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

In the audit of Bharat Steels Ltd, the auditor notes that the company's Property, Plant and Equipment includes a plant purchased in the year for ₹90 lakh. The invoice shows ₹90 lakh, but the capitalised amount in the register is ₹1.05 crore, with the extra ₹15 lakh described as 'repairs of old machine' debited to the plant account. Which audit conclusion is most appropriate?

The ₹15 lakh is repair expenditure on an old machine, which is revenue in nature. Capitalising it wrongly overstates property, plant and equipment and profit. The auditor should ask management to charge it to the profit and loss account and consider modifying the report if left uncorrected.

  1. AAccept the capitalisation, as all expenditure on plant is capital in nature
  2. BTreat ₹15 lakh as revenue expenditure wrongly capitalised, which overstates PPE and profit, and ask management to correct itCorrect
  3. CTreat the ₹15 lakh as a contingent liability and disclose it in the notes
  4. DIgnore the difference as it is below the invoice value and therefore only a depreciation matter

Explanation

Ordinary repairs of an old machine are revenue expenditure and do not add to the future benefits of the new plant. Capitalising them overstates PPE and profit for the year. The auditor should ask for correction and consider the effect on the report if it is not adjusted.

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