Page 128 - CA Inter MCQ Book

CA RAVI TAORI CA INTER AUDIT MCQs
42
"During the financial year 2020-21, a Partnership Firm of Chartered Accountants HW and Associates was
appointed to audit the books of accounts of Extremely Healthy and Very Delicious Limited. HW and
Associates consists of two partners, Mr. H and Mr. W. While auditing the books of accounts of the above
mentioned company for the financial year 2020-21, Mr. H observed certain accounting transactions and
accounting treatments which he was not able to understand. Such accounting transactions and
accounting treatments are provided as follows:
1. The books of accounts of Extremely Healthy and Very Delicious Limited showed profit for the
financial year 2020-21. The closing stock was incorrectly recorded in books of accounts of the
company for ` 11,45,000. However, the actual closing stock was of ` 11,05,000.
2. Expenses and Incomes were not recorded on Accrual Basis and such fact was not disclosed in
the financial statements.
3. Each and every type of inventory was valued at higher of Cost and Market Value.
4. An amount of ` 15,500 received in cash from one of the trade receivable was presented in the
cash flow statement as Inflow of Cash of ` 15,500 from Investing Activities.
5. A payment of ` 16,600 was done in cash for the purpose of purchasing Machinery 22. This
accounting transaction was presented in the cash flow statement as Inflow of Cash of ` 16,600
from Financing Activities.
6. Extremely Healthy and Very Delicious Limited received certain amount in cash on issue of
shares. One such amount of ` 19,100 received in cash was presented as Outflow of Cash of `
19,100 from Operating Activities in the Cash Flow Statement.
7. Fair Value of Equipment 31 = ` 1,07,300.
Carrying Amount of Equipment 31 = ` 90,400.
Residual Value of Equipment 31 = ` 79,600.

No depreciation was charged on Equipment 31 for the financial year 2020-21 as Management of
Extremely Healthy and Very Delicious Limited was of the opinion that no depreciation would be charged
as Fair Value of Equipment 31 was more than Carrying Amount of Equipment 31.

Keeping the basic concepts of Accounting Standard 1 relating to Disclosure of Accounting Policies,
Accounting Standard 2 relating to Valuation of Inventories, Accounting Standard 3 relating to Cash Flow
Statements, Accounting Standard 10 relating to Property, Plant and Equipment and Audit of Items of
Financial Statements in mind answer the multiple-choice questions that follow:"
I. "Closing Stock of ` 11,05,000 was incorrectly recorded in books of accounts of Extremely Healthy
and Very Delicious Limited for ` 11,45,000. This means profit before correction in books of
accounts of the company was:
(a). Understated by ` 20,000.
(b). Understated by ` 40,000.
(c). Overstated by ` 20,000.
(d). Overstated by ` 40,000.
II. "Inventory of Extremely Healthy and Very Delicious Limited must be valued at:

(a). Cost.
(b). Lower of Cost and Net Realizable Value.
(c). Market Value.
(d). Higher of Cost and Net Realizable Value.
III. "The amount of ` 15,500 which was received in cash from one of the trade receivable of Extremely
Healthy and Very Delicious Limited, must be presented in Cash Flow Statement as:
(a). Inflow of Cash of ` 15,500 from Miscellaneous Activities.
(b). Inflow of Cash of ` 15,500 from Operating Activities.
(c). Inflow of Cash of ` 15,500 from Investing Activities.
(d). Inflow of Cash of ` 15,500 from Financing Activities.
IV. "For the purpose of purchasing Machinery 22, a payment of ` 16,600 was done by Extremely
Healthy and Very Delicious Limited in cash. This accounting transaction must be presented in the
Cash Flow Statement as:
(a). Outflow of Cash of ` 16,600 from Investing Activities.
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