Payment for Acquisition of Assets

The purchase of an asset must be duly supported by the receipt for the amount paid. In case of an immovable property the auditor must also inspect the title deeds. The title of an immovable property passes only on registration. It is therefore essential for an auditor to see that property has been registered in the purchaser’s name as required by the Transfer of Property Act, 1882 and also that the
title of the transfer to sell property has been verified by a solicitor or an advocate. In the case of movable property requiring registration of ownership, e.g., a car or a ship, it must be verified that such a registration has been made in favour of the purchaser. It is necessary for the auditor to satisfy himself generally as regards existence, value and title of the assets acquired. It must also be verified that the assets were purchased only by a person who had the authority to do so. Section 292 of the Companies act, 1956 provides that only the Board of Directors can invest the funds of the company. Thus the Board alone can sanction the purchase of a fixed asset. If the benefit of an item of expense has been acquired by the purchaser along with the asset, its value should be debited to a separate account, e.g., when a motor car has been purchased on which certain taxes and insurance charges were paid by the seller for a period that had not expired. In the case of an asset constructed or manufactured by the client himself, e.g., where a building has been constructed or a plant or machinery
manufactured by the concern with its labour and materials, it must be verified that the cost of labour, materials and other direct expenses incurred has been charged as cost of the asset on a proper allocation of the total expenditure debited under these heads. This is because, if a larger sum is capitalised than warranted in the circumstances, it would inflate the profit and if a smaller amount is debited, it would have the effect of unduly reducing the profit. Also corresponding values of assets would not be properly recorded. It must also be seen that neither expenses on repairs and maintenance have been capitalised nor the cost of additions to assets charged off as revenue expenses.

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