Skip to content

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

CA Farhan is auditing the financial statements of Gandhinagar Education Society, which receives a government grant for constructing a laboratory block. The grant conditions require that the amount be used only for the block and that unspent amounts be refunded. At year end, part of the grant is unspent and shown as income. Which audit response is most appropriate?

The auditor should read the grant sanction conditions and challenge treating the unspent, refundable portion as income, since it should be shown as a liability or deferred amount. If management does not correct a material misstatement, the auditor should consider modifying the audit opinion.

  1. AAccept the treatment since grant receipt always constitutes income in the year of receipt
  2. BExamine the grant sanction conditions and challenge the recognition as income, as the unspent portion subject to refund should be treated as a liability or deferred amount, and consider modifying the report if unresolvedCorrect
  3. CTreat the unspent portion as a contingent asset and not disclose it
  4. DAsk management to reduce the grant from the cost of the laboratory block without reading the conditions

Explanation

Grants with conditions of utilisation and refund should not be recognised as income until conditions are reasonably complied with. The auditor reads the sanction letter, challenges the treatment, and modifies the opinion if management does not correct a material misstatement. Option A ignores the conditions.

Did you get it right without looking?

One question tells you little. A timed set on Special Features of Audit of Different Type of Entities shows your real accuracy, how long you take and where you lose marks.

Practise Special Features of Audit of Different Type of EntitiesFree diagnostic mock

More Special Features of Audit of Different Type of Entities questions