Verification and Valuation of Assets and Liabilities: Audit of Balance Sheet Items Questions

Question 1

Define verification.

Accepted Answer

**Verification** means checking **existence and ownership** of balance sheet items.

Question 2

Define valuation.

Accepted Answer

**Valuation** means ensuring assets and liabilities are recorded at **correct value** as per accounting principles.

Question 3

State stock valuation rule.

Accepted Answer

Inventory is valued at **cost or NRV whichever is lower**.

Question 4

What is BRS?

Accepted Answer

**BRS** is **Bank Reconciliation Statement**.

Question 5

Give one method to verify bank balance.

Accepted Answer

Obtain **bank confirmation** and verify with bank statement/BRS.

Question 6

What is a contingent liability?

Accepted Answer

A **contingent liability** is a possible obligation whose outcome depends on a future event and is generally **disclosed**.

Question 7

Differentiate between verification and valuation.

Accepted Answer

**Verification** checks **existence and ownership** of assets/liabilities, while **valuation** checks whether they are recorded at the **correct amount**.

| Verification | Valuation |
|---|---|
| existence/ownership | correct value |
| physical/title evidence | depreciation/provisions |

Both ensure balance sheet items are not overstated or understated.

Question 8

State objectives of verification and valuation (any five).

Accepted Answer

Objectives (any five):
- ensure assets/liabilities are **genuine** and exist.
- confirm **ownership** and title.
- ensure correct **valuation** and depreciation/provisions.
- detect **overstatement/understatement**.
- ensure proper **classification and disclosure**.

Thus they support a true and fair view.

Question 9

Explain verification and valuation of fixed assets (brief).

Accepted Answer

For **fixed assets**, auditor verifies purchase invoices/title documents, checks physical existence of major assets, and verifies additions/disposals.
For **valuation**, auditor checks **depreciation method and calculation**, capitalization vs revenue classification, and whether any asset is impaired/charged.

Thus PPE is verified for existence and valued correctly through depreciation.

Question 10

Explain verification of cash and bank balance (brief).

Accepted Answer

For **cash**, auditor performs **physical cash count** and matches with cash book. For **bank**, auditor checks bank statements, obtains **bank confirmation**, and verifies **BRS** for reconciling items.

This ensures existence and correct balance of cash/bank.

Question 11

Explain audit of creditors/payables (brief).

Accepted Answer

Auditor verifies creditors by checking purchase ledger, supplier statements, and **subsequent payments** after year end. Also checks cut-off for unrecorded liabilities.

Main risk is **understatement of liabilities**, so completeness is important.

Question 12

List any three red flags in verification/valuation.

Accepted Answer

Red flags (any three):
- **Overvaluation of stock** or fixed assets.
- Unusual year-end adjustments and cut-off issues.
- Missing title documents/pledged assets not disclosed.
- Understatement of liabilities (unrecorded expenses).

These can distort the true and fair view.

Question 13

Explain verification and valuation. Differentiate them with a table and show the main audit checklist (flow).

Accepted Answer

**Verification** confirms the **existence, ownership and authenticity** of assets and liabilities shown in the balance sheet, while **valuation** ensures they are recorded at the **correct amount**.

### **Verification vs valuation (table)**
| Basis | **Verification** | **Valuation** |
|---|---|---|
| Main focus | existence/ownership | correct value |
| Evidence | physical inspection, title deeds | cost, depreciation, provisions |
| Result | item is genuine | amount is correct |

```text
Existence → Ownership → Possession/Charge → Valuation → Disclosure
```

Thus both are essential to prevent overstatement/understatement in balance sheet.

Question 14

Explain verification and valuation of inventory (stock). Add key checks in a table.

Accepted Answer

### **Audit of Inventory (Stock)**
Auditor verifies both **existence** and **valuation** of inventory.

#### **Verification (existence)**
- attend/observe **stock count** (where possible)
- check stock records and reconciliation with physical count
- verify goods in transit and stock at third parties

#### **Valuation**
- ensure stock valued at **Cost or NRV whichever is lower**
- verify pricing method (FIFO/weighted average) is consistent
- check cut-off at year end (purchase/sales cut-off)

| Check area | Key documents/steps |
|---|---|
| Existence | stock sheets, count records |
| Ownership | invoices, GRN, delivery challans |
| Valuation | costing sheets, NRV basis |

Thus correct stock verification prevents profit manipulation via over/undervaluation.

Question 15

Explain audit of debtors/receivables. Include confirmations, subsequent receipts and provision check with a flow/table.

Accepted Answer

### **Audit of Debtors (Receivables)**
Auditor ensures receivables are **real, recoverable** and properly valued.

Key procedures:
1) **Ledger scrutiny** and ageing analysis.
2) **External confirmations** from customers (reliability is high).
3) Check **subsequent receipts** after year end.
4) Verify **credit notes/returns** and cut-off.
5) Check **provision for doubtful debts** based on ageing and past experience.

| Step | Purpose |
|---|---|
| Confirmation | existence/accuracy |
| Subsequent receipts | collectability |
| Provision check | correct valuation |

```text
Debtors listing → ageing → confirmations → receipts check → provision → conclusion
```

Thus debtor verification supports correct asset value and prevents overstatement.

Verification	Valuation
existence/ownership	correct value
physical/title evidence	depreciation/provisions

Verification and Valuation of Assets and Liabilities: Audit of Balance Sheet Items

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