The verification of assets and liabilities involves the consideration of the following points:
- That each asset/liability is correctly stated in the balance sheet.
- That each asset/liability is correctly valued according to the generally accepted valuation principles.
- That the assets actually exist on the date of balance sheet, and are the property of the company.
- That the assets are free from any charge except that disclosed on the balance sheet.
- That no liabilities on the date of balance sheet have been omitted.
The verification of assets and liabilities achieves two main objects:
- Propriety of transactions recorded.
- Expressing an opinion on the financial statements, i.e., whether the balance sheet reflects a true and fair view of the state of affairs of the company.
1. Where Stock Records are Maintained:
(a) applying test checks to ensure proper maintenance ;
(b) comparing quantities as per stock sheets with those of the balances in the stock records;
(c) checking consistency in their valuation ;
(d) comparing ‘gross profit on turnover’ (%) with that of previous years, including the explanations for material variations, if any ; and
(e) ensuring separate disclosure of the value of the various components of stock-in-trade in the balance sheet.
- Where Stock Records are not Maintained:
(a) Inquiring into the system of stock-taking and stock sheets, preparation by reference to counts, pricing, extensions and totals;
(b) Inquiring into the system of internal accounting and administrative controls and evaluating its adequacy;
(c) Verifying the stock movements (i.e., receipts, issues, etc.) during the count, the listing of items in the stock sheets ;
(d) Determining the obsolete, slow-moving, non-moving, and damaged items and ascertaining their treatment in accounts ;
(e) Ensuring that the stock sheets include the goods sent on consignment but not yet sold, and do not include any goods:
(i) held on consignment,
(ii) sold but not dispatched, and
(iii) received but not purchased ;
(f) Examining that the quantities and corresponding values have neither been over-stated nor under-stated, and that the valuation has been done as per the company’s policy in accordance with the generally accepted accounting principles;
(g) Testing the appropriateness of allocation of costs of materials and labour, and of the proportion of overhead charges (if any) relating to the goods-in-process ;
(h) Comparing ‘gross profit on turnover’ (%) with that of previous years and ascertaining the reasons for material variations ;
(i) Obtaining a certificate from the management to the effect that the stock sheets are accurate, and confirming that the stock sheets have been signed by a partner or director or a responsible officer, and
(j) Finally ensuring that the various components of stock have been separately disclosed in the balance sheet with their mode of valuation.
The verification steps for various assets of a company include:
- Loans Against Security of Landed Property:
(1) Examining the documents like: Memorandum and Articles which empower the company to lend money, security papers, mortgage deeds, title deeds of properties, insurance policies, etc.
(2) Vouching the date and amount of loan, the rate of interest, and the date on which due.
(3) Examining the value’s certificate for sufficiency or otherwise of the securities held.
(4) In case of land and property having been mortgaged, seeing that:
(i) The mortgage has been properly executed.
(ii) The mortgager is empowered to do so.
(iii) The mortgage is registered with the Registrar of Companies in the case of a company.
(iv) The first mortgagee is aware of the second mortgagee (if any) and the title deeds are with the first mortgagee.
(5) Scanning the loan accounts in the ledger and obtaining confirmation from the borrowers as to the loan amounts on the date of balance sheet.
- Loans Against Security of Stocks and Shares:
(1) Obtaining the list of stocks and shares held as securities and ascertaining that these are transferred in the client’s name.
(2) Examining the status of shares as fully or partly paid as because the transferee will have to pay the uncalled amount whenever the company makes a call.
(3) Checking the valuation of securities held to ascertain its sufficiency or otherwise against the amount of loan.
(4) Examining the terms of agreements, viz., rate and amount of interest payable by the borrower, etc.
(5) Verifying whether such securities have been lodged with the bank for safe custody and obtaining a certificate from the bank.
(6) Confirming from the borrowers as to the loan amounts on the date of the balance sheet.
- Loans Against Security of Goods:
(1) Examining the documents like:
(i) Go-down-keeper’s receipt/Warehouse receipt/Dock warrant against which a loan has been advanced.
(ii) Railway receipt/Bill of Lading/Letters of Hypothecation/Insurance policy/Invoice on the basis of which a loan has been advanced for the goods-in-transit.
(iii) Inspection Reports to ascertain the quantity of goods which have been held as securities.
(2) Ensuring that the above documents have been duly endorsed in favour of the client.
(3) Ascertaining the value of the goods from the invoices, market quotations, etc., in order to determine the value of securities.
(4) Confirming/inspecting the turnover of the stock, where the goods are of perishable mature.
- Loans Against Personal Security of the Borrower:
(1) Making an inquiry as to the financial solvency of the surety, if any.
(2) Examining the validity periods of the Securities e.g., promissory notes.
(3) Ensuring that the terms, on which a loan has been advanced, have not been changed during the repayment period of the loan.
(4) Vouching of repayments and enquiry as to steps for recovery.
- Loans Against Insurance Policy:
(1) Examining whether the insurance policies:
(i) Are running policies;
(ii) Have been assigned in favour of the client , and
(iii) So assigned have been notified to the insurance company.
(2) Seeing that the amount of loan advanced is within the surrender value of such policies.
(3) Checking the premiums paid by the borrower by reference to the last receipts.
(4) Ascertaining whether the client has paid any premiums to prevent the policies lapsing and whether amounts so paid have been debited to the concerned loan Account of the borrower.