BCom 3rd Year Verification of Assets Notes Study Material
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Verification of Assets Notes Study Material
“The verification of assets implies an enquiry into the value, ownership and title: existence and possession: the presence of any charge on the assets.” – Spicer and Pegler
“The verification of assets is a process by which the auditor substantiates the accuracy of the right-hand side of the Balance Sheet, and must be considered as having three distinct objects: (a) the verification of existence of assets. (b) the valuation of assets. (c) the authority of their acquisition.” -Lancaster
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. This is known as verification of assets and liabilities. Thus, verification means to prove the truth about and the correctness and authenticity of assets and liabilities. In the London Oil Storage Co. Ltd. vs. Seear Hasluck & Co. (1904). it was held that it is the duty of an auditor to verify the existence of the assets stated in the Balance Sheet and that he will be liable for any damage suffered by the client if he fails to do so.
Very often, vouching and verification are considered to be one and the same thing. It is not so. A clear line of demarcation can be drawn between the two. Vouching is to examine the correctness and authenticity of the transactions recorded in the books of prime entry while verification is to confirm the value of assets and liabilities as shown in the Balance Sheet. As such, in verification it is not merely the duty of the auditor to see that assets have been acquired but he has to certify that such assets (i) exist with the business, (ii) are the property of the client, and (iii) are valued at proper figures on a particular date, viz., the date of the Balance Sheet.(BCom Verification of Assets Notes Study Material)
It may be possible that after having acquired an asset, some persons employed in the business might have either sold or mortgaged it as a security for loan with some other firms. Hence, the auditor has to see that the assets existed with the client on the date of the Balance Sheet. If he does not proceed in an effective way while verifying the assets and liabilities, he will be held liable for negligence. In the decision of McKesson & Robins case (1939), it was held that the auditor must physically inspect some of the assets. He should, therefore, examine the documents of title, e.g., shares, debentures, securities. negotiable instruments, etc., to ensure that the assets existed on the closing day of the financial year.
Thus, the auditor has to perform four types of functions in verifying the assets:
(1) To see that they are clearly stated in the Balance Sheet.
(2) To ensure that they are in existence on the day of the Balance Sheet.
(3) To verify that they are the Property of the business and as such, they are free from any charge or mortgage.(BCom Verification of Assets Notes Study Material)
(4) To satisfy himself that they are properly valued.
On an analysis, it can be held that in verification it becomes the primary duty of the auditor to satisfy himself in regard to the existence, ownership and value of the assets. So, also for liabilities, he has to check the nature and extent of their amount due on the day of the Balance Sheet.
Assets like cash, bills receivable, investments, etc., should be inspected by the auditor by examining them personally on the day of Balance Sheet. If personal inspection is not possible, he should try to reach thereafter as soon as possible. If he visits the business sometime after the close of business on the day of the Balance Sheet, he should check the transactions thoroughly which have been made during this day and the date of his visit.
It is also equally necessary that the assets which are of easily negotiable in character or easily exchangeable should be verified by him very cautiously, e.g., in verifying securities, he should try to check them in one sitting, if possible, and if it is not possible, he should note down their number, date, etc. in his note book. At least, he should have the securities in his possession till they are completely verified by him. If some of them are pledged or sent to some bank, etc., for inspection, a certificate to that should be obtained from the institution concerned.
At the very outset, it would be apt to remark that the valuation of assets is an important part of their verification. Hence, it should be studied as a part of verification and not separately. It would be a great mistake to take it otherwise. It is rather true that the correct profits cannot be calculated unless the assets are properly valued. Only then, the Balance Sheet will reveal the true and fair position of the financial affairs of a business. The valuation as such involves to ensure the correct valuation of the assets while in verification, the auditor has to verify the authority and existence of the property also besides its valuation.
