In the previous year XYZ Co. Ltd, made a provision of 9% of the contract value on an ongoing project. The actual loss on completion of the contract in the subsequent year was 10%. The management adjusted the difference in the previous year‟s account.

Auditing and Assurance Revision Questions and Answers

Answer:
The provision of loss of 9% of the contract value XYZ Co. Ltd in the previous year is in the nature of accounting estimate since due to uncertainties inherent in any business activity; it is difficult to measure such item in a precise manner. Accordingly, adjusting the difference in the previous years‟ account is not correct. set standards on Accounting Policies, Change in Accounting Estimates and Error, states that the effect of a change in an accounting estimate should be included in determination of net profit or loss in the period of the change, if the change affects the period only. Thus the management should adjust the difference in the current period only. Alternatively, the auditor should qualify his report.



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