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CMA Intermediate · Corporate Accounting and Auditing · Auditing of Different Types of Undertakings

A trust received a donation of ₹5,00,000 with a specific direction by the donor that it be used only for a library building. During audit, the auditor found it was credited to the general income of the Income and Expenditure Account and used for salaries. What should the auditor primarily do?

The auditor should treat the donation as a specific or corpus fund because of the donor's direction, insist on correct classification, and report the misapplication of funds. Crediting it to general income and spending on salaries violates the donor's condition. Ordering refunds is not the auditor's role.

  1. AAccept it because all donations are income
  2. BTreat it as a restricted capital fund (corpus/specific fund), report the misapplication and insist on correct classificationCorrect
  3. CIgnore it since the amount is below materiality
  4. DAsk the trust to refund the salaries paid

Explanation

A donation with a specific direction is not freely usable income; it should be shown as a specific fund or corpus. The auditor should require correct classification and report the diversion of funds. Refund of salaries is not an auditor's function.

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