Finding out whether a company's financial statement accurately and fairly depicts its real financial status is the goal of an audit. Additionally, the existence of assets at the time of the balance sheet is not proven solely by the appearance of an entry in the accounts.
To be more specific, the asset should exist according to the entry in the company's records. The auditor's job is to make sure that the asset exists in reality as well as in the books. Furthermore, the value that appears on the balance sheet of the company is accurate. As a result, both verification and valuation are essential components of an audit. You will learn the distinction between valuation and verification in this article.
Valuation vs. Verification
Verification and valuation are two words that are frequently used when establishing the truth and worth of something. Despite certain similarities, there is a definite difference between the processes involved in verification and valuation. Verification is the process of determining whether or not something is correct or truthful. It entails verifying the accuracy of information or data by cross-checking, investigating, or comparing it to make sure there are no mistakes or fraud. Verification's objective is to make certain that the data being supplied is reliable and accurate.
Contrarily, valuation is the process of establishing the applicability, value, or use of anything. It entails determining the economic worth or value of a tangible or intangible asset based on several variables, including market supply, demand, quality, and condition. Finding an item's true value is the aim of valuation, which can help make wise financial decisions. The procedures used in verification and valuation differ from one another. Verification involves making sure something is true, whereas valuation involves figuring out how much something is worth. While valuation focuses on determining the economic value or worth of an item, verification focuses on guaranteeing the veracity of information.
Difference between verification and valuation in tabular form.
|Parameters of comparison||Verification||Valuation|
|Meaning||Verification is a specific process in which the assets displayed on the balance sheet are checked by the auditor. It also makes sure whether the asset exists in reality or not or whether there are any charges present on it.||Valuation is the examination of the real value of the liabilities and assets of the organization as shown in the balance sheet.|
|Time||The verification occurs at the end of the fiscal year.||The valuation occurs for all of the transactions throughout the year.|
|Purpose||to verify assets' existence, ownership, and possession||To determine the true worth of assets according to GAAP|
|Work is performed by||The work of verification is performed by an auditor.||The work of valuation is performed by management|
|Advice||In the verification process, the auditor does not attempt to get external support for verification.||The auditor may seek advice from valuers for the process of valuation|
What is verification?
The correctness and fairness of the financial situation as represented by the balance sheet and the operating performance as demonstrated by the profit and loss account must be evaluated by an auditor. He must link the presented or declared facts or information in books and the facts or information to verify the assets. During the asset verification process, the value, ownership and title, existence and possession, and presence of any charges on the assets are all evaluated. Verification is the process of establishing the existence, ownership, possession, classification, and value of an entity's assets through physical examination, document analysis, and expert opinion. It is used to support the assets listed in books of account.
Verification entails demonstrating the veracity of supporting documentation. The auditor verifies that the items are correctly classified as assets and liabilities in the entries made to the company's balance sheet. Verification, in essence, satisfies the auditor with the veracity of the assets and liabilities.
Additionally, it is desirable to divide the assets into two groups while verifying them:
- The possessions acquired during the reviewed year
- The assets that were present at the last balance sheet date.
It is important to attest to their purchase in the first scenario. In this regard, cost and authorization issues are verified.
Activities involved in the process of verification
- Comparing the balance sheet to the asset ledger accounts
- confirming the assets' actual existence as of the balance sheet date.
- Ensuring that assets are only acquired for business use and used for that purpose only.
- Ensuring that the designated officer has permitted the acquisition of assets.
- Confirming that the assets are solely the firm's property
Verification of assets involves
- Existence: As of the balance sheet date, assets exist.
- Asset valuation: The balance sheet accurately reflects the asset values.
- Legal ownership and title belong to the business.
- Possession: The business is in charge of possession of the assets.
- Charge: There are no fees associated with assets.
The balance sheet discloses the assets that the company has acquired.
Verification of liabilities involves
- Existence: The liabilities listed on the balance sheet are legitimate obligations.
- Obligation: Liabilities that show the development of business duties towards third parties are necessary for the business's legal functioning.
- Completeness: Verify that any liabilities that are known have been properly accounted for. Additionally, the balance sheet includes a footnote describing contingent liabilities. Liabilities are valued correctly and reasonably in the financial statement. Making sure that liabilities are appropriately classified and disclosed in the financial statements following the applicable accounting principles
What is valuation?
Valuation is the process of figuring out what an asset or business is now worth. It is frequently employed in financial analysis and the choice of investments. The value of an asset or business can be determined using a variety of techniques, such as discounted cash flow analysis, comparable company analysis, and precedent transaction analysis. The kind of asset or business being valued, as well as the valuation's goal, will determine the method to use. For investors, lenders, and management to make wise choices regarding the prospective worth of a firm or investment, valuation is a crucial tool.
