Other Fixed Assets
The procedures discussed above regarding premises also apply, to the extent relevant, to verification of other fixed assets. In respect of moveable fixed assets, the auditor should pay particular attention to the system of recording the movements as well as other controls over such fixed assets, e.g., their physical verification at periodic intervals by the branch management and/or by inspection/internal/concurrent audit team. The auditor should also examine whether discrepancies have been properly dealt with in the books of account and adequate provision in respect of any damaged assets has been made.
In recent years, banks have incurred substantial expenditure on computer hardware and software. Computer hardware qualifies the definition of a ‘fixed asset’ as given in AS 10, “Accounting for Fixed Assets”. Computer software that is essential for the functioning of the hardware (e.g., operating system) can be considered an integral part of the related hardware. The expenditure incurred on acquisition and installation of the hardware (as also on any systems software considered to be an integral part of the related hardware) should be capitalised in accordance with the principles laid down in AS 10, “Accounting for Fixed Assets”, and depreciated over the remaining useful life of the hardware. Hardware and software are susceptible to faster rate of technical obsolescence; hence the auditor must take into consideration this fact while verifying the provision for depreciation on these assets. The same, however, should not be depreciated for a period of more than three years.
Application software is not an integral part of the related hardware and is treated as an intangible asset. Accordingly, the same should be accounted for as per Accounting Standard (AS 26), “Intangible Assets”. The treatment of expenditure on applications software, whether acquired from outside or developed in-house, would also be similar. However, in estimating the useful life of applications software, the rapid pace of changes in software as also the need for periodic modification/ upgradation of software to cater to changes in nature of transactions, information needs etc. need special consideration. As far as expenditure during the stage of in-house development of software is concerned, the same needs to be accounted for in accordance with AS 26, “Intangible Assets”, according to which expenditure incurred during the research phase should not be capitalised as part of cost of intangibles. While capitalising the development phase expenditure, due consideration should be given to Paragraph 44 of the said Standard. Further, due care should be taken in verifying the date of capitalization and date on which asset was put to use/ ready for intended use, particularly in case of implementation of application software and system. While conducting the audit of intangible assets, the auditor should also consider the guidelines given by RBI by way of Circular No.DBOD.No.BP.BC.82/21.04.018/2003-04, dated April 30, 2004. In case of Banking Companies, the auditor needs to verify that the requirements of Schedule II to the Companies Act, 2013 are also complied with including identification of components wherever applicable. At times, though depreciation has been fully provided on certain types of assets, however, they continue to be in use. In such cases the auditor should verify that the bank’s policy in this regard has been followed.
Many a times, fixed assets like furniture, office equipments, etc., are transferred from one branch to another. The auditor should examine whether accumulated depreciation in respect of such assets is also transferred. It may be noted that the consolidated accounts of the bank would not be affected by such transfers. In recent times, the fixed asset management softwares are in use. The auditor has to examine the reasonableness of the internal controls with respect to recording such inter branch transfer of assets
It should be examined whether fixed assets have been properly classified. Fixed assets of similar nature only should be grouped together. For example, items like safe deposit vaults should not be clubbed together with the office equipments or the theft alarm system of the bank.
In respect of fixed assets sold during the year, a copy of the sale deed, if any, and receipt of the sale value should be examined by the auditor. In such a case, it should also be seen that the original cost and accumulated depreciation on the assets sold have been correctly adjusted. Profit earned or loss incurred on such sales should also be checked. In case of sale/disposal/scrapping of fixed assets, the auditor should examine whether there is an adequate control system in place and the same has been adhered to. He should also ensure that proper accounting for the same has been done.
The auditor should examine whether any expenditure incurred on a fixed asset after it has been brought to its working condition for its intended use, has been dealt with properly. According to AS 10, “Accounting for Fixed Assets”, such expenditure should be added to the book value of the fixed asset concerned only if it increases the future benefits from the asset beyond its previously assessed standard of performance.
The auditor at head office level should examine if the consolidated fixed assets schedule matches in all respect and all the transfers’ ins/outs, are tallied. A broad check on the depreciation amount vis-a-vis the gross block of assets must be reviewed with special emphasis on the computer hardware/software.