Verification of Assets and Liabilities of a Company | Auditing

In this article we will discuss about the checklist for the verification of assets and liabilities of a company:- 1. Copyright  2. Royalty 3. Travelling Expenses 4. Loans on Mortgage 5. Bank Overdraft 6. Loan to a Director 7. Investment in Shares 8. Plant and Machinery 9. Secured Loans 10. Preliminary Expenses 11. Leasehold Mining Rights 12. Railway Siding 13. Advances for Value to be Received and Few Others.

1. Copyright:

It refers to the rights of either the publisher or the author for publication or reproduction of a book written by an author. Such rights depend on the terms and conditions contained in the agreement between the author and the pub­lisher.

In order to verify this item, the auditor should:

(1) Examine the original contract to know the terms including the rate of royalty,

(2) Ascertain the right possessed by whom,

(3) Vouch the actual payments as royalties or the actual purchase consideration paid to the author,

(4) Review the life-span and value of the copyright for writing off the value, and

(5) Confirm about the disclosure in the balance sheet.

2. Royalty:

A term which is used to mean a pay­ment for the right to use certain classes of property belonging to others, such as the rights to extract minerals from mines or to manufacture articles from patents or to publish and sell copyright books.

The auditor’s verification procedures should include:

(1) Review of the agreement,

(2) Examination of the Deed for the lease or patent or copyright,

(3) Check­ing of the rate and amount of royalty paid or re­ceived and of the recording of transactions.

3. Travelling Expenses:

These are usually reim­bursed to the staff and employees undertaking offi­cial tours.

The auditor in this respect, should:

(1) Examine the tour programme and its approval by the controlling officer in respect of touring per­sonnel (e.g., salesmen, site inspecting staff, etc.),

(2) Verify the Travelling Allowance claim bills,

(3) Check the rates of allowances admissible, vouch­ers attached with the claim bill, mode of travel and the journey distance, and

(4) Review the bills re­maining outstanding at the year end.

4. Loans on Mortgage:

The auditor should ex­amine and verify:

(1) The mortgage deed to ascer­tain the name of the mortgagor, the property mort­gaged, the amount of loan, the rate of interest, and other terms and conditions ;

(2) The coverage of risks to property by proper insurance ;

(3) The real­isable value of the property ;

(4) The existence of any charge on the property ;

(5) The extent of re­ceipts against the loan ;

(6) The certificate from the mortgagee to find out the outstanding amount, if any.

5. Bank Overdraft:

The auditor should:

(1) Review the director’s minute book authorising such over­draft;

(2) Ascertain from the bank as regards amount, nature of security, and other terms;

(3) Check up the accrued interest thereon ; and

(4) Ensure the disclosures to the extent that the over­draft is exhibited under ‘secured loans’ or ‘unse­cured loans’ (as the case may be) and the interest under ‘current liabilities’ on the balance sheet.

6. Loan to a Director:

The auditor should:

(1) Exa­mine the applicability of the provisions of Sections 227(4A) and 295 of the Companies Act and verify as to their compliance by a company granting such loan;

(2) Inspect the directors’ minute book for sanction of such loan;

(3) Check up the book debts relating to directors so as to ascertain if they are in the nature of loans; and

(4) Ensure the disclosure of this loan as a separate item in the balance sheet.

7. Investment in Shares:

The auditor should:

(1) Inspect the share certificates and cross check with the register of investments;

(2) Confirm about the actual holding of all shares in the company’s own name (except in the case of shares in a wholly owned subsidiary company in which case a few shares may be held in the name of nominees) ;

(3) See the letters of trust given by nominees;

(4) Check up the entries regarding particulars of shares held in other names made in a register meant for this ;

(5) Review the compliance of the require­ments of the company law with respect to such in­vestments in a company belonging to the same group;

(6) Verify the value of quoted shares with the market quotations on the balance sheet date;

(7) Ensure proper disclosure, on the balance sheet, of all particulars of such investments, and (8) in­spect the register of inter-company investments.

