Verification of Assets and Liabilities – Meaning, Auditor's Responsibility and Duties

 Q. What do you understand by verification of assets and liabilities ? How far an auditor is responsible for the verification of assets appearing in the balance sheet ?

OR

Q. What are the duties of auditor regarding verification of assets and liabilities?

Ans. Meaning of Verification: Verification is a technique of auditing in which the auditor certifies the assets and liabilities as shown in Balance Sheet by actual checking or an̈y other technique. 

According to Joseph Lancaster, “The verification of assets is a process by which the auditor substantiates the accuracy of the right-hand side of the balance sheet and must be considered as having three distinct objects: (a) the verification of the existence of assets, (b) the valuation of assets, and (c) the authority for their acquisitions.”

General rules of Verification: The auditor has to certify the truth and fairness of the financial position of a business, therefore, he should should certify the assets and liabilities , as shown in the Balance Sheet. The auditor should not issue a report unless he believes that the assets and liabilities as shown in the Balance Sheet are present in the business and are free of any charge, in case they have a charge, the same should be explained. If under any circumstances, the auditor issues a report without checking and verifying he would be held guilty for negligence.

The following rules should be followed by an auditor for verifying assets and liabilities:

(1) As far as possible the task of verification should be done by the auditor himself. He should not obtain any help from the employees of the client. In case this is not possible, then the task of verification should be assigned to the most responsible and trustworthy member of his staff and a test check should be done on his work to establish the effectiveness of verification.

(2) The title documents of the assets should be verified to establish the title and right of the client on those assets.

(3) A physical verification of assets should be done on the date of the Balance Sheet or end of financial year to satisfy any doubts as to their existence. In case it is not possible to do a physical verification of any assets then a certificate certifying its existence in the organisation should be obtained.

(4) Easily exchangeable or liquid assets (like stock, cheque, securities, cash, etc.) should be verified in one sitting only.

(5) The incomes and expenditure incurred for various assets should be carefully verified and it should be seen that expenses are incurred on existing assets onĺy.

(6) A certificate should be obtained from the client stating that the assets are free of any charge or if a charge exists the details of such charge.

(7) In case any asset has been given as security, then a certificate should be obtained from the concerned person and the relevant documents should be verified.

(8) In case any asset has been kept in custody of a person, a certificate for the same should be obtained from him.

(9) A confirmation should be received for the balance receivable from the debtors.

(10) The appropriateness of the valuation of assets should be determined.

(11) Any under-valuation of assets should be verified. Adequate provision is made for any loans which seem doubtful or recovery should also be verified.

(12) It is not possible to physical verify fictitious and intangible assets like goodwill, unearned income, prepayments, etc. Therefore the auditor should verify the same on the basis of any documentary evidence available. 

(13) A certificate should also be obtained from the client regarding the various liabilities of the organisation specifying that the liabilities for the business only and have been duly authorized. 

(14) The balance outstanding to various creditors should be verified from the confirmation letters received from the debtors.

Duties of an Auditor in relation to Verification: An auditor’s primary responsibility regarding the verification of assets and liabilities is to ensure they exist, are owned by the business, are valued correctly, and are accurately presented in the balance sheet according to standard accounting principles. 

The duties of an auditor regarding verification can be divided into the following two parts:

(1) In relation to Assets, and

(2) In relation to Liabilities. 

● Auditor’s duty in relation to assets: The auditor should verify the following points while conducting a verification of assets:

(i) The assets actually exist on the date of the Balance Sheet. 

(ii) The assets belong only to the organisation and all the assets have been clearly mentioned in the Balance Sheet. There should be no assets which are not mentioned in the Balance Sheet.

(iii) The valuation of assets is appropriate.

(iv) The assets are in the name of the organisation and the organisation has a right on them.

(v) The assets are free of any charge or lien on them, but in case there is a charge on them the same has been mentioned clearly.

(vi) Any addition made to any asset should be added to the value of the asset in the Balance Sheet.

(vii) Any expenditure incurred in the repairs and renewal of the asset should be debited to the profit and loss account.

(viii) Adequate and appropriate depreciation is charged on tĥe assets  

(ix) In case a part of any asset is sold the auditor should verify the relevant sales, counterfoil copies of receipts and other evidence in that respect.

