Audit of Land and Building | Freehold & Leasehold | Verification Procedure

Audit of Land and Building

Assets like land, building, etc. can be divided into two categories such as

  1. Freehold Property, and
  2. Leasehold Property.

We shall new discuss the verification procedure of these categories of assets separately.

Audit of Land and Building - Audit Procedure
Audit of Land and Building – Audit Procedure

1. Audit of Freehold Property – Verification Procedure

As land is a non-depreciable asset, it is better if it is shown separately in the Balance Sheet. In other words, it should not be shown along with buildings because building is a depreciable asset whereas land is a non-depreciable asset. The verification procedure is as follows:

1. The auditor should examine the title deeds in order to ensure that they are in the name of the client.

2. In case the property is mortgaged, he should obtain a certificate from the mortgagee or his solicitor to the effect that the title deeds are in their possession. He should also enquire whether there is any second or subsequent mortgage or not.

3. If it is purchased, correspondence and broker’s note should be examined. If the purchase is effected through auction the auctioneer’s account should be checked.

4. If the client has constructed the building, the auditor should examine the certificates received from the builder, contractor, architect and other necessary papers and documents.

5. If the building is a newly purchased one, the value of building can be ascertained by vouching the amount paid to the contractor. If it is partly constructed, by obtaining architect’s certificate, its value can be determined.

6. If the client’s own staff members are also engaged in its construction, the auditor should see that a reasonable basis of allocation of wages, supervisor charges, etc. has been adopted.

2. Audit of Leasehold Property – Verification procedure

If the land or building is acquired by the business for a fixed duration on lease, the property is said to be leasehold. Auditor should see that separate accounts are maintained both for freehold and leasehold properties.

The amount of premium paid in order to acquire the lease, the expenses incurred on the improvement of the building, etc. should be capitalized and written off over the life of the lease.

The royalty paid every year should be treated as revenue expenditure and debited to the Profit & Loss Account. The cost of leasehold property should be written off on straight line basis.

The auditor should take the following steps to verify the leasehold property:

1. The auditor should inspect the lease agreement to find out value of the property and its duration. He should see that the lease agreement is registered with the Registrar and certificate testifying the validity of the same has been obtained from the client’s legal advisor.

2. He should see that the terms and conditions of the lease are duly complied with.

3. The annual charge for depreciation will be arrived at by dividing the total cost by the term of the lease. The auditor should see whether amount written off is sufficient to provide for depreciation at the end of the term.

4. If the property is sub-let, the auditor should examine the agreement entered into with the sub-lessee.

5. If the asset is of building, the tax paid, and repair expenses made for it should be treated as operating expenditure. The auditor should see whether they are treated so.