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.
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 signed / examined by auditor for public knowledge which increases the trust on 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.
Differences Between Verification and Valuation
Verification and valuation are interlinked and interdependent. It is a combined process by which the position of different assets appearing in the Balance Sheet is examined. However, the following are the differences between the two terms.
Classification of Assets
1. Fixed Assets
Fixed assets are utilized to create incomes.
Investments are expected to fetch income from external agencies.
3. Wasting assets
Wasting assets are of a fixed nature but depleted or consumed gradually.
4. Fictitious Assets
Assets, which have no market values, are known as fictitious assets. They are shown in the Balance Sheet on the asset side of it under the head “Miscellaneous Expenditure”.
5. Current Assets
Current assets are those which are utilized or converted into cash within one year period.
6. Intangible Assets
They are long-term resources of an entity, but have no physical existence. They derive their value from intellectual or legal rights, and from the value they add to the other assets.