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CA Intermediate · Auditing and Ethics · Audit of Items of Financial Statements

Ganga Steel Ltd's Property, Plant and Equipment register shows a machine bought on 1 April at Rs 40 lakh. The auditor notes that on 10 April the company incurred Rs 2 lakh on a trial run and Rs 1.5 lakh on staff training, and on 20 April Rs 3 lakh on an advertisement launching the product made by the machine. Management has capitalised all of these. Which statement reflects the correct audit finding?

Only the trial run cost, as a testing cost, is directly attributable under AS 10 and can be capitalised. Staff training and the launch advertisement are not costs of bringing the asset to working condition and must be expensed, so the Rs 4.5 lakh capitalised for them is a misstatement.

  1. AAll three amounts are properly capitalised as costs of bringing the asset to use
  2. BOnly the trial run cost may be part of cost; training and advertisement costs should be charged to the statement of profit and lossCorrect
  3. COnly the advertisement cost may be capitalised, as it relates to the asset's output
  4. DNone of the three can be capitalised and the Rs 40 lakh itself must be reviewed

Explanation

Under AS 10, costs of testing whether the asset functions properly are directly attributable and may be capitalised. Costs of staff training and advertising or promotional activities are not part of the cost of PPE and must be expensed. Hence Rs 4.5 lakh is overstated in assets, which is a misstatement to be corrected: capitalised Rs 42 lakh instead of Rs 46.5 lakh. Option one wrongly includes training and advertisement.

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