How would you check the correctness of preliminary expenses while auditing the accounts of a public company?

Preliminary expenses are the expenses incurred at the time of promotion, floatation or incorporation of a company. The following items are usually included in this head:

Cost of printing the Memorandum and Articles of Association, Prospectus, Letters of Allotment, etc.

Legal expenses incurred in drafting the Memorandum and Articles of Association.

Accountant’s and Value’s fees for report, certificates, etc.

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Stamp duty, registration fee, etc.

Expenses incurred in entering into agreements with stamp duties in respect thereof.

Cost of advertising the Prospectus, etc.

Cost of preparing, printing and stamping debentures and Debenture Trust Deed, if any.

Cost of company’s seal and statutory books.

Some important points should be noted as:

(i) Preliminary expenses are of a capital nature, but not represented by available assets and as such, they should be written off out of profits as soon as possible.

(11) Such expenses may be written off out of the premium received on issue of shares as laid down in section 78.

(iii) Preliminary expenses as not written off to date should be shown as a separate item in the Balance Sheet under the head, ‘Miscellaneous Expenditure’.

(iv) Underwriting commission and brokerage on shares or debentures should not be included under the head, ‘Preliminary Expenses’ and hence, be shown separately in the Balance Sheet.

Auditor’s Duty:

(1) The auditor should see that only the expenses connected with the creation, floatation or incorporation have been included in this item.

(2) Such expenses should not be debited to the Profit and Loss Account of the first year but should be spread over three, five or seven years, though it is not obligatory for a company to write them off in such a manner.

(3) He should vouch the payment of these expenses by reference to receipts, invoices, bills, etc.

(4) If the Prospectus has been issued, it should be seen that the amount of preliminary expenses has not exceeded the amount stated in the Prospectus.