Preliminary Expenses Meaning, Auditor's Duties Relating to Preliminary Expenses

Preliminary Expenses Meaning
Auditor's Duties Relating to Preliminary Expenses

Preliminary Expenses                    2017

Expenses incurred to the formation of a company are called ‘Preliminary Expenses’. Preliminary expenses include the following:

a)       Expenses incurred in order to get the company registered.

b)      Expenses incurred for the preparation, printing and issue of prospectus.

c)       Cost of preliminary books and Common Seal.

d)      Duty payable on Authorized Capital.

e)      Underwriting Commission etc.

Preliminary Expenses are to be written off out Securities Premium Account or it may be written off out of the Profit & Loss A/c gradually over some period. The balance left of preliminary expenses is to be shown in the asset side of the balance sheet of the company under the heading of ‘Miscellaneous Expenditure’.

Auditor’s Duties regarding Preliminary Expenses

1.       To verify the following on the basis of documentary evidence and to see that preliminary expenses do not include these:

a)       Loss incurred in the first year of the life of the company;

b)      Brokerage, commission etc. for selling or underwriting or for placing shares;

c)       Once the company begins to earn revenue, the current expenditure should not be debited to preliminary expenses account (Baidya Nath Biswas v. Emperor).

2.       To see that the company is charged only with expenses appropriately payable by it.

3.       To examine the contracts relating to these expenses and vouch the mode of payment.

4.       To see that expenses of capital nature but unsupported by available assets, be written off as soon as possible out of the revenue. According to Sec. 52 such expenses can be charged against share premium.

5.       To see that these are disclosed in the prospectus, statutory report and balance sheet.

6.       To see that the preliminary expenses not written off yet have been shown separately under ‘Miscellaneous Expenditure’ in the Balance Sheet.

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