Situation analysis

Q1(a): A company has debited Rs 1.75 lakh to Delivery Van Account received from a customer against credit sales of Rs 1.5 lakh to him who is not able to pay the amount. The delivery van has not been registered in the name of the company with R.T.O. till the date of finalisation of accounts.

Since the vehicle is a movable property, it is governed by sale of goods Act, wherein title in goods passes on delivery.

In the instant case, when the company received the delivery van from the debtor, title passed on to the company since he would have signed on the necessary documents. Registration of the delivery van is merely to further secure the title in the name of the company.

Therefore, the company is justified in debiting the delivery van account on receiving it, the fact that it was not registered in its name notwithstanding.

When the sale was for Rs 1.5 lakh, debiting the delivery van with the same amount would appear reasonable.

As per AS 10, in case of exchange of assets, the company can value the asset at the value of the old asset or the new asset, whichever can be determined with reasonable accuracy.

Thus, if the delivery van was valued at Rs 1.75 lakh by an independent expert (such as an automobile engineer), it would be justified in debiting the van with the same amount.

In such a situation, the difference of Rs 25,000 should be treated as profit and taken to profit and loss account and the company can charge depreciation on Rs 1.75 lakh.

Q1(b) PQ Ltd has given donations of Rs 50,000 each to a charitable school and a trust for blinds during the year ended March 31, 2007. The average net profit of the company during last three financial years amounts to Rs 12 lakh. The Companies Act places certain restrictions on donations to political parties.

These restrictions are not applicable to donations made to non-government organisations such as those mentioned in the question.

Therefore, the company has not made any violation in making such donations.

Q1(c): AAS Ltd had provided for doubtful debts to the extent of Rs 23 lakh during the year 2004-05. The amount since had been collected in the year 2006-07. Another debt of Rs 25 lakh had been identified to be doubtful during the year 2006-07. The company made an additional provision of Rs 2 lakh during the year. The profit and loss account for the year ended March 31, 2007 disclosed in debit side — provision for doubtful debts Rs 2 lakh.

Collection of doubtful debts provided in earlier years has no relevance to the debts of current year being identified as doubtful. They belong to two accounting periods. The provision of Rs 23 lakh made in the year 2004-05 should be written back since it is no longer required. A fresh provision of Rs 25 lakh is to be made for the current year.

Setting off the provision of an earlier year against a provision to be made for the current year vitiates the true and fair view of the profit and loss account.

In the given question, the entry made by the company does not portray the information about collection of debtors pertaining to 2004-05 and that further Rs 25 lakh are identified doubtful in the current year. Therefore, the entry passed by the company is not acceptable.

Q1(d): Alagar Ltd is a company engaged in the business of chassis building and bus transportation services. It accounts all expenses and income in profit and loss account under various heads explaining clearly the nature of operations. The auditor of the company requires that the profit and loss account should depict the profit or loss from the businesses of assembly as well as of operation of bus services separately.

Preparation and presentation of the financial statements is the responsibility of the management. The auditor merely expresses an opinion whether or not the financial statements give a true and fair view of the financial position of the entity.

Provisions of the Company Law require every company to maintain its accounts so that profit or loss can be determined. AS 17 on segment reporting also requires companies to report on activities of various segments as an additional information. There is nothing in the Companies Act or in Accounting Standard that requires the profit and loss account to depict separately profit or loss from different activities.

Thus, the auditor requiring the company to depict the profit or loss from the businesses of assembly as well as of operation of bus services separately is not justified.

SOME Comments

2(a): Seeman & Co had been the company auditor for Amudhan Company Ltd for the year 2006-07. The company had three branches located at Chennai, Delhi and Mumbai. The audit of branches in Chennai, Delhi were looked after by the company auditors themselves. The audit of Mumbai branch had been done by another auditor M/s Vasan & Co, a local auditor in Mumbai. The branch auditor had completed the audit and had given his report too. After this, but before finalisation, the company auditor wanted to visit Mumbai branch and have access to the inventory records maintained at the branch. The management objects to this on the grounds of the company auditor is transgressing the scope of audit areas agreed.