Asset valuation is the process of determining if the value of assets as they appear on the firm's balance sheet at the end of the fiscal year is accurate. It makes it easier to verify the company's accurate financial situation. It includes:
- Gathering all relevant valuation-related data.
- Examining every number
- Demonstrating the value was conducted following GAAP.
- Ensuring consistency in the procedures used each year to value assets.
- Obtaining feedback on the valuation's accuracy
The auditor must also guarantee the accuracy of the valuation and calculation base. He must verify the establishment of contingency plans. Additionally, the main goal of asset valuation is to demonstrate that the balance sheet represents a genuine and fair perspective of the business. Additionally, he must ensure that there are no accounting frauds that artificially increase the company's profitability.
Points that are necessary to remember while discussing valuation
One must consider that the company's assets are valued by taking into consideration the different points that we have discussed below.
- The first important thing is the original cost.
- The expected operating life of the company's assets
- Wear and tear of the asset
- Break-up value of the company's assets
- Possibilities of the assets becoming obsolete
- These are various important points to consider.
What are the types of values?
There are various types of values.
Replacement Value: The quantity required to acquire a different asset of a similar type in exchange for the existing one.
Value realized: The quantity that an available asset would receive when the company sold it on the market.
Scrap Value: The quantity that a company receives if it sells a specific asset when it appears unusable.
Book Value: The price at which assets are entered into the accounting book of the enterprise.
Value of liquidation: It is the value that a firm realizes for an asset when it enters into liquidation.
Objectives of valuation
The various objectives of the valuation are:
It helps evaluate the actual and financial position of the organization.
It helps to determine the real position of assets through the balance sheet.
Check the investment mode of the organization's capital.
goodwill estimation of the firm’s
identification of the distinction in the value of assets At the time the company purchases them and at the balance sheet's date It also helps to identify the cause of the difference.
What are the advantages of the valuation?
The basic advantages are that determining the correct market value of the asset can help in forming informed decisions for investment.
A valuation can assist in setting real prices for selling or buying the assets of a company.
It works as a tool for compliance and financial reporting with tax and accounting regulations.
Valuation also helps in determining a company's worth and achieving the objective of raising capital.
It can also provide insight into a company's performance and future growth.
Valuation is a tool that also helps in mergers and acquisitions by helping to determine a fair price for the acquisition of an asset.
Difference between verification and valuation in points
The verification is based on facts and information, and the valuation is based on estimations.
In verification, the documentary evidence is a title deed, a receipt for payment, etc. But in valuation, the title of the document of evidence is the certificate offered by owners, directors, or experts.
The work of verification is performed by an auditor. But the verification work is performed by the client's staff.
The verification of assets and liabilities is guaranteed by the auditor. The correctness of the asset and liability valuations is not guaranteed by the auditor.
The auditor is in charge of confirming the assets and could face legal action for carelessness if the assets are not correctly substantiated. On the other hand, auditors aren't meant to be valuers. Management is in charge of valuing the assets on the balance sheet, and the auditor may rely on a certificate provided by an authorized valuer in this regard.
The verification procedure must include an asset valuation. The verification process includes determining an asset's existence, ownership, possession, accurate appraisal, and sufficient disclosure. While determining the legitimacy and correctness of the value of the various assets listed on the balance sheet is the only goal of valuation, As a result, the term "verification" has expanded to include asset value. The valuing strategy, however, is more focused. This part of the verification procedure is what it is.
To be confident in the asset's existence, ownership, possession, and value, the auditor must perform verification. On the other hand, the goal of the management's asset valuation is to value the assets in line with widely accepted accounting rules.
The auditor of the company guarantees and ensures that the assets are verified. Whereas, the auditor of the company, in the case of verification, makes no guarantees about the accuracy of the asset valuation.
The main goal of asset verification is to demonstrate the assets' physical presence. Asset valuation, on the other hand, focuses on determining the true value of assets.
Output in valuation yields an estimate of value; verification produces a confirmation or denial of the information is verified.
Fact-checking, testing, and inspection are widely employed in the valuation process, whereas financial analysis, market research, and other techniques are regularly utilized in the verification process.
Above all, asset appraisal is a crucial component of verification. Verification won't be possible without the assessment of assets and liabilities. In addition to valuation, verification includes examining ownership rights, confirming the existence of the asset, and determining whether it is free from debt or liens.
The valuation process is crucial to the verification of assets. Even though an auditor is not a valuer, he is nonetheless required to use reasonable care and skill to ensure that the assets have been valued correctly as per the accounting principles which are accepted and agreed in industry standards. Valuation experts may perform this task on behalf of the business. This article has defined the difference and importance of valuation and verification in an organization.