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

At year-end, goods costing Rs 2,00,000 were lying with Verma Traders Pvt. Ltd. but had already been invoiced and set apart for a customer who would collect them next week, and control had passed to the customer as per the contract. The goods were still included in closing inventory. What is the audit concern and correct treatment?

Inventory is overstated, and the goods costing Rs 2,00,000 should be excluded from closing inventory. Control has passed to the customer and the sale has been recognised, so the goods are no longer the company's asset, even though they are still physically lying in its godown.

  1. AInventory is understated, so Rs 2,00,000 should be added
  2. BNo issue, since goods physically lying in the godown are always inventory of the company
  3. CInventory is overstated; the goods should be excluded from closing inventory because the sale is recognisedCorrect
  4. DOnly a disclosure note is needed and inventory remains unchanged

Explanation

Once control has passed and the sale is recognised, the goods are no longer the entity's inventory even if physically held. Including them overstates inventory and double counts the goods (as sold and as stock). Physical location alone does not decide ownership, so the other options are wrong.

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