Verification and Valuation of
Individual Current Assets
and valuation of current assets states that the Balance Sheet shows true and
fair view of the financial position of business enterprise. The auditor must satisfy
himself that various current assets disclosed in the Balance sheet have been
valued according to the Generally Accepted Principles of Accounting.
cash and petty cash in hand are to be physically verified at the closing hours
on the last day of the financial year. The auditor has to be very careful while
verifying cash-in hand. Defalcation or embezzlement of cash has become a very
common technique of committing fraud. In this regard, the auditor may conduct a
surprise verification of cash at any time during the course of audit.
Therefore, while verifying cash, the auditor should ensure the following:
the cashier is present at the time of verification.
the temporary advances and payments on suspense accounts are excluded.
the cash-in-hand at one sitting and compare it with the cashbook balance.
Simultaneously a statement is prepared with details of denominations and number
of currency notes and coins. Both the cashier and audit staff must sign this
statement. The copy of this statement is handed over to the cashier and the
auditor may retain the original statement for future reference purpose. If in
case of non-agreement of cash balance, the auditor should demand explanation
from respective cashier or accountant for non-agreement of physical cash
balance and balance as per book.
count the petty cash book, stamps in hand and IOU’s (I Owe You) slips for
temporary advances made to the employees. If any discrepancy, he should get a
certificate to that effect from the accountant.
far as cash-in-transit is concerned, the auditor should verify this with the
help of proper documentary evidences and correspondences.
Carryout verification of cash at the end of the year or by way of surprise
check at any time during the year. The latter will enable the auditor to detect
the embezzlement, if any.
practice of keeping large balance of cash on hand is not a sound practice and
should be discouraged from the viewpoint of internal control.
prevent difficulties of physically counting the cash, auditor should ask the
client to deposit the entire cash Balance on balance Sheet date with a bank.
per the guidelines of Institute of Chartered Accountant of India, the auditor
should see whether duties are segregated among different person to authorise
should ensure that bank reconciliation is prepared periodically.
purpose of verification and valuation of cash at bank, the auditor should take
Compare the balances as shown in the passbook with that shown in the bank
column of the cashbook.
reconciliation statement is very helpful in detecting various types of frauds.
Therefore, prepare a bank reconciliation statement as on the last day of the
accounting year for ascertaining the current position of the cheques drawn by
the company but not yet presented for payment, or the cheques deposited by the
concern but not yet cleared.
auditor shall also carefully verify the post-dated cheques issued by the
organisation before the end of the year and ensure that such cheques are not
taken into account for the year under audit.
Examine that cheques issued for more than three months are treated as unpaid
and the relative entries are reversed.
Obtain a certificate of balance in client’s account as on the Balance Sheet
date from the bankers.
the organisation maintains accounts with more than one bank, the auditor should
verify all the bank accounts individually.
Auditor should obtain separate certificates from the bank in respect of Fixed
Deposit Account, Current Account, Savings Bank Account etc.
Scrutinise the fixed deposit receipts in respect of their date of issue,
amount, rates of interest, date of maturity etc., and get interest accrued on
deposits during the year duly adjusted.
any charge created on the deposits or if the deposits made under any legal
requirement, the auditor shall ensure that the fact is disclosed in the balance
due to legal restrictions, one or more of the bank accounts of the organisation
may be blocked. In such a case, the auditor shall ensure that the fact is
disclosed in the balance sheet.
or Inventories is the life-blood of a business. Therefore, value of stock-in
-trade has to be properly determined for ascertaining profit or loss for the
year and also to disclose a true and fair financial position of the concern.
Inventories or Stock- in-trade normally includes the following:
Raw-Materials: Raw materials form a major input into the production. They
are required to carry out production activities, for example, steel, copper,
rubber, cotton, wool, timber, lime stone, coal etc.
Work-in-Progress: The work in progress is that stage of stocks,
which are in between raw materials and finished goods. It means the total value
of unfinished production at the end of each financial period. It is in the form
of materials, which have absorbed varying amounts of labour and other overheads
to reach the manufacturing stage at the time of counting of stock of
work-in-progress. Work-in-progress should be shown in Balance Sheet separately
and not as stock-in trade.