Thus, valuation means to test the exact value of an assets on the basis of its utility. It is actually the ascertainment or measurement of the money value at which an asset has been shown in the books of accounts or in the financial statement. Normally, valuation is done after deducting the depreciation for the value of an asset. If proper depreciation on assets is not provided for, the result would be very serious. If the amount of depreciation charged to the Profit & Loss Account is more than the actual, the profits will De reduced and consequently, the shareholders of a joint-stock company would get less dividend. On the contrary, if it is shown at a less figure than the actual, the profit would be inflated and the shareholders would receive more dividend, a part of which would, thus, be paid out of capital. As a result of this, the capital would be exhausted by and by, and the company would be insolvent. These are, in short, the repercussions that will follow incorrect valuation of assets of a business.
The following are some of the interpretations of the value used in the valuation of assets:
(1) Cost Price. It is a price paid for the acquisition of an asset. As a matter of practice, e expenses incurred in the purchase of an asset and its installation are included in its Cost Price.(BCom Verification of Assets Notes Study Material)
(2) Replacement Value. It is a price at which a particular asset can be replaced. In such a value, the expenses, e.g., commission, Freight, etc., are also included.
(3) Market Value. If an asset has a market for it, a value which it will bring when sold in the market, is termed as Market Value.
(4) Book Value. It is a value at which an asset appears in the books of Accounts. It is usually the cost less depreciation written-off so far.
(5) Realizable Value. A value which will be realized in the market and received from the sale of an asset is known as its Realizable Value. Usually, expenses such as commission, brokerage, etc., are deducted from it. The realizable value is normally used in the valuation of existing assets.
(6) Break-up Value and Scrap Value. A value which may be obtained from the asset if it is sold as scrap and unserviceable is Break-up value.
(7) Going-concern Value or Value of the Business as a Going Concern. This is also known as Conventional or Token or Historical Value. It is equivalent to the cost less a reasonable amount of depreciation written off.
How far the valuation of a particular asset is correctly made is a question which will depend upon its nature, size and use. However, the following points have to be considered in the valuation of assets:
(i) The Original Cost;
(ii) The probable working life, i.e., the lifetime for which an asset will remain in proper working order;
(iii) Its Wear and Tear;
(iv) Its Break-up Value; and
(v) The chances of its being Obsolete.
Classification of Assets
Assets are generally classified under five main categories:
(1) Fixed Assets,
(2) Floating or Current or Circulating Assets,
(3) Wasting Assets,
(4) Intangible Assets,
(5) Fictitious Assets.
(1) Fixed Assets. Fixed Assets are acquired for permanent use and continuous service rendered by them for a pretty long time. They are neither meant for resale in the ordinary course of business nor consumed totally or partially in the business. Thus, such assets are more or less of permanent character and are used for the purpose of earning profits. The utility of these assets remains so long as they are in working order. Land, building, plant, machinery, furniture, etc., are some of the examples of fixed assets.(Verification of Assets Notes Study Material)
Out of the fixed assets, land is peculiar in the sense that it is not subjected to depletion in value by its use. Hence, its valuation is usually done at cost price. The remaining assets depreciate on account of their constant use and as such, are of depreciable nature, they are, therefore, valued at what is popularly known as a ‘Going-concern Value’ or ‘Historical or Token Value’ as explained earlier. The reason for it is that fixed assets are acquired to the running of a business and put to their repeated uses. They are valued at cost less a reasonable depreciation written-off and any fluctuation in their prices is not cared for
Thus, market price of realizable value of these assets is not considered for their valuation as they are not meant for resale in the market. The utility of such assets is not in the least affected by their market value being low or high. Service of experts are sought to recommend the estimated amount of depreciation in each case.(BCom Verification of Assets Notes Study Material)
(2) Floating or Current or Circulating Assets. The assets which cannot be put to constant uses are floating or current or circulating assets. Floating assets are meant for resale or are processed or produced for the purpose of sale and converting them into cash. Closing stock, semi-manufactured goods, book debts, bills receivable, cash, etc., are some of the examples of floating assets.
