Verification Of Assets
For verification of any assets the auditor has to mainly check some general points, which are almost similar for all kinds of assets, still according to the name of the asset, the auditor verifies them in the following manner
The main parameters to verify the value of an asset are
- Trade Mark
- Land and Buildings
The auditor should verify this asset carefully because it- might be that full amount has been received from a debtor, but the whole amount is not shown as a receipt and some portion of that amount is shown as discount to debtor and that amount of discount has been fraudulently stolen by the firm by not giving this discount to debtors. This may also be possible that cash may be received from debtor but it is not deposited in his account and theft, and the debt of that person (debtor) is shown as a Bad Debt and written off from Profit and Loss account. The auditor shall verify this asset in the following manner.
Attaining the List
The auditor shall attain a certified list of total debtors of the firm, from a responsible officer. He shall also attain the necessary documents and receipts of debtors relating to total amount of bad debts.
Communication with the Debtors
If the auditor considers it necessary, he shall communicate with the debtors independently and confirm whether. The amount remaining in balance at the end of the year is also according to their books or not.
Checking Bad Debts and Discount to Debtors
The auditor should see that discount to debtors is given as per the rules and which officer is authorised to give, this rebate. He should also see whether on each discount, the signature of that officer is present or not. Similarly, if for any loan it seems that it is not recoverable and it is written as a Bad debt, the auditor should also check that the officer who has written it, in Bad Debts account was authorised to do so, or not, because it is possible that after showing it as a Bad Debt, the loan was recovered from the debtor and distributed between the officer and the debtor, fraudulently.
Checking of Securities
If any cash loan is given by the organisation by taking some security, then such securities should also be checked.
Presentation in the Balance Sheet
The auditor should see whether any special law applies on that organisation, or not. If any special law applies then he should see that according to that law, how the debtors should be shown in the Balance Sheet. As according to the Companies Act, it is compulsory for the company to show its loans under the following heads
- Loans which are considered receivable and for which the company is fully secured.
- Loans which are considered receivable but in relation to which the company does not have any other security other than the personal security of the debtor.
- Loans which are considered Bad and Doubtful.
If no special law applies on the organisation, the auditor shall see that debtors are shown in a manner as shown in other ordinary business organisations.
An important case relating to showing of debtors in the Balance Sheet, is London & General Bank case. In this case, the auditor of London & General Bank Ltd. was held responsible for breach of duty because he did not reveal this fact to the shareholders of the bank in his report that he has shown various loans as asset (debtors) in the Balance Sheet and interest earned on them also shown in the Profit & Loss account as a profit, whereas; fact was this that the chances of recovery of these loans were almost nil, though the auditor was quite aware of this fact.
Goodwill is an intangible asset. If it is separated from business then it has no value. Its value depends on the increase and decrease of the profits of the business. If there is any additional profit in any business then the goodwill of the business is considered big.
Goodwill is a separate asset from other assets of the business, its valuation also cannot be done like other assets-of the business because neither it depreciates, nor it requires reconstruction and repairs, etc., or it needs to be replaced.
Goodwill is valued in an organisation in the following two cases
- While purchasing a running business, in such a case, the Purchase Price of goodwill is known by deducting net assets from the Purchase Price, i.e., (Goodwill = Purchasing Price — Net Asset). For example, if a running business is purchased for Rs. 100000 and the Purchase Price of the assets of the organisation is Rs. 80000, then the goodwill of that organisation will be, 100000 — 80000 = Rs. 20000.
- When a new partner is taken in a partnership or any old partner separates from the business, then a goodwill account is opened, at that time.
In both the above cases the following method is adopted for the Verification of Goodwill
- On purchase of goodwill, the auditor must study the contract with the vendor (seller of goodwill) and see that it is shown at the proper value in the books of accounts or not.
- If goodwill arises with admission of a new partner in the business or on separation, then the auditor must see the Partnership Deed.
- In the Balance Sheet goodwill must be shown at Cost Price.
- Sometimes goodwill is written off, and re-opened due to some reasons. If this is done, then the auditor must study the copy of resolution passed by the directors.
- Even after complete investigations, if the auditor is not satisfied with the amount of goodwill, then he should state this clearly in his, report.
When a product is registered with a specific symbol so that no other producer is permitted by the law to use that symbol. That product and its manufacturer are also identified by that symbol.
For trade mark, the auditor has to perform the following steps
- If any organisation or its branches has more than one trademarks, the auditor must obtain a list of all trademarks which should contain the details of serial number, date, duration, fees etc.
- If trade mark is obtained by paying some amount to another person, the investigation of this payment must be made by the payment receipt, received from him.
- If trade mark is such that it is registered for the first time, then the fees paid for registration must be verified from the receipt of the payment made.
- If the trade mark is renewed, then the amount paid in renewal should be checked by the receipt which is received against that payment.
- The auditor must see the period of trade mark from the Registration certificate attained. The period of a trade mark is usually not more than 14 years. Thus, he should see that during this period, provision for depreciation is provided on trade mark or not. The rate of depreciation should be such that by the time of the expiry of the period of trade mark, it should be fully written off.
Land And Building
- If building is purchased, its verification must be done on the basis of the contract.
- If building is constructed on contract, it must be verified by the certificates of contractors and experts.
- If building is constructed by the employees of the organisation only, then the certificate of the responsible officer must be obtained.
- Building must be shown in the Balance Sheet, after deducting appropriate depreciation on it.
- The existence of the building should be seen by the auditor himself.
- Building must be shown at cost price only. The auditor must see that no profits earned by the organisation, are fraudulently included in this amount.