Auditing and Assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

Just before the year end, a fire broke out in the warehouse of M/s RM Manufacturing Ltd. theredestroying the huge chunk of raw materials which forms major part of company‟s current assets.

The management was unable to ascertain the value of the raw materials destroyed in the fire. Insurance claim was lodged for the book value of whole inventory. The claim is pending at the time of finalization of accounts and the company does not want to make provision for losses and wants to show whole amount as insurance claim receivable. Give your comments.
Answer
In the given case, the company has to make provision for losses mainly for two reasons, firstly the event resulting in the loss of assets has actually been happened and secondly the insurance claim receivable is uncertain.
Since company has lodged claim for the loss of whole inventory as per the book value, it has acknowledged the whole inventory has been destroyed in the fire not withstanding whether any inventory was still safe and usable. Hence, provision equal to the insurance claim lodged should be made in the accounts of the company. After the claim is received in part or whole, the provision equal to the claim received can be written back and shown as the income of the company. A proper disclosure of the events and its status shall be made in the accounts.



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