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481 ASSIGNMENT No. 2
(Unit 5–9)
Total Marks: 100
Pass Marks for BA/ B. Com: 40
Pass Marks for AD/BS: 50
Q.1 Why is the verification important? Discuss the various 'techniques 'used in verification. (20)
ANSWER1:

Verification means "proving the truth" or "confirmation". Verification is an auditing process in which auditor
satisfy himself with the actual existence of assets and liabilities appearing in the Statement of Financial
position.Verification is usually conducted through examination of existence, ownership, title, possession, proper
valuation and presence of any charge of lien over assets.
Thus, verification includes verifying:
The existence of the assets and liabilities.
Legal ownership and possession of the assets
Correct valuation, and
Ascertaining that the asset is free from any charge
Verification in an audit process can be done offsite or onsite. Offsite verification means verification by
checking documents, official records, photos and by questioning staff responsible or otherwise trusted to be a
reliable source for the facility in verification. Onsite verification means the verifying party is physically visiting
the facility, getting introduced into due facts about it on the site where the facility is located and operated. The
process may be regulated by law in certain countries.

AN OVERVIEW OF VERIFICATIONS
Firstly, there are many types of checks to consider such as: education, employment, professional licenses and
professional certificates. They are all important, but some will matter more to different types of businesses.
Hundreds of thousands of candidates apply for jobs every year with fabricated qualifications and falsified
education histories. They essentially exaggerate or lie about their achievements in order to position themselves
for a job.
It’s worth stating, however, that often the candidates themselves are duped into believing an institution is
legitimate when they aren’t. The question of who’s to blame is less important – what matters is that your
organisation has strong verification procedures in place to prevent it happening during your recruitment process.

Importance of Verification and Valuation of Assets

Assets and liabilities are very important aspects of every business concerns. To show the exact financial
position of the concern, one of the main work of an auditor is to verify the assets and liabilities. An auditor
should satisfy himself about the actual existence of assets and liabilities appearing in the Balance Sheet is
correct. If Balance Sheet incorporates incorrect assets, both Profit and Loss account and Balance Sheet will not
present a true and fair view. So, verification and valuation of assets is very important for business and their
importance is highlighted below.
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1. Showing the Actual Financial Position
Balance Sheet is prepared to show the actual financial position of a business. If proper valuation is not made,
such Balance Sheet does not provide true and fair information. So, to provide information about the real
financial position, verification and valuation of assets are essential.

2. Ascertaining the Real Position of Profit or Loss:

Depreciation and other expenses on assets will be incorrect if proper valuation of assets is not made. So, to
calculate the actual amount of profit or loss, proper valuation of assets and liabilities is necessary.

3. Increase Goodwill
Proper valuation gives fair information about profitability and financial position of a business. So, people can
get information which creates positive attitude towards company. The positive attitude of public can increase
the goodwill of the concern.

4. Assures Safe Investment to Shareholders

Verification and valuation provide actual information about assets and liabilities to the shareholders which
assure safety of their investment.

5. Easy for Sale

At the time of sale of the company, it can be sold at the price which is enlisted in the Balance Sheet, but the
assets whose valuation is not made need valuation before selling the company.

6. Easy to Get Loan

Companies disclose the Balance Sheet proved by auditor for public knowledge which increases the trust of the
company. Hence, companies can easily obtain loan from financial Institutions.

