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

While auditing Anand Retail Ltd, the auditor tests the revenue for the last week of the year and finds that goods worth ₹18 lakh were dispatched on 2 April but the sale was recorded in March, and the invoices carried 31 March dates. Which assertion is primarily affected and what is the likely effect on profit?

The affected assertion is cut-off, because sales for goods dispatched in April were booked in March. Revenue and trade receivables are overstated, and so profit of the year is overstated by the margin on those sales, requiring adjustment by management.

  1. ACompleteness; profit understated
  2. BCut-off; profit overstatedCorrect
  3. CClassification; profit understated
  4. DRights and obligations; no effect on profit

Explanation

Sales recorded in the current year for goods dispatched after year end relate to the next period. This is a cut-off error. Revenue and receivables are overstated, so profit for the year is overstated by the margin on the sale.

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