(x) For verification of movable assets like cash, bills, stock and securities etc. the auditor should be present in the organisation on the date of the Balance Sheet is made.

(xi) Other fictitious and intangible assets which need to be written off should be verified keeping in mind the principles applicable to them.

● In Relation to Liabilities: The auditor verifies liabilities also alongwith assets and for doing so he has to keep the following points into consideration.

(i) The liabilities shown in the Balance Sheet are of the organisation only and nobody else. 

(ii) Personal liabilities of the employees should not be included in the liabilities of the organisation.

(iii) The liabilities as shown in the Balance Sheet were actually liabilities on the date on which the Balance Sheet was made.

(iv) The libabilities are shown at their correct values. 

(v) Doubtful liabilities should not be included in the actual liabilities.

The auditor will be held liable for any loss incurred due to his being negligent in his duties.

Cost Control – Meaning, Process and Techniques

 Q. What is meant by Cost Control ? Discuss its process and techniques.  

Ans. SBP

Meaning of Cost Control: Cost control is an essential component of any system of cost accounting. It seeks to ensure that costs are kept in line with the requirements of corporate planning so as to achieve its objectives and targets. Cost control is exercised through comparing actual costs with pre-determined standard costs so that the variance between the two can be measured and corrective actions may be taken according to reasons of such variances, if any. 

According to W.H. Harper, “Control is the guidance of the internal operations of all divisions of the business to produce the most satisfactory profits at the lowest cost.”

Process of Cost Control / Steps in Cost Control: The following steps are taken in the system of Cost Control :

(1) Establishing Norms or Standards: The first step in cost control is to set norms or standards. These attainable standards are set on the basis of past performance adjusted for changes expected or estimated in respect of future.

(2) Clearly defined Authority and Responsibility: The authority-responsibility relationship within the organisation must be clearly defined so as responsibility may be fixed in case of controlled variances.

(3) Accumulation of Actual Cost: There should be foolproof system for accumulating and ascertaining costs because it is the actual costs which are compared with pre-determined standard costs.

(4) Timely Comparison: No doubt, actual costs are compared with standards but this must be done timely and promptly so as necessary corrective actions may be taken immediately.

(5) Effective Reporting System: A system of effective reporting system should also be developed. In this context accounting reports should be presented in such a way that those concerned with cost in incurrence can understand them fully and react to them in an appropriate manner. Accounting control reports should include (a) Expected level of performance in terms of costs, (b) Actual level of performance in terms of costs, (c) Indication, whether performance is getting better or worse, (d) Basis for investigating deviations from standards so as causes can be established and future actions may be modified accordingly.

(6) Investigating of Variances: After the availability of cost report, variances are analysed and investigated. In this process, they are classified as controllable and uncontrollable variances as well as random and significant variances.

(7) Corrective Action: It is an important step in order to prevent the recurrence of unfavourable, controllable and significant variances. In this context, it should be remembered that “if small leaks are plugged in time, a lot can be saved and contributed towards profits.”

Techniques of Cost Control: Among various techniques of cost control, 2 most popular are Standard Costing and Budgetary Control. 

(1) Standard Costing: The technique of the standard costing involves:

(a) the assertainment of standard costs of various elements of cost, viz., material, labour and overhead.

(b) the comparison of actual costs with pre-determined standard cost. 

(c) the analysis of variances for ascertaining the reasons for the same.

(d) the location of responsibility for the variances and the corrective measures to be taken.

(2) Budgetary Control: It is the tool of management control and accounting which directs and co-ordinates the working operation on the basis of budgets. If there are variances in actual results, then either they are corrected or budget is modified so that the objective of maximum efficiency as per the policy of management may be achieved. 

VK 

Meaning of Cost Control: Cost Control means to keep the cost of production of a product, job, batch, process, cost centre, or a contract within the prescribed limits (i.e. the laid down standards). In Cost Control, all rules and regulation are applied by the executive action of the cost of operating a business enterprise so that the predetermined plans may be effectively applied to achieve the given targets of cost in each area. Cost control is achieved through the application of various techniques like Budgetary Control, Standard Costing and Responsibility Accounting. Under cost control technique standard for the products or service for each elements of cost (like material, labour and other expenses) and for each level of the worker are set. Also, there is regular and continuous comparison of actuals with standards are carried out and in case of deviation (Difference or Variations) the necessary corrective actions are taken at the earliest possible to control these variances, specially negative variances. This exercise will control the gap in actual and expected performance. 

