How do verify the Goodwill and Freehold Property?
Verification of Goodwill and Freehold Property.
Goodwill is an intangible asset. Its value depends on the earning capacity of the business. According to Accounting Standard 10, the accounting for goodwill should be recorded in the books only when some consideration in money or money’s worth has been paid for it. While verifying goodwill, the auditor should keep the following points in consideration:
- Examine the method of valuation of goodwill.
- If the business has been purchased, the agreement regarding purchases of business should be studied.
- In case of partnership firm, the partnership deed should be studied.
- Unless goodwill has been purchased, it should not been shown in the Balance Sheet.
- The method of writing off goodwill should be studied.
- If no arrangement has been made regarding writing off goodwill then it should be shown in the Balance Sheet at the cost price.
- If the auditor has any suspicion about goodwill, he should clearly mention about this doubt in his report.
The freehold property includes such land and buildings which are absolutely owned by the company. Its verification should be done on the following lines:
- The land holdings should be verified by examining the original title deed.
- The list of lands held by the client as on the closing date should be compared with that of the previous year to find out any purchase or sale of land during the year.
- Purchase or sale of land should be vouched with reference to correspondence, brokers account and the accounts submitted by the legal adviser.
- All legal charges, brokerage etc., paid for the purchase of land has been capitalized.
- It should be verified that the amount of profit and loss resulting from Sale has been properly adjusted in the accounts.
- The freehold land is utilized by the client for the purpose of business only.
- If the land has been mortgaged the title deed will be in the possession of the mortgagee from whom the certificate to that effect should be obtained.
- Land in case of a real estate dealer is a current asset and not a fixed asset. The same should therefore be valued at cost or market value whichever is less.