The auditor should call for a duly authorized schedule of all such assets. If the cost incurred in their preparation is very high, it is usually capitalized. But if it is quite nominal, is written off by charging to the Profit & Loss Account.
There is no question of having any charge on assets of this nature.
Assets of this nature cannot last long as they are used for the purpose of advertisement. Hence, the revaluation method is the appropriate method for their valuation. The auditor should see that this is shown in the Balance Sheet at the proper cost.
Motor Vehicles
Motor Vehicles Account is to be separately maintained. The auditor should compare with the Balance Sheet which should be clearly stated under a separate head. (BCom 3rd Year Verification of Assets Notes Study Material)
If the number of motor vehicles is very large, a separate register, such as a Plant Register in case of a plant, is maintained.
The auditor may call for a schedule of motor vehicles and compare it with the register so kept. He should check the Registration Books and Licence and ascertain if all the vehicles are registered in the name of the client. He should further see that actual purchases or additions during the year are capitalized. He should check the Premium Receipts to ensure that the vehicles are fully insured against accidents and similar other risks. The fees paid for renewal, etc., should be properly entered and the entries should be vouched.
Motor Vehicles are to be adequately depreciated. The auditor should see that they are shown in the Balance Sheet at cost less depreciation.
Livestock
Besides comparing the necessary ledger accounts with the records in the Balance Sheet, the auditor should check the asset with the help of a certified inventory of all the animals like horses, bullocks, cows, etc., which he should obtain from the client. Usually, a separate register is maintained to record the asset in which the purchase price, life, etc., are distinctly written about all the animals. He should check this register with the inventory. (BCom 3rd Year Verification of Assets Notes Study Material)
As for a valuation, he should see that they are annually revalued and any loss on account of the death or sale of an animal is written off.
Assets acquired on Hire Purchase or Instalment Agreement
Assets acquired on hire-purchase or installment agreements should be properly recorded. Each year the installment has to be paid and so much of the money paid in this connection is to be recorded in the books of accounts. If the asset has been written off at its full value in the Balance Sheet, it is necessary to show the unpaid installments on the liability side.
The necessary agreement should be examined and it should be seen that the expenditure has been distinctly allocated as capital and revenue. The interest paid on the unpaid balance should be charged to the Profit & Loss Account.
The provision for depreciation should be made on the basis of the full cash price and the asset should be shown in the Balance Sheet after deducting the amount of depreciation. (BCom 3rd Year Verification of Assets Notes Study Material)
Stores and Spare Parts
The asset known as stores and spare parts consists of materials that are meant for consumption in the business and not for resale. Lubricants, grease, dyes, fuel, etc., are examples of stores, while spare parts of the machinery are preserved to maintain its proper order. The asset as such should be clearly shown in the Balance Sheet. (BCom 3rd Year Verification of Assets Notes Study Material)
The auditor should obtain an inventory of stores and spare parts duly certified by a responsible officer. He should count the stock himself and thus, verify their existence by personal inspection, if possible. It is to be remembered that the stores consumed are debited to the Manufacturing Account and spare parts used are debited to the Machinery Account.
The asset is to be shown at cost price in the Balance Sheet. It is not a depreciable asset by use and provision for depreciation is not necessary. However, the loss on account of breakage or waste or being worn out should be duly written off. The asset should be revalued annually.
Loose Tools
The auditor should obtain a list of loose tools which should be duly authorized by some responsible officer. Such assets consist of small tools, molds, etc., which have a short useful life and are also priced low. Hence, all such tools are shown in one account and not separately. The auditor should check the certified list of loose tools. (BCom 3rd Year Verification of Assets Notes Study Material)
Revaluation of loose tools is the most appropriate method of valuation. The difference between the cost price and the current price should be treated as depreciation or loss to be charged to the Profit & Loss Account. If the loose tools are prepared in the business itself, the cost thereof should be verified from the Cost Sheet certified by the Chief Engineer of Works. In such a case, the valuation should not be made at a price more than the cost so incurred. (BCom 3rd Year Verification of Assets Notes Study Material)
Investments
Investments include Government Securities, Shares, Debentures, etc. When the number of investments is very large, the auditor should insist upon asking for a schedule of investments held by the client. Such a schedule should include all details about investments, e.g., name of the Securities, date of purchase, nominal value, cost price, the market price at the date of the Balance Sheet, etc. The schedule so obtained should be examined by reference to the relevant ledger accounts.
