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

While auditing Meridian Foods Ltd, the auditor finds a ₹25 lakh loan taken from a director during the year that is shown as 'unsecured loans' without further disclosure, and the company has never obtained a declaration from directors about the source of funds. The company is a private company. Which audit response is most appropriate?

The auditor should check whether the director gave a declaration that the money came from his own funds, not borrowed, and whether the loan is properly disclosed as a loan from a director. Any missing declaration or disclosure should be reported, because neither blanket permission nor automatic violation is correct.

  1. AIgnore it because directors' loans are always permitted without any condition
  2. BExamine whether the money was given out of the director's own funds and whether the required declaration was obtained, as well as disclosure under Schedule III, and report any non-complianceCorrect
  3. CTreat the amount as a deposit and report automatically a violation of deposit rules in every case
  4. DReclassify it as share capital without enquiry

Explanation

Money received from a director is generally not treated as a deposit if the director furnishes a declaration that it is not out of funds borrowed from others, and a private company has some relaxations. The auditor must verify the declaration, the source and the disclosure of loans from directors. It is wrong to assume it is always a violation or always permitted.

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