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

CA Prakash is appointed auditor of Sunrise Educational Society, a registered society that runs a school. He notices that fees received in advance for the next academic session have been credited to income of the current year. What is the correct audit view?

Where the society follows the accrual basis, advance fees for the next session should be shown as income received in advance, a liability, and not credited to current year income. Income is recognised in the period the service is rendered, regardless of tax or any size threshold.

  1. AAcceptable, because societies always follow the cash basis for fee income
  2. BAcceptable, since advance fees are taxable in the year of receipt
  3. CIncorrect where the society follows the accrual basis; advance fees should be shown as a liability or income received in advance and not as current incomeCorrect
  4. DIncorrect only if the fees exceed the society's total annual income

Explanation

Under the accrual basis, income belongs to the period in which the service is rendered, so fees for the next session are a liability (income received in advance). The cash basis claim is not universal, tax treatment does not decide accounting recognition, and there is no threshold of total income for the treatment.

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