and newspapers should be consulted
for checking the market rates. The securities themselves may be consulted or the
broker’s notes may be examined for checking the cost etc.
The auditor should verify the amount of interest or dividends ass have already
have been declared before the date of the balance sheet, should be taken into account
as outstanding ones.
Valuation: If investments are to be held as a fixed asset for the purpose of
earning interest/dividend; these are to be valued at cost which includes brokerage and
stamp duty paid in regard there to.
But if the investments are held as current assets, these assets should be valued at cost or market price whichever is less. The auditor may come across the situations where the market Value is much below the cost of acquisition of investments. Ordinarily he should ignore a temporary fall in the market value, but where the fall in value seems to be of a permanent nature, he should see that adequate depreciation is provided by passing the required entries.
Other related items :
Verification & Valuation : Concept and Differences
Vouching : Meaning and objective
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