Meaning and Objectives of Verification and Valuation

25/07/2020 2 By indiafreenotes

Concept and Meaning of Verification

Verification means proving the correctness. One of the main work’s of auditor is verification of assets and liabilities. Verification is the act of assuring the correctness of value of assets and liabilities, title and their existence in the organization. An auditor should be satisfied himself about the actual existence of assets and liabilities appearing in the balance sheet is correct. If balance sheet incorporates the incorrect assets, both profit and loss account and balance sheet do not present true and fair views.

Thus, verification means to confirm the truth or accuracy and to substantiate. It is a process by which the auditor satisfies himself not only about the actual existence, possession, ownership and the basis of valuation but also ensures that the assets are free from any charge. While verifying the assets, an auditor should consider the following points:

  • Ensuring the existence of assets.
  • Acquiring the assets for business.
  • Ensuring the proper valuation of assets.
  • Ensuring that the assets are free from any charge.

Objective of Verification

The objectives of verification are as follows:

  • To show the correct value of assets and liabilities.
  • To know whether the Balance Sheet exhibits a true and fair view of the state of affairs of the business.
  • To find out the ownership, possession and title of the assets appearing in the Balance Sheet.
  • To find out whether assets are in existence.
  • To detect frauds and errors, if any while recording assets in the books of the concern.
  • To find out whether there is an adequate internal control regarding acquisition, utilization and disposal of assets.
  • To verify the arithmetic accuracy of the accounts.
  • To ensure that the assets have been properly recorded.

Auditor’s Duty Regarding Verification

The auditor of a business is required to report in concrete terms that the Balance Sheet exhibits a true and fair view of the state of its affairs. In other words, he has to examine and ascertain the correctness of the money value of assets and liabilities appearing in the Balance Sheet and this examination is known as verification of assets and liabilities. Therefore, an auditor has to keep in mind the following points while verifying the assets:

  • Ensuring the existence of assets.
  • Acquiring the assets for business.
  • Legal ownership and possession of the assets.
  • Ensuring the proper valuation of assets.
  • Ensuring that the assets are free from any charge.

Concept and Meaning of Valuation

Valuation is the act of determining the value of assets and critical examination of these values on the basis of normally accepted accounting standard. Valuation of assets is to be made by the authorized officer and the duty of auditor is to see whether they have been properly valued or not. For ensuring the proper valuation, auditor should obtain the certificates of professionals, approved values and other competent persons. Auditor can rely upon the valuation of concerned officer but it must be clearly stated in the report because an auditor is not a technical person.

An auditor should consider the following points regarding the assets while making valuation off assets:

  • Original cost
  • Expected working life
  • Wear and tear
  • Scrap value

Objectives of Valuation

  • To assess the correct financial position of the concern.
  • To enquire about the mode of investment of the capital of the concern.
  • To assess the goodwill of the concern.
  • To evaluate the differences in the value of the asset as on the date of purchase and on the date of Balance Sheet.

Methods of Valuation

Valuation of various assets can be made by using different methods of valuation of fixed assets. Some of the major methods are as follows:

  1. Cost Price Method

In this method, valuation of assets is made on the basis of purchase price of the assets. This price refers to the price at which an asset is acquired plus expenses incurred in connection with the acquisition of an asset. It is a very simple method of valuing assets.

  1. Market Value Method

Valuation of assets can be made on the basis of market price of such assets. But if same nature of assets is not available in the market, it is very difficult to determine the value of such assets. So, there are two methods related to it. They are:

  • Replacement Value Method: It represents the value at which a given asset can be replaced. This method of valuation of assets can be done only in the case of replacement of the same asset.
  • Net Realizable Value: It refers to the price in which such asset can be sold in the market. But expenditure incurred at the sale of such asset should be deducted.
  1. Standard Cost Method

Some of the business organizations fix the standard cost on the basis of their past experience. On the basis of standard cost, they make valuation of assets and present in the Balance Sheet.

  1. Book Value

This is the value at which an asset appears in the books of accounts. It is usually the cost less depreciation written off so far.

  1. Going concern or Historical Value or Conventional Value or Token Value

It is equivalent to the cost less a reasonable amount of depreciation written off. No notice is taken of any fluctuation in the price of the assets. Reason for this is that these assets are acquired for use in the business and not for resale.

  1. Scrap Value

This method shows the value realized from sale of an asset as scrap. In other words, it refers to the value, which may be obtained from the assets if it is sold as scrap.

Auditor’s Duty as Regards Valuation

In a legal case against Kingston Cotton Mills Co: It was held that “although it is no part of an Auditor’s’ duty to value the assets and liabilities, yet he must exercise reasonable skill and care in scrutinizing the basis of valuation. He should test the accuracy of the values put by the officers of the business. In any case, the auditor cannot guarantee the accuracy of the valuation”.

It is not an auditor’s duty to determine the values of various assets. It has been judicially held that he is not a valuer or a technical man to estimate the value of an asset. But he is definitely concerned with values set against the assets. He has to certify that the profit and loss account shows true profit or loss for the year and Balance Sheet shows a true and fair view of the state of affairs of the company at the close of the year. Therefore he should exercise reasonable care and skill, analyse all the figures critically, inquire into the basis of valuation from the technical experts and satisfy himself that the different classes of assets have been valued in accordance with the generally accepted assumptions and accounting principles. If the market value of the assets are available i.e., in the case of share investment then he should verify the market value with the stock exchange quotations. If there is any change in the mode of the valuation of an asset, he should seek proper explanation for it. If he is satisfied with the method of valuation of the assets he is free from his liability.