Buying a 2006 S40, 2.4L
 

first and foremost is the maintenance history. The top maintenance items are 1) the timing belt - the service interval is 10 years OR 120K miles - whichever comes first, so a 2006 should be on its third timing belt. 2) condition of the PCV system - when inspecting the car you should pull the dipstick with the motor running to see if any smoke vents out or do the rubber glove test over the oil fill cap. 3) color of fluids, and any signs of leaks? All should have been serviced at some point - coolant, brake fluid, transmission, power steering 4) overall cleanliness? If somebody can't keep the car clean inside and out, why would you expect the car to be properly serviced? Generally speaking the S40s should be fairly reliable, but as a 12 year old car, there will be things to fix. Read through the posts on the S40 board to get an idea - keeping in mind people post up only when they have things that go wrong or want to do their own repairs. Its better to be a DIY type for things like regular oil changes, fluid flushes, brakes, odd sensors that fail.

Just so there's no confusion, a 2006 vehicle without well over 200,000 miles will be on its second timing belt, not its third (it's on the WAY to its third belt, of course). Lots of people overlook this when buying a car, and end up having to drop a grand into the car immediately (or worse, have the belt break or slip bad enough for the valves to get in a fistfight with the pistons).

Checking most of the fluids for color and condition is fairly easy EXCEPT the transmission. For some thoroughly (to me) unknown reason, Volvo put it where it can only be removed from underneath the car, with the splash panel off. FWIW, I'd seriously recommend pulling the splash panel anyway - it can hide a host of problems - you'll be hard-pressed to see leaks unless they're visible from above (most aren't), or so bad that the fluid is dripping out all over the place even with the cover removed. Look for any kind of fluid anywhere it shouldn't be.

When you put a latex glove over the oil fill port (cap removed, of course), you're checking for blow-by from the pistons, and/or a clogged PCV (Positive Crankcase Ventilation) valve. Normally I'll just slap my palm over the hole, and can feel blowby that way. Then again, I don't mind getting a little oil on my hands.

A few other items to test:
1) Apply the brakes sharply (at a low speed) and see if you get a really noticeable "thunk" through the steering wheel. Normally this will mean that the bushings in the lower control arms are shot, and you'll need new LCAs (along with an alignment).
2) Make sure the car shifts properly in "manual mode" (pushing the shift lever over to the right). Many times, the black panel that keeps you from being able to see down into the console around the shift lever is broken, and without this (cheap and easy) part, the car won't shift manually.
3) Pay close attention for any harsh up- or down-shifts. Better that your test drive is long enough to get the transmission up to temperature, because some problems will occur only when cold, others only when hot.
4) Try to insist that the car has NOT been started and/or warmed up before you arrive. This can cover up a host of problems, such as a leaky fuel system (requiring a long crank in the morning), telltale puffs of white smoke from bad rings / valve guides, etc., etc., etc.
5) Driving over speed bumps, and/or pot holes - and taking a few sharp turns can point out suspension issues you might miss otherwise.
6) Count the keys and remotes. They're VERY expensive to add after the fact.
7) Check the title - VIN is correct, no liens listed, owner info is correct. Fixing a title problem can be one of the most frustrating things you'll do this year (decade, century)
8) Look for leaks - between the engine and transmission (rear main seal - big bucks), axles (axle seals - easy DIY, but will cost a whole lot more at a dealer, valve cover gasket (ditto), oil filter housing, hoses, etc.
9) Yes, make sure the A/C works. Easy to overlook if it's freezing outside, but you're going to regret not catching an A/C (or heat) problem when the weather changes.
10) Wheel bearings - you'll hear a bad bearing as a grumbling or droning noise, often identifiable audibly to one corner though not always. You'll be spending a few hundred bucks to fix each of these (around $100 if you're a DIY guy with a press).
11) Water damage - I like to pull up the trim panels on the door sills and look under the carpet for signs of water damage. Yeah, some cars that are used in nasty weather can have a LOT of water just from sloppy, snow-covered boots, but it's important to make sure that the car hasn't been in a flood (it'll never, ever, ever, ever, ever be right if it was).
12) And of course, look for any signs of an accident. Normally this will be easiest to spot "on the corners" - look at the unibody under the hood / trunk carpet for any signs of having been straightened. Same with side door sills, and suspension attachment points. Usually if a car has been bent up at all, you'll see some sign of it that the body shop can't (or won't) be able to fix entirely.