Page 169 - CA Inter Audit PARAM

CA Ravi Taori
(ii) Ensure that no cost related to research (or from the research phase of an internal project) gets
recognized as intangible asset.
(iii) Check the certificate or report or other similar documentation maintained by the entity to verify the
date of use of the intangible which could be linked to date of commencement of commercial
production/ economic use to the entity, for all additions to intangible assets during the period under
audit.
(iv) Verify whether the additions (acquisitions) have been approved by appropriate entity’s personnel.
(v) Verify whether proper internal processes and procedures like inviting competitive quotations/
proper tenders etc. were followed prior to finalizing the vendor for procuring item of intangible
assets by testing those documents on a sample basis.
(vi) In relation to deletions of intangible assets, understand from the management the reason and
rationale for deletion and the manner of disposal. Obtain the management approval and disposal
note authoring disposal of the asset from its active use. Verify the process followed for sale of
discarded asset, example inviting competitive quotes, tenders and the basis of calculation of sales
proceeds. Verify that the management has accurately recorded the deletion of intangible asset
(original cost and accumulated amortization up to the date of disposal) and the resultant gain/ loss
on disposal in the entity’s books of account.

QNO B/S (Intangible Fixed Assets, Research Activity)- Old Course -- (M19E/N20M/M21M)
AIFS.36 Bhaskar CNO - AIFS-P2.040
You are an auditor of PQR Ltd. which has spent 10 lakhs on Research activities of the product during period
under audit. Board of Directors want to recognize it as an internally generated intangible assets. Advise and
discuss the conditions necessary to be fulfilled to recognize the intangible assets in the financial statements
Answer ➢ As per AS 26 - “Intangible Asset”
An intangible asset shall be recognised if, and only if:

• the said asset is identifiable.
• the entity controls the asset i.e. the entity has the power to obtain the future economic
benefits flowing from the underlying resource and to restrict the access of others to those
benefits.
• it is probable that future economic benefits associated with the asset will flow to the entity.
• the cost of the item can be measured reliably.

No Intangible asset arising from research (or from the research phase of an internal project) shall
be recognised. Expenditure on research shall be recognised as an expense when it is incurred since
in the research phase of an internal project, an entity cannot demonstrate that an intangible asset
exists that will generate probable future economic benefits.

➢ Case Discussion
Auditor of PQR Ltd. which has spent 10 lakhs on Research activities of the product during period under
audit. Board of Directors want to recognize it as an internally generated intangible asset.

➢ Conclusion
Thus, board of directors of PQR Ltd cannot recognize the expense as internally generated intangible asset.

QNO B/S (Intangible Fixed Assets, Valuation) Old Course – (M21E)
AIFS. Bhaskar CNO - AIFS-P2.040
36.50
The value of intangible assets may diminish due to efflux of time, use and/or obsolescence. The diminution
of the value represents cost to the entity for earning revenue during a given period. Discuss the audit

procedures to be applied by the auditor to ensure that Intangible assets have been valued appropriately
and as per generally accepted accounting policies and practices.
Answer Value = Cost - Amortisation - Impairment

Amortisation & its Purpose
The value of intangible assets may diminish due to efflux of time, use and/ or obsolescence. The
diminution of the value represents cost to the entity for earning revenue during a given period. Unless

www.auditguru.in 5.15