Semi-Finished Goods: Goods in
a semi-finished condition on the
date of Balance Sheet should be valued at cost of raw materials plus a
reasonable proportion of factory overhead or production overheads. The auditor
should get a certificate from production manager about the portion of overheads
related to semi-finished goods. He should also examine the method of absorption
of overheads as a percentage of raw materials, labour and volume of production
for fair allocation.
Finished Goods: These are the goods, which are ready for the consumers. The
stock of finished goods provides a buffer between the production and the
market. If there is purchase of finished goods for resale, their valuation
should be at purchase price and a reasonable proportion of direct expenses
incurred on them, such as freight, duty, taxes etc., finished goods, Valuation
of should be at lower of cost of manufacture and market price. Whatever the
method of valuation is adopted, the auditor must confirm that valuation of
finished goods should never be at a rate higher than market price of identical
goods in the market.
Consumable Stores and Spare Parts: 'Spare',
as the name suggests, refers to additional or extra to what is required for
ordinary use. That purely means an item kept as standby, in case another item
of the same type is lost, broken, or worn out. These are purchased for reducing
the idle time of machineries and other auxiliary processes in case of sudden
breakdowns or any other contingencies. The auditor should confirm the adequacy
of spare parts according to plant capacity to reduce idle time by repairing the
breakdown of machineries immediately, thereby increasing the production
efficiency of concern. It is very helpful to reduce the idle time wages and
increase the profitability position of the company.
Loose-Tools: These are part of current assets, and will be typically found on
any Balance Sheets that may be produced for the business. There is another
definition of what qualifies as current assets, and this is expected to be used
within the next 12 months. In the context of verification of loose tools, the
auditor should obtain a list of loose tools duly authorised by some responsible
officer and examine the same. Revaluation of loose tools is the most
appropriate method of valuation. The difference between the cost price and the
current price should be treated as depreciation or loss to be charged to the
profit and loss account.
Auditor's Duty in Verification
1. Evaluation of Accounting and Internal
Control System: The auditor should study
and evaluate the accounting system and internal controls relating to
inventories. This would facilitate him in determining the nature, timing and
extent of substantive procedures to be carried out by him. The auditor should
review the following aspects of internal controls over stock–in-trade.
Custody: There must be provision of adequate controls to guard the
stock from loss through pilferage, exposure to weather and other hazards. The
storage of various items of inventories should be sound enough to protect them
against damage, deterioration, etc.
Records: There should be adequate records of all stock movements,
periodically reconciled with accounts and costing records.
Authorization: All stock movements should be properly authorized.
Authorities for giving purchase orders and receipts of goods should be clearly
laid down. Issues from stores should be made only against proper requisitions
notes approved by authorized managers.
Insurance: Different items of inventory should be adequately insured
against fire, theft, etc. Insurance Premium should be paid in time and
insurance policies should be kept in proper custody.
Slow-Moving Stock: There should be a regular review to identify and
take action to get rid of slow-moving, obsolete or defective stock.
2. Examine Existence of Stock: Auditor should verify the existence of stock
by exercising physical stock verification as on the date of Balance Sheet.
While undertaking physical stock taking or verification the following points
should be borne in mind:
Ensuring that staffs involved are both
knowledgeable about the stock and independent of the day-to-day handling or
recording of the stock.
Issue of written stock taking instructions
regarding counting procedures and clearly defining the responsibilities of all
Computing and checking calculations and
additions on stock sheets.
Continuous or periodic agreement of physical
checks with records, and all material differences investigated.
3. Verify Stock Records: He
should ensure that stock records are
properly maintained and must verify receipts and issues of materials. He must
also verify that Inspection Reports and Stock Sheets are authorised by a
Auditor's Duty in Valuation
is a Current Asset and the auditor should ensure that stock-in -trade is valued
at cost price or market price whichever is lower. The Institute of Chartered
Accountants of India Accounting Standards - 2 (AS 2) “Valuation of Inventories”
states that, stock of material is valued at cost or market price (Net
Realizable Value) whichever is lower on the date of Balance Sheet.
Methods of Valuation of Stock
of stock-in-trade is ordinarily at cost or market price whichever is less.
