valuation and verification of assets from an auditor’s point of view
It is an
important duty of an auditor to see that assets and liabilities are reasonably
valued. The accuracy of the Balance Sheet and Profit and Loss Account entirely
depends upon the correct valuation of assets and liabilities. Balance Sheet
will not disclose the true financial state of affairs if the assets are in
appropriately valued.
Though valuation
is done by the responsible officers of the concern, auditor must use his common
sense in finding out if the assets have been valued on the basis of some
scientific principles. An auditor cannot be taken to be an expert in valuation.
In his work, he can rely on the valuations put by the responsible officers of
the business or to the certificates of component persons such as valuers,
surveyors etc. He would do well to disclose the basis of valuation of assets in
the Balance Sheet. He is more concerned in checking the values of the assets to
see that they represents their real worth to the business as a going concern on
the date of Balance Sheet.
He must impress upon the business that assets should
be valued on some reasonable basis and scientific principles. According to London
Since the coming
into force of the new Company Ordinance, the auditor is required to see that
the Balance Sheet represents the financial state of affairs of the company truly
and fairly. Auditor should therefore, in no case permit under-valuation or
over-valuation of assets. He should not allow the creation of secret reserves,
final accounts prepared by the company’s accountants must not be certified by
him as correct unless they are fair to all the parties interested in the
affairs of the company. Auditor must be careful to see that one party has not
been given preference over the other. All the objects discussed above cannot be
achieved until the assets are shown in the books at their proper and real
values.
In spite of the
fact that auditor is not an expert valuer, he must be cautious and painstaking
in verifying the values of the assets at which they are shown in the books. All
the relevant facts and evidences may be taken into consideration in
ascertaining the fair value of the assets.
Verification
Verification of
the existence of an asset is very much different from the vouching of the
expenditure incurred in the purchase of an asset. Vouching of an entry in the
books goes to prove that the asset ought to exist. It is the duty of an auditor
to satisfy himself that the asset actually does exist.
Verification
entails the inspection of such evidence as well satisfy the auditor that such
assets are actually in the possession of his clients on the date of Balance
Sheet. False assets should not be created and real assets should not be
suppressed. The auditor must also guard against substitution of assets, an
auditor would not be able to detect misappropriations and may be held liable
for negligence in the performance of his duties as was decided in the case of
“The London Oil Storage Co. Vs. Sean Husluch & Co. ”
To sum sup, the
verification of assets involves the following points:
1) To compare
the ledge accounts with the Balance Sheet;
2) To verify the
physical existence of assets as on the date of Balance Sheet and to see that
these assets are acquired by proper authority and for business purposes;
3) To satisfy
that the assets are free from any charge or mortgage or encumberence and that
the business under audit is the real owner thereof and that they are under
proper custody;
4) To verify
that it is properly valued and correctly stated in the Balance Sheet, to
ascertain their relation to the corresponding items at the end of the previous
year and where necessary, earlier year;
5) The
suitability of the description used;
6) Adequate
disclosure of information.
Fixed Assets are
those of a permanent nature, by means of which are held for the purpose of
earning income, and not for the purpose of sale.
Current assets
are these in which the business deals, and which are acquired for the purpose
of sale and the subsequent stages of their conversion into cash.
Although, it is
not possible for an auditor to inspect each and very asset, e.g. all the items
of stock, yet he remains liable for all undetected errors and frauds. The fact
that certain assets of the business at the date of Balance Sheet are in the
hands of third parties will not in any way diminish the auditor’s
responsibility in relation there. However, he can rely upon the responsible
officers, because if this duty is imposed on him, it may take weeks and months
for him to actually inspect each and every asset. It was also held in the case
of Kingston Cotton Mills, that “it is no part of an auditor’s duty to take
stock. No one contends that it is. He must rely on other people for the details
of the stock-in-trade in hand.” But, by adopting different indirect methods of
checking the accuracy of stock sheets, he can verify this item and such other
items also. Auditor must exercise reasonable skill and care in accepting
certificates from third parties or the responsible officers of the business.
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