If the investments are held in Demat form their existence should be checked from the statement of account issued by the depository. These statements can be seen on computer screens through the internet.
It should be seen that the asset has been shown distinctly and properly in the Balance Sheet the Schedule III of the Companies Act, 2013. The auditor should, in particular, examine the following:
(i) The authority of purchase of investments (if purchased during the year).
(ii) The prices of investments be checked by reference to Allotment Letters or Stock Brokers’ Bought Notes.
(iii) The Stock Exchange quotations be examined to verify the price paid along with the payees’ receipt.
(iv) It should be ensured that all investments are in the name of the client.
(v) The Memorandum and Articles of Association of the company be examined for the authority of the company to purchase.
(vi) It is to be seen that the purchase or sale of investments possesses adequate approval of the Board of Directors.
(vii) Section 186 of the Companies Act provides that a company, whether by itself or together with its subsidiaries shall not be entitled to acquire by way of subscription, purchase, or otherwise the shares of any other body corporate except to the extent and except in accordance with the restrictions and conditions specified in this section. This is to be verified.
The auditor should verify the existence of investments by his personal inspection at the same time. If there is a very large number of investments, he should take special care as he would not be in a position to verify all of them in one sitting. Those checked should be kept by him in safe custody under lock and key which should be in his possession till the entire lot is checked. He should compare the Schedule and Securities with the Register of Investments maintained by the client.
If the Securities have been entrusted to the bank for safe custody, he should obtain a certificate from the bank giving details about all such Securities so kept. It is to be ensured that the Securities are free from any charge. Thus, in all situations, the auditor should personally inspect all the Securities wherever or by whomsoever, they may be held. In the case of City Equitable Fire Insurance Company Ltd. (1924), it was held that the auditor should try to inspect all Securities himself.
If the Securities have been purchased during the year, he should examine the Transfer Deed when no certificate has been issued till the date of verification. He may also inspect the Bought Note received from the broker. Similarly, if Securities are held by any Trustee on behalf of the company, the Trust Deed should be inspected. If some of the Securities have been sold during the course of the year after the date of the Balance Sheet but before the date of audit, the auditor should vouch for the sale proceeds either in the Cash Book or in the Bank Pass Book.
As has been already stated, it is very essential to ensure that the investments are registered in the name of the client and they are free from any charge. He should rely on the relevant vouchers and certificates to do so.
Having verified the Securities through the devices mentioned above, the auditor should proceed further to find out that the investments are properly valued. Really speaking, investments are not subjected to depreciation except investment in shares of mines and plantations, but it has to be seen as to the purpose for which investments are held.
In the case of trust companies, the object of having an investment is to earn interest and dividends so that the same may be distributed among the shareholders. Hence, investments are to be treated as fixed assets. In such cases, investments are valued at cost and even a permanent fall in their value is not taken into account. Much will depend, however, on the provisions of the Articles of Association and the Memorandum of Association of trust companies. (BCom 3rd Year Verification of Assets Notes Study Material)
If investments are held by finance companies (ie., ordinary financial institutions), where they are treated as current assets to be sold wherever it is thought necessary that they are vouched at “cost price or market price, whichever is less.” In the case of Securities purchased by underwriters, the cost price thereof will be the face value less the underwriting commission.
Interest Accrued on Investments. The auditor should obtain a schedule showing the accrued interest on different types of investments and examine it. If there is a part of the interest that is not likely to be realized, proper provision should be made therefor. Such interest should be shown in the Balance Sheet separately. The auditor should check costs, calculations, etc.
