Capital expenditure is the amount spent on acquisition of fixed assets which include purchase of (1) Land and Buildings, (2) Plant and Machinery, (3) Motor Vehicles, (4) Investments and (5) Patents and copyrights. The procedures in vouching various items of capital expenditure are as follows:
Auditor should examine the title deeds and sale agreements of the property purchased.
When assets are purchased on leasehold basis, lease agreement should be verified with regard to lease rent, period, terms etc. In case of purchase of freehold asset, auditor should examine the correspondence directly from the seller. He should ensure that all expenses incurred in connection with purchase of a asset like auctioneers commission, brokerage, architects fees, registration fees and legal charges, are capitalized. He should also vouch all such payments with reference to receipts. When asset is purchased through broker, the auditor should verify the brokers note. When asset is purchased in auction, the account submitted by the auctioneer should be examined. Similarly, auditor should ensure that all expenses incurred in connection with construction of a building like materials purchased, wages paid, cartage has been capitalized. In case of construction of a building, auditor should examine the construction contracts and architects certificate.
Documents to be Vouched: (1) Title Deeds, Sale Agreements, (2) Lease Agreement, (3) Correspondences with Seller, (4) Auctioneers Statement, (5) Architects Certificate, (6) Contractors Agreement, (7) Receipts.
On 20th April 2016, purchased a piece of land for Rs.1,00,000 and paid cash.
Auditor should vouch the transaction in the following manner:
1. Verify entry in Cash Book with respect to date of purchase, cost, and nature of asset purchased.
2. Verify entry in Land and Buildings Account with regard to date and amount of purchase.
When plant and machinery are purchased, auditor should vouch the invoices and receipts received from the vendors. He should ensure that all incidental charges connected with the asset are capitalized and added with the cost of asset. He should also carefully scrutinize that expenses in connection with repairs and maintenance are not capitalized. When the asset is purchased on Hire purchase, he should verify the Hire purchase agreement and related vouchers. When the asset is purchased on Auction, Auctioneers statement of account should be verified. In case of purchase of imported machinery, any import duty and clearing charges should be debited to asset account.
(1) Invoice from Vendors, (2) Receipts, Auctioneers Statement of Account, Hire Purchase Agreement.
Contract of purchase, invoice, broker’s note, payee’s acknowledgement, asset receiving report and the registration book showing the ownership in the name of the client should be examined.
Documents to be Vouched:
(1) Invoice, (2) Contract of purchase, Registration book, (4) Brokers note and (5) Payees acknowledgement.
Auditor should vouch payments made for purchase of Investments with the Brokers Bought Note. He should verify that investments purchased are properly authorized and registered in the name of the company. He should physically examine the actual investment held by the company. In case of new issue of securities, auditor should examine letters of allotment, bank receipt for installments paid, share certificates etc. If investments are purchased cum-dividend, auditor should verify that the expenditure has been properly apportioned between capital and revenue. In case of inscribed stock, certificate from the bank in whose books the stock is inscribed should be obtained.
(1) Brokers Bought Note, (2) Schedule of Investments, (3) Share certificate, (4) Letters of Allotment and Bank Receipt, Bank Certificate for Inscribed Stock.
Patent is an exclusive right or privilege to make or produce something and copyright is a right to produce an item of aparticular design. Incase of purchase of patents and copyrights, auditor should obtain the patents and copyrights list from the client and examine it with reference to registration number, date, name of the seller, consideration paid etc. He should verify the registration certificates, certificates for grant of patent, documents of assignment, copyright agreements and receipt for renewal fees. When patent is purchased through broker, brokers commission should be accounted as capital expenditure and should be included in the cost of patent. Similarly, when patents are received through research, research expenses should also be capitalisied. On the other hand, he should ensure that renewal fees paid should be not be capitalized but instead should be treated as revenue expenditure. He should also ensure that lapsed patents have been written off from the books of accounts.
(1)List of Patents and Copyrights, (2) Patent and Copyright Agreement, (3) Registration Certificates, (4) Document of Assignment, (5) Receipts.