Book debts, bills receivable, etc., are normally valued at book value and in case of book debts, a provision is made for bad and doubtful debts. Raw materials and semi-manufactured goods are valued at cost. The closing stock of goods is valued at the date of the Balance Sheet at a cost price or market price whichever is lower. This principle is to be followed in most of the cases.
The valuation of floating assets should be done at the cost price or the market price, whichever is less. Why? This is an important issue to be considered. This clearly means that anticipated profits must not be accounted for while expected losses must always be taken note of. This is essential. The profits which have not yet been earned cannot be called and treated as actual profit in the strict sense of the term and even if they are treated as such for the present, it will be a great shock to the business in case there is loss instead of profit as anticipated. Similarly, if dividend is also distributed out of such anticipated profits to the shareholders of a company, it will not be a sound policy in the interests of the business itself and in the future, if it is a loss, money so distributed will not be taken back from the shareholders.(Verification of Assets Notes Study Material)
On the contrary, if expected loss is taken into account at present and even if a loss occurs at a later stage, the business will not be affected adversely and if there is no loss, it is quite good for the business. This is the reason as to why the guiding principle, i.e., cost price or market price, whichever is less, is followed for the valuation of floating assets.(BCom Verification of Assets Notes Study Material)
(3) Wasting Assets. There does not appear any necessity to provide depreciation on Wasting Assets like mines, quarries, etc., in terms of the decision of the case of Lee vs. Nauchatel Asphalte Co. Ltd. (1889). But as a matter of principle, the theory propounded in the case does not hold good. Wasting Assets exhaust by working and hence the process involves depletion of the capital employed. Hence, a charge should necessarily be made to maintain the capital employed so as to exhibit a true and fair value of the assets for the purpose of cost accounting. Wasting Assets are of Fixed nature and are depleted gradually or exhausted in the process of earning income, such as mines, quarries, oil-wells, etc. But there is difference between Fixed Assets and Wasting Assets. The decrease in the value of Fixed Assets is due to their use, i.e., wear and tear or obsolescence, while in the case of Wasting Assets, the decrease in value is a result of the operation of extracting a part of it or gradual exhaustion.
As a general rule the value of the Wasting Assets should be reduced each year to the extent of the estimated amount by which as a result of exhaustion, such assets have diminished in value. However, it is difficult to ascertain how much of the mine is exhausted and how much mineral remains more. Hence, Wasting Assets are shown in the Balance Sheet at their original value and provision is made for depreciation or depletion on the basis of their estimated exhaustion.
(4) Intangible Assets. Intangible assets do not have their form and hence, they are visible in their concrete form. However, they are equally well serviceable and valuable for business concern like any other assets. They are actually fixed assets without any concrete form. Goodwill, patents, copyrights, trademarks, etc., are some of the examples of such assets. Intangible assets are more or less treated as Fixed Assets for the purpose of valuation.
(5) Fictitious Assets. Fictitious Assets are different by their nature itself. Such assets are not physically visible, though, of course, money is spent in their case or are unrealizable assets. The examples of such assets are preliminary expenses in a new company, special advertising expenses, development expenses, debenture discount and issue expenses, discount on issue on shares, share issue expenses, etc. These items are really items of expenditure not represented by actual values and have no exchange value.
Hence, fictitious assets are of peculiar nature and are represented by the revenue expenditure that has been temporarily capitalized with the ultimate object of spreading the amount over several future years. Practically, these assets appear in the Balance Sheet as the amount of expenditure or loss represented, less any amount written-off from year to year to the Profit & Loss Account.