7. Easy to Get Compensation

Whenever the loss occurs due to any incident, insurance company provides compensation on the basis of
valuation of assets. So, the company can easily get compensation
The four fundamental methods of verification are Inspection, Demonstration, Test, and Analysis. The four
methods are somewhat hierarchical in nature, as each verifies requirements of a product or system with
increasing rigor. I will provide a description of each with two brief examples of how each could be used to
verify the requirements for a car and a software application.
Inspection is the nondestructive examination of a product or system using one or more of the five senses (visual,
auditory, olfactory, tactile, taste). It may include simple physical manipulation and measurements.
 Car: visually examine the car to ensure that it has power windows, power adjustable seats, air
conditioning, a navigation system, a tow package, etc.
 Software Application: visually examine the software for screens that were requested, check for the fields
needed for data entry, verify that the necessary buttons exist for initiating required functionality, etc.
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Demonstration is the manipulation of the product or system as it is intended to be used to verify that the results
are as planned or expected.
 Car: use the automatic switches to verify that the windows and seats work as intended, start the vehicle
and ensure that the air conditioning produces cold air, take the car for a test drive to sense the
acceleration and cornering as it was described based on the requirements.
 Software Application: enter all required fields on a screen and select the button to return a specific
report. Ensure that the report is returned with the type of data needed.
Test is the verification of a product or system using a controlled and predefined series of inputs, data, or stimuli
to ensure that the product or system will produce a very specific and predefined output as specified by the
requirements.
 Car: accelerate the car from a complete stop to 60 mph, and verify that it can be done in 5.2 seconds.
Accelerate through a turn under controlled conditions, producing .8G of force, without the car loosing
traction.
 Software Application: enter the type and model of car, automatic windows, power steering, and all other
options as stated in the predefined test plan, select the price now button and receive back a price quote of
precisely $43,690.
Analysis is the verification of a product or system using models, calculations and testing equipment. Analysis
allows someone to make predictive statements about the typical performance of a product or system based on
the confirmed test results of a sample set or by combining the outcome of individual tests to conclude
something new about the product or system. It is often used to predict the breaking point or failure of a product
or system by using nondestructive tests to extrapolate the failure point.
 Car: complete a series of tests which rev the engine at a specific rpm for a set length of time, while
monitoring engine vibration and temperature, to verify that the expected results are achieve. Use this
information to model the failure point of the engine, i.e. max rpm sustained over a specific period of
time.
 Software Application: complete a series of tests in which a specified number of users input the
characteristics of the car they are attempting to price and initiate the pricing functionality at the same
time. Measure the response of the system to ensure that the pricing function returns its results within the
time specified. Analyze the relationship between increasing number of system users and the time it
takes for pricing to be returned. Record the results to capture system degradation. Use this information
to predict at what point the system no longer meets the maximum allowable time to return pricing as
defined by the requirements.

Q.2 Differentiate fixed assets from current assets. Describe the various steps involved in verification of current
assets. 20
ANSWER2:

Fixed Assets
Fixed Assets are the components of non-current assets, which are possessed by the enterprise with the intention
of good use by the enterprise rather than resale. They are expected to furnish economic gains for more than 1
accounting year and are possessed by the enterprise for carrying out company operations. On the balance sheet,
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fixed assets are documented at their net book value, i.e. amortisation or purchase cost price less depreciation as
the case may be. Fixed assets can be contemplated as long term assets which are obtained by the enterprise for
the intention of pursuing to earn income

Current Assets
An asset is referred to be a current asset when it is expected to be realised or planned to be sold or utilised
within 1 year or the enterprise’s standard operating period. Enterprises hold the current asset in the form of cash
or their regeneration into cash or for utilising it in by furnishing goods and services. Current assets refer to such
type of resources which an enterprise possess for being dealt with and which are not possessed for more than a
year
Companies own a variety of assets that are used for different purposes. These assets also have different time
frames in which they are held by a company. Companies categorize the assets they own and two of the main
asset categories are current assets and fixed assets; both are listed on the balance sheet.

The balance sheet shows a company's resources or assets while also showing how those assets are financed;
whether through debt, as shown under liabilities, or through issuing equity, as shown in shareholder's equity.

Current assets are short-term assets, which are held for less than a year, whereas fixed assets are typically long-
term assets, held for more than a year. However, there are other differences between them.

Current assets are assets that can be converted into cash within one fiscal year or one operating cycle. Current
assets are used to facilitate day-to-day operational expenses and investments. As a result, short-term assets
are liquid, meaning they can be readily converted into cash.