8. Plant and Machinery:

The auditor should:

(1) Inspect directors’ minute book authorising capi­tal expenditure on this account ;

(2) Examine the cost details when such plant is erected by the com­pany’s own men, or the invoices for the purchases and the bills for erection by outsiders ;

(3) Check up the profit or loss on the sale of any plant and its accounting treatment;

(4) Scan the plant register and physically inspect some of the major plants by a visit to the works;

(5) Obtain from the company management certificate about the verifications of all items as required under Companies (Auditor’s Report) order of 2003;

(6) Check the adequacy of the amount of depreciation ; and

(7) Finally ensure appropriate disclosure of all information in the balance sheet as required by the company law.

9. Secured Loans:

The auditor should:

(1) Refer the Articles/Memorandum of Association and the Directors’ minute book to ascertain the borrowing powers of the company;

(2) Check up the clauses of the agreement or arrangement made with the bank or other financial institutions and the nature of se­curities and interest rates;

(3) Obtain confirma­tions from the lending institutions about the amount of loan, yearend balance, interest dues, and the securities lodged;

(4) Verify whether such loans are guaranteed by any director;

(5) Examine, in the case of loans obtained against debentures, the fol­lowing:

(i) Trust deed,

(ii) Sanction from Control­ler of Capital Issues, and

(iii) Register of Charges, if there is any charge.

10. Preliminary Expenses:

The auditor should:

(i) Identify the expenses incidental to the Articles, Memorandum, Prospectus and preliminary con­tracts (i.e., costs of stamp duty, registration, com­pany’s seal, printing documents, legal charges, etc.) and capitalisation thereof;

(ii) Vouch by reference to the documentary evidences, such as bills, re­ceipts, agreements, etc.;

(iii) Compare the actual expenses with the estimates specified in the pro­spectus;

(iv) Verify as to whether these expenses have been written off from the future profits, etc.

11. Leasehold Mining Rights:

The duties of the auditor should be to:

(1) Examine critically the terms and conditions of the lease agreements with par­ticular emphasis on matters, such as the period cov­ered by the rights, rate of royalty, minimum rent, recovery terms for short-workings, etc. ; and

(2) Verify the mode of capitalisation and of the ac­counting treatments.

12. Railway Siding:

This is owned usually by the large organisations through an agreement with the Department of Railways.

The auditor, in order to certify this item, should:

(1) Examine the terms and conditions of the agreement with respect to the rent and other maintenance charges payable to the rail­way authorities; and

(2) Verify the appropriateness of the scheme of capitalisation and depreciation.

13. Advances for Value to be Received:

They usu­ally refer to the items included under ‘prepaid ex­penses’, such as rent, rates, taxes, insurance, roy­alty, etc.

In these cases, the auditor should:

(1) Ex­amine the terms contained in the original documents and agreements, if any;

(2) Verify the relevant re­ceipts and payment vouchers; and

(3) Make sure that a separate schedule of such advances is made, i.e., not clubbed with other loans or advances paid to staff or suppliers, etc.

14. Compensation to a Director:

The auditor should:

(1) Examine the compliance with the provisions under Section 318 of the Companies Act; and

(ii) Verify the accounting treatment as to whether it has been debited to the current year’s Profit and Loss Account.

15. Premium Paid for Lease:

The auditor, in order to verify this item, should:

(i) Refer to the terms of lease agreement;

(ii) Verify the rate and amount paid, and

(iii) Check up as to whether it has been treated as capital or deferred revenue expenditure and charged off over the period of lease for which the benefit was derived.

16. Discount on Issue of Debenture Stock:

The au­ditor should verify as to:

(1) Whether a sinking fund has been created for a period equal to the life-span of this stock,

(2) Whether the discount is written off periodically,

(3) Whether the directors’ minute book authorizes this action.

17. Rebate on Capital Purchase due to Earlier Pay­ment:

The auditor’s duty should be to verify as to how such rebates are computed and allocated to the relevant purchases and the accounting adjust­ments.

18. Cost of Old Factory Pulled Down, etc.:

The auditor should verify:

(i) The cost of demolition;

(ii) The amount realised, if any;

(iii) The accounting treatments; and

(iv) The corresponding payment vouchers and miscellaneous receipts.

19. Trademarks and Patent Rights:

The auditor should:

(1) Inspect the certificates issued by the reg­istering authorities;

(2) Examine the terms and con­ditions attached to the rights when such rights (in­cluding trademarks rights) are obtained by pur­chase from others; and

(3) Verify the transfer deeds or assignment deeds.

