Capital expenditure :
According to Spicer and Pegler “Capital expenditure is all expenditure incurred for the purpose of acquiring, extending or improving assets of a permanent nature, by means of which the business may be carried on or for the purpose of increasing the earning capacity of the business”. Such expenditure is normally heavy and therefore require special attention. The type of documents required depends upon the nature of the payment. Some of the items of capital nature and the duties of an auditor in each case are given below :
1. Land & Building :
The auditor should take the following steps :
(i) The documents of title of the property purchased should be examined.
(ii) The auditor should find out as to whether land or buildings purchased are on freehold or leasehold basis. In latter case, he should examine the terms of the lease.
(iii) If the properties are purchased through an auctioneer, the account submitted by the auctioneer should be checked.
(iv) In case the property has been purchased through the broker, the broker’s note should be examined.
(v) Where the property is got erected through a contractor, he should examine the receipts issued by the contractor, for payments made. If the buildings have been constructed by engaging labour,he should vouch the expenditure on building materials purchased, cartage paid, wages paid to the workers etc. and also see that the expenditure has been properly capitalised.
(vi) The expenses incurred, for example, auctioneer’s commission, brokerage, architect’s fee, registration fee etc. can be vouched with the help of the receipts obtained and it should be seen that they are capitalised.
2. Plant, Machinery, Furniture, Fixtures etc. :
In this connection, the auditor should take the following steps :
(i) examine the invoices and the receipts obtained from the supplier and see that the items have been properly authorised.
(ii) In case, machinery has been purchased on hire-purchase basis the auditor should examine the contract of hire-purchase with the vendors to find out the purchase price, the amount of instalment and interest. Here, he should note that only the principal amount has been capitalised.
3. Investments :
Investments should be vouched in the following manner:
(i) In case, these have been purchased though a stock-broker, payments should be vouched with reference to the brokers sold note.
(ii) In case of a new issue for which application has been made and if the share certificates have not yet been received, the allotment letter and banker’s receipts for the instalments paid should be inspected. But if share certificates or debentures have been received, they should be examined.
(iii) The actual investments should be examined.
(iv) In case of cum-dividend purchase, he should see that the expenditure has been properly apportioned between capital and revenue.
(v) He should see that the investments have been made in accordance with the provisions of the Companies Act and Investments are registered in the name of the company required under section 49 of the Companies Act.
4. Patents :
The auditor should take the steps as given below :
(i) examine the patent.
(ii) if the patent has been purchased, the assignment should be inspected together with the receipt for the purchase consideration.
(iii) In case patent has been purchased through some agent, the agent’s receipted amounts should be examined to note the agent’s fees and verify the amount so included in the asset account.
(iv) He should note that the patent renewal fees has not been charged to the patent account, as these fees represent revenue expenditure.
5. Loans :
In order to vouch the figure of loans, the auditor should :
(i) inspect the loan agreement, the security held if any, receipt given by the borrower etc.
(ii) examine that the loan has been properly authorised.
(iii) If the loan has been advanced against mortgage he should examine the receipt mortgage, the receipt from the borrower, the mortgage, deed, title deeds and other documents.
(iv) In case of loans to directors, the managing directors and other officials of a company, he must see that the provisions of the companies act are followed.