Examples of current assets include:

 Cash and cash equivalents, which might consist of certificates of deposit

 Marketable securities, such as equity or debt securities
 Accounts receivable, or money owed to the company for selling their products and services to
their customers
 Inventory
 Prepaid expenses

Fixed assets are noncurrent assets that a company uses in its production of goods and services that have a life
of more than one year. Fixed assets are recorded on the balance sheet and listed as property, plant, and
equipment (PP&E). Fixed assets are long-term assets and are referred to as tangible assets, meaning they can be
physically touched.

Examples of fixed assets include:

 Vehicles like trucks

 Office furniture
 Machinery
 Buildings
 Land
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Fixed assets undergo depreciation, which divides a company's cost for non-current assets to expense them over
their useful lives. Depreciation helps a company avoid a major loss when a company makes a fixed
asset purchase by spreading the cost out over many years. Current assets are not depreciated because of their
short-term life.1

Noncurrent assets (like fixed assets) cannot be liquidated readily to cash to meet short-term operational
expenses or investments. Fixed assets have a useful life of over one year, while current assets are expected to be
liquidated within one fiscal year or one operating cycle. Companies can rely on the sale of current assets if they
quickly need cash, but they cannot with fixed assets.

For example, if the economy is in a downturn and a company is not making any profits but still needs to make a
debt payment next month yet has no cash reserves to do so, it can sell its marketable securities within a few
days and obtain cash. On the other hand, it would not be able to sell its factory within a few days to obtain cash
as that process would take much longer.

Capital Investment and Fixed Assets

Capital investment decisions are long-term funding decisions that involve capital assets such as fixed
assets. Capital investments can come from many sources, including angel investors, banks, equity investors,
and venture capital firms. Capital investments might include purchases of equipment and machinery or a new
manufacturing plant to expand a business. In short, capital investments for fixed assets mean a company plans
to use the assets for several years. These purchases are also known as capital expenditures.

Capital Investment and Current Assets

Although capital investments are typically used for long-term assets, some companies use them to
finance working capital. Current asset capital investment decisions are short-term funding decisions essential to
a firm’s day-to-day operations. Current assets are essential to the ongoing operation of a company to ensure it
covers recurring expenses.

Capital investment decisions look at many components, such as project cash flows, incremental cash flows, pro
forma financial statements, operating cash flow, and asset replacement. The objective is to find the investment
that yields the highest return while ignoring any sunk costs.

Return on invested capital (ROIC) is a calculation used to assess a company's efficiency at allocating the
capital under its control to profitable investments. Return on invested capital gives a sense of how well a
company is using its money to generate returns.

There are several methods used in determining how to allocate capital to one investment versus another,
including incremental analysis, whereby a company can calculate the differences in cost between different
investment options.

Q.3 Define current liabilities. Describe the various steps involved in verification of current liabilities. (20)
ANSWER3:

Current liabilities are a company's short-term financial obligations that are due within one year or within a
normal operating cycle. An operating cycle, also referred to as the cash conversion cycle, is the time it takes a
company to purchase inventory and convert it to cash from sales. An example of a current liability is money
owed to suppliers in the form of accounts payable.
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Current liabilities are typically settled using current assets, which are assets that are used up within one year.
Current assets include cash or accounts receivables, which is money owed by customers for sales. The ratio of
current assets to current liabilities is an important one in determining a company's ongoing ability to pay its
debts as they are due.

Accounts payable is typically one of the largest current liability accounts on a company's financial statements,
and it represents unpaid supplier invoices. Companies try to match payment dates so that their accounts
receivables are collected before the accounts payables are due to suppliers.

For example, a company might have 60-day terms for money owed to their supplier, which results in requiring
their customers to pay within a 30-day term. Current liabilities can also be settled by creating a new current
liability, such as a new short-term debt obligation.

Below is a list of the most common current liabilities that are found on the balance sheet:

 Accounts payable
 Short-term debt such as bank loans or commercial paper issued to fund operations
 Dividends payable
 Notes payable—the principal portion of outstanding debt
 Current portion of deferred revenue, such as prepayments by customers for work not completed or
earned yet
 Current maturities of long-term debt
 Interest payable on outstanding debts, including long-term obligations
 Income taxes owed within the next year

Sometimes, companies use an account called "other current liabilities" as a catch-all line item on their balance
sheets to include all other liabilities due within a year that are not classified elsewhere. Current liability
accounts can vary by industry or according to various government regulations.

