Duties of an Auditor in regard to Preliminary Expenses
Preliminary
expenses, also known as startup costs or pre-incorporation costs, are expenses
incurred by a company before it begins its normal operating activities. These
expenses are typically capitalized and amortized over a period. The auditor's
duties in regard to preliminary expenses include:
Identification and Classification:
The auditor should
identify and classify preliminary expenses in the financial statements. These
expenses may include costs such as legal fees, registration fees, promotional
expenses, and incorporation costs.
Review of Accounting Treatment:
Examine the
company's accounting policies and treatment of preliminary expenses to ensure
they are in compliance with accounting standards and legal requirements.
Preliminary expenses are typically capitalized and amortized over a specified
period.
Verification of Incurred Expenses:
Verify that the
preliminary expenses claimed by the company as incurred have actually been
spent and are supported by relevant invoices, contracts, or other source
documents.
Amortization Schedule:
Ensure that the
amortization schedule for preliminary expenses is accurately maintained, and
the expenses are being amortized in accordance with the company's accounting
policies.
Assessment of Compliance:
Assess whether the
company's accounting policies related to preliminary expenses are consistent
with generally accepted accounting principles (GAAP) or the relevant accounting
standards.
Disclosure in Financial Statements:
Confirm that
preliminary expenses are properly disclosed in the financial statements. This
typically includes a note to the financial statements detailing the nature of
the expenses and the amortization period.
Communication with Management:
Discuss with the
company's management to understand the nature of the preliminary expenses, the
rationale for their incurrence, and any unusual or significant expenses.
Review of Supporting Documentation:
Examine any
agreements, contracts, invoices, or other documentation related to preliminary
expenses to validate the accuracy of the expenses claimed.
Testing for Impairment:
Assess whether any
of the preliminary expenses are impaired. If there are indicators of
impairment, the auditor should ensure that the expenses are properly written
down to their recoverable amount.
Consideration of Materiality:
Evaluate the
materiality of preliminary expenses in the context of the financial statements.
If the amount is immaterial, extensive audit procedures may not be necessary.
Reporting and Documentation:
Document the audit
procedures performed, findings, and conclusions in the audit working papers.
Include a statement
in the auditor's report regarding the audit of preliminary expenses, outlining
the auditor's responsibilities and findings.
Reporting to Shareholders:
If required, report
the results of the audit related to preliminary expenses to the shareholders or
other relevant stakeholders. Ensure that any issues or discrepancies are
brought to the attention of the shareholders and management.
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