Stock-in-Trade (Inventory). The verification of the stock of goods in hand at the close of the period requires a lot of care and caution on the part of the auditor. Similarly, also, the value of the stock should be correctly arrived at, otherwise, the Profit & Loss Account will be incorrect and show misleading results. In every business, the stock is taken at the close and if the Stock Accounts are maintained properly and there is an effective system of internal check-in operation, the possibility of fraud and errors is minimized.
The following points should be kept in mind while verifying the stock-in-trade:
(1) The method of stock-taking should be examined so that possibilities of fraud and errors may be found. It should also be seen whether proper control is exercised over the receipt and the issue of goods in stock.
(2) The auditor should obtain a list of instructions issued in connection with the stock-taking.
(3) A few items should be checked in the rough stock sheets.
(4) The totals and balances of Stock Sheets should be thoroughly checked.
(5) The value of different items of stock should be examined with the help of Valuation Sheets, Invoices, etc.
(6) The principles and bases followed in the valuation of stock should be examined cure that they are those followed in previous years. To verify the work-in-progress closing stock, the accounts relating to costs should be checked.
(7) It should be seen that the valuation of stock is done on the basis of ‘cost price or et price, whichever is less’ as stock is a floating asset and is meant for resale. The actual loss has been provided for and the stock is properly valued.
(8) The Goods Inward Register should be examined and it should be seen that the ds received on the closing day or earlier have been included in the stock.
(9) Similarly, the goods sold on or prior to the closing day, have not been included in the stock.
(10) It should also be ensured that the goods not related to the business have not been recorded in the stock.
(11) The percentage of gross profit to the sale of the current year should be compared with that of the previous years. If there is some difference, that matter should be enquired into. (BCom 3rd Year Verification of Assets Notes Study Material)
Method of Stock-taking. The usual procedure followed is that a clerk of the business goes to the godown and calls out the number and other particulars of items of each class of goods and another clerk enters these particulars on sheets of paper, popularly known as Stock Sheets. Thus, the entire quantity of goods in stock and all the details connected with the stock are written on the Stock Sheets.
When it is done, another independent batch of two clerks checks the records to ensure that there is no mistake. Then, a responsible officer fills in the rates of goods at which they are to be valued.
After the rates are written in the relevant column of the Stock Sheets, another clerk is made responsible for calculating the value of each class of goods, and his work is then checked by another clerk. It is necessary that each of the persons who have taken part in the preparation of the Stock Sheet should sign at proper places so that if there is some discrepancy in their work, they may be held responsible.
The Stock Sheets should then be signed by the General Manager or the Partner.
A Few Precautions
(1) There may be some goods that may be legally in the ownership of the client but not actually in his possession. For example, goods might have been purchased but not yet delivered while the invoices have been entered in the financial books. As a rule, such goods must be included in the Stock Sheets. (BCom 3rd Year Verification of Assets Notes Study Material)
(2) Similarly, goods that are with the Branches or Agents or have been sent on ‘approval or return’ basis for which approval has not been received should be entered in the Stock Sheets. (BCom 3rd Year Verification of Assets Notes Study Material)
(3) Goods received but not entered in the financial books should not be included in the goods shown in the Stock Sheets.
(4) Goods sold but not delivered to the buyer on or prior to the last day should not be recorded in the Stock Sheets and similarly, the goods which are in the stock of the Client as an agent should also not be included in the closing stock.
(5) If proper precautions are not observed, errors may creep up, and hence, the whole work of stock-taking should be supervised by some responsible officials. (BCom 3rd Year Verification of Assets Notes Study Material)
It is an important duty of the auditor while verifying the stock-in-trade to obtain the following certificates:
(i) So far as we know, the particulars, the value, and the quantity of stock entered in the Stock Sheets on 31st December 1998 are correct.
(ii) The goods included in the stock are the property of the business.
(iii) The stock of goods does neither include goods not entered in the business records nor the goods sold but not yet delivered.
(iv) The goods which are neither saleable nor suitable for use, are either written off or provision has been made for such losses.
(v) The basis of the valuation of stock is the same as in the previous years.
Characteristics of a Good System of Stock-taking
The following are the main characteristics of a suitable system of stock-taking:
- Stock-taking should take place at the close of business on the last day of the accounting period.
- The work of calling out the quantities and description of the goods and the making of the entries on the Stock Sheets should be performed by senior clerks. (BCom 3rd Year Verification of Assets Notes Study Material)
- Such entries should be thoroughly checked.
- A responsible officer should enter the price on the Stock Sheets.
- The work of extensions and calculations should be done by separate clerks and of checking by other clerks.
- Additions should be done by another clerk and their checking should be independently done.
- The task involved as above should be initiated by those who do it so as to fix the responsibility for the same.
Valuation of Stock: Some Basic Principles
There are no two opinions on the issue that stock should be correctly valued. If the stock is over-valued or shown at a figure more than its actual value, the profits will be inflated and shown at some artificial or misleading figures which can be misused by the Managers or Partners for earning or receiving more commission. If it is undervalued, the price of shares of a company will fall in the market or secret reserves will be created. The auditor should see that it is not done as the practice is always detrimental to the interests of the business itself.
Stock is a floating asset and is meant for resale. Hence, it should be valued “at cost price or market price, whichever is less.” Even if the rise in price is of a permanent nature, the stock should not be valued at a higher price than the cost price. The idea underlying this principle is that anticipated losses should always be provided for. (BCom 3rd Year Verification of Assets Notes Study Material)
What are the cost price and market price, then? There are several opinions on this issue.
Cost Price
The term ‘cost price is interpreted in the following ways:
(1) Unit Cost. If different lots of goods have been purchased, the stock in hand can be easily identified and the invoices or the Cash Memos can help in finding out the cost price. The cost price of the unsold stock will be the cost price at which such a lot is acquired. This is the ‘Unit Cost’ method of finding out the cost price. It is easy to know the cost price if goods have been kept separately.
(2) Average Cost Method. If goods have been purchased and acquired at different intervals of time, it is very difficult to identify them in case they are mixed up together. In such a situation, goods in stock are valued at the average cost price of various consignments taken together.
(3) First In, First Out (FIFO) Method. According to this method, the stock is valued at the rate at which the most recent purchases were made. It is assumed that the goods issued out of the store or sold are those which entered it first, ie.. the goods are issued We order in which they were purchased. The goods which entered first are issued first the most recent purchases remain in stock at the rate of the latest consignment so purchased. (BCom 3rd Year Verification of Assets Notes Study Material)
(4) Last In. First Out (LIFO) Method. Under this method, the whole of the stock has valued at the rate at which the earliest purchases were made. It is assumed that the latest purchases are sold first and the unsold stock consists of the earliest purchases and is Priced accordingly. This method is not much in use for the purpose of valuation.
(5) Adjusted Selling Price Method. Under this method, an estimated cost is found by pricing the unsold stock at the prevailing selling price less a normal margin of profits, and the estimated selling expenses included overhead charges.
(6) Standard Cost Method. Under this method, the stock is valued at some pre-determined cost per unit which is known as the standard cost.
Market Price
There are two different ways of expressing market price:
(1) Replacement Cost. This is virtually the cost of replacing the stock at the date of the Balance Sheet. Thus, it includes the expenses also in the market price at which such goods can be acquired. (BCom 3rd Year Verification of Assets Notes Study Material)
(2) Net Realizable Value. This denotes the price at which the goods can be sold in the market. Thus, the estimated selling expenses are deducted from the selling price. (BCom Verification of Asset Notes Study Material)
Methods of Valuation
The valuation of stock is ordinarily made on the basis of cost price or market price, whichever is lower in the two different ways given below:
(1) Individual Method or Pick and Choose Method. According to this method, the cost or market price, whichever is less, of each individual item of stock is taken into consideration. (BCom 3rd Year Verification of Assets Notes Study Material)
(2) Global Method. Under this method, the aggregate cost of all the items of stock is taken separately and so also, the aggregate market price is calculated. Then, the lower of the two valuations becomes the basis for the valuation of the stock.
The goods in stock may be placed into three categories, i.e., raw materials. Semi-manufactured goods and finished goods:
(1) Raw Materials. Raw materials are not meant for resale but are for use in the manufacture of goods. Hence, they are valued at the cost price which may also include a reasonable amount of expenses incurred in connection therewith. Thus, the market price is not taken into consideration in the valuation of raw materials. But if there is some abnormal fall in the value of raw materials on the day of the Balance Sheet, then, their valuation should be made at under cost. (BCom 3rd Year Verification of Assets Notes Study Material)
(2) Semi-Manufactured Goods. There may be some semi-manufactured goods in stock on the last day of the financial year. They are the goods in the process of manufacture. Such goods are valued at cost price including the cost of raw materials used and the proportionate amount of wages, establishment charges, etc. (BCom 3rd Year Verification of Assets Notes Study Material)
(3) (a) Manufactured or Finished Goods. Usually, the stock of finished goods is valued at the cost price or market price, whichever is lower but in practice, it is not done so. Often, it is valued at cost, at under cost, at market price, or at below market price. This all depends upon the circumstances. However, if it is not possible to calculate the cost or to find out the market price of various items of stock, one of the bases just quoted is taken for granted in valuation just to avoid inconveniences and complicated calculations.
If the goods have been sold under forward contracts but not delivered at the date of the Balance Sheet, they are valued at contract rates for the purpose of the Balance Sheet. (BCom 3rd Year Verification of Assets Notes Study Material)
(b) Goods on Consignment. The stock of goods with the consignee is valued at cost price plus the proportionate expenses including freight, rent, etc., or market price, whichever is lower. If it is not convenient to find out the market price, which is usually the case, it is valued at cost price on account of its being a convenient basis of valuation.
(c) Goods on Approval or Return Basis. The goods which have been sent on ‘approval or return’ basis should never be valued at more than the cost price.
(d) Stock of Special Trades. There are some special goods or trades such as wine, rice, leather, etc., whose value tends to rise with the passage of time. Hence, they are valued at above cost, a rule which is usually not followed in the valuation of floating assets. In the value of the stock of special trades, the expenses of maintaining such stocks in safety and interest on them at a reasonable rate are added to the cost. In no case, the valuation should be made at a price that is higher than the price at which such goods are available in the market.
(e) Goods of Plantation Products. The stock of plantation products, such as rubber, tea, sugarcane, coffee, etc., should be valued at the net amount to be subsequently realized, i.e., the expected selling price less reasonable selling expenses.
Work-in-Progress
According to the Companies Act, 2013, work-in-progress should be separately shown in the Balance Sheet. The auditor should examine all accounts pertaining to the work-in-progress:
He should keep in mind the following points while verifying the work-in-progress:
(1) If Cost Accounts are properly maintained in the business, he should check the Statement of Raw Materials used and wages. If overhead expenses have been included in the valuation, he should see that they are not excessive.
(2) The basis of valuation and cost of work-in-progress for the current year should be compared with that of the previous year and the difference, if any, should be carefully enquired into. (BCom 3rd Year Verification of Assets Notes Study Material)
(3) If Cost Accounts are not maintained, a detailed statement should be prepared to know the progress of work completed.
(4) The progress of work should be checked according to the time devoted and work being done.
(5) It should be seen that creditors’ balances are duly provided for.
The auditor should obtain the certified Stock Sheets from the client and check them. Such sheets should contain details about the work-in-progress, work completed, work certified and uncertified, etc., and he should check them thoroughly and carefully.
The work-in-progress is normally valued at cost price. The cost includes the actual cost of materials put into the manufacturing process plus some of the labor and other manufacturing expenses. In the calculation of cost price, a reasonable proportion of the profit earned and received to date is also included especially in case of contracts that extend for a considerable period.
De Paula talks of the use of standard cost for the valuation of work-in-progress. The standard cost is also known as ‘estimated cost’ under which the valuation of stock is made on the basis of a pre-determined cost or budgeted cost per unit. However, the standard cost or budgeted cost is not a static cost but it is sometimes reviewed periodically and is subject to change which depends upon time and motion studies and also on performance appraisal. (BCom 3rd Year Verification of Assets Notes Study Material)
Some other writers are of the opinion that the work-in-progress should be valued at cost price or replacement value, whichever is lower.
Valuation of Stock and Auditor’s Duty
In the case of Kingston Cotton Mills (1896), it was held that it is not the duty of the auditor to take the stock and that he is not guilty of negligence if he accepts the certificate of a responsible official in the absence of suspicious circumstances.
Broadly speaking, there are three points raised in the decision:
(1) The auditor is not a valuer:
(2) It is not his duty to take stock; and
(3) If he has some suspicion in his mind as regards the valuation of stock, he should rely on the certificate of a responsible official.
It was also said that the auditor is not an insurer and all that he is required to do is to exercise reasonable care and skill. But what amount of skill and care will be reasonable will depend upon the auditor and the circumstances of a particular case.
Nevertheless, it should be remembered that the decision in the above case was given more than seventy years ago. Since then, many remarkable changes have taken place. As such, it will not be advisable to proceed entirely in accordance with this decision.
A few years back, another decision was given, in re: The Westminster Road Construction & Engineering Co. Ltd. (1932). This, too, is an important decision in which it was held that the auditor is liable for not detecting over-valuation of assets or omission of liabilities from the Balance Sheet if such could be detected by the application of reasonable skill and care. The acceptance of a certificate without question in such a case is amounting to negligence. (BCom 3rd Year Verification of Assets Notes Study Material)
Three things are as follows:
(1) To value stock is not the duty of the auditor.
(2) He can rely on reports and statements duly certified by some responsible officials in case of suspicious circumstances.
(3) He should exercise reasonable care and skill.
The foregoing views are acceptable to all without exception. It is also generally accepted that it is not a part of the auditor’s duty to verify stock through his personal inspection. Still, after the decision which was given in the case of McKesson & Robins. some auditors do verify the stock personally at the close of the financial year. Whatever the case, new developments have taken place in the field of business organization and business management which must be kept in mind by the auditor. (BCom 3rd Year Verification of Assets Notes Study Material)
But one thing is noteworthy. If an auditor is not able to detect fraud because of his quality and the method of audit procedure which is below the practice normally recognized, he would be held guilty. Such a decision was given in re: Thomas Gertad & Sons Ltd. (1968) case.
Thus, an auditor cannot leave everything to the company’s management. When he gives his report, he is expected to examine all the accounting data. It is evident that the auditor is now required to go more in detail than what was expected from him in the judgment given in the Kingston Cotton Mills case. He cannot rely on the commercial honesty of the management and he should go into depth more than what was expected from him earlier. It shows that now the standards of auditing are changing.
It is to be noted that the auditor should satisfy himself that the stock lists have been duly examined by the technical and commercial managers. It is also to be seen that adequate provision has been made for obsolescence. It becomes, therefore, clear that while he has to satisfy himself with the physical and financial accuracy of the stocks, he is not expected to have the technical knowledge to judge the exact length of obsolescence that he has set in. For this, he can discuss with the technical staff available and satisfy himself accordingly.
Actually, he should verify that the charge for obsolescence has been correctly made on the Profit and Loss Account of the year. The charge for obsolescence must correlate with that of the previous year and if budgeted, it should be compared with that budgeted.
The Companies Act requires an auditor to report that the Balance Sheet of a company exhibits a true and fair view of the state of affairs for which he has to examine all the assets thoroughly. (BCom 3rd Year Verification of Assets Notes Study Material)
Hence, he should not be satisfied simply by certifying the stock but should apply tests in checking the Stock Sheets. The volume of tests, however, will depend upon the size of a business, the particular circumstances of a case, and the system of maintaining accounts. If there is a properly maintained costing system and accounts of stores and stock are also kept and if the auditor thinks them to be effective, he can rely on the quantity balances at the date of the Balance Sheet. (BCom 3rd Year Verification of Assets Notes Study Material)
Debtors
According to the Companies Act, the book debts of a company should be shown as under:
(a) Debts considered good in respect of which the company is fully secured;
(b) Debts considered good for which the company holds no security other than the debtor’s personal security, and
(c) Debts considered doubtful or bad.
In order to form an opinion on whether the debts are good, doubtful, or bad, the following points should be borne in mind:
1. The Age of Debts. This is the main consideration to establish whether a debt of 15 is good. doubtful or bad. The age of the debts must be viewed in relation to the terms of credit allowed by the company. The settlement of accounts regularly within a reasonable time after the expiry of the credit period and cash discounts being taken regularly are some of the signs to denote that the debts are good and not doubtful.
2. Regular Payments. If payments are made regularly, the accounts may be good. But if payments are erratic and balances are increasing the accounts should be considered doubtful. (BCom 3rd Year Verification of Assets Notes Study Material)
3. Heavy Dishonoured Bills. Dishonored bills are always considered to be a sign of weakness and similarly returned cheques and renewed bills should be viewed with suspicion that such debts are doubtful.
4. Noting on the Accounts. Notes on the accounts such as ‘In Solicitor’s Hands’, ‘In Liquidation’. ‘Address Unknown’, etc. clearly indicate that the accounts are doubtful. ere should be a sufficient provision in the accounts to guard against such doubtful debts.
5. A comparison of Bad Debts, Budgeted and Actual. In many businesses, a simple comparison of actual bad debts with budgeted bad debts provides a basis for considering debts bad, doubtful, or good. Such a comparison can be made over a number of years and the opinion be formed accordingly. (BCom 3rd Year Verification of Assets Notes Study Material)
The auditor should see that the debtors have been shown properly. He should examine the Ledger Accounts and should obtain a certified schedule of all debts. He should compare the schedule with the Ledger Accounts.
He should examine the schedule of debtors with the help of some responsible officials and should see that proper provision has been made for doubtful debts, discounts, etc. Debts written off as bad should be vouched by reference to necessary vouchers for which the auditor should examine and the Directors’ Minute Book. He should contact debtors through correspondence to verify the money received from the debtors. (BCom 3rd Year Verification of Assets Notes Study Material)
It is a good practice to get the balances confirmed by the parties concerned. This will provide a sufficient basis for an opinion regarding the collectibility of the book debts. Such a sort of confirmation of balances has proved to be sound evidence. However, the auditor may not send the letters of confirmation to all the parties but can be satisfied by testing only a few cases.
If loans are granted in cash under security, he should examine the Securities. He should check the accounts relating to the receipts of interests in the ledger. If loans are granted to the officers of the business, he should see that they are given under rules and regulations prevailing in this connection in the business. (BCom 3rd Year Verification of Assets Notes Study Material)
Bills Receivable
To verify bills receivable given in the Balance Sheet, the auditor should call for a certified schedule of bills in hand. The totals of the schedule should be checked by reference to the accounts in General Ledger. He should examine each bill to see that it is properly drawn, signed by the acceptor, and is also properly stamped. (BCom 3rd Year Verification of Assets Notes Study Material)
If an audit is conducted sometime after the last day of the financial year, the auditor should check the transactions pertaining to bills during the period.
