Verification and valuation of assets and liabilities

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1. Topic: Verification and Valuation Of Assets & Liabilities Presentation By Syed Atta Hussain Shah (2K14-Com-26) and Sanjay Kumar (2K14-Com-93) Under the Supervision of Madam, Najia Shaikh

2. Objectives Introduction Verification and Valuation Difference between Verification and Valuation Relationship between Verification and Valuation Classification of Assets Window Dressing Verification and Valuation of Assets

3. Introduction One of most important duties of an Auditor is audit of accounts of a concern, to verify the assets & liabilities appearing in the balance sheet of business concern.

4. Verification Verification of Assets is a enquiry into title (ownership), existence, possession, Classification and verify that assets are free from charge or not.

5. Advantages Of Verification

6. Valuation Meaning determine the current worth of something. Determining the value of the assets shown in the Balance Sheet on the basis of generally accepted accounting principles. If valuation of assets is not correct, than the financial statements ( B.S & P&L a/c ) can not be correct. Valuation is primary duty of Company officials.

7. Difference Between Verification & Valuation Verification is a final work. Verification is the work of Auditor. Verification is made at the end of the year. Valuation is the initial work and it need to verification. Valuation is the work of concerned authority or board (Company) Valuation is made throughout the year

8. Relationship Between Verification and Valuation Valuation of assets is the part of verification, without proper valuation of assets, verification is not possible. Verification includes apart from (except) valuation “the examination of ownership right, the existence of the assets in business & its freeness from any mortgage”. Verification and valuation of assets are almost interdependent. Verification and valuation of assets is a combined process by which the position of different assets appearing in the balance sheet is examined.

9. Window Dressing The fraud through manipulation of accounts is known as window dressing because accounts are manipulated to show a wrong picture of the profit or loss of the business and its financial affairs. It is action taken to improve the appearance of a company’s financial statements . It may also be used when a company want to impress a lender for qualify of a loan. Example: Income of previous year may be recorded in the current year. Showing short term liabilities as long term liabilities.

10. Classification of Assets Preliminary Expenses Discount on issue of Shares and Debentures Cash Sundry Debtors Prepaid Expenses Stock in trade Land & Building Plant & Machinery Fixtures & Furniture Goodwill Copyright Patent & Trademark

11. Fictitious Assets No physically existence No realizable value but represents actual cash expenditure. The purpose of creating a fictitious assets is to account for expenses those incurred at the time of commencement. i.e. Preliminary Expenses, discount on issue of shares. Fictitious assets are written off as soon as possible from earnings of the company.

12. Intangible Assets Intangible assets are those assets which have no physical existence. Can be realize They does not shows in the balance sheet until purchased Example: Goodwill Patent rights Copyrights Trademarks

13. Intangible Assets Fictitious Assets The intangible assets can be realize. The intangible assets also don’t posses physical existence like intangible asset. Goodwill does not appear in the balance sheet except when it is actually purchased. The fictitious can not be realize. Fictitious assets are deferred revenue (future revenue) expenditure whose benefit is derived over long period of time The fictitious assets appear in balance sheet. Difference Between Intangible and Fictitious Assets

14. Fixed Assets Assets which are purchased for long term use for the purpose of producing or providing goods or service and not for sale in the normal course of business Not easily converted into cash. Examples: Land & buildings Equipment. Fixtures and Furniture Plant and Machinery

15. Land & Building Classified in two types Freehold Property Leasehold Property Freehold Property: A property which is free from hold (possession/Rights) . This means that the property you are buying is free from the hold of any body besides the owner. That's why the owner enjoys complete ownership.

16. Cont. Leasehold Property: The property which is on lease (rent). The property  (plot/flat/villa/mall/factories) which is leased by the landlord for a certain period of time to the lessee (tenant / leaseholder / renter / occupant / dweller). The (tenant) have been given the right to use during that specified time by the landlord. Generally, the lease varies from 30 to even 99 years (in case of long term leases). The ownership of the property returns to the landlord when the lease comes to an end.

17. Verification of Freehold Property Auditor verify the title deed first of all. He should check that land is in the name of the client. Note the area covered If deed is deposited as mortgage than auditor obtain certificate for verification.

18. Valuation of Freehold Property The cost of buildings should be depreciated at appropriate value, depending upon the quality of their structure and the use, which is being made of them. The auditor has to see the basis of revaluation & confirm that same method has been used in past. Ensure that depreciation charged on building only not on land (but in some cases depreciation can be charged on land, in case of Location, structure & Quality).

19. Verification of Leasehold Property Auditor examined the lease agreement / deed for find out the amount of premium paid for period & other term. i.e. lease period, maintenance, insurance etc. Note the area covered Also confirm the write-off the legal expense incurred for lease. Auditor should note down the condition of lease check the properly physically if possible

20. Valuation of Leasehold Property The value of lease checked from lease deed. Valuation of property depend on the type of the property, its structure and durability, on the situation size, shape, outlook , width of roadways the quality of materials used in the construction and present days prices of material. Auditor check if any maintains with reference (Bills) also check physically if possible.

21. Hire Purchase System Meaning: The hire-purchase system is a system under which the purchase price is paid in a number of installments. As soon as the contract is entered into and the first installment is paid the hire-purchase acquires possession (not the ownership) of the goods. After the payment of the final installment, the hire-purchaser becomes the full fledged owner of the goods. So long as he does not become the owner, the installments paid by him are considered to be the payment for hire. In case the hire-purchase fails to pay any particular installment, the seller or vendor can the away the goods, and the installment already paid become forfeited.

