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

In the audit of Anand Retail Ltd, the auditor notes that a loan of Rs 2 crore has been classified as non-current in the balance sheet, though the loan agreement is repayable on demand at the lender's option. Which audit view is correct under Schedule III of the Companies Act?

The loan should be classified as a current liability. A loan repayable on demand means the company lacks an unconditional right to defer settlement for twelve months after the reporting date. That the lender has not yet asked for repayment does not change the classification required by Schedule III.

  1. AThe classification is correct because the lender has not demanded repayment so far
  2. BThe loan should be shown as a current liability because the company does not have an unconditional right to defer settlement for at least twelve monthsCorrect
  3. CThe classification does not matter since total liabilities remain the same
  4. DThe loan should be shown as a contingent liability

Explanation

A liability is current if the company has no unconditional right to defer settlement for at least twelve months after the reporting date. A loan repayable on demand fails this test, so it must be shown as current. Absence of a demand so far is irrelevant, and the total does not cure the misclassification affecting liquidity presentation.

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