Verification and valuation of specific assets: land and building, plant, goodwill, investments, stock-in-trade and debtors

Principles and Practice of Auditing · Unit IV · Topic 10 of 15 · 6 min read

Item-by-item procedure for verifying and valuing land and building, plant and machinery, goodwill, investments, stock-in-trade (with a worked lower-of-cost-and-NRV example and attendance at the stock count) and debtors, with the frauds and errors to watch for each.

← All Principles and Practice of Auditing topics Past papers

On this page

1. Land and building
2. Plant and machinery
3. Goodwill
4. Investments
5. Stock-in-trade (inventories)
6. Debtors and cash
How this is examined

Cases checked to exist. Read the judgment before quoting a holding.

Every case cited here has been checked to exist — the citation resolves and names the right parties. The propositions attributed to each case have not been verified line by line against the judgment. Case names link through to the full judgment: read it before quoting a holding in an examination answer, and never carry a proposition from notes into court on trust.

The examinable core. “How do you verify the following items?” is set in every paper. Land and building and goodwill appear almost every time; plant and machinery, investments and stock-in-trade (inventories) are the next most common. For each item write four heads: existence, ownership, valuation, disclosure.

1. Land and building

Freehold land and buildings

Title: examine the title deeds (sale deed registered under the Registration Act 1908), mutation in revenue records and property tax receipts; see that they are in the name of the client. If the deeds are with a bank as security, obtain a certificate from the bank; the charge must be disclosed.
Additions: vouch with the sale deed, stamp duty and registration receipts, broker’s bill; for construction, the architect’s certificate and contractor’s bills; see the Board’s approval.
Sales: see the deed of conveyance, sale proceeds in the bank, and the profit or loss correctly computed.
Valuation: land at cost (not depreciated); buildings at cost less depreciation (AS 10 / Ind AS 16; Schedule II to the Companies Act 2013 for useful lives). If revalued, see the registered valuer’s report and that the increase is credited to revaluation reserve, not to profit.
CARO 2020: report whether the title deeds of all immovable property are held in the company’s name; give details if not.

Leasehold property: examine the lease deed for the period, rent and restrictive covenants; see that the premium is amortised over the lease period; check that the conditions of the lease (such as repairs) are complied with, as breach may lead to forfeiture.

2. Plant and machinery

Obtain a schedule and the fixed asset register showing each item, its cost, location, date of purchase and accumulated depreciation; agree with the ledger.
Vouch additions with the supplier’s invoice, and see that freight, installation and trial-run costs are capitalised, and repairs are not.
Physical verification: examine the management’s certificate of physical verification; inspect important items himself; test tags or numbers against the register.
See that depreciation is charged on a proper and consistent basis (straight-line or written down value) over the useful life.
See that discarded, sold or destroyed machinery is written off, and that the profit or loss is recorded; check insurance claims for destroyed items.
Check for impairment (AS 28 / Ind AS 36) where machinery is idle or obsolete.
For hired or leased machinery, see that it is not shown as owned.

3. Goodwill

Goodwill may appear in the books only when it has been purchased (on acquiring a business, or in an amalgamation); self-generated goodwill must not be recorded (AS 26).
Vouch the amount with the purchase agreement: goodwill is the excess of the purchase consideration over the fair value of net assets acquired; check the calculation.
See that it is amortised or tested for impairment as required by the applicable standard (AS 14 and AS 26 provide for amortisation; under Ind AS 103 and Ind AS 36 goodwill is not amortised but tested for impairment every year).
Where goodwill has been written up on the admission or retirement of a partner, see that it is written back if the partnership agreement requires.
Disclosure: shown under intangible assets in Schedule III.

4. Investments

Obtain a schedule showing each investment, its face value, cost, market value and income.
For physical certificates, inspect them at the balance sheet date and see they are in the client’s name; for dematerialised holdings, obtain the demat statement from the depository participant as at the year end.
Investments held by banks or brokers: obtain a certificate from the holder.
Vouch purchases and sales with brokers’ contract notes and Board approvals; for a company, check compliance with section 186 (limits and approval).
See that income (interest, dividend) has been received and accounted.
Valuation (AS 13): long-term investments at cost, less provision for permanent decline; current investments at the lower of cost and fair value. Under Ind AS 109, at amortised cost or fair value according to classification.
Disclose quoted and unquoted investments separately, with the market value of quoted ones.

5. Stock-in-trade (inventories)

Verification

Study the procedure for stock taking issued by management: who counts, cut-off arrangements, treatment of damaged goods.
Attend the physical count where inventory is material (SA 501). Observe the count, make test counts, and trace them to the final stock sheets.
Check cut-off: goods received before the year end are included in stock and in purchases; goods sold and dispatched are excluded.
Check the stock sheets for arithmetic, and agree the total with the stock ledger.
Obtain confirmation for stock held by third parties (godowns, consignees, job workers).
Exclude goods held on behalf of others (consignment stock received, goods sold but not yet delivered).
Compare the gross profit ratio and stock turnover with previous years to detect manipulation.
Obtain a certificate from a responsible official that the stock has been properly taken and valued; it does not relieve the auditor of his duty.

Valuation: AS 2 / Ind AS 2: at the lower of cost and net realisable value, item by item (or by groups of similar items), not on the total. Cost includes purchase price and costs of conversion, worked out by FIFO or weighted average (LIFO is not allowed). Obsolete and slow-moving items should be written down.

Item	Cost (Rs.)	NRV (Rs.)	Value taken (Rs.)
A	50,000	62,000	50,000
B	80,000	71,000	71,000
C	30,000	30,500	30,000
Total	1,60,000	1,63,500	1,51,000

Comparing totals would give Rs. 1,60,000 (lower of 1,60,000 and 1,63,500); the correct item-wise value is Rs. 1,51,000. Taking totals overstates stock and profit by Rs. 9,000, the loss on item B.

Trap. Over-valuation of closing stock is the classic method of inflating profit, because every rupee added to closing stock adds a rupee to profit. Kingston Cotton Mill and Thomas Gerrard (see the previous note) were both stock cases; cite them in an answer on stock.

6. Debtors and cash

Debtors: obtain a schedule, agree with the ledger, send balance confirmations (SA 505), review ageing, check subsequent receipts, and see that adequate provision is made for doubtful debts and that bad debts are written off with authority.
Cash in hand: count it on the balance sheet date (or by surprise), in the presence of the cashier, and obtain his signature on the count.
Cash at bank: obtain a bank certificate or confirmation of the balance, and check the bank reconciliation statement and that uncleared items cleared soon after the year end.

How this is examined

Combinations set: land and building, goodwill, contingent liability (2019, October 2023); goodwill, land and building, plant and machinery, investment (April 2021); investments, bills payable, plant and machinery (November 2021); land and building, goodwill, investments, creditors (August 2024); land and building, goodwill, bills payable (June 2025); plant and machinery and valuation (January 2026, 16 marks); plant and machinery and inventories (August 2024 short note); stock-in-trade (2019, 2022, April 2023, October 2023). Liabilities are in the next note.

Now try the real questions: Principles and Practice of Auditing past question papers.