These variances can be materi material variances, labour variances or overhead variances. These variances for cost control purpose are further divided into different categories. Like usage variance,  price variance, cost variance, mix variance or field variance. Different names are given to these variances as per element of cost, i.e., Material, labour and other expenses. Further these variances can be divided into favourable variance and adverse variances.  These variances can also be categorised as: (a) Controllable variances: Controlable are those which can be controlled or reduce by the necessary or immediate action by the management. For eg (i) abnormal wastage of material. (ii) abnormal idal time of the workers. (iii) non availability of material, men power or machine hour or electricity power at the required time. All these needs timely action control these leakage and hence uncontrollable variances are those which are beyond the control of management like, price rise oe due to unexpectable events like war, earthquake, floods, draught or fire etc. 

In nutshell we can say that cost control means when actual cost productions equal to predetermined standard cost and there is zero variance. Thus cost relates to:

1. Fixing standard cost for each element of cost.

2. Comparing the actual cost with standard cost.

3. Calculating variances whether favourable or adverse.

4. Taking necessary and corrective action adverse variances specifically.

5. Ascertain the cause of adverse variances and fixing responsibility damage control action.

6. To review the standards from time to time so that the standards may be revised as per changed circumstances and situation.

Cost Control Techniques or Methods may be summarized as below:

(A) Control on material cost like:

1. Various stock levels.

2. ABC analysis and VED analysis.

3. Perpetual inventory system.

4. Slow moving material.

5. Controlling waste and scrap.

(B) Labour control like:

1. Time keeping and time booking records comparison.

2. Abnormal idle time report.

3. Over time reports.

(C) Standard costing and predetermined costing.

(D) Budgetary control techniques.

(E) Accounting ratio to be used as meaning barometer for efficiency, productivity, profitability and return on investments.

Necessary Steps for Effective Cost Control:

(1) Division of work and division of authority and responsibility in the organisation.

(2) Efficient collection and Transmission of call cost reports with adverse variances so that ‘Management by Exception’ policy may be implemented effectively.

(3) Two way communication channel should be established without fear or favour correct reporting.

(4) Motivation and rewards to the work force for better and higher efficiency,  performance and productivity, team spirit and sense of belongingness at all levels of organization should be the core factor. 

(5) Sense of cooperation at various levels and among various departments for successful implementation of budgetary control system and standard costing technique must exist.

Industrial Marketing – Meaning and Difference Between Industrial Marketing and Consumer Marketing

 Q. What do you mean by Industrial Marketing? How it is different from consumer marketing? 

Ans. Meaning of Industrial Marketing: Industrial Marketing is also known as B2B Marketing, i.e., Business to Business Marketing. It is a process of exchange between the two business firms. Thus, when needs and wants of a firm are satisfied by some other firms through the exchange process, it is called industrial marketing. In the industrial market, markets are relatively concentrated and there are short channels of distribution, buyers are sophisticated in buying techniques, highly organized and fully informed. Therefore, industrial marketing creates its own set of conditions for the marketing decisions. It consists of all the activities involved in the marketing of products and services to the organizations that use these products and services for the production of other consumer or industrial products and services.

Industrial marketing is the human activity directed towards satisfying the needs, wants and demands of organizations through exchange process. It is basically marketing to customers who utilize the products and services they buy for manufacturing some other products and not for personal use. It consists of all the activities involved in the marketing of products and services to the organizations that use these products and services for the production of other consumer or industrial products and services. 

According to Philip Kotler, “Industrial Marketing is a human activity directed towards satisfying wants and needs of the organisations through the exchange process.”

Industrial Marketing involves exchange process between two business firms, thus, it is called B2B (business to business) marketing.

