Auditing and Assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

Express your views as an auditor in the following cases: (5Marks, each June 2007)
a) A company has received a final assessment order from the Inland Revenue Office for the FY 2058/059. The assessment order has provided a tax credit of Rs. 15 lakhs being the advance tax paid

in the FY 2058/059. On review of the books of the Company, you came to note that the credit granted was erroneously charged to the Profit and loss account in the year it was paid. The management seeks your opinion on the mode of presentation of the tax credit in its financial statements.

b) M/s M & N Company Ltd. is an exporter of Nepali handicrafts. During the FY 2062/63 it sold the handicrafts amounting to US $ 500,000 out of which US $ 100,000 was on credit which was outstanding and included in debtors account at the year end. The sales were booked at US $ 1 = NPR. 70.00, which was exchange rate on the date of sales. However, on the closing day of the year the US $ became costlier the exchange rate being US $ 1 = NPR 74.00.

The company does not want to account for profit arising out of change in exchange rates for the FY 2062/63 on the ground that this is notional and no settlement of debtors was done during the time

Answer

a) It is evident that the advance paid for income tax in the year 2058/059 was erroneously charged to the profit and loss account as expense. Since the amount is material, financial statements of 2058/059 cannot be considered as reliable. Therefore, the error that relates to prior period should be reported adjusting the opening balance of retained earnings. Comparative information should be restated. Alternatively, the amount may be included in the determination of net profit or loss for the current period and comparative information should be presented as reported in the financial statements of the prior period. If this alternative treatment is adopted the company will be required to present the prior period adjustment through additional information, in the financial statement.

b) Exchange differences arising on reporting an enterprise’s monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, should be recognized as income or as expenses in the period in which they arise, with the exception of exchange differences dealt with in accordance with of SET STANDARDS1. When the transaction is settled within the same accounting period as that in which it occurred, all the exchange difference is recognized in that period. However, when the transaction is settled in a subsequent accounting period, the exchange difference recognized in each intervening period up to the period of settlement is determined the change in exchange rates during that period. Since the exchange rate of transaction is different from the date of settlement, there is a resulting exchange difference. Therefore, the company should recognize the exchange difference in each period till the settlement is made.

In the given case, the company must account for exchange profit of NPR 4,00,000 writing up the value of debtors the same amount for the FY 2062/063.



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