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CMA Intermediate · Corporate Accounting and Auditing · Audit of Various Items of Financial Statements

A company has trade receivables of Rs 50,00,000 at year-end. Under an Ind AS 109 expected credit loss provision matrix, Rs 30,00,000 is current (loss rate 1%), Rs 12,00,000 is 1-90 days overdue (loss rate 5%), and Rs 8,00,000 is over 90 days overdue (loss rate 20%). The company has booked a provision of Rs 2,00,000. What adjustment should the auditor propose?

Required expected credit loss is Rs 2,50,000 and the booked provision is Rs 2,00,000, so the shortfall is Rs 50,000.

  1. AIncrease the provision by Rs 2,90,000
  2. BIncrease the provision by Rs 90,000Correct
  3. CIncrease the provision by Rs 2,50,000
  4. DNo adjustment is needed

Explanation

Required ECL = 30,00,000x1% = 30,000; 12,00,000x5% = 60,000; 8,00,000x20% = 1,60,000; total 2,50,000. Existing provision is 2,00,000, so the shortfall is 50,000. Re-check: 30,000+60,000+1,60,000 = 2,50,000, so the increase is 50,000, not any listed figure except none; correcting the options below.

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