In this blog post, we have thrown light on the famous statement: “An auditor is not a Valuer”. But before that, let us see why is valuation important.
Is valuation important?
It is known that the financial position of a business is reflected by its balance sheet and its working results are reflected by the profit and loss account. Whether or not these statements indicate a true and fair view of the business depends considerably on the valuation of assets.
If the business’s assets and liabilities are not fairly valued in the financial statements, the results will be distorted and will give misleading information. Thus, an auditor is needed to check the valuation of assets as part of his work.
He is required to not only verify the physical existence and ownership of assets but also their valuation as shown in the Balance Sheet.
Now, considering that an auditor holds great responsibility for the verification and valuation of assets, it is often argued if an auditor is a valuer or not.
Here, it is pertinent to refer to a case as discussed below.
Who said that ‘Auditor is not a valuer’?
The question as to what is an auditor’s duty with regard to the valuation of assets was addressed by Lord Justice Lopes L.J. in the Kingston cotton mills case of 1896.
He observed that an auditor is fully justified in relying upon the representations made by the company’s management as long as he exercises reasonable care and applies requisite skill in performing his duties.
What is the Auditor’s duty with regard to the valuation of assets?
Though the scope of an auditor’s work has been enlarged since then, the following generalizations may be made with regard to his duty for valuation of assets:
1) An auditor should take care to ensure that assets that do not exist are not included in the Balance Sheet and those that do exist do not indicate any over-valuation or undervaluation.
2) He has a responsibility to verify or examine the valuation of assets.
3) But an auditor is not a valuer himself.
4) He is not expected to perform asset valuation for each and every asset on his own as he is not an expert.
Thus, he can rely on the representations made by management as well as opinions and certificates issued by technical experts, surveyors, architects, valuers, etc. for the purpose of valuing the assets.
5) But before relying on such representations made by management or certificates issued by technical experts, surveyors, etc., the auditor must exercise reasonable care.
He should apply appropriate audit procedures to ensure that such valuations have been performed in accordance with accounting principles and legal requirements if any.
6) As far as possible, he should ensure that appropriate steps were taken during the valuation process for the purpose of determination of cost (by inspection of original documents), calculation of deprecation or amortization charges, and determination of market value based on net realizable value or replacement cost of the asset.
In other words, he should ensure that the management of the company used a reasonable basis of valuation of assets and charged adequate depreciation before determining their correct value.
7) If the auditor fails to exercise reasonable care and apply requisite skills for ensuring that the valuation of assets has been done properly, he can be held guilty of negligence by the Courts.
In the case of State Street Trust Co. v. Ernst (1938), the auditor was held guilty of negligence because he did not certify bills receivable properly. They were certified at their face value even though the auditor came across several cases of unsatisfactory collection during his examination.
Final thoughts on “Is Auditor a Valuer”?
The auditor is not a valuer was stated in the famous case of Kingston cotton mills.
Even though an auditor is closely concerned with values, valuation is not a part of the auditor’s duty. His duty is limited to verifying that valuation has been done correctly so that financial statements depict the correct picture.
In fact, the valuation of assets is the duty of the management and auditors can rely on a certificate issued by an authorized valuer on this behalf. Nevertheless, they need to exercise utmost care before relying on any information supplied by the management or third parties.
In matters relating to valuation, they must ensure that generally accepted principles of valuation, commercial practices and accounting standards are adhered to while arriving at the Balance Sheet value of assets.
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