Position of an Auditor as regards the Valuation of Assets
“He is not a valuer and cannot be expected to act as such. All that he can do is to verify the original cost price and to ascertain as far as possible that the current values are fair and reasonable and are in accordance with the accepted commercial principles.” -Lancaster
“An auditor is not liable, if in the absence of suspicious circumstances, he relies on trusted officials of the company.” In re: Kingston Cotton Mills Ltd. (1896)
It is, thus, evident that an auditor has to be very careful and cautious in examining the valuation of assets. He should remember that the accuracy of the Profit & Loss Account and Balance Sheet depends upon the accuracy of the valuation of assets. But he is not a valuer or a technical expert who can estimate the value of assets which are different in their nature and character. As such, he has no alternative but to rely upon the valuation made by directors, partners, technical experts, surveyors, etc. He has to satisfy himself that the valuation of assets has been correctly made according to some accepted principles. He should ensure that such valuation appears to him to be fair and reasonable. If some fairly ordinary methods of valuation are adopted, the auditor can examine himself the utility of such methods and report on them.
But does it mean that he is absolved from his liability if assets are incorrectly valued by the officials of the business and also if he entirely depends upon their reports? Is he in a position to submit his report that the Balance Sheet exhibits a true and fair state of the financial affairs of a business? The answer is obviously ‘no’. He must use his best judgment as regards each item and take reasonable possible steps to verify that the valuation of assets has been made correctly. He should specially note the following two things:
(i) How far the principles of accounting have been adopted in the valuation of assets. (ii) Whatever steps are taken in the valuation of assets are based on the established practices already in vogue in the business and are the procedures already accepted in previous years.(Verification of Assets Notes Study Material)
If on these two bases, he is satisfied with the methods of valuation of the assets, he is free from his responsibility and liability. If he is not satisfied in this respect, he must qualify his report to the shareholders accordingly.
In every business, it is a usual practice to engage technical experts who possess the technical knowledge of different types of assets. They submit their certificates indicating therein the estimates on the basis of which depreciation has been provided for. The auditor should rely on their reports and assessment and make up his mind as to how far the valuation is fair and correct. If there is the slightest suspicion in his mind as regards the valuation of assets, he should make enquiries from the responsible officers of the business. This is the only remedy before him for certifying valuation of assets.
Verification of Different Types of Assets
As has already been stated, the auditor has to keep four considerations in his mind in verifying the different types of assets. They are:
(i) That an asset is clearly stated in the Balance Sheet.
(ii) That it was in existence with the business as an asset of the business on a particular day, viz., the date of the Balance Sheet.
(iii) That it is free from any charge or mortgage.
(iv) That it is correctly valued and its value is correctly disclosed in the Balance Sheet. It is to be seen that the depreciation provided is adequate and the basis on which it is provided is consistent with one applied in the previous years.
In the pages that follow, an effort has been made to verify different kinds of assets on the basis of these four considerations.
This is an intangible asset and, as such, has value so long as it is attached with the business. Its value, therefore, depends upon the earning capacity of the business and it fluctuates according to this capacity. In other words, it increases with the rise in profits leading to an increased value of the reputation of the business and falls with fall of profits.(Verification of Assets Notes Study Material)
There are normally four situations in which Goodwill is calculated or assessed and shown in the books of the business. They are:
(i) It is valued at the time of purchase when it is paid for. In such a case, Goodwill is equivalent to the difference between the purchase price and the net assets (ie., assets – liabilities) acquired.(BCom Verification of Assets Notes Study Material)
(ii) The company has written up the values of its assets on a revaluation of the whole of its assets and a Goodwill Account has been raised in its books.
(iii) There is another occasion when the Goodwill acquired by the company and written-off as such has been later brought back to write-off the debit balance in the Profit & Loss Account or a capital loss which the company has subsequently incurred.(BCom Verification of Assets Notes Study Material)
(iv) In case of partnership firms, the amount of Goodwill is calculated and assessed usually at the time of admission and retirement or death of a partner.
The auditor in all the above cases should check the accounts and compare the Goodwill Account with the Balance Sheet to ensure that Goodwill is clearly stated in the Balance Sheet and no other asset is mixed with it.
