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

CA Rohini is auditing Shree Ganesh Educational Society, which receives grants from a State Government for specific scholarships. The grant letter requires that the money be used only for scholarships and that unused amounts be refunded. At year end, Rs 8 lakh of the grant remains unspent and is shown as the society's general income. What is the most appropriate audit response?

The auditor should insist that the unspent grant be shown as a liability or restricted fund because the grant conditions require refund of unused amounts. If management does not correct this material misstatement, the auditor must consider modifying the opinion rather than merely reporting in a management letter.

  1. ATreat the unspent amount as a liability or restricted fund as per the grant conditions, and if management does not correct the presentation, consider the effect on the audit opinionCorrect
  2. BAccept the treatment since grants received are always income of the year
  3. CIgnore the matter because it is below the trust's total corpus
  4. DReport it only in the management letter without considering the opinion

Explanation

Because the grant is conditional and refundable if unused, the unspent portion is not freely available income and should be shown as a liability or restricted fund. If management refuses to correct a material misstatement, the auditor must consider a modified opinion. Merely mentioning it in a management letter does not discharge that duty.

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