Auditor generally adopts either of the two methods in valuing stock such as:
(1) Pick and Choose Method, (2) Global Method.
1. ‘Individual or Pick and Choose’ Method: According
to this method, the lower of cost or
market price is the basis in respect of each individual item and the total of
the same is the value of the inventory.
2. Global Method: Under this method, first the cost of all items is
determined and aggregated. Then, the market price of all the items is
ascertained and aggregated. The lower of these two valuations is the value of
Illustration of Valuing Stock in-Trade at
Individual and Global Method
the following methods are used in determining cost price and market price of
Methods of Calculating Cost Price: In the context of valuation of
inventories, any one of the following methods is adopted to determine the cost
price of stock.
1. Unit Cost Method or Actual Cost Method: In this
method, each item or batch of goods
is valued at the actual price at which it was purchased. This method can only
be applied where goods have been purchased in different lots. The cost price of
unsold stock will be the cost price at which such a lot is acquired.
2. First in First Out Method (FIFO): In this method, issues are priced in the
order of the purchase lots. The price of the first lot is taken first, and when
that lot is exhausted, the price of the next lot is taken and so on. Hence,
items issued are valued at the earliest price or cost. As materials purchased
at earlier rates are charged first, the value of closing stock is more or less
nearer to the current market price.
3. Last in First Out Method (LIFO): In this method, issues are priced in the
reverse order of purchase. The price of the last lot is taken first, and when
that lot is exhausted, the price of the previous lot is taken and so on. Hence,
items issued are valued at the latest price or cost. The inventory in hand
remaining unsold is assumed to be out of the earliest lot and valued at the
earliest price paid or cost incurred for the same.
4. Base Stock Price Method: Under
this method, a minimum quantity of
stock known as base stock or safety stock is always held at fixed price. The
fixed price is kept below the original cost of the ‘base stock’.
5. Highest in First Out Method (HIFO): This
method is based on the assumption that issues are priced at the highest value
of available consignments in the store. The closing stock of materials should
always remain at the minimum value. The method is not popular as it always
undervalues the stock, which amounts to creating secret reserves.
6. Average Cost Method: When
large volumes of materials are
available in stores with largely varied prices, pricing based on actual cost
may be difficult. In such cases average price methods can be followed.
Following are the different average price methods which is used to value
(a) Simple Average Price Method: According
to this method, items issued are priced at average of the prices of the
different lots in stores, on the day of issue regardless of the quantity of
each lot. It is assumed that materials received first are issued first, at the
simple average price. Stock is valued at average of the prices of different
lots in stores.
Average Price Method: In this method, the items issued are valued at
weighted average price, which is calculated by taking into consideration both
the quantities of items and the cost of the items. The costs of all items are
added and the total cost is divided by the total quantity of items available.
It is the most commonly used method for valuation of Inventories.
7. Standard Cost Method: In this method stock is valued at some predetermined
cost per unit called the Standard Cost.
8. Adjusted Selling Price: In this method, the unsold stock is valued at
the prevailing price out of which the normal profit plus the estimated cost of
disposal, i.e., selling expenses and overhead expenses are deducted.
Methods of Calculating Market Price: Market
price of stock is determined by following any of the two methods:
1. Net Realisable Value: It
refers to the estimated price at
which stock of goods can be sold in the market after deducting cost of
marketing, selling and distribution expenses etc.
2. Replacement Cost: It
represents the cost of replacing the
stock of identical items at the date of balance sheet.
debtors fall in the category of current assets. The task of verifying this
asset would be reduced largely in case there is an efficient internal check
system for recording sales and writing off the sales ledger. According to the Companies
Act, 2013 the book debts of a company should be shown as under:
Debts considered good in respect of which the
company is fully secured.
Debts considered good for which the company
holds no security other than the debtor’s personal security.
Debts considered doubtful or bad.
object of verification in case of Book Debts is to ascertain-
or Accuracy of the amount of book debt.Validity or
of claims against recorded debtors.
and determination of realisable value.
disclosure in accordance with legal provisions and professional pronouncements.
verification and valuation of debtors or book debts, an auditor should
carefully examine the following points:
(A) Accuracy of the amount of Book Debts or
Debtors: Accuracy of the book
debts amount or debtors amount shall be:
should obtain a list (Schedule) of debtors, duly certified by some responsible
officer of the company.
whether the debit balance of the sales ledger is in agreement with the control
account or not.
