It is the duty of the auditor not only to verify the physical existence and ownership of the asset but also its valuation as shown in the Balance Sheet. He should not only check the arithmetical accuracy of the assets appearing in the Balance Sheet but should also make inquiries through information and explanation to know the correct state of affairs. The auditor has to be very careful and cautious while examining the valuation of various assets especially the current assets such as inventory, bills receivable, accounts receivable etc. As far as fixed assets are concerned, the same are valued on the basis of their historical costs and less proper amount of depreciation.
An auditor may rely on the directors of the company or on the certificates of other professionals in respect of valuation of the assets, provided he uses reasonable care and skill. In matters relating to valuation of assets the auditor must adhere to the generally accepted principles of valuation, commercial practices and accounting standards.
The auditor should ensure that adequate depreciation has been charged on assets before determining the current value. The auditor should state the basis of valuation of assets in the Balance Sheet as certified by the directors or engineers, architect etc. as the case may be.
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Auditor’s duty with regard to:
1.Fixed Assets:
a. Freehold land and building:
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.
b. Leasehold property:
The auditor should inspect the lease agreement to find out the value and duration. The auditor should see that the lease agreement is registered with the registrar and certificate testing to the validity of the same.
c. Plant and machinery:
The Auditor should commence the process of verification by obtaining a schedule of plant and machinery certified by the responsible officer of the concern.
2.Stock in trade:
It is practically impossible for an 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.
3.Investments:
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 as have already been declared before the date of the balance sheet and should be taken into account as outstanding ones.
4.Capital:
In the case of the firm, the auditor should verify the liability on account of the capital with the help of the partnership deed; passbook and cash book.
In case a company auditor should examine the memorandum of association to verify the information as to the maximum capital the company is authorized to raise. He should also ascertain the amount of called up in respect of each class of shares and also ascertain how many shares of each class
are allotted as fully paid. Auditors should also specify the sources from which the bonus shares are issued i.e. capitalization of profits are reserves for share premium accounts. He should also ensure that capital profit, if any on the issue of forfeited shares, has been transported to capital reserve.
5.Reserves and Funds:
The auditor should examine and verify that whether the decision to create reserve or fund is dictated by the needs and circumstances of the business and relevant legal provisions and check the relevant entries in books of accounts and check the entries passed for the purpose in the profit and loss appropriation account.
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