Case Study 5

It was during the diploma 1st year, Samuel showed interest in pursuing accounting as his profession. He felt that accounting is a profession which allows him to use his expertise and provides him an option to enter the various professions such as Management Accountant, Financial Accountant and an Auditor. At present, Samuel is working in the KMG Auditing Company. He has successfully completed his training and is currently undertakes an auditing assignment of a public limited company in the region. While going through the various accounting statements as part of auditing, he noted down the following points.

- There are certain expenses of the Board of Directors, which are accounted in the financial statements of the company. For instance, two of the directors went to Malaysia with their family members. Though the purpose of travel was to attend a one- day conference, they stayed there for one week. During this time, they have visited many places. In the accounting statements, their expenses are included under the head traveling expenses.

- The company has purchased a few assets which are fully written off during the year itself. For instance, the furnitures which the company bought during January of the current year was considered as an operational expense. When Ahmed checked the purchase order and the related invoices, it was mentioned that the supplier is ready to provide services free of cost, for the next three years.

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- Few fixed assets were revalued during the year and was reported at their market price in the financial statements.

- It was observed that the company prepared separate financial reports for each subsidiary during the last year. However, the financial statements are prepared in a consolidated manner during the current year. There was no mention about the way fixed assets are valued for the different subsidiary units.

- Few contracts which the company signed is available in the record. For example, the company has signed a contract to provide 50,000 units of a material every year for the next three years, to an overseas company. The company received the full amount of the 150,000 units as an advance and considered the whole amount as revenue in the current year.

Based on the case, answer the following questions. (Maximum word count for Case Study is 400 Words)

(5+5 = 10 Marks)

1. Briefly explain the various accounting concepts and conventions violated in this case.

2. For each of these accounting concepts and conventions, identify the correct treatment if you are an accountant working in the company.