## Auditing PPE: Rights and Obligations Assertion

The rights and obligations assertion verifies that the entity legally owns the assets it claims to own, and that any charges or encumbrances against those assets are properly disclosed.

### Why It Matters

An entity may record assets in its books that it does not legally own (e.g., assets held in nominee's name, assets under dispute). Equally, assets may be pledged as security without proper disclosure — misleading lenders and investors.

### Audit Procedures

#### For All PPE Additions

Verify that purchase invoices are in the name of the entity (establishes legal title)

#### For Land and Buildings Specifically

Examine the conveyance deed / sale deed to confirm legal and valid ownership
Insist on and verify original title deeds for all immoveable properties held at balance sheet date

#### When Property is Mortgaged

Original title deeds will be held by the lender, not the entity
Auditor should request management to obtain a written confirmation from the lender (on lender's letterhead) stating they hold the original title deeds as security

#### For Charges and Encumbrances

Verify the Register of Charges maintained by the entity to identify any charges created against PPE
Cross-check disclosures in the financial statements against charges registered

Worked example

### Example 1

Q: Kyte Pvt. Ltd. acquired immovable property worth ₹5 crores during FY 2023-24 and mortgaged it to a bank. How should the auditor verify rights and obligations?

A: The auditor should: (1) Check the purchase invoice is in Kyte Pvt. Ltd.'s name, (2) Examine the conveyance/sale deed to confirm legal ownership, (3) Since the property is mortgaged, original title deeds are with the bank — obtain a written confirmation from the bank confirming they hold the title deeds as security for the loan, (4) Verify the Register of Charges to confirm the mortgage is registered and disclosed, (5) Ensure the charge is disclosed in the notes to the financial statements.

⚠️ Common exam mistakes

Assuming invoice in entity's name alone is sufficient — for immoveable property, the conveyance/sale deed must also be examined
Not asking for bank confirmation when property is mortgaged — candidates often say 'the title deed is not available' and stop there
Forgetting to check the Register of Charges — charges against PPE are a key disclosure requirement
Conflating completeness procedures (all additions recorded) with rights and obligations (ownership is valid) — these are separate assertions

Reference:

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Auditing PPE – Rights and Obligations Assertion

Worked example

⚠️ Common exam mistakes