In case of purchase of the business, the auditor should verify it with the help of the contract made with the vendors. In the case of revaluation of assets which has raised Goodwill Account in the books of the company, it will be necessary for the auditor to make a reference on the basis on which the assets of the company have been revalued. In the case of Goodwill which has been later brought back to write-off the debit balance in the Profit & Loss Account or a capital loss, the auditor will be required to investigate the period over which the Goodwill originally acquired by the company was written-off. He will also ascertain the amount of Goodwill. He should refer to the resolution of the Board of Directors in this respect for reintroducing Goodwill as an asset. To utilize this amount for some specific purpose, approval by the shareholders will be necessary. For Goodwill in the partnership firm, the Partnership Deed should be referred to. He may verify the changes made in the Goodwill Account from time to time on the basis of provisions made in the Partnership Deed in this regard. He is not expected to press upon the Directors or the Partners to write-off a particular portion of the Goodwill Account, but he can satisfy himself by making a reference to the Articles of Association and Directors’ resolution in the case of company and to the resolutions of partners, if the business is a partnership firm.
Since Goodwill is an intangible asset having no physical existence, the question of some mortgage or charge on it does not arise at all.
Goodwill is valued at cost as, like fixed assets, it is not subjected to depreciation or depletion in value. Hence, it is shown at cost less the amount written-off. Legally, it is not binding on a company or a firm to write-off goodwill, but, however, it is advisable from the sound financial point of view to write it off gradually within a reasonable period out of the current profits or reserves. The auditor should very carefully look to the reasonableness of appreciation in its value, if any.
First of all, the auditor should see that in freehold land, no other asset, leasehold or freehold is shown alongwith this as its part. This is highly objectionable. He should compare the relevant Ledger Accounts with the Balance Sheet to ensure that freehold land is separately and distinctly shown in the Balance Sheet.
The freehold land or property is absolutely the property of the client. Hence, he should examine the Title Deeds relating to the freehold land and see that the asset is in the name of the client and is in his free and fair possession and the Title Deeds are genuine. He should verify the sale, if a part of it has been sold out during the course of the year and it is purchased during the year under audit he should examine correspondence and Broker’s Note or Auctioneer’s Account.
The land is not subjected to depreciation, but there may be some fluctuations in its value according to the changed circumstances. The auditor should see that no notice of such an appreciation or fall is taken into account while valuing the asset. But if such a fluctuation is accounted for, the auditor should see that such an adjustment in value has been disclosed in the Balance Sheet. Usually, land appears at cost in the Balance Sheet.
The auditor should examine the genuineness of the records made in the accounts to ensure that freehold land and buildings are shown in the separate accounts. It is to be remembered that building is to be treated separately from land as in the case of the former, depreciation has to be provided for building while there is no depreciation of land.(BCom Verification of Assets Notes Study Material)
He should examine the Title Deeds relating to the property. If it is purchased, correspondence and Broker’s Note has to be examined. If the purchase is affected through auction the Auctioneer’s Account should be checked. But if the building has been constructed by the client, he should examine the certificates received from the Builder. the Contractor, the Architect and other necessary papers and documents.(BCom Verification of Asset Notes Study Material)
If the building has been mortgaged, and its Title Deeds are with the mortgagee, the auditor should obtain a certificate from the mortgagee, and verify the asset with its help. If the Title Deeds are with the Solicitor or the Banker for the safe custody, it should be seen that they are for safe custody and not deposited as a security for a loan.(BCom Verification of Assets Notes Study Material)
Freehold building should be valued at cost less depreciation. Fluctuations in the market value are not to be considered in its valuation. But if something otherwise has been done, it should be clearly disclosed in the Balance Sheet.
When an asset is acquired by the business for a duration on lease, the property is said to be leasehold. It should be seen by the auditor that separate accounts are maintained both for freehold and leasehold properties.
To scrutinize the existence of the property on the day of the Balance Sheet, he should examine the Lease Deed to find out its value and duration. It should be seen that the lease has been registered with the Registrar and the conditions of the lease as regards payment of lease rent, maintenance of fire insurance, etc., have been duly complied with. It is to be noted that if the conditions are not fulfilled, the lease is likely to be forfeited.
The leasehold property cannot be mortgaged but can be sublet. If so, the agreement with the tenant should be examined.
There is no depreciation in the case of freehold land but the leasehold property which includes land also is subjected to depreciation and hence, provision for depreciation has to be made. The annual charge for depreciation will be arrived at by dividing the total cost by the term of the lease. The amount written-off should be such as would be sufficient to provide for dilapidation at the end of the term.
Plant and Machinery
Usually, the money spent in the acquisition of plant and machinery is shown in one account le., Plant and Machinery Account. The auditor should check the Balance Sheet with the help of Ledger Accounts and ensure that the asset is clearly stated. The asset is to be verified and entries relating thereto have to be vouched by reference to the original invoices, correspondence, etc.
The auditor should examine the Plant Register in which particulars about the cost, records about sales, provision for depreciation, etc., are available. It is advisable for the auditor to ask for a schedule of various plants in which details about cost, depreciation, etc., should be clearly given. He can now verify the asset by comparing the schedule with the Plant Register. If a part of the asset has been purchased during the year, the purchase should be vouched by reference to the invoice to the relevant vouchers. If a part of the asset is sold out, it should be seen that the necessary entries have been passed at proper places. Profit or loss arising out of the sales has been duly recorded. If plant and machinery is kept abroad, a certificate to that effect should be obtained from the local auditor. He should verify the existence of the asset by his personal inspection.
To see the mortgage or charge on the asset, the auditor should look to the details given in the Plant Register.(BCom Verification of Assets Notes Study Material)
Plant and Machinery is to be valued at its going-concern value. It should be shown in the Balance Sheet at cost less depreciation after making necessary adjustments relating to additions or substitutions made by the concern during the course of the year. Every depreciation is deducted from the cost and repairs and renewals are charged to Revenue Account. This is the usual practice, but if revaluation method is adopted for its valuation, the auditor should examine the Valuation Sheets.(BCom Verification of Assets Notes Study Material)
Furniture, Fixtures and Fittings
Furniture, fixtures and fittings are shown usually as one asset and verified as such by the auditor. But in practice, there is a distinction. Furniture is a movable asset and can easily be removed from one place to another, e.g., chair, table, etc. Fixture is an asset tightly fixed to the ground. For example, in science classes in a college, furniture is usually kept as fixed to the ground. It cannot be removed from place to place. Fittings are fitted on the walls and their examples are electric fittings and fans which are fitted and fixed on the walls of a building.
The assets like furniture, etc., are verified as it is done in the case of plant and machinery. Normally, Furniture Stock Register is maintained in the business. It is to be seen that on the date of Balance Sheet, the register so maintained has been properly balanced and the balance is shown clearly in the Balance Sheet. If furniture is acquired on lease (though it is not usually the case), the conditions mentioned in the Lease Deed should be examined.
The auditor should see that the asset is properly valued. Furniture includes chairs, tables, almirahs, etc., and is movable from one place to another, while fittings are those fitted on the walls, as electric wires, etc. Fixtures are those assets which are fixed on the ground or walls and are not movable. It should be seen in each case that proper depreciation has been provided for and the assets are shown at net figures in the Balance Sheet. The amount of depreciation will depend upon the nature of the use of a particular asset. It is to be noted that the depreciation should be so provided every year that the entire asset may be written-off by the expiry of its life-time.
The auditor should first of all examine the patents and verify them with the help of the certificates under which patent rights have been granted. The patents should be clearly stated in the Balance Sheet under separate head.
The auditor should ensure that the patents are registered in the name of the client. Patents may have been either secured as a result of experiments carried out by the business itself or may have been purchased. Patent rights are acquired in two ways:
(1) By Purchase. If they are purchased, the fees paid for purchasing or taking out such rights should be treated as capital expenditure and as such, debited to the Patents Account, while renewal fees, being of revenue nature, should be debited to the Profit & Loss Account.(BCom Verification of Assets Notes Study Material)
(2) By Development and Research. If the patents are created by the client by doing some research, it should be seen that the money so spent on research is of capital nature and, hence, should be debited to the Patents Account.
Thus, for purchases, the Assignment of Purchase or Patent Agent’s Accounts should be examined. If it is the first year, the auditor should check the cost and the duration for which such rights are to last from the relevant accounts. If the number of patents is large, he can call for a schedule thereof from the client, and should examine the registered number, dates of acquisition, description and the unexpired period from this schedule. The renewal fees should be vouched with the aid of receipts available with the client. It should be noted that if a patent is not renewed, it will lapse. A patent right lasts for 16 years unless the term is extended.(BCom Verification of Assets Notes Study Material)
The question of having any charge or mortgage on patents does not arise as the asset itself is used and maintained as a right by the business which acquires or develops it.(BCom Verification of Assets Notes Study Material)
The patents should be written-off in a period of 16 years after which the right lapses unless the term is extended. There may be three causes of depreciation, viz., (i) lapse of time, (ii) obsolescence, (iii) the patented article going out of fashion.(BCom Verification of Assets Notes Study Material)
The asset as such should be valued on the date of the Balance Sheet. If by revaluation the present value becomes higher than the cost price, it should not be taken into account. If the cost value of patents is to be written-off during some fixed period, it should be seen that it is done so. It should be noted that the money spent in the acquisition of the asset is of capital nature while the renewal fee paid each year should be debited to the Profit Loss Account.
This is the exclusive right to produce or reproduce a book or an article or, in the case of a lecture, to deliver the work or any part thereof in public. The author of the work is regarded as the first owner of the copyright and the duration of the copyright is the lifetime of the author and fifty years after his death. The auditor should proceed with their verification more or less in the same manner as he has done in case of patents.(BCom Verification of Assets Notes Study Material)
In verifying copyrights, the agreement between the Author and the Publisher is of immense value and it should be examined by the auditor. If there are many copyrights with a business, the auditor should call for a schedule thereof from the client and verify them from this schedule.
Copyrights suffer depreciation from the effluxion of time and thus, lose their value with the passage of time. Hence, in this case, the revaluation method of charging depreciation is considered to be most appropriate. The auditor may rely on the certificates of experts who are responsible for the revaluation of the asset.
Trademarks like patent rights are also registered in the name of the client. The Companies Act, 1956 provides that Goodwill, Patents, Trademarks and Designs should be separately and distinctly shown in the Balance Sheet of a company. The auditor should see that it is so done.
Most of the remarks relating to patents apply to this type of asset. The Assignment Deed should be examined and it should be seen that the renewal fee is paid each year at the right time. If the number of Trademarks is very large, a schedule duly signed by some responsible officer should be called for.
The revaluation method is the most suitable method of valuation of Trademarks. It should be seen that it is properly valued and shown in the Balance Sheet.
There is a practise usually followed by business firms to undertake Endowment Policies for the purpose of redeeming some liability which falls due at a later date or of replacing an asset later on. The example is that of Sinking Fund Policies which are taken up to redeem debentures. It is the duty of the auditor to inspect the policies physically. He should further ensure that the premiums due have been paid in time and the policies have not lapsed.
Patterns, Designs and Drawings
Some business-houses maintain patterns of goods produced by them and make advertisement with their help and get orders. Generally, patterns are prepared on a miniature scale for the products of a business while drawings and pictures are prepared on the paper. Designs are used for clothes and similar other things. Drawings are actually the pictures prepared by experts and artists on the model papers to depict the size and nature of the products of a business. The auditor has to see the respective accounts to ensure that such assets are clearly and separately shown in the Balance Sheet.