(B) Validity: Confirmation requires direct communication with the debtors. The
auditor should carefully determine the method, the time of requesting such
confirmation and the number of debtors to be requested after taking into
consideration the following:
Undertake test checking of individual accounts,
the balances of ledger accounts and some of the entries of control accounts for
Probability of response from the debtors.
Examine thoroughly the system of internal check
in operation in relation to book debts.
Materiality of accounts.
Institute of Chartered Accountants of India through its Standard of Audit
recommends that the direct confirmation of balance should be done along the
Scrutinize the accuracy of the debtor’s list and verify the existence of debts
by receiving directly the confirmation letters or statement of accounts from
the debtors (or) arrangements should be made with the client for sending out
these letters to the debtors. This may be done on selective basis. However, the
confirmation of the balance by the debtor is not a guarantee as regards its
Confirmation procedures should be carried out within a reasonable period from
the end of the year.
the number of debtors is small, letters may be sent to all of them, but when
there are numerous debtors these could be done on a test basis.
of debtors selected for confirmation should be prepared in duplicate. A copy of
this list should be handed over to the client for preparing request for
confirmation, which should be fully addressed. In this regard, the client
should enclose stamped envelope bearing the auditor’s name and address for
Replies received should be carefully gone through and in cases, where balances
do not agree, client should be asked to investigate.
auditor must pay special attention to those balances for which confirmations
are not available. They might have been either fictitious or made to conceal a
(C) Collectability and Collection of Book Debts
or Debtors: Confirmation of a debt
is not an evidence of its collectability.
regarding with collectability, the auditor should make ageing analysis of the
debts and classify them as those under 30 days, between 30 and 60 days, between
60 and 90 days, and 120 days and above. This will enable him to ascertain the
collectability of individual debts.
of non-collectability of any debt will depend on credit-period allowed to the
debtor; how regularly he is paying; how many times he has defaulted in
payments; etc. Certain indications of doubtful or uncollectable debts may be as
Continuous violation of the terms of credit.
debts remaining unpaid while new ones are fully paid on time.
of payments after withdrawal of credit facility.
disease, or death of a debtor.
of debtor’s business or his disappearance.
over of old debts to company lawyer to file legal suit for recovery.
in case of writing down any bad debt or allowing excessive discount to any
debtor, the auditor should carefully go through relevant correspondence and see
that there is proper authorization for the same.
regard with collection of debtors, the auditor must consider the following
Make sure that all payments collected from
debtors, particularly towards the closing of the year, are promptly credited to
their accounts. Auditor should also see that duly authorized vouchers issued by
the company acknowledging payments in respect of debts substantiate all such
Examine carefully amount paid by debtors, but
not credited in their accounts, if any.
Make sure that customer’s account is duly
debited for goods sold or credit.
Vigilantly enquire into disputed balances owing
to some claims or complaints.
Check the adequacy of the provision for bad and
doubtful debts made by the management by undertaking an analysis of the
provision for doubtful debts. The auditor should allow a debt to be written off
as bad debt when he is fully satisfied that it is irrecoverable. Inadequacy of
provision for bad and doubtful debts, if any, must be brought to the knowledge
of the owner of the business and highlighting the same in audit report.
(D) Disclosure in Balance Sheet
must appear in Balance Sheet at their estimated realisable value. That means
there should be deduction of the provision kept for Doubtful Accounts from the
total book debts. According to Para III Schedule to Companies Act 2013, there
should be disclosure of Sundry Debts in Balance Sheet as follows:
There should be separate statement of aggregate
amount of trade receivable (book debts) not paid for more than six months from
the date they became due.
Classification of Trade receivables must be as
follows: (a) Secured, considered good, (b) Unsecured, considered good and (c)
There should be separate disclosure of
allowance for bad and doubtful debts.
Debts owned by Directors or other officer of
the company, or any of them either individually or jointly with any other
person, or debts owned by firms or private companies respectively in which any
director is a partner, a director, or member, should be separately stated.