Question

1. An auditor has identified the following discrepancies in the financial statements prepared by the managers.
   1. Overstatement of account receivables to the extent of Rs. 50 million
   2. Understatement of inventories to the extent of Rs. 50 million

Please undo these distortions and show what entries in the balance sheet and profit and loss statement have to be readjusted.

Answer 1

The following enteries have to be readjusted in the balance sheet and profit and loss statement.

a) Overstatement of account receivables to the extent of Rs. 50 million

Readjustment entry:

Sales.......Dr Rs.50 million

To Accounts Receivables/Debtors .......Cr Rs.50 million

.

That is Sales and Accounts Receivables both have to be reduced by Rs.50 million.

b)Understatement of inventories to the extent of Rs. 50 million

Readjustment entry:

Inventory.......Dr Rs.50 million

To Profit & Loss A/C .......Cr Rs.50 million

.

That is Inventory has to be increased by Rs.50 million and profit and loss acount to be reduced by Rs.50 million.