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CA Intermediate · Auditing and Ethics · Special Features of Audit of Different Type of Entities

CA Arjun audits Bright Future Education Society, a registered society running a school and receiving grants from the State Government for a specific building project. The society has credited the entire grant to its income and expenditure account in the year of receipt, though the building is incomplete. What should the auditor do?

The auditor should examine the terms of the grant and, since it relates to a capital project, check that it is treated under AS 12, for instance as a deduction from asset cost or capital reserve, not as income on receipt. If management does not correct this, the auditor should modify the opinion.

  1. AAccept the treatment because grants are always income when received
  2. BCheck the grant terms and, if the grant relates to a capital asset, ensure it is treated per AS 12 (for example, deducted from asset cost or credited to capital reserve), and report or modify the opinion if not correctedCorrect
  3. CDefer the matter because societies are exempt from accounting standards
  4. DReduce the grant by tax at source and treat the rest as income

Explanation

A government grant relating to a specific capital asset cannot be taken fully to income on receipt. Per AS 12 it is shown as a deduction from the asset cost or treated as deferred income or capital reserve as the terms require. The auditor examines the terms and, if management refuses to correct, reports a qualification. The claim that societies are exempt is not correct.

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