Page 166 - CA Inter Audit PARAM

CA Ravi Taori

QNO BS (PPE Rights & Obligation And Valuation) Old Course – (N19M/N19R/SM20/SM21/N22M/M23R)
AIFS.31 Bhaskar CNO-AIFS-P2.020 New Course – (SM25/S24M/J25M)
The auditor has to ensure whether PPE has been valued appropriately and as per generally accepted
accounting policies and practices and also the entity has valid legal ownership rights over the PPE claimed
to be held by the entity and recorded in the financial statements . Explain how the auditor will verify the
same.
OR
The auditor A of ABC & Co.- firm of auditors is conducting the audit of XYZ Ltd and while performing testing
of additions wanted to verify that all PPE (Property Planed and Equipment) purchase invoices are in the
name of the entity he is auditing. For all additions to land, building in particular, the auditor desires to have

concrete evidence about ownership. The auditor is worried about whether the entity has valid legal
ownership rights over the PPE claimed to be held by the entity and recorded in the financial statements.
Advise the auditor.
OR
BOTS is a manufacturing entity having material Property, Plant and Equipment (PPE) items in its financial
statements. The auditor of the entity wants to verify that PPE items have been valued appropriately as per
generally accepted accounting policies and practices. Comment on significance of such verification. Suggest
a few audit procedures in this regard.
Answer The auditor has to ensure whether PPE has been valued appropriately and as per generally accepted
accounting policies and practices.

The value of fixed assets/ PPE depreciates due to efflux of time, use and obsolescence. The diminution of the
value represents an item of cost to the entity for earning revenue during a given period. Unless this cost in
the form of depreciation is charged to the accounts, the profit or loss would not be correctly ascertained, and
the values of PPE would be shown at higher amounts.

• The auditor should:
o Verify that the entity has charged depreciation on all items of PPE unless any item of PPE is non-
depreciable like freehold land;
o Assess that the depreciation method used reflects the pattern in which the asset’s future economic
benefits are expected to be consumed by the entity. It could be Straight line method, diminishing
value method, unit of production method, as applicable.
o The auditor should also verify whether the management has done an impairment assessment to
determine whether an item of property, plant and equipment is impaired as per the requirements of
AS 28 - Impairment of Assets.

To verify whether the entity has valid legal ownership rights over the PPE claimed to be held by the entity
and recorded in the financial statements
• In addition to the procedures undertaken for verifying completeness of additions to PPE during the period
under audit, the auditor while performing testing of additions should also verify that all PPE purchase
invoices are in the name of the entity that entitles legal title of ownership to the respective entity.
• For all additions to land and building in particular, the auditor should check the conveyance deed/ sale
deed to verify whether the entity is the legal and valid owner or not.
• The auditor should insist and verify the original title deeds for all immoveable properties held as at the
balance sheet date.
• In case the entity has given such immoveable property as security for any borrowings and the original title
deeds are not available with the entity, the auditor should request the entity’s management for obtaining
a confirmation from the respective lenders that they are holding the original title deeds of immoveable
property as security.
• In addition, the auditor should also verify the register of charges, available with the entity to assess that
any charge has been created against the PPE.

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