A manufacturing company includes depreciation consistently in its valuation of inventories of manufactured goods. In the year 2066-67, the company decided not to provide depreciation in the books of account mainly because of lack of profits. The company however included depreciation in stock valuation for the annual accounts even though depreciation was not charged to Profit and Loss account during the year.Discuss
In the present case as depreciation is not debited to the profit and loss account, it means that it is not recognised as cost the management and hence cannot be recognised as an item of cost for the purpose of inventory valuation. Therefore, the company cannot include the depreciation for the purpose of valuation of manufactured inventories. The auditor should qualify the main report as the depreciation has not been provided as per set standards and also report that the valuation of the said inventories is not fair and proper as per the generally accepted accounting principles and that the valuation of the inventories is not carried on the same basis as in the earlier years. The auditor should also report the effect of the said deviation, if material.