Verification and Valuation of Investments

Verification and Valuation of Investments

An investment is a monetary asset purchased with the idea that the asset will provide income in the future or will later be sold at a higher price for a profit. Investments include Government securities, shares, debentures, etc. When the number of investments is very large, the auditor should ask for a schedule of investments held by the client containing various particulars like name of the securities, date of purchase, nominal value, cost price, market price, etc., and examine the same. He should ensure that the investment asset has been shown separately in the Balance Sheet.

The auditor should verify the existence of investments by personal inspection. At the same time, he should also ensure that the investments are registered in the name of the client and they are free from any charge. He should rely on the relevant vouchers and certificates to do so.

If the securities are with the trustees on behalf of the concern the auditor should examine the trust deed. In case they are under the safe custody of the banker then he should obtain the certificate from the banker and examine the same. If they are with the broker, he should examine the certificate received from the broker.

Having verified the securities, the auditor has to find out that the investments are properly valued. Generally, investments are valued at cost price or market price whichever is lower. 

In case there is a temporary fall in the price of the shares, it should be ignored. But where such a fall is permanent, depreciation must be provided. Actually, the basis of valuations of investment will depend upon the purpose for which they are held. For instance, in case of trust company, the sole purpose of which is to earn interest and dividend, then such investment must be treated as fixed asset. In such cases, even the permanent fall in their value should be ignored.

The investments are classified as – (1) Quoted Investments, and (2) Unquoted Investment

Quoted Investment

A company’s share is said to be “lists”, or “Quoted” if its share can be traded on a stock exchange, i.e., Public Limited Companies.

Auditor's Duty in Verification

1. Verify the authorization for purchase of investment. Auditor should review board minute book (book which record the conclusion of meeting) for authorization.

2. Vouch the entries in brokers contract note, share certificate and cash book.

3. Examine the share certificate to ensure that the type of security and number of share agrees with investment account and that the share held in the company with its name.

4. Verify that the investments are properly classified and disclosed as stated in Companies Act.

Auditor's Duty in Valuation

1. The auditor should satisfy himself that the investment has been valued in the financial statement in accordance with recognized accounting policies and practices and relevant statutory requirements.

2. The auditor should examine whether in computing the cost of investment, expenditure incurred on account of transfer fees, stamp duty, brokerage etc., is included in the cost of investment.

Unquoted Investments

A company share is said to be “unlisted” or “unquoted” if its stocks that are not listed on a stock exchange and so have no publicly stated price. Here, Investments are difficult to value, for example, shares that have no stock exchange listing i.e. Private Company etc.

Auditor's Duty in Verification

1.        Audition hould verify the Memorandum of Association to ensure authority for purchase such investment.

2.        Where investments are in large numbers, the auditor should obtain the schedule of securities certified by a senior officer of the company.

3.        Obtain the schedule of investment comprises for information about the name of the securities / investment, date of their acquisition, nominal/ face value, cost price, book value, paid up value market value, rate of interest applicable, dates of interest due, tax deduction, etc., at the date of Balance Sheet.

Auditor’s Duty in Valuation

1.        The Auditor should examine the method adopted by the organization for determining the market value of such securities.

2.        The Auditor should  examine whether the method of valuation of securities by entity is one of the recognized methods of valuation viz., breakup value method, capitalization of yield method, yield to maturity method etc.