(1) Bills subsequently met should be verified by vouching the cash received and entered in the Cash Book.
(2) Bills discounted should be examined by way of entries in the Cash Book and Bills Receivable Book. The auditor should see that a note for the contingent liability in respect of bills discounted appears on the Balance Sheet.
(3) If bills have been deposited with a bank either for safe custody or for the security of a loan, they should be verified on the basis of a certificate obtained from the bank concerned which may be regarded as good evidence of their existence.
(4) If the bills have been retired before the date of the Balance Sheet, the proceeds were of should be checked by reference to the Cash Book.
Payments in Advance
The amount paid in advance, such as insurance, telephone rent, rates, etc., should be verified by the auditor by reference to the schedule that he should obtain from the client. Such a schedule should contain all details regarding payments made in advance. He should examine the receipts and demand notes for the latest payments and compare the schedule with the Ledger Accounts.
According to the Companies Act, payments in advance should be separately shown on the Balance Sheet.
Cash in Hand
The auditor may proceed in one of the following three ways while verifying the cash in hand:
(1) He should visit the business premises at the close of the financial year and actually count the cash in hand and compare it with the balance as shown in the Cash Book. It is to be remembered that all the balances of cash should be counted by him simultaneously so as to avoid any fraudulent manipulation, e.g., the shortage in one account may be made up from the balance in another account.
He should count the cash, stamps, IOUS in hand. He should see that IOUS is genuine. To avoid fraud, he should take all vouchers and books in his possession till the entire cash balance is duly verified. (BCom 3rd Year Verification of Assets Notes Study Material)
(2) If it is not possible for him to pay a visit and count the cash in hand himself, he should pay a visit on a subsequent day after the day of the close of the year and verify the cash by checking exhaustively the balances of cash, receipts, and payments in between the date of the Balance Sheet and the day of his visit. (BCom 3rd Year Verification of Assets Notes Study Material)
(3) Then, there is another method. The auditor should ask his client to deposit the whole of the cash in hand on the closing day into the bank. By doing so, the entire cash will be counted and the auditor will easily verify it. But the difficulty is that IOUS cannot be deposited in the bank. He can pay a surprise visit if he so likes. (BCom 3rd Year Verification of Assets Notes Study Material)
It is to be noted that in cases where physical counting of cash is not possible, the auditor should get a certificate signed by the Branch Manager or the person in-charge to the effect that he himself has counted the cash balance including notes and coins or he has physically verified the counting of such a balance. (BCom 3rd Year Verification of Assets Notes Study Material)
As a matter of safety, it is prudent to advise that large cash balances should not be held by the business. If such balances show a tendency to increase, the auditor should make careful inquiries to verify their existence and to know the reasons for holding such a heavy balance of cash with the business. (BCom 3rd Year Verification of Assets Notes Study Material)
The auditor should also verify revenue stamps or postage stamps on the closing day of the financial year as they are a part of the cash balance to be shown in the Balance Sheet. (BCom 3rd Year Verification of Assets Notes Study Material)
The documents such as stock of unsold canteen tickets, lunch coupons, etc., should also be physically counted by the auditor as they are ready to be converted into cash. (BCom 3rd Year Verification of Assets Notes Study Material)
Cash at Bank
First of all, the auditor should compare the balances as shown in the Pass Book with the balance of cash as shown in the bank column of the Cash Book. If there is some difference, he should prepare a Bank Reconciliation Statement.
It is possible that a fictitious Pass Book may be presented to the auditor without bringing the fact to his knowledge. In such a suspicious situation, he should obtain a certificate directly from the bank. In case of some difficulty, he can check the accounts himself in the bank ledger.
He should obtain separate certificates for Fixed Deposit Accounts, Current Accounts, Savings Bank accounts, etc. from the bank. This is the only valid way of verifying the balance in the different accounts.
BCom 3rd Year Verification of Assets Notes Study Material
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