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CA Intermediate · Advanced Accounting · AS 4 Contingencies and Events occurring after the Balance Sheet Date

Sagar Foods Ltd. closes its books on 31 March 2025. Its financial statements were approved on 28 May 2025. On 15 June 2025, a fraud committed by an employee in February 2025 was discovered, which led to an unrecorded loss of Rs 5 lakh. Meanwhile, the company's gross inventory of Rs 20 lakh was found on 10 April 2025 to include goods of Rs 2 lakh, sold before year-end and thus wrongly counted. Based on AS 4, which statement is correct regarding the 2024-25 statements already approved?

AS 4 applies only to events up to the date of Board approval. The fraud found on 15 June falls after approval of the 28 May accounts, so AS 4 does not require adjustment of those statements. The inventory error found on 10 April was within the period and should have been adjusted.

  1. ABoth items must be adjusted by reopening the approved accounts
  2. BNeither item is an event occurring up to the approval date, so AS 4 does not require adjustment of approved statements for events after 28 May 2025; the inventory error found on 10 April should have been adjusted before approvalCorrect
  3. COnly the fraud should be adjusted, since fraud is always an adjusting event
  4. DBoth should be treated as non-adjusting and only disclosed

Explanation

AS 4 covers events up to the date the financial statements are approved by the Board. The fraud discovered on 15 June is after approval, so it is not dealt with as an event after the balance sheet date for those statements. The inventory discovery on 10 April fell before approval and gave evidence of a condition at year-end, so the Rs 2 lakh overstatement should have been adjusted.

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