22. Verification of Assets purchase under Hire Purchase The hire purchase agreement should be inspected in order to find out the term and conditions of purchase. After the payment of the final installment, the purchaser becomes the full fledged (with complete control) owner of the goods

23. Valuation of Assets purchase under Hire Purchase The auditor should see the hire purchase deed and determine the price of asset. The calculation of the annual depreciation should be based on the cash price of the asset and not on the total installment value.

24. Verification and Valuation of Investment Investment: Money committed or property acquired for future income. The investment classified as under Quoted Investment Unquoted Investment

25. Cont. Quoted Investment: A company is said to be "listed", or "quoted”, If its shares can be traded on a stock exchange. i.e. Public Limited Companies .

26. Cont. Unquoted Investment A company is said to be “unlisted", or “unquoted” stocks that are not listed on an stock exchange and so have no publicly stated ( price. Investment which is difficult to value e.g. shares which have no stock exchange listing i.e. Private Company etc.

27. Verification of Quoted Investment Check of authorization for the purchase of the investment. e.g. review of appropriate board minute book (book which record the conclusion of meeting). Vouch the purchase to brokers contract note and share certificate to the cash payment Examine the Share certificate to ensure that the type of security and number of share agrees with investment account and that the share is held in the company with its name. Use a share information service to determine the dividend which should have been received during the year. Check that the investments are properly classified for Company Act disclosure purposes.

28. Valuation of Quoted Investment The auditor should satisfy himself that the investment has been valued in the financial statement in accordance with recognized accounting policies and practices and relevant statutory requirements. The auditor should examine whether in computing the cost of investment, expenditure incurred on account of transfer fees stamp duty, brokerage etc is included in the cost of investments.

29. Verification of Unquoted Investment Study the Memorandum of Association as an authority for such investment. Where investments are in large numbers, the auditor should obtain the schedule of securities certified by a senior officer of the company. Obtain the schedule of investment comprises for information about the names of the securities / investment, date of their acquisition, nominal/ face value, cost price, book value paid up value market value, rates of interest applicable, dates of interest due, tax deduction, etc. at the date of balance sheet.

30. Valuation of Unquoted Investment The auditor should examine the method adopted by the organization for determining the market value of such securities he should examine whether the method of valuation of securities such as by entity is one of the recognized methods of valuation of securities. Such as breakup value method, capitalization of yield method, yield to maturity method etc.

31. Verification of Contingent Assets A contingent asset is a possible asset which arise from future due to occurrence of events that are not under an organizational control. Examples: Receiving of bad debts Refund of octroi (duty) paid for goods, which have been sent out later. Uncalled share capital of company (uncalled share capital refers to the amount of the nominal value of a share which is unpaid and has not been called up by the company).

32. Bank Overdraft Overdraft is an extension of credit from a lending institution when an account reaches zero. An overdraft allows the individual to continue withdrawing money even if the account has no funds in it. Basically the bank allows a set amount of money.

33. Verification of Overdraft The auditor should see Memorandum of association for borrowing power and limitation of company. He should examine the term and condition of overdraft from the agreement between bank and company. The auditor should examine the interest on overdraft has been paid or not. Confirm & check the amount limit sanctioned by bank Check if any security was offered as terms of agreement

34. Proposed Divided It is a way in which a company shares its profit to its shareholder. It is given in percentage of the value of the share. It is declared in Company’s general meeting from that day its became as liability.

35. Verification of Proposed Divided Examine special provisions in the Memorandum or Article of Association in respect of payment of dividends. Ascertain that it does not included unpaid (unclaimed) dividends, which must be excluded from it and shown separately. See that the amount of proposed dividend recommended by the board that must stated in the balance sheet.

36. Contingent Liabilities Obligation which arises from future event. It is not to record contingent liabilities in the books of account. A reference is made to them by way of a footnote to the balance sheet. Examples: Guarantees Pending labor disputes

37. Verification f Contingent Liabilities  Auditor should see that unknown and known such liabilities are record into account on the date of balance sheet. He should verify that such liabilities are shown on the balance sheet by foot note. Auditor should obtain certificate from the responsible officer (Accountant/Bookkeeper) that all known liabilities been taken into account. Auditor should also check that sufficiently reserve has been allocated for such liability which is likely to result in a loss.

38. Event occurring after the Balance Sheet Financial events that occur after the date of the balance sheet, but before the date that the balance sheet are issued.

39. Adjusting Events Those events that provide further evidence about the existed at the end of reporting is called adjustment event. Example: A loss on a trade receivable account which is confirmed by the insolvency of a customer which occurs after the balance sheet date. A fraud during the accounting period is detected after the balance sheet date but before the approval .

40. Non-Adjusting Events Those events that provide that reflect the end of reporting period. Examples: A decline in market value of investment between the balance sheet date and the date on which the financial statement are approved.

41. Prior Period and Extraordinary Item and Change in Accounting Policies Prior (past) Period: The financial accounting term prior period adjustment refers to either a correction to a existing period’s financial statement. Prior period generally used in association with adjustments made in the revenue or expenses of the current accounting year to reflect a new accounting policy or error corrections.

42. Extraordinary Item These are income statement item that are unusual in nature and infrequent in occurrence. Example: Loss from an earthquake and loss from a country taking over a company’s oil refinery.

43. Accounting Policies: Accounting policy are the specific principles, bases convention rules and practice applied by an entity in presenting financial statements. Change in accounting policies According to IAS8 The International Accounting Standard code has power to select and change accounting policy, accounting for change in estimates reflecting correction of prior period.