Auditing and Assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

How do you express your view as an auditor in the following case? (5 Marks each June 2004)

a. ABC Ltd. has earned a lower profit during the finance year 200X and its assets were idle for more than Seven months during the period. During the finance year it has a profit of Rs. 400 thousand, before providing depreciation, and the board of directors decided for not to provide depreciation on assets, amounting to Rs. 500 thousand, during the finance year.
As per Section 182(6) of the Companies Act 2063, before paying or declaring a dividend out of the profits for any financial year, a company shall have fully deducted the pre operation expenses, the amount required to be depreciated in accordance with the accounting standards fixed the competent authority under the prevailing law, any amount required to be paid or
set aside out of the profits under the prevailing law or the amount or accumulated loss in previous financial years.

Also, for a prudent accounting to arrive at the fair value of assets, depreciation needs to be charged once the asset is ready for use. It is irrelevant whether or not the assets were used during the reporting period. In this case no depreciation has been provided in the financial statements. This is in contrary to Accounting norms.

In such case, the auditors should report in their opinion in the financial statements stating ‘had this depreciation on assets was provided in the financial statements, during the financial year 200X, the company would have a loss of Rs. 100 thousand (Rs. 400 thousand profit-Rs. 500 thousand depreciation). Similarly, the closing balance of the fixed assets is also overstated to that extent. Accordingly, the auditor has to issue a qualifies opinion on the same.

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