State briefly the duty of the auditor with regard to: A sum of Rs.10,00,000 is received from an Insurance Company in respect of a claim for loss of goods in transit costing Rs.8,00,000. The amount is credited to purchases account.

Auditing and Assurance Revision Questions and Answers

Answer

All items of income and expenses which are recognized in a period should be included in the determination of net profit or loss for the period.

The loss of goods in transit costing Rs.8,00,000 should be therefore, charged to profit and loss account of present financial year and insurance claim of Rs.10,00,000 should be credited to profit and loss account under an appropriate head. It should not have been credited to purchases account. If done so, the purchases would be overstated.
Insurance claim (excess) is profit from ordinary activities. when items of income (and expense) within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the entity for the period, the nature and amount of such items should be disclosed separately.
Thus, a separate disclosure of insurance claim received is necessary and it should not be credited to purchases account.



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