Analysts and creditors often use the current ratio. The current ratio measures a company's ability to pay its
short-term financial debts or obligations. The ratio, which is calculated by dividing current assets by current
liabilities, shows how well a company manages its balance sheet to pay off its short-term debts and payables. It
shows investors and analysts whether a company has enough current assets on its balance sheet to satisfy or pay
off its current debt and other payables.

The quick ratio is the same formula as the current ratio, except it subtracts the value of total inventories
beforehand. The quick ratio is a more conservative measure for liquidity since it only includes the current assets
that can quickly be converted to cash to pay off current liabilities.

A number higher than one is ideal for both the current and quick ratios since it demonstrates there are more
current assets to pay current short-term debts. However, if the number is too high, it could mean the company is
not leveraging its assets as well as it otherwise could be.

The analysis of current liabilities is important to investors and creditors. Banks, for example, want to know
before extending credit whether a company is collecting—or getting paid—for its accounts receivables in a
timely manner. On the other hand, on-time payment of the company's payables is important as well. Both the
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current and quick ratios help with the analysis of a company's financial solvency and management of its current
liabilities.

Accounting for Current Liabilities

When a company determines it received an economic benefit that must be paid within a year, it must
immediately record a credit entry for a current liability. Depending on the nature of the received benefit, the
company's accountants classify it as either an asset or expense, which will receive the debit entry.

For example, a large car manufacturer receives a shipment of exhaust systems from its vendors, with whom it
must pay $10 million within the next 90 days. Because these materials are not immediately placed into
production, the company's accountants record a credit entry to accounts payable and a debit entry to inventory,
an asset account, for $10 million. When the company pays its balance due to suppliers, it debits accounts
payable and credits cash for $10 million.

Suppose a company receives tax preparation services from its external auditor, with whom it must pay $1
million within the next 60 days. The company's accountants record a $1 million debit entry to the audit expense
account and a $1 million credit entry to the other current liabilities account. When a payment of $1 million is
made, the company's accountant makes a $1 million debit entry to the other current liabilities account and a $1
million credit to the cash account.

Example of Current Liabilities

Below is a current liabilities example using the consolidated balance sheet of Macy's Inc. (M) from the
company's 10Q report reported on August 03, 2019.

 We can see the company had $6 million in short-term debt for the period.
 Accounts payable was broken up into two parts, including merchandise payables totaling $1.674 billion
and other accounts payable and accrued liabilities totaling $2.739 billion.
 Macy's had $20 million in taxes payable.
 Total liabilities for August 2019 was $4.439 billion, which was nearly unchanged when compared to the
$4.481 billion for the same accounting period from one year earlier

The most common current liabilities found on the balance sheet include accounts payable, short-term debt such
as bank loans or commercial paper issued to fund operations, dividends payable. notes payable—the principal
portion of outstanding debt, current portion of deferred revenue, such as prepayments by customers for work not
completed or earned yet, current maturities of long-term debt, interest payable on outstanding debts, including
long-term obligations, and income taxes owed within the next year. Sometimes, companies use an account
called "other current liabilities" as a catch-all line item on their balance sheets to include all other liabilities due
within a year that are not classified elsewhere.

Q.4 Discuss the link between balance sheet and profit and loss account. Describe the various steps involved in
verification of various expenses. (20)
ANSWER4:

The relationship between balance sheets and profit and loss accounts
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The profit and loss (P&L) account summarises a business' trading transactions - income, sales and
expenditure - and the resulting profit or loss for a given period.

The balance sheet, by comparison, provides a financial snapshot at a given moment. It doesn't show day-to-
day transactions or the current profitability of the business. However, many of its figures relate to - or are
affected by - the state of play with profit and loss transactions on a given date.

Any profits not paid out as dividends are shown in the retained profit column on the balance sheet.

The amount shown as cash or at the bank under current assets on the balance sheet will be determined in part by
the income and expenses recorded in the P&L. For example, if sales income exceeds spending in the period
preceding publication of the accounts, all other things being equal, current assets will be higher than if expenses
had outstripped income over the same period.

If the business takes out a short-term loan, this will be shown in the balance sheet under current liabilities, but
the loan itself won't appear in the P&L. However, the P&L will include interest payments on that loan in its
expenditure column - and these figures will affect the net profitability figure or 'bottom line'.

The two important parts of the financial statement are the Balance Sheet and the Profit & Loss account.
Without the preparation of these two entities the financial statement cannot be reported, even the readers of the
statement are not able to clearly understand the company’s position. Hence, due regard is to be given by every
company in the preparation of the two. However, people don’t understand them very clearly and have problems
distinguishing the two terms.

Balance Sheet

 Meaning: A statement that shows the company's assets, liabilities, and equity at a specific date

 Time frame: Financial condition on a certain date

 Type: Statement

 Information disclosed: Assets, liabilities, and capital of shareholders

 The sequence of preparation: It is prepared after the preparation of the Profit & Loss Account

Profit and Loss Account and Balance Sheet are important financial statements of any business. They are
related with the financial health of the firm or business. Balance sheet shows the position of assets and liabilities
of a business entity as on a particular date. Profit and Loss Account provides the vital link between the balance
sheet at the beginning of a period and the balance sheet at the end of that period. Profit and Loss Account deals
with the costs incurred during the current period for the purpose of earning the related revenue. The impact of
this is disclosed by the balance sheet
The balance sheet exhibits expenditure which is either outstanding or paid in advance, i.e. the unexpired
benefits. It also serves as a means of carrying forward unexpired acquisition costs of assets. The amount of net
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profit or loss reported by the Profit and Loss Account is carried forward in the balance sheet showing their
impact on various other terms disclosed in the balance sheet.

Profit and Loss Account explains the changes in the owner’s capital or equity between the opening and closing
balance sheet of the accounting period. Thus, balance sheet shows the transactions remaining for execution as a
result of the revenue transactions of the Profit and Loss Account.

The preparation of Profit and Loss Account precedes the working of the balance sheet and the balance sheet
cannot be prepared without the preparation of the profit and loss account. The profit and loss account can be
prepared without the balance sheet. However, absence of balance sheet will fail to disclose the impact of the
revenue terms on the balance sheet which is the final resulting financial position of the business.

The simple accounting equation shows that total claims are equal to the total assets of the firm. This means that
the total claims include the owner’s capital or equity and, the liabilities

Key Differences between Balance Sheet and Profit & Loss Account
1.The Balance Sheet is prepared at a particular date, usually the end of the financial year while the Profit
and Loss account is prepared for a particular period.
2.The Balance Sheet reveals the entity’s financial position, whereas the Profit and Loss account discloses
the entity’s financial performance.
3.A Balance Sheet gives an overview of the assets, equity, and liabilities of the company, but the Profit and
Loss Account is a depiction of the entity’s revenue and expenses.
4.The significant difference between the two entities are is that the Balance Sheet is a statement while the
Profit and Loss account is an account.
5.The Balance sheet is prepared on the basis of the balances transferred from the Profit and Loss account.

Q.5 Describe the status, powers, rights, and duties of a Public Ltd. company auditor. (20)
ANSWER5:

A ―power‖ is an authority to act, whereas a ―duty‖ is an obligation. A duty of an estate trustee compels her to
act, or prohibits her from acting in certain situations. A power, on the other hand, allows her to act in a certain
way, subject to her discretion.
An estate trustee faces potential personal liability from unauthorized actions in the administration of an estate.
Although, generally a will prescribes specific powers and duties for an estate trustee when it comes to the
administration of the estate, there may also be a situation which the will simply does not contemplate.

It is not unusual for an estate trustee to be given discretion with respect to the exercise of administrative powers
conferred to manage the estate. However, she mayalso be given the authority to allocate estate property to the
beneficiaries. That kind of power is referred to as dispositive power or discretion and may require an estate
trustee to do such things as, divide income and/or capital between beneficiaries at a time of her choosing.

Rights and Powers of Company Auditors

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According to Section 227(7) of the Companies Act, a company auditor has the following rights:

1. Right of Access Books of Accounts: As per Section 227(1) of the Companies Act every auditor of the
company has the right to access at all times to the books of accounts and vouchers of the company, whether
kept at the head office of the company or elsewhere. Under section 209(1) (d), a company auditor has the right
to examine the cost records also which are required to be maintained by certain companies relating to
production sales, stores etc.

2. Right to Obtain Information and Explanations: An auditor can call for any information or explanation
from different officers of the company which he may think necessary for the performance of his duties.
Apart from the auditor’s right to obtain information and explanation it is the duty of every officer of the
company to furnish without delay the information to the company auditor. If the directors or officers of the
company refuse to supply some information on the ground that in their opinion it is not necessary to furnish it,
then the auditor has the right to mention that in his audit report.

3. Right to Receive Notices and Other Communication Relating to General Meetings and to attend
them: According to section 231, of the companies act an auditor of a company has the right to receive notices
and other communications relating to the general meetings in the same way as that of the members of the
company.
Similarly an auditor also has the right to attend any annual general meeting and also to be heard at those
meetings which he attends and which concerns him as an auditor.
The auditor also has the right to make a statement or explanation with regard to the accounts he has audited. But
he auditor is not expected to answer questions in the general meeting.

4. Right to Visit Branches: According to section 228 of the companies act the auditor of the company has the
right to visit the branch office or offices of the company.
He can also audit such accounts of eh offices of the company provided that there is not qualified auditor to audit
the accounts of the branch office or offices of the company, in such cases, the auditor has the right to access at
all times to the books of accounts and vouchers that the company maintains at branch office or offices.
Moreover section 226 of the companies act provides that in case of the company gets the branch accounts
audited by some of the local auditors, even the auditor has access at all times, to the books, accounts an
vouchers of the company and he can also visit the branches, if he feels necessary.

5. Right to Correct Any Wrong Statement: The company auditor is required to make a report to the members
of the company on the accounts examined by him of the final accounts and the related documents which are laid
down before the company in the general meeting.

6. Right to sign the Audit Report: As per section 229 of the companies act only the person appointed as
auditor of the company or where a firm is so appointed, only a partner in the firm practicing in India, may sign
the audit report or authenticate any other document of the company required by law to be signed.

7. Right to Being Indemnified: Under Section 633 of the Companies Act, an auditor is considered to be an
officer of the company and he has the right to be indemnified out of the assets of the company against any
liability incurred by him in defending himself against any civil and criminal proceedings by the company if it is
proved that the auditor has acted honestly or the judgment is delivered in his favour.
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8. Right to seek Legal and Technical Advice: The company auditor has the full right to seek the opinion of
the experts and to take their legal and technical advice so as to discharge his duties efficiently.

9. Right to Receive Remuneration: As per Section 224(8) of the Companies Act, the company auditor has the
right to receive remuneration provided he has completed the work which he has undertaken to do so.

Duties and Liabilities of a Company Auditor (Section 227):

Duties towards the shareholders:
1. Report shareholders about true and fair state of affairs of the company
2. State that balance sheet and profit and loss a/c give all information required by law
3. State that balance sheet and profit and loss a/c agree with the books of account
4. State that balance sheet and profit and loss a/c agree with accounting standards
5. State that he has obtained all the necessary information
6. State whether the company has maintained all books as required by law;
7. State the reasons of qualification in his report
8. State that he has received the audit report on the branch accounts audited by other auditor and how he has
dealt with the same in preparing his report
9. Auditor shall state in his report whether:

a) The loans taken are properly secured and the terms of loans are not against the interests of the company
b) Loans given are shown as fixed deposits and the terms of loans are not against the interests of the company

10. Transactions recorded as book entry are not against the interests of the company