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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Advanced Auditing, Assurance and Professional Ethics

Case: Bharat Steelworks Ltd has a debtors balance of Rs 12 crore. The auditor, CA Isha, used a statistical sample of 60 debtors out of 600 debtors with tolerable misstatement of Rs 60 lakh. The sample, representing Rs 1.2 crore of book value, showed an overstatement of Rs 6 lakh. Assume the sample is projected proportionally to the population by ratio of book values. Also, an identified specific error of Rs 8 lakh (a debtor already confirmed as bankrupt) lies outside the sample and was found separately. What is the total misstatement to compare with the tolerable misstatement, and what is the conclusion?

The projected misstatement is 5% of Rs 12 crore, which is Rs 60 lakh, and adding the separately identified Rs 8 lakh error outside the sample gives Rs 68 lakh. This exceeds tolerable misstatement of Rs 60 lakh, so the auditor should extend procedures or seek adjustment.

  1. ARs 60 lakh projected plus Rs 8 lakh specific = Rs 68 lakh, exceeds Rs 60 lakh tolerable; sampling risk is unacceptable, so extend procedures or request adjustmentCorrect
  2. BRs 6 lakh only; below tolerable, so accept
  3. CRs 60 lakh only; equals tolerable, so accept without any further work
  4. DRs 68 lakh, but since it relates to a specific debtor it is ignored for comparison

Explanation

Projection ratio: 6/120 = 5%, applied to Rs 12 crore gives Rs 60 lakh. Adding the Rs 8 lakh specific error outside the sample gives Rs 68 lakh (a specific item is added without projection, avoiding double count since it is outside the sample). 68 exceeds 60 lakh tolerable, so the auditor cannot conclude the population is fairly stated; request adjustment or extend procedures. Option C omits the specific error.

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