Concept of Valuation
Valuation is the act of determining the value of assets and critical examination of these values on the basis of a normally accepted accounting standard. It is the analytical process of determining the current (or projected) worth of an asset or a company. Valuation of assets is to be made by the authorized officer and the duty of auditor is to see whether they have been properly valued or not. The purpose of the valuation typically determines what standard of value is used.
For ensuring the proper valuation, the auditor should obtain the certificates of professionals, approved values and other competent persons. An auditor can rely upon the valuation of the concerned officer but it must be clearly stated in the report because an auditor is not a technical person. Fundamental analysis is often employed in valuation, although several other methods may be employed such as the capital asset pricing model (CAPM) or the dividend discount model (DDM). Business valuation involves the determination of the fair economic value of a company or business for various reasons such as sale value, divorce litigation, and the establishment of partner ownership. If you have a business and seek funding from investors, they will need to know how much your enterprise is worth. This is achieved through a valuation – an estimate of your company’s overall worth.
An auditor should consider the following points regarding the assets while making valuation off assets:
- Original cost
- Expected working life
- Wear and tear
- Scrap value.