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Cost of materials consumed and purchases are higher than closing stock in case metals

Rajlaxmi inc (5 Points)

04 March 2021

My CA audit report query

Cost of materials consumed reported as below

Material purchases- 22.95 lakh

Add opening stock 77.18 lakh

Total 100.14 lakh

Less closing stock - 20.61 lakh

Consumption of materials 79.52 lakh

My question is that how can auditors say that material consumed which is not eatable and it is metal form .it can be downgraded or shown as scrap but it can not be disappeared.

Please guide on legal way as showing less closing stock and showing higher value in material consumed there is wrong interest of stealing the income tax by showing less profit

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5 Replies

CA. Sourav Sarkar (Chartered Accountant ) (24583 Points)
Replied 04 March 2021

Materials which are not consumed during the year should be shown under closing stock it cannot be shown as scrap. Materials which are in metal form should be shown as closing stock of Finished goods or closing stock of Raw materials as applicable.
Stealing Income tax by showing less profit is a fraud intentionally in financial statements as this will lead to tax evasion. Auditor should take care his due diligence and professional skills and should told the management the query as this will cause material misstatements in financial statements which could lead to demand under IