CA Raj is in the completion phase of the audit of Happy Private Limited, a manufacturing company, for the financial year 2024-25. On 26th May 2025,…

CA Intermediate · Auditing and Ethics · MTP · September 2025
CA Raj is in the completion phase of the audit of Happy Private Limited, a manufacturing company, for the financial year 2024-25. On 26th May 2025, he becomes aware that a fire had occurred on 15th April 2025 at one of the company's premises. As a result of the fire, all inventories stored at that location, amounting to 2 crores, were destroyed. However, these inventories were insured with Insure Goods Limited for 75 lakhs, and the company has lodged a claim, which is yet to be settled. This issue remains uncorrected in the financial statements. Which of the following statements is most appropriate regarding the fire incident?
(A) The auditor should ask management to disclose it in notes to accounts.
(B) The auditor should ask management to adjust financial statements for period under audit and book a loss of 75 lakhs in its Statement of Profit and Loss.
(C) The auditor should ask management to adjust financial statements for period under audit and book a loss of 2 crores in its Statement of Profit and Loss.
(D) The auditor has no responsibility regarding described fire incident.

Suggested Answer and Working Notes:

Correct Answer: Option (A)

The auditor should ask management to disclose it in notes to accounts.

Topics: Audit of Items of Financial Statements

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