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CA Ravi Taori

QNO-- What is Misstatement ? Case Study -- Other Income New Course – (S24M)
315.00.50 Bhaskar CNO –SA315-P1.010

CDE Private Limited, a manufacturing company, had made investment in shares of some blue-chip
companies. Additionally, it had temporarily deposited some of its extra funds in fixed deposits with a
scheduled bank. Dividend from shares amounting to ₹ 1.80 lakhs (net of TDS, TDS = ₹ 0.20 lakhs) and bank
interest of ₹ 2.70 lakhs (net of TDS, TDS = ₹ 0.30 lakhs) were credited in bank account of the company.
During the year 2023-24, it has also sold some shares resulting in net gain of ₹ 5 lakhs. The company has
shown above incomes under head “Other income” for consolidated amount of ₹ 9.50 lakhs in the statement
of Profit and Loss. No other information is furnished in the financial statements put up for audit. As the
auditor of the company, discuss whether the above situation constitutes “misstatement” in the financial
statements of the company. Also state, few examples of misstatements.
Answer Misstatement refers to a difference between the amount, classification, presentation, or disclosure of a
reported financial statement item and the amount, classification, presentation, or disclosure that is required
for the item to be in accordance with the applicable financial reporting framework.

In the given situation, there is a difference in amount to be recorded as well as in disclosure of a financial
statement item from what is required in accordance with applicable financial reporting framework. The
company should have recorded gross amount of dividend and interest amounting to ₹ 2.00 lakhs and ₹ 3.00
lakhs respectively in its financial statements in accordance with AS 13. Therefore, amount recorded under
head “Other income” should have been for ₹ 10 lakhs (2 lakhs+3 lakhs+5 lakhs).

Further, in accordance with disclosure requirements of Schedule III of the Companies Act, 2013, other income
shall be classified in the above situation as: -

a) Interest Income of ₹ 3 lakhs
b) Dividend Income of ₹ 2 lakhs
c) Net gain on sale of investments of ₹ 5 lakhs

Few examples of misstatements are:
• Charging of an item of capital expenditure to revenue or vice-versa.
• Difference in disclosure of a financial statement item vis-à-vis its requirement in applicable financial
reporting framework.
• Selection or application of inappropriate accounting policies.
• Difference in accounting estimate of a financial statement item visà-vis its appropriateness in
applicable financial reporting framework.
• Intentional booking of fake expenses in statement of profit and loss.
• Overstating of receivables in the financial statements by not writing off irrecoverable debts.
• Overstating or understating inventories.

QNO Audit Risk (All Components with Inter Relationships) Old Course -- (P16M/SM17)
315.01 -Master answer Bhaskar CNO- SA315-P1.020
Audit Risk and inter-relationship of its components.
OR
XYZ Ltd is engaged in the business and running several stores dealing in variety of items such as readymade
garments for all seasons, shoes, gift items, watches etc. There are security tags on each and every item.
Moreover, inventory records are physically verified on monthly basis.
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