How should title risk and title insurance be addressed in real estate audits?

• A. Rely on the seller's assurances without verifying deeds.
• B. Verify title deeds and insure; test for liens, encumbrances; confirm title registration.
• C. Only check tax payments, not title.
• D. Title risk is not audit-relevant.

Answer: (B)

Assessing title risk in a real estate audit means ensuring the property has a valid, marketable ownership and that any claims against it are identified and managed. The best approach is to verify the title deeds and related documents, test for liens and encumbrances, and confirm that the title is properly registered in the land or property registry. Verifying title deeds provides evidence of ownership and the chain of title, while checking for liens, encumbrances, and other claims uncovers any financial or legal burdens that could affect transfer or value. Confirming title registration ensures the records match reality and that the asset can be legally conveyed. Title insurance is important because it transfers residual risk to the insurer for defects discovered later, but it does not replace the need for thorough verification of the actual title and encumbrances at the time of audit. Relying only on seller assurances, or focusing solely on tax payments, misses critical title issues and can overstate the asset’s readiness for transfer or collateral. Title risk is relevant to the audit because undisclosed or unrecorded defects can affect asset values, rights, and disclosures.