Difference between Industrial and Consumer Marketing: The differences between industrial marketing and consumer marketing are based on the characteristics of both. The considerable differences exist between industrial consumer marketing in the following areas:

1. Market

2. Marketing Mix 

3. Buyer’s Behaviour 

4. Exchange Transactions 

Basis		Industrial Marketing	Consumer Marketing
Market	Size	Global	Regional
	Number of Buyers	Fewer Buyers	Mass Market
	Competition	Oligopolistic Competition	Monopolistic Competition
	Buyer’s Location	Geographically Concentrated	Geographically Dispersed
Marketing Mix	Product Demand	Derived and Volatile	Direct and Less Volatile
	Product Nature	Tailor Made and Standardized	Standardized
	Requirement of Buyer	Service, Delivery, and Availability very important	Service, Delivery, and Availability less important
	Price	Non-Standardized	Standardized
	Negotiation	More with Price Lists	Less with Price Lists
	Promotion	Personal Selling	Advertising, Sales promotion, Publicity
	Place	Channel Length: Short Linkages: Fewer	Channel Length: Long Linkages: Multiple
Buyer’s Behavior	Quantity	Large	Small
	Brand	Loyal to brand	Brand Switching
	Nature	Rational Buying	Rational and Impulsive both
	Relationship	Strong Interpersonal Relationship	Weak Interpersonal Relationship
Exchange Transactions	Product Exchange	Need Satisfaction and Fulfillment of Product Specifications	Product Specifications not of a high order
	Information Exchange	Strong and Deep Interaction between buyer and seller	Limited Interaction between buyer and seller
	Financial Exchange	More Importance to purchase price and, commercial terms	Limited importance to terms and conditions relating to price
	Social Exchange	Cordial relations necessary	Cordial relations not necessary

industrial marketing meaning difference consumer marketing. 

Value Analysis – Meaning, Difference Between Value Analysis and Value Engineering, and Techniques

 Q. What is Value Analysis ? How is it different from Value Engineering ? Explain any two techniques of value analysis.

OR

What is Value Analysis ? Discuss various techniques of value analysis.

OR

What is the meaning of value analysis ? What are the techniques of value analysis ?

Ans. Meaning of Value Analysis: Value analysis or value engineering is such a technique which reduces the cost of products or services through following a scientific approach and analysis. The various unnecessary costs associated with the products or services are identified and eliminated without affecting the quality. The unnecessary costs are those which neither provide any additional satisfaction to customers nor their removal will affect the quality of the product or services. If these costs are identified and eliminated, it will reduce the cost of the products or services and ultimately the volume of turnover will increase. This technique saves the scarce resources and promotes indigenous development of substitutes.

Value analysis and value engineering are different in a sense that the term value analysis is used for existing products or services, whereas value engineering refers to new products or processes which are not finalised. Although these words are generally used interchangeably. 

Techniques of Value Analysis: The two techniques which are used in value analysis are as follows:

1. Functional Analysis System Technique (FAST): It is an evolution of the value analysis process which is created by Charles Bytheway. The set of original questions for FAST given by him includes the following:

(i) What subject or problem would you like to address?

(ii) What are you really trying to do when you want to do something?

(iii) What higher level function has caused to come into being?

(iv) Why is it necessary?

(v) How is it actually accomplished or how it is proposed to be accomplished?

(vi) Does the method selected to cause any supporting functions to come into being?

(vii) If you did not have to perform, would you still have to perform the other supporting function?

(viii) Do apparent dependent functions come into existence as a result of the current design?

FAST permits people with different technical backgrounds to effectively communicate and resolve issues that require multi-disciplined considerations. FAST builds upon VA by linking the simply expressed verb-noun functions to describe complex systems.

The FAST model has a horizontal directional orientation described as HOW-WHY dimensions. HOW and WHY questions are asked to structure the logic of the system’s functions. The two steps are followed: 

(i) Start with a function and ask HOW that function is performed to develop a more specific approach.

(ii) Abstract the problem to a higher level and ask WHY that function is performed. 

Addressing any function on FAST model can be as follows:

(i) The questions WHY is answered by the function on the left which expresses the goal of that function.

(ii) The questions HOW is answered by the function on the right, which is a method to perform that function.

2. Brain Storming: Brains Storming was originated from advertising industry to stimulate the creative thinking. It is a group activity in which the members of the group throw out ideas after applying their imagination to a single problem. The group is consisted of four to ten members. The ideas are welcomed no matter how ridiculous it may seen. It attempts to promote creative thinking. Chairman notes down every idea but they are not evaluated at the time of presentation. The logic behind this that one idea even though ridiculous will stimulate the other idea and so on. This process will ultimately lead to a genuinely original and workable solution to the problem. When the brain-stomming session is over, the resulting ideas are evaluated in terms of contribution on reducing cost.

