Auditor’s Duty as Regards Depreciation

Apart from fixed assets in respect of which depreciation must be provided in the manner a forementioned, it also has to be provided on semi-permanent assets, e.g., patents, trade marks, blocks and dies, etc. Since the auditor is not in a position to estimate the working life of a majority of them, for this he has to rely on the opinion of persons who have a technical knowledge of the assets. He must, however satisfy himself that an honest attempt has been made to estimate the working life of each asset, that the total provision for depreciation is adequate and that the method adopted for determining that amount to be written off appears to be fair and reasonable. If he is of the opinion that the provision for depreciation is not adequate, he should report to the appropriate authority. He must also see that depreciation written off is properly disclosed in the Profit and Loss Account and the Balance Sheet. In Part III of Schedule VI of the Act, it is provided that any amount, written off (after the commencement of the Act) which is in excess of the amount, which in the opinion of the directors is reasonably necessary for the purpose, to be regarded as a ‘reserve’. The amount should be shown as a reserve under head “Reserve and Surplus” on the liabilities side of the Balance Sheet. If, however, it has been written off prior to the commencement of the Act, it is not to be treated as a reserve, and such excess depreciation in the case should be deducted along with the normal depreciation from the cost of the asset.