The Auditor of a company has certain statutory rights under the Companies Act, which can not be restricted by the company or the directors. Such rights include right to visit the branches in India and right to access records of the company.

The fact that the branch is audited by another auditor cannot be a reason for restricting the statutory auditor from visiting the branches. The auditor enjoys independence in deciding the nature, extent and timing of audit procedures to be carried out. In the given question, the company cannot say there is any transgression of the scope of audit. Hence, the company is not justified in saying so.

2(b): AB & Associates, the auditor of Ajanta Ltd refused to deliver the Books of Account of the company, which were given to them for the purpose of audit, as the audit fees is not paid to them in full.

The provisions of auditors lien state that the books of account should come to the auditor in the normal course and that he cannot resort to unfair means to secure the books of account on lien.

He can exercise lien on those books on which the work was carried out for which remuneration was receivable. Board of directors should pass a resolution to that effect and deliver the books of account to the auditor. The auditor in the given case is not justified in refusing to return the books of account with him on the ground that audit fees is not paid in full. Since the books of account were still with him it indicates that the books of account pertain to the current year. Fees for the current year becomes payable after the completion of the audit. Current year books cannot be retained for non payment of fees of an earlier year.

2(c): Mr A was appointed as auditor of X Ltd for the year ended March 31, 2008 in the AGN held on August 16, 2007. Mr A had indebted to the company for a sum of Rs 2,500 as on April 1, 2007, the opening date of the accounting year which had bee subject to his audit. Upon learning that he might be appointed as the auditor, he repaid the amount on August 14, 2007. Mr B, a shareholder complained that the appointment of Mr A as auditor was invalid and he incurred disqualification under Section 226 of the Indian Companies Act 1956 and his independence had been vitiated in relation to the accounting year of his audit. The Section 226 states any indebtedness of an amount exceeding Rs 1,000 as a disqualification to be appointed as an auditor.

In the given question, the auditor has repaid the amount before he was appointed as auditor of the company. As on the date of his appointment, he does not have any disqualification.

An auditor is appointed at the AGM from the conclusion of one AGM to the completion of the next AGM and not for the year ended March 31, 2008. Therefore the contention of Mr B is invalid.

2(d): The financial controller of AS Ltd refuses to provide for proposed dividend in books of accounts for the year ended March 31, 2007 on the ground that it is pending approval of shareholders in Annual General Meeting to be held on September 16, 2007.

The Section 205 dealing with dividends requires that the dividends be proposed by the board of directors and declared at the AGM by the shareholders. The dividends declared by the shareholders cannot be more than the dividends as proposed by the board of directors

Once the board of directors propose dividends, the same is to be declared by the shareholders. Such dividends are to be paid out of the profit made by the company for the year ended March 31, 2007. Therefore, it is proper to make the provision for such dividends.

Declaring of dividends is an event occurring after on the date of the balance sheet, which confirms a situation existing as on the date of balance sheet.

AS 4 on events occurring after the date of balance sheet classifies such events as adjusting events and non-adjusting events. Declaring of dividends is an adjusting event, for which a provision is to be made in the accounts. For the same reason proposed, dividends merely appear as a provision (item no 9 under the head current liabilities and provisions) and not as a current liability. It assumes the nature of a current liability once the dividends are declared at the AGM. Therefore, the contention of the financial controller is not justified.



0 Responses to “”

  1. Leave a Comment

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

Admission open for Nov ‘2010 exams

Admissions have already opened for Nov 2010 exams. We offer only 45 seats for a batch and admissions have already started filling up with only 10 seats remaining

Batch for May 2010

Classes scheduled to start from February 2009 for May 2010
November 2007
« Oct   Dec »



%d bloggers like this: