(1) Where a company or a partnership has taken over the assets of a going concern, the agreement of sale should be inspected and that amount paid for them ascertained. It should be further verified that the allocation of the total cost among the various assets is fair and reasonable.
(2) The cost of assets acquired piecemeal should be verified with their invoices, purchase agreements or ownership rights and the receipt of the sellers in respect of the price paid. It should be verified that expenditure on assets newly acquired and that on the renewal and replacement of old assets has been correctly recorded, consistent with the method that has been generally followed in the past.
(3) When an asset is sold, its sale-proceeds should be vouched by reference to the agreement, containing the terms and conditions of sale, counterfoil of the receipt issued to the purchaser or any other evidence which may be available. If the sale of a fixed asset has resulted in capital profit, it should be transferred to capital reserve. However, the profit limited to the original cost or a loss should be transferred to the Profit & Loss Account.
(4) It is obligatory for a company to provide for depreciation out of the profits in accordance with the provisions under sub-section (1) of section 205, before any profits can be distributed as dividend. The law requires that depreciation should be provided in one of the ways specified in the section 205(2) of the Companies Act, 1956.
(5) The existence of fixed assets, where practicable, should be verified by a physical inspection and, or by comparing the particulars of assets as are entered in the Schedule attached to the Balance Sheet, with the Plant or Property Register and reconciling their total value with the General Ledger balances.
(6) Wherever possible, all the securities and documents of title, cash, negotiable instruments, etc. representing the assets, should be inspected at the close of the last day of the accounting period. If this be not practicable and the examination is undertaken at the later date, a careful scrutiny of transactions
subsequent to the date of the balance sheet must be made to ensure that the changes in their balance that have subsequently taken place are bonafide and are supported by adequate evidence.
(7) It should be ascertained that no unauthorised charge has been created against an asset and all the charges are duly registered and disclosed. Where shares or securities are lodged with a bank to secure a loan or an overdraft, a certificate should be obtained from the bank showing the nature of the charge, if any.
(8) Where assets, e.g., government securities, share scrips and debenture bonds are in the custody of a third party other than a bank, these must be inspected.
(9) Where depreciable assets are disposed of, discarded, demolished or destroyed, the net surplus or deficiency, if material, should be disclosed separately.
(10) According to the provisions contained in Part-I of Schedule VI to the Companies Act, 1956, the expenditure on fixed assets is required to be segregated under the following heads :
- Railway sidings
- Plant and machinery
- Furniture and fittings
- Development of property
- Patents, trade marks and designs
- Vehicles, etc.
It is the duty of the management to ensure that the fixed assets of the company are in existence and for this purpose, it is important that physical examination of plant and machinery and other fixed assets should be carried out periodically depending upon the size of the company. The order issued under section 227(4A) of the Act requires the auditor to report on the physical verification of the fixed assets by the management, and the treatment of the discrepancies, if any.