3. Comparative Analysis: Sometimes comparative analysis off similar items provide more savings than by applying tests of value individually to each item. A comparison might provide some clues. For example, an analyst of cooler industry might review all the available alternatives regarding front grill. If he replaces the iron sheet grill with fiber or plastic grills, it will reduce the weight and will also decrease the cost. Simultaneously the cooler will be noiseless and will be more handy to clean. Some analysis plot it on a graph taking to different variables on X-axis and Y-axis. A curve like graph appears after plotting the values on the graph. The value that do not follow the curve are not necessarily poor values, since there may be some additional features that justify the premium charged in cost. But they should be properly investigated. 

4. Design Analysis: First of all the components and functions of the products are to be visualised thoroughly. When a product is designed and developed, initially engineers developed the components or parts individually. Then the value analysis team analyses each sub-assembly in relation to each other and to the total product. After analysing, they made suggestions regarding new material and method to be used or to add or eliminate an assembly for adding more value to the product.

5. Buyer-Supplier Seminars: The number of suppliers for each smallest part may be numerous and each supplier may have different knowledge about the functioning performance and usefulness of the part. This technique of Buyer-Supplier Seminars is to create a pool of knowledge and know-how. In the seminars, the suppliers introduce new components, new knowledge, etc. On the other hand, the company’s executives introduce their new initiatives, objectives and discuss future plans. They may also invite suppliers for their valuable suggestions for improvement in the product.

6. Gordon Technique: This technique is closely related to brainstorming technique. But the major difference between the two is the approach. In this technique, the group leader opens the session with a statement of the board to be discussed, while in brainstorming session technique, the problem is pinointed.

7. Checklist Technique: The value analysis procedure starts with the detailed checklist to ensure that every pertinent questions is asked about each component. But in this technique, the checklists are prepared specifically for solving a particular problem. The following type of suggestions are included in the checklist:

(i) What does it cost?

(ii) What does it do?

(iii) Can it be eliminated?

(iv) Can a standard item be used?

(v) Can the item be redesigned?

8. Synectics Techniques: This is the preset method was first introduced in 1960 by J.J. Fordon. Synectics was derived from the Greek word ‘synektiken’ which means joining of different items together and reflect the early discovery of the synergistic effects of ‘banging things together’ where the creative equation of A + B = C illustrates how new ideas can be created from two old ideas. Thus synectics is a structured and efficient method of creative problem solving. In Synectics, the problem is stated very broadly such that problem solvers have not even inkling of the problem. When the discussion proceeds and perspectives are formed, then the facts of the problem are revealed which makes the solution more refined and specific to the actual problem. Team leader plays a crucial role during the session. The analogous and metaphorical information is exchanged within group of individuals having different specialisations and personalities.

9. Morphological Analysis: This method was deloped by Fritz Zwicky in 1966. Morphological analysis is actually a group of methods that share the same structure. This structure breaks down a system, product or process into its essential sub-concepts. Each concept represents a dimension in a multi-dimensional matrix. Thus every product is considered as a bundle of attributes. New ideas are found by searching the matrix for new combination of attributes that do not yet exist. It doesn’t provide any specific guidelines for combining the parameters. It tends to provide a large number of ideas. It helps in discovering new relationships and configurations which are overlooked by others.

10. Attribute Listing Technique: Attribute listing is a technique from the early 1930’s which takes an existing product or system, breaks into parts and identifies various ways of achieving each part. It prompts the different ways to change, modify or improve each attribute and recombine them to identify new forms of the product or system. Attribute listing is a very useful technique for quality improvement of complicated products, procedures for services. Let us take an example of business of making torches. The torch has different components - casing, switch, bulb, battery and the attribute weight. A list of ideas can be developed to improve each one. 

Attribute Listing  – Improving a torch

Feature	Attribute	Ideas for Improvement
Casing	Plastic	Metal
Switch	On/off	On/off/flow beam
Battery	Power	Rechargeable
Bulb	Simple Bulb	LED
Weight	Heavy	Light