It is duty of an auditor to verify the assets and liabilities of the business appearing in the balance sheet. It is necessary to find out whether the balance sheet reveals the true and fair view of the state of affairs of the business.
Meaning of Verification
Verification means ‘truth proving’ or confirming the truth, verification is the process by which the auditor satisfies himself by actual inspection or otherwise, as to existence, ownership, valuation and accuracy of the various items appearing in the balance sheet.
“The verification of assets implies an enquiry in to the value, ownership and title, existence and possession; the presence of any charge on the assets”.
J.R. Batliboi: “He (auditor) must satisfy himself that they really existed at the date of balance sheet and were free from any charge and they have been properly valued. In verifying the liabilities he has to see that all the liabilities have been inserted at their proper figures and that no liability has been omitted.”
Lancaster: “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 (i) the verification of the existence of the assets (i) valuation of the assets, and (iii) the authority of their acquisition.”
6 Principles of Verification
Verification of balance sheet requires the auditor to take care to the following aspects. There are termed as principles of verification which are as follows.
1. True and fair position/correct disclosure
The auditor has to certify weather the balance sheet shows a true and fair financial position and for this he has to verify the assets and liabilities. He should ensure that disclosure requirements as prescribed in schedule 4th and fifth of Company Ordinance 1984 as well as in IAS 5 have been fulfilled.
To certify the ownership and title of the assets appearing in the balance sheet. The auditor must examine documentary evidence to verify the ownership.
The auditor should verify the physical existence of the particular assets appearing in the balance sheet. This is done by physical examination or by documentary evidence as per situation.
4. Correct valuation
Correct valuation of all the assets with reference to their documentary evidence. It is duty of an auditor to apply all possible tests and make sure that the assets have been valued according to the generally accepted principles of accounting.
Different methods of valuation are used by different business mostly depend upon the nature of the business and the objects for which these assets are held. Different methods are as under.
(a) Fixed assets (cost less depreciation)
(b) Current assets (current assets are valued at cost or market price whichever is lower)
(c) Wasting assets (These assets are shown in the balance sheet at cost minus depletion upto the date of balance sheet. (Reduction in the value of natural resources as a result of with drawl is known as depletion).
5. Assets are free from charge
It is the duty of an auditor to verify the fact that assets are free from any charge or not if not weather it is mentioned in the balance sheet or not. The following step should consider for assessing such charge against any assets.
- The auditor must obtain a certificate from the management that all the assets are free from any charge which is not disclosed in the balance sheet.
- If any loan is obtained by the client auditor should inquire about the security offered against the loan.
- If certain investment is hold by the bank the auditor should inquire the purpose for which they are held by the bank.
- Register of mortgage and charges as required under section 125 d. of the company ordinance 1984.
The auditor must satisfy himself that the ownership in respect of that asset is really owned by his client. The auditor should acquire the certificate from relevant authority to examine the title deed of certain assets he should also examine the possession of assets weather it lies with the client or not.