Virup Global Holdings Ltd. (VGHL) is preparing Consolidated Financial Statements for the year ended March 31, 2026. VGHL owns 80% of Nexus Systems…

CA Final · Advanced Auditing, Assurance and Professional Ethics · PYQS · May 2026
Virup Global Holdings Ltd. (VGHL) is preparing Consolidated Financial Statements for the year ended March 31, 2026. VGHL owns 80% of Nexus Systems Private Ltd. (NSPL). During the year, VGHL sold goods to NSPL at a 25% markup on cost. At year end, 40% of these goods remained unsold in NSPL's inventory. The applicable tax rate is 30%. The group prepares consolidated financial statements under Ind AS. Separately, NSPL had a customer receivable of 4 crore outstanding as at March 31, 2026. On May 15, 2026, the customer was declared insolvent following a fire incident that occurred on March 30, 2026 in his factory. The required consolidation adjustments and treatment of subsequent events is
(A) Unrealised profit elimination equals 10% of intercompany sales value, deferred tax adjustment is not required, and the customer insolvency is treated as a non-adjusting event requiring disclosure only.
(B) Unrealised profit elimination equals 40% of intercompany profit only, deferred tax adjustment is not required on consolidation entries, and the customer insolvency is treated as a non-adjusting event.
(C) Unrealised profit elimination equals 25% of closing inventory value, deferred tax adjustment is optional based on materiality, and the customer insolvency is treated as a disclosure event only.
(D) Unrealised profit elimination equals 8% of intercompany sales value, deferred tax adjustment is required on unrealised profit elimination, and the customer insolvency is treated as an adjusting event requiring recognition of impairment.

Suggested Answer and Working Notes:

Correct Answer: Option (D)

Unrealised profit elimination equals 8% of intercompany sales value, deferred tax adjustment is required on unrealised profit elimination, and the customer insolvency is treated as an adjusting event requiring recognition of impairment.

Topics: Standard on Auditing (SA)

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