The aim of verification and valuation of assets and liabilities is to check the accuracy of assets and liabilities. And this job to check the accuracy of assets and liabilities is of Auditor. It checks either the value of assets and liabilities entered in the balance sheet is correct or not. If the auditor faces any technical problem then he can take help from a technical expert which will help him to solve that technical issue.
In the case of verification, the auditor checks the accuracy of assets and liabilities whereas in the valuation of assets and liabilities auditor find out the value of assets and liabilities. To understand verification and of assets and liabilities in we have to understand verification of assets and liabilities as well as valuation of assets and liabilities separately.
Verification of assets and liabilities
In the verification of assets and liabilities, we will discuss the verification of assets and verification of liabilities separately. At first, let’s discuss the verification of assets.
Verification of assets
Verification of assets means checking the right side of the balance sheet. This means when the auditor examines the right-hand side of the balance sheet then it is considered as verification of assets. Verification of assets is done to examine the total assets which the company has. Let’s make it more clearly with an example.
A company buys a machine of ₹ 50000 and now the rate of that machinery is ₹ 20000. So to examine, was the cost of that machinery ₹ 50000 or something else. For this verification of assets used. There are three objectives for the verification of assets. And those three verifications are as follows:-
1. Verification of the existence of assets
2. Valuation of assets
3. Authority of their existence
1. Verification of the existence of assets
Through this objective, it examines that how many assets were before and how many assets are there at present. This method helps companies to find out the profit and loss of the company if he compares their assets from before to after.
2. Valuable assets
This process examines how much money a company is. Because to make a better path for the company to grow it’s very important to their financial statements. And by using this objective it has become very easier to know the financial statements of the company.
3. Authority of their existence
Authority of existence shows that who came more assets for the company which help company to increase their shares in the market.
Verification of liabilities
Verification of liabilities implies an inquiry where the following things have been checked:-
• When verification of liabilities occur then the check that, is all the liabilities are recorded in the balance sheet or not. Because sometimes it occurs that some of the records haven’t been entered in the liabilities section of the balance sheet.
• As the liabilities should be related to business, so they check that is the liabilities recorded in the balance sheet is related to business or not. It is very important because if the liabilities will not be related to business and will enter in the liabilities section of the balance sheet then it will cause a big problem for the company.
• While doing verification of liabilities it is also checked that is that liabilities are fully authorised or not
• They check that in liabilities the value is correctly mentioned or not. Because the value won’t be correctly mentioned then it will cause loss of the company.
So these are the things that verify while examining or verifying liabilities in the balance sheet. Now there are some of the objects of the which are mentioned as below:-
Objects of verification
• Picture of true positions
It verifies that, is the picture of assets and liabilities which are shown in the balance sheet is correct or not. It means verifying the correct value of assets and liabilities.
• Correct valuation
The valuation of assets and liabilities is done on the accounting principles or not. This means it checks that the valuation of assets and liabilities is done on the principle of accounting or not.
• Not exceeding the actual
The values shown in the assets and liabilities shouldn’t be more than the actual. This means the assets and liabilities should not be more than the value of assets and liabilities which are actually in the count.
• Not less than the actual
The values shown in the assets and liabilities shouldn’t be less than the actual. This means the assets and liabilities should not be less than the value of assets and liabilities which are actually in the count.
• Existence and possession
It implies checking that the value of assets and liabilities entered in the balance sheet exist or not. And if the assets and liabilities are present then, are they in the name of the business or not. This means the aim is to check is the assets and liabilities exist or not.
• Ownership and title
To check the owner of assets and liabilities which are entered in the balance sheet. This means who is the owner of that assets and in whose name these assets are.
• Without fraud and irregularity
It means there should not have any fraud or irregularity in the assets. It checks that is there any fraud or irregularity present in assets or not.
• Arithmetical accuracy
There should not have any mathematical error in the assets recorded in the balance sheet. It implies checking the mathematical accuracy of the assets.
• Correct presentation of balance sheet
The balance sheet should be correctly represented in which both assets and liabilities have to verify and should have to be correctly arranged.
These are the objects of verification. Now we will discuss the principle of verification in which we will know on what basis verification has done.
Principle of verification
1. Verification is done as the existence of assets and liabilities.
2. To verify the ownership and title of the assets and liabilities.
3. To verify if any loan on the company. Means to mortgage or charge on the company.
4. For correct valuation of assets and liabilities
5. Other things
6. Presentation in the balance sheet
Valuation of assets and liabilities
Valuation means to find out the value of various assets and liabilities. And this value of assets and liabilities will find out by the auditor. The auditor must check its accuracy. The auditor checks the proper value of assets and liabilities are recorded or not. If the proper valuation of assets and liabilities do not occur then it will be either seen as overvalued or undervalued.
And if the auditor faces any technical problem while analysing the assets and liabilities then the auditor will take help from a technical expert, who will solve the problem and then the auditor will be able to evaluate the assets and liabilities.
The auditor must check that the value of assets and liabilities which have to appear in the balance sheet is correct or not. They also check that the balance sheet is prepared by following the accounting principles and conventions or not.
Method of valuation
1. Cost price
In the cost price method, the total expenses acquired by the assets become in usable condition. This means the total price of acquiring and expenses will be considered to make assets come in usable condition.
2. Book value
The book value method appears in the books of account which you have written after depreciation of accounts.
The value realises when the company goes to the sale of its assets. Means when the company wants to sale his assets then the approximate value which realises by the company has reliable amount.
4. Market value
Value of assets in the market. This means the value of the assets in the market which is at present has the market value of the assets.
5. Replacement value
The approximate value on which the company can replace their assets.
6. Conventional value
The value comes out after the depreciation of cost price and if some of the fluctuations come to arise then we ignore that and consider only that depreciated amount.
7. Scrap value
The value of the assets which are not in use. This means the assets which are not in use and the company wants to sell that asset at a low price. That value of assets is scrap value.
These are the method of valuation. Now we will talk about the basis on which valuation is done.
- Basis of valuation
The basis on which the auditor evaluate the assets are as follows:-
• Original cost.
• Expected working hours of the assets.
• Wear and hearing expenses.
• Scrap value.
• Chances of assets become obstacles.
So these are the brief introduction of verification and valuation of assets and liabilities where verification implies checking the accuracy of assets and liabilities whereas valuation finds out the value of various assets and liabilities.