State how you would verify the following:
a) Intangible assets (5Marks each June 2011)
b) Sale of Investments (5Marks each June 2011)
c) Leasehold property
An intangible asset is an identifiable non-monetary asset, without physical substance held for use in the production or supply of goods or services, for rental to others or for administrative purposes. Enterprises frequently expand resources, or incur liabilities, on the acquisition, development, maintenance or enhancement of intangible resources such as scientific or technical knowledge, design and implementation of new processes or systems, licenses, intellectual property, market knowledge and trademarks (including brand names and publishing titles). Common is another example of an item of intangible nature which either arises on acquisition or is internally generated. If an item covered does not meet the definition of an intangible asset expenditure to acquire it or generate it internally is recognized as an expense when it is incurred. However, if the item is acquired in an amalgamation in the nature of purchase, it forms parts of the goodwill recognized at the date of the amalgamation.
Some intangible assets may be contained in or on a physical substance such as a compact disk (in the case of computer software), legal documentation (in the case of a license or patent), or film (in the case of motion pictures). The cost of the physical substance containing the intangible assets is usually not significant. Accordingly, the physical substance containing intangible assets, though tangible in nature, is commonly treated as a part of the intangible asset contained in or on it.
In some cases, an asset may incorporate both intangible and tangible elements that are, in practice, inseparable. In determining whether such an asset should be treated under set standards, or as an intangible asset under set standards, Judgment is required to assess as to which element is predominant. For example, computer software for a computer-controlled machine tool that
cannot operate without that specific software is an integral part of the related hardware and it is treated as a fixed asset. The same applies to the operating system of a computer, where the software is not an integral part of the related hardware, computer software is treated as an intangible asset.
b) Sale of investment:
See that sale of investment has been made on the proper authorization of Board or other competent authority.
Ascertain the method of selling investments. It may be either through broker, directly or through a bank. See the broker‟s sold note.
See that the difference between the carrying amount and the sales proceeds, net of expenses, is recognized in the Profit & Loss Account. Ensure that when only a part of the holding of an individual investment is sold, the carrying amount is allocated on the basis of average carrying amount of the total holding of the investments.
Interest, dividends, rentals on investments are to be shown in P& L A/c at Gross Value and TDS as advance tax paid.
Showing separately profit & Loss on disposal and changes in carrying amount of current and long-term investments.
The auditor should verify that contingent liabilities do not include any items which require an adjustment of relevant assets or liabilities.
c) Leasehold property
Various steps involved in the verification of leasehold properties are stated below:
1. Inspect the lease or assignment thereof to ascertain the amount of premium, if any, for securing the lease, and its terms and conditions; and that the lease has been duly registered.
2. Ascertain that all the conditions, the failure to comply with which might result in the forfeiture or cancellation of the lease, e.g. payment of rent in due dates, insurance of property, maintenance of property etc. as prescribed lease agreement are being duly complied with.
3. Examine the counterpart of the lease agreements, if part of the leasehold property has been sublet.
4. Make certain that due provisions for any claim that might arise under the dilapidation clause on the expiry of the lease has been made, and, if no such provision has been made, draw the client‟s attention to the matter.
5. Ensure that the outlay as well as any legal expense incurred to acquire the lease which are shown as an asset in the Balance Sheet are being written off at a rate which could completely wipe off the assets over the unexpired term of the lease.
A leasehold property, even where no premium has been paid for its acquisition, may sometime can have a considerable value. In such a case, it may not be advisable to continue to show the assets as if it has no value. Nevertheless, where the leasehold rights have been revalued that fact should be clearly shown on the Balance Sheet till the account has been completely written off.