Verification and valuation of assets: meaning, objectives and the auditor's position

1. Meaning

Verification means proving the truth of the assets and liabilities shown in the balance sheet: that each asset exists, is owned by the business (title), is free from undisclosed charge, was acquired for the business and properly authorised, and is correctly valued and disclosed. For liabilities, it means confirming that all liabilities are recorded and correctly stated.

Valuation means seeing that each asset is shown at a proper value, on an accepted basis, consistently applied, in accordance with the accounting standards (for example, cost less depreciation for property, plant and equipment; lower of cost and net realisable value for inventories).

2. Objectives of verification

1. to show that the assets exist and are in the possession of the business on the balance sheet date;
2. to show that the business has title to them;
3. to ascertain that they are properly valued;
4. to ascertain whether any charge or encumbrance exists on them, and that it is disclosed;
5. to see that they were acquired for the business and with proper authority;
6. to see that they are properly classified and disclosed as required by Schedule III to the Companies Act 2013;
7. to detect frauds: assets shown that do not exist, or that have been removed;
8. to prevent manipulation of the accounts (over-valuation of assets or omission of liabilities to show inflated profits, or the reverse);
9. to see that all liabilities are included and none are fictitious.

Need for verification (2022). Without it, a balance sheet could include assets that had been sold, lost or pledged, or at values far above their worth; the profit would be overstated by the same amount; and the auditor could not say that the balance sheet shows a true and fair view. The CARO 2020 also requires the auditor to report whether property, plant and equipment and inventories were physically verified by management at reasonable intervals, whether material discrepancies were found, and whether title deeds of immovable property are held in the company’s name.

3. General procedure

• obtain schedules of each class of asset and liability, agreeing with the ledger and the balance sheet;
• physical inspection of tangible assets (cash, stock, plant) or attendance at the client’s count;
• examination of documents of title (title deeds, share certificates or demat statements, registration certificates);
• external confirmation from third parties holding the asset or owing the money (banks, debtors, custodians) under SA 505;
• review of minutes, loan agreements and charge registers for encumbrances;
• review of the basis of valuation and its consistency with the previous year;
• management representations (SA 580) about ownership and completeness;
• review of events after the balance sheet date (SA 560).

4. Bases of valuation

Assets are also classified for valuation as fixed (held for use, valued on a going concern basis at cost less depreciation), current or floating (held for conversion into cash, valued at lower of cost and realisable value), wasting (mines, leases, amortised over their life), and fictitious (preliminary expenses and debit balance of profit and loss, which are not assets at all).

5. The auditor’s position as regards valuation

1. Valuation is management’s responsibility. The directors prepare the accounts and fix the values. The auditor is not a valuer or an expert in every trade.
2. He may rely on experts and responsible officials, provided he has no reason to doubt them. In Re Kingston Cotton Mill Co. (No. 2) (1896) the manager had over-valued stock for years and certified the figures; the auditors accepted his certificate. The Court of Appeal held them not liable: there was nothing to arouse suspicion, and they were entitled to rely on a trusted official. Lopes L.J. said the auditor is a watchdog, not a bloodhound.
3. But he must use care and skill and test the basis. In Re London and General Bank (No. 2) (1895), Lindley L.J. said the auditor is not an insurer, but must use reasonable care and skill, and must report what he finds; the auditors were liable because they knew the bank’s loans were inadequately secured but did not report it clearly to the shareholders.
4. Where suspicion is aroused he must probe it to the bottom. In Re Thomas Gerrard & Son Ltd. (1967) invoices had been altered to shift purchases into the next year and stock was inflated; the auditor noticed the alterations but accepted the managing director’s explanation. He was held liable. The standard of care has risen since 1896.
5. He must see that the basis is proper and consistent, and in accordance with the accounting standards; any change and its effect must be disclosed.
6. Current standards: he must evaluate accounting estimates and the reasonableness of the assumptions (SA 540), and may use the work of an expert after evaluating his competence and objectivity (SA 620), but the responsibility for the opinion remains his.
7. If he disagrees with a material valuation, he must qualify his report (SA 705).

How this is examined

“Briefly explain the position of an auditor as regards verification and valuation of assets” (2019, October 2023, 10 marks); short notes on the auditor’s position (April 2023, August 2024). “Objectives of verification of assets and liabilities” (November 2021, August 2024, 10 marks; short notes 2019, 2021, 2023, June 2025). “How do you value different assets as an auditor?” (June 2025) takes sections 4 and 5 with examples. Name the three English cases in any answer on the auditor’s position.