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

CA Kavya audits Pragati Educational Society for the year. The society's accounts show tuition fees received in advance for the next academic year as income of the current year. The society follows accrual accounting. What is the correct audit response?

Advance fees for the next academic year are not current year income under accrual accounting. They should be shown as income received in advance, a liability. The auditor should ask management to correct this and, if the effect is material and uncorrected, modify the audit opinion.

  1. AAccept the treatment, since cash was received during the year
  2. BTreat the fees as a liability or income received in advance, not current year income, and ask management to correct the accounts, failing which modify the reportCorrect
  3. CRemove the amount from the books and ignore the effect on the report
  4. DTreat it as capital receipt and ask for it to be credited to the capital fund

Explanation

Under accrual accounting, fees relating to the next academic year are income of that year and are shown as income received in advance, a liability, at this year end. If management refuses correction and the effect is material, the auditor modifies the opinion. Cash receipt alone does not decide recognition, and the amount is not a capital receipt.

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