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CMA Intermediate · Corporate Accounting and Auditing · Audit of Various Items of Financial Statements

Near the year-end, Sharma Traders Ltd. recorded sales of Rs 8,00,000 for goods dispatched on 30 March, and the buyer's acceptance was on 'sale or return' terms with a right to return within 60 days. The year ends 31 March. Which audit concern is most relevant?

The main concern is overstatement of revenue. With a 60-day sale-or-return right and no firm acceptance, control of the goods may not have transferred by year-end, so recognising Rs 8,00,000 as revenue may be premature. The auditor should review contract terms and post-year-end returns.

  1. ARevenue may be overstated because control may not have transferred to the customerCorrect
  2. BRevenue may be understated because of unrecorded discounts
  3. CTrade payables may be overstated
  4. DDepreciation may be understated

Explanation

Under sale or return terms, where the customer has not accepted and may return the goods, control may not have passed, so recognising revenue at dispatch risks overstating it. The auditor should examine the terms and subsequent returns, and adjust revenue if recognition criteria are unmet.

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