For trademarks, the verification should cover the aspects of the cost of registration or assignment and the mode of capitalisation. For patent rights, the verification should extend to the original cost, rate and amount of depreciation, and the accounting treatment.

20. Goodwill:

It refers to the additional value attached to a prosperous firm because of certain attributes not possessed by other firms to the same degree. It is defined as “the current value of ex­pected future income in excess of a normal return on the investment in net tangible assets” (by E.L.Kohler).

However, the auditor should verify this item with reference to:

(1) The partnership agree­ment that determines the value of goodwill;

(2) The basis of its creation and/or writing-off;

(3) The dis­closure practices in the accounts; and

(4) The dif­ferent methods of calculating goodwill.

For writing off goodwill the auditor should pay particular attention as to the method adopted. Good­will may be written off either out of current year’s profits or out of reserves. Whatever be the basis, the auditor should ensure that the basis is followed consistently and also properly disclosed in the Profit and Loss Account and the balance sheet.

21. Loose Tools:

They usually refer to small tools, dies, moulds, etc. having relatively a short span of life.

 The auditor should examine the aspects of:

(1) Inventory taking;

(2) Stock records;

(3) The original acquisition costs or the costs of making, if own-made;

(4) The charging of tools-costs to pro­duction;

(5) The method of revaluation, if any; and

(6) The scheme of depreciation charged or the write ­off in the accounts.

22. Technical ‘Know-How’ or Technical Aid Pay­ments:

The expression is generally associated with certain services obtained from outside agencies, usually foreign collaborations. However, these pay­ments depend upon the contractual agreements be­tween two parties, ‘aid’ giver and ‘aid’ receiver. Such agreements may be for technical design, draw­ings, installation, erection, manufacturing process, etc.

However, the auditor should:

(1) Examine the director’s minute book for authorisation ;

(2) Refer the agreement deed for the rate and amount of pay­ment and the basis;

(3) Check the classes of pay­ment, viz. royalty, patents, etc.; and the mode of payment; and

(4) Ensure the consistency of account­ing treatment as to revenue and/or capital expendi­ture. The auditor should keep in mind the concept of propriety audit while verifying this item.

23. Motor Vehicles:

In order to verify this asset, the auditor should:

(1) Examine the documents, such as registration books, insurance policies, road li­cences, and the original purchase receipts;

(2) In­spect physically;

(3) Verify the Assets Register for the necessary entries relating to the year of acqui­sition, rate and amount of depreciation, and the re­alised value when sold out; and

(4) Ensure disclo­sure under an appropriate head in the balance sheet.

In case of any vehicles bought under the hire-purchase agreement, the auditor should ascertain the terms and conditions for this and check up the pay­ments towards installments, interests, and the scheme of capitalisation necessary under the law.

24. Imported Plant and Machinery:

The auditor should:

(1) Refer the directors’ minute book for reso­lution authorising this purchase ;

(2) Refer the Re­serve Bank of India’s permission and the import licence;

(3) Examine the agreement with the sup­plier in a foreign country with respect to the terms of payment and interest rates and the deferred pay­ment basis;

(4) Verify the vouchers relating to the purchase, customs duty, clearing and shipping charges, insurance premia etc. ; and

(5) check the entries made in the Assets Register.

25. Fixed Assets:

The auditor should:

(1) Refer the director’s minute book for sanction of capital pur­chases ;

(2) Vouch the suppliers’ bills and receipts for details;

(3) Examine the Assets Register for all assets bought, hired, transferred (from one loca­tion to another), sold, scrapped or destroyed dur­ing the year and the adjusted written-down values after depreciation ;

(4) Note down the basis of de­preciation charged and its consistency, and of any change in the basis and its impact on profit or loss and its disclosure;

(5) Obtain a certificate from the management to the effect that:

(i) The fixed assets shown in the balance sheet were in existence on the date,

(ii) The assets were free from encum­brances, and

(iii) The amount of depreciation pro­vided for in the year is adequate but not excessive.

It is, however, to be noted that the verification of different types of assets requires different steps but the above steps apply to all fixed assets.