BY

Atta-ur-Rahman Arif

PURPOSE

Verification enables an auditor to confirm the

result of Vouching about the ownership or

the existence of the assets and the liabilities.

Essential to discharge the legal duties

imposed on the auditor by Companies

Ordinance sub-section 3 of section 255.

Enable an auditor to submit the report

addressed to the shareholders.

SIX POINTS TECHNIQUES

1. Physical existence of an asset or liability

2. Asset or liability is correctly valued

3. Ownership of asset and liability

4. Correct disclosure of asset and liability

5. Assets suffering from charge

6. Proper authorisation of acquisition or

disposal of asset and liability

1. PHYSICAL EXISTENCE Physical existence of an item will be varify by two

techniques:

Actual count, weighing or measurement. For example:

cash must be counted by the auditor as on the date of

balance sheet.

Documentary evidence and certified inventories duly

signed by responsible official of company, where first

technique is not practicable or feasible. For example:

bank balance is to be verified with reference to a

certificate obtained directly from the client’s bank

1. PHYSICAL EXISTENCE (Contd…)

Bank balances must to be verified by a certificate

Investments held must be physically examined.

Certificate for physical inventory count of fixed

assets must be obtained.

2. CORRECT VALUATION It is the duty of auditor to check the valuation of the

asset with reference to any evidence.

Where technical knowledge is involved he is entitled to

rely upon the information supplied to him by the skilled

and technical persons.

Auditor should apply all possible tests to obtain

satisfaction that the asstes have been valued upon the

GAAP and in accordance with the 4th Scedule and 5th

Scedule of Companies Ordinance.

2. CORRECT VALUATION (Contd…) Different basis is being used for valuation depending

upon the nature of business:-

Fixed Assets: Acquired for earning income and not for

resale. For a going concern valued at Cost-Dep.

Market value not considered b/c

It does not affect their earning power

Not considered at the time of replacement of asset

Not realizable value except placed in market for resale.

If sale at any point of time not treated as business

income.

2. CORRECT VALUATION (Contd…)

Current Assets: Which are required for the purpose of sale

and their subsequent conversion into cash e.g. Stocks,

Book debts, bank balance, cash on hand etc.

Important points to be considered for valuation

Cost or market price whichever is lower

Temporarily fall in market price may be ignored

Same principal adopted in subsequent years

Depreciation must be provided in necessary

Wasting Assets: Fixed nature assets consumed or

exhausted in the process of income e.g. mine

Reduction in book value on estimation basis

3. OWNERSHIP

Auditor must satisfy himself that the ownership ofassets and liabilities which are shown on the balancesheet is vested in his client.

Techniques which enabling the auditor to acquire thesatisfaction on this point, depending upon the nature ofan asset or liability.

For example the ownership of Investments is to beverified either by the physically seeing the name of theclient on the share certificate or by seeing aconfirmatory certificate directly obtained from theclient’s banker.

4. CORRECT DISCLOSURE Verify whether the information which is required by

law has in fact been given in the Balance Sheet on

which the auditor is submitting his report.

Legal requirements are:

1. Disclosure requirements governing Companies are

contained in the 4th (Listed)and 5th (non-listed)

Schedule of Companies Ordinance 1984.

2. Disclosure requirements governing financial

statements contains in IAS 1.

5. ASSETS SUFFERING CHARGE

Ownership of an assets is of two types Clean, Charge

Charge means:

Mortgage (given the right to the mortgagee to sold the propertythrough court in case of non-payment by the mortgager, torealize his dues. If the sale proceeds are insufficient, mortgagerwill remain personally liable for the payment of the debt)

Pledge ( It is bailment of goods as security for the payment of adebt. It can be made of moveable property alone. The borrowermust be in possession of the moveable property under a legalright)

Pawn: Something given as security for a loan

Lien: The right to retain the lawful possession of the property ofanother until the owner fulfills a legal duty to the person holdingthe property

Steps to taken to know whether as assets if suffering from

charge:

Obtain certificate from management whether asset shown in

Balance sheet free from any charge, if so then details must

by obtained.

Enquire about the nature of charge

Examine the object of holding any security

Scrutiny of the register of mortgage and charges are

required to be maintained under section 125 of the

ordinance

Securities are in safe custody, it could be ascertained by

taking certificate from bank, investment co.

5. ASSETS SUFFERING CHARGE (Contd…)

The duty of an auditor to adopt such ways and means

whereby he ascertains whether an asset of the company

is suffering from charge or not.

Whether the nature of the charge is indicated in the

Balance sheet .

If the management does not agree to mention the nature

of charge in the balance sheet, he must qualify his report

to the shareholders.

Section 121 requires that mortgages and charges created

by a company must be registered.

5. ASSETS SUFFERING CHARGE (Contd…)

6. PROPER AUTHORISATION

The auditor must acquaint with the relevant clauses

affecting the auditor as liad down in the memorandum

and articles of association.

Auditor must examine and use the documentary

evidence which establishes a proper authorisation for

complete verification of the entries made in the books

of accounts.

Verification of Assets not in possession

In following cases auditor has recourse to client’s banker

for verification

Balance of Accounts

Bills under discount and not matured

Bills held by bankers for collection

Title deeds, Securities, investments, held for safe custody

Balances of loans, Overdrafts, limits and nature of charge

Verification of Assets not in possession

Necessary certificates obtained from

Officials

Certified inventory of Plant and Machinery

Certified stock Sheets

Certified lists of bad or doubtful debts

List of all outstanding liabilities

Third Parties

Bankers: Balance of accounts, overdraft

Agents: Cash balances

Mortgagors: Title deeds

Events occurring after the closing date Auditor has to report that the balance sheet exhibits a

true and correct view of the state of affairs of the firm at

a particular date.

Should also take care of the events occurring after the

closing date

Liabilities: Amounts of contingent liabilities

Provision for taxation

Fixed assets: Acquiring and consideration was not

determined as of closing date

Debtors: Subsequent realization and adjustments

Stock in Trade: Establish realizable value

REPRESENTATION LETTER

Representation by Management as Audit Evidence

is a title of ISA 580, which explains rational,

documentation, written representation, action to be

taken.

Auditor should obtain evidence that management

acknowledges its responsibility for appropriate

presentation of financial statements

These representations either unsolicited or in

response of specific inquiries.

REPRESENTATION LETTER If relate to matters which are material to the financial

statements then auditor should

Seek corroborative audit evidence from sources inside or

outside the entity

Evaluate whether the representation made by

management appear reasonable and consistent with other

audit evidence obtained

Consider whether the individuals making representations

can be expected to be well informed in matter.

REPRESENTATION LETTER Auditor can document in his working paper evidence

of management's representation

To avoid misunderstanding representation must be in writing

Letter should be address to Auditor, contain the information requested by him

Should be dated the same date as the auditor’s report on the financial statements.

Should the signed by the members of management who have primary responsibility

ANALYTICAL PROCEDURES Used to describe the analysis of significant ratios and trends including the

resulting investigation of usual fluctuations and items. ISA 520 deals with

nature of analytical review procedures.

These procedures include

Comparable information for prior periods

Anticipated results (Budget, forecast)

Similar industry information

These procedures are used to

Assist auditor in planning the nature, timing and extent of auditing

procedure

When Substantive test to obtain

Overall review of the financial information at final stage.