Ardent Precision Components Ltd. has been sanctioned a Cash Credit (CC) limit of ₹ 10 crore by a bank to finance its working capital requirements.…

Ardent Precision Components Ltd. has been sanctioned a Cash Credit (CC) limit of ₹ 10 crore by a bank to finance its working capital requirements. As per the sanction terms, the borrower is required to submit monthly stock statements, on the basis of which the bank computes the Drawing Power (DP) after applying margin on eligible current assets such as stock and receivables. During the branch audit as on 31st March, the auditor observed that the branch had computed the drawing power at ₹ 8.20 crore based on the stock statement dated 30th November submitted by the borrower. However, the outstanding balance in the CC account as on 31st March was ₹ 8.60 crore. Further examination of the account revealed that the outstanding balance had remained continuously above the drawing power for more than 90 days preceding the balance sheet date. While reviewing the borrower's records, the auditor compared the stock value appearing in the audited financial statements for the year ended 31st March with the stock value reported in the stock statement submitted to the bank and noticed a significant difference, indicating possible overstatement of stock in the statement submitted to the bank. Further examination revealed that inventory worth ₹ 2 crore, which had been considered by the branch while computing drawing power, was stated to be lying at a third-party warehouse. However, the branch had not obtained any confirmation from the warehouse operator regarding ownership of such inventory. After accumulating the differences between the stock reported to the bank and the stock appearing in the audited financial statements, the auditor observed that the aggregate misstatement was approaching the materiality level determined for the audit. When the matter was discussed with the borrower's management, they stated that the difference arose due to variations in valuation methods used for internal reporting and expressed the view that no adjustment was necessary in the financial statements. Consequently, the identified misstatements remained uncorrected as on the reporting date. During discussions on these matters, the branch manager informally suggested that the auditor should avoid highlighting these irregularities in the audit report, as doing so might adversely affect the borrower's banking relationship. On the basis of above, answer the following MCQs