Skip to content

CA Intermediate · Auditing and Ethics · Audit of Items of Financial Statements

In auditing the fixed assets of Bharat Steels Ltd, the auditor notes a machine costing ₹60 lakh was added during the year, and the invoice is dated 20 March but the machine was delivered and installed only on 10 April. The company capitalised it and charged full-year depreciation. Which audit concern is MOST relevant?

The main concern is cut-off and existence. The machine was delivered and installed after year end, so it was not ready for use at the balance sheet date and should not be capitalised as a working asset or depreciated for the full year. Depreciation is overstated as a result.

  1. AValuation only, since the cost is correctly stated
  2. BCut-off and existence, as the asset was not ready for use at year end and depreciation was overchargedCorrect
  3. CPresentation only, since classification as fixed asset is correct
  4. DCompleteness of liabilities only

Explanation

The machine was not delivered or put to use before the balance sheet date, so it should not be capitalised as an installed asset; at most it is capital work-in-progress or an advance. Charging full-year depreciation is also wrong. The issue is cut-off and existence of the asset, with consequential effect on depreciation.

Did you get it right without looking?

One question tells you little. A timed set on Audit of Items of Financial Statements shows your real accuracy, how long you take and where you lose marks.

Practise Audit of Items of Financial StatementsFree diagnostic mock

More Audit of Items of Financial Statements questions