VERIFICATION AND VALUATION OF ASSETS

VERIFICATION OF ASSETS According to the

Statements of“Auditing Practices” issued by the ICAI,the auditor’s objective in regard to

verificationof assets is to satisfy himself that-

They exist;

They belong to the client;

They are in possession of the client or any authorized by him;

They are not subject to undisclosed encumbrances or lien;

VERIFICATION OF ASSETS

They are stated in the balance sheet at proper amount in accordance with sound accounting principles; and

They are recorded in the accounts this will include scrap and waste).

TYPES OF ASSETSFIXED ASSETSFLOATING OR CURRENT ASSETS

WASTING ASSETSINTANGIBLE ASSETSFICTITIOUS ASSETS

A long-term, tangible asset held for business use and not expected to be converted to cash in the current or upcoming fiscal year is called fixed assets Fixed assets are not consumed or sold during the normal course of a business but their owner uses them to carry on its operations. In accounting, 'fixed' does not necessarily mean 'immovable;' any asset expected to last, or be in use for, more than one year is considered a fixed asset. In a balance sheet, these assets are shown at their book value (purchase price less depreciation).

•FREEHOLD LAND•LEASE-HOLD LAND

•LAND AND BUILDINGS•LEASE HOLD BUILDINGS•OWNERSHIP FLATS

•JOINTLY OWNED ASSETS•PLANT AND MACHINERY

•FURNITURE ,FIXTURES AND EQUIPMENT•TRANSPORTATION EQUIPMENT•PATENTS AND TRADEMARKS

•COPYRIGHTS

A land tenure arrangement where the land is permanently owned and not

leased.VALUATION:

Being a non-depreciable asset, freehold land is shown at cost, which

includes the purchase price, cost of options, unpaid taxes, broker’s

commission, registration fees, legal charges and also clearing draining and

other similar expenses. It should be clearly disclosed separately in the

balance sheet.

Leasehold land means tenancy of an immovable property held on lease, which implies a transfer of a right to enjoy such property for certain period or perpetuity, in consideration of a price.

VALUATION: Unlike freehold land, leasehold land is subject to diminution in value with the passage of time and as such depreciation should be provided thereon at a rate i.e. adequate to write off the total cost over the lease period.

A structure that has a roof and walls and stands more or  less permanently in one place .“ Buildings owned by the client may have been either purchased or constructed during the year under audit.”

VALUATION: Building should be valued at cost less depreciation at a reasonable rate. Depreciation should be provided even when the building is not used during the year that the market value is higher than the cost value, but it should be clearly disclosed in the balance sheet.

OWNERSHIP FLATS The flats owned by the owner is

called Ownership Flats. Such flats or premises should be shown under fixed assets liable to depreciation.

VALUATION: Ownership flats or premises being depreciable assets should be shown at cost less depreciation, together with the cost of the shares.

Plant or machinery if it is used for carrying on the business and is not stock in trade, the business premises or part of the business premises.

VALUATION: Plant and machinery are generally valued at original cost less depreciation at reasonable rate to be calculated. Repairs and renewals should be charged to separate repairs and maintenance account. After valuation it should be disclosed in the balance sheet.

Furniture refers to movable article in a dwelling house or a place of business. Fixtures mean chattels so affixed to land or building as to become a part of thereof. Office equipment means office appliances.

VALUATION: Furniture's, fixtures etc. are valued at cost less depreciation at a reasonable rate. Care should be taken to see that provision of depreciation is adequate keeping in view the working life of the asset given a variety of items to be found in this category.

Transportation equipment may consists of trucks of various sizes, trailers, station wagons and small buses used for pick up and delivery of goods and for transporting employees.

VALUATION: Transportation vehicles, though movable assets are regarded as fixed assets because these are used for carrying on the business. These are to be valued at cost less depreciation.

Current assets are cash and other assets expected to be converted to cash, sold, or consumed either in a year or in the operating cycle (whichever is longer), without disturbing the normal operations of a business. These assets are continually turned over in the course of a business during normal business activity.

Current Assets = Cash +Bank + Debtors + Bills Receivable + Short Term Investment + Inventory + Prepaid Expenses

The phrase net current assets (also called working capital) is often used and refers to the total of current assets less the total of current liabilities.

CASH AND CASH EQUVIVALENTS INVENTORIESRECIEVABLESSUNDRY DEBTORSPREPAID EXPENSESSHORT TERM INVESTEMENT

It is the most liquid asset, which includes currency, deposit accounts, and negotiable instruments (e.g., money orders, cheque, bank drafts).

VALUATION: The total cash remained in hand at the end of the accounting is taken into account. The same thing is done in case of bank balance.

Inventory is a list for goods and materials, or those goods and materials themselves, held available in stock by a business.. .

The valuation of inventories is based on a physical inventory count as of the balance sheet date. Raw materials and supplies are stated at purchase price, while finished goods and work in process are valued at production cost. Production cost includes direct expenses as well as an appropriate portion of material and production overheads. If the comparable selling value is lower, this value is used.

VALUATION : Valuation of inventories can be done in 3 ways.

FIFO - FIRST IN FIRST OUT

LIFO - LAST IN FIRST OUT

AVERAGE METHOD FIFO and AVERAGE is commonly used methods

for valuation of the inventories. Or it can be valued at the price at which last

stock was sold out i.e. last selling price of the last stock

Accounts receivable (A/R) is one of a series of accounting transactions dealing with the billing of a customer for goods and services he/she has ordered receivable - is an amount awaiting receipt of payment.

VALUATION: accuracy of the amount of bills can be verified by the reference to a certain schedule of b/r in hand and related to individual ledger accounts. the auditor should also discus with the client about the

Collectivity of each bill and review the bills which are for material sums or have matured or been renewed . And if bills are endorsed the risk of credit is transferred to the endorsee and the accounts thereof should be eliminated and no contingent liability need to be shown.

Where the bills have been retired after the balance sheet date , the same should be verified by reference of cash book

Prepaid expenses are those expenses which have been paid in advance. In other words, these are the expenses which have been paid during the accounting period for which the final accounts are being prepared but they relate to the next period. As the benefit of such expenses are received in the subsequent years, it will be treated as expenses of the coming years and not the year in which it is paid.

An account in the current assets section of a company's balance sheet. This account contains any investments that a company has made that will expire within one year. For the most part, these accounts contain stocks and bonds that can be liquidated fairly quickly.

Most companies in a strong cash position have a short-term investments account on the balance sheet. This means that a company can afford to invest excess cash in stocks and bonds to earn higher interest than what would be earned from a normal savings account.

Microsoft, which is always in a strong cash position, had short-term investments totaling approximately $32 billion at the end of 2005.

VALUATION OF WASTING ASSETS

MEANING:

An asset that diminishes in value by reason of, in proportion to, the extraction or removal of a natural product such as ores, oil and timber, which it contains, is called as a wasting asset.

Examples: Mines, oil wells, collieries etc.

VALUATION: The value of wasting assets waste away

with use, rather than depreciating with time and use. The asset as such is irreplaceable and it has a useful life limited to the period over which it is economically feasible to extract the substance on which the value of the asset depends.

The cost of a wasting asset includes, in

addition to the original cost of land, title cost as also exploration, development and carrying charges up to such time as commercial production begins. It is reduced by the amount of yearly depletion calculated on the basis of the total cost and the number of recoverable units.

DEFINITION:

Intangible assets can be define a non-physical claim to future value or benefits. Corporate intellectual property (items such as patents, trademarks, copyrights, business methodologies), goodwill and brand recognition are all common intangible assets in today's marketplace. An intangible asset can be classified as either indefinite or definite depending on the specifics of that asset. A company brand name is considered to be an indefinite asset, as it stays with the company as long as the company continues operations. However, if a company enters a legal agreement to operate under another company's patent, with no plans of extending the agreement, it would have a limited life and would be classified as a definite asset.

TYPES OF INTANGIBLE ASSETS

GOODWILL

TRADEMARKS

PATENTS

COPYRIGHTS

MEANING OF GOODWILL

Goodwill typically reflects the value of intangible assets such as a strong brand name, good customer relations, good employee relations and any patents or proprietary technology. It is usually described as the difference between the sales price of a company and the value of its tangible assets. Goodwill is based on the company's reputation and customer loyalty.

Goodwill = Purchase Price – Market Value

 of Assets

VALUATION OF GOODWILL

Goodwill represents the difference between the overall business valuation, arrived at on the foregoing basis, and the aggregate book value of the individual net assets carried in the balance sheet.

AVERAGE PROFIT METHODSUPER PROFIT METHODCAPITALISATION MEHTOD

AVERAGE PROFIT METHOD Under this method goodwill is

valued on the basis of an agreed number of years purchase of the average maintainable profit.

 If in any year there is an exceptional opportunity or an exceptional expense or absence of expense , the profit for the year has to be so adjusted as to get it free from such exceptional influences.

SUPER PROFIT METHOD Under this method super profit is

ascertained . Goodwill is valued at a few years purchase of the super profit of the concern. The number of year to be taken for consideration depends upon the nature of the business, the steady and fluctuating nature of profits and also the goodwill. Ascertain the average capital employed during a year, For this take the total of the closing real assets of the concern as revalued. Now we calculate the normal average annual trading profit after tax , but before charging interest on debentures and long term loans and also preference dividend.

From this average profit reasonable managerial remuneration should also be deducted. The profit as obtained after the above adjustments is to be compared with the reasonable return on the average capital employed, calculated at the rate of return earned by similar businesses .If the former exceeds the latter the balance represents the super profit .A few years purchase of the super profit is taken as the value ofgoodwill.

CAPITALISATION METHOD

Capitalisation of Average Profit: Under this method the average annual profit is to be ascertained after providing for reasonable management remuneration . This profit should be capitalized at the rate of reasonable return to find out the total value of business. Now the value of goodwill will be the total value of business minus its net assets. If, however, the net assets is greater there will be no goodwill, rather there is bad will.

Capitalisation of super profit : Under this method the average super profit capitalised at a certain rate of interest and this capitalised amount becomes the value of goodwill.

A patent is an official document which secures to the inventor an exclusive right for term of years to make , use or sell his inventions. A trademark is a distinctive mark attached to goods offered for sale in the market.

VALUATION: Patents and Trademarks should be shown at cost less depreciation, it should be calculated with reference to the period of expected benefit but in no case more than the life of the patent or trademark which is usually 16 yrs.

A copyright is the exclusive legal right to reproduce, publish and sell the matter and form, of literary, musical or artistic work.

VALUATION: Copyright is shown at cost less the amount written off as depreciation from time to time. The rate of depreciation should be based on calculation as to the period of expected substantial sales of the copyrighted work.

DEFINTION

Asset created by an accounting entry (and included under assets in the balance sheet) that has no tangible existence or realizable value but represents actual cash expenditure. The purpose of creating a fictitious asset is to account for expenses (such as those incurred in starting a business) that cannot be placed under any normal account heading. Fictitious assets are written off as soon as possible against the firm's earnings.

Verification and valuation of fictitious assetsPreliminary expenses

The statutory report, memorandum and articles of association and prospectus should be examined. The auditor should see that only items connected with the flotation and promotion of the company are included under this head of account. The broad details of amounts constituting preliminary expenses are:

Legal cost of registering the company Stamp duty and fees paid on the authorized

capital. Fees and stamp duties paid on the documents

filed with the registrar of joint stock companies. Cost of preparing and printing memorandum

and articles of association. Cost of preparing all preliminary expenses

including stamp duties. Cost of preparation, printing and publication of

prospectus. Engineer and valuer fees for valuing assets

intended to be acquired. Cost of preparing and printing share

certificates, letters of allotment, debentures, trust deed, etc.

Cost of the first set of books of accounts, statutory and statistical books and common seal of the company.

All legal and professional charges in respect of promotion and formation of the company.

Brokerage The amounts paid in respects of brokerage

should be verified as under:The provisions of the Articles of Association

should be inspected.The relevant portion of the prospectus

dealing with the item of brokerage should be studied.

The entitlement should be verified by the study of the above documents and with the application forms marked by the broker.

The broker’s receipt should be checked and the directors’ minutes should be examined for authorization of the payment.

Underwriting commissionIt will be verified as given in the following stepsThe terms of underwriting commission should be

verified from the articles of association, prospectus and agreement with the underwriter's).

It should be seen that the limits laid down by the controller of capital issues in respect of underwriting commission are not exceeded.

If the said commission has been paid in cash, payee’s acknowledgement and the calculation of the amount should be checked

If shares have been allotted against the consideration of underwriting commission, the relevant entries should be checked.

The amount paid should be separately shown in the balance sheet until written off.

Deferred revenue expenditure Where any heavy expenditure in the

nature of revenue is incurred, the benefit of which is likely to extend beyond the financial year in which it takes places, it is usual to allow such an expenditure to be temporarily capitalized and to be spread equally over number of years for which it is anticipated that benefit would be reaped by the business. The following are some of the examples.

Abnormal heavy amount of advertising expended in any one year to popularize a new product.

Cost of removal of business to a more convenient place.

Exceptional repairs of plant, buildings. Etc. of non-recurring nature.

Deferred revenue expenditure will be verified by the auditor in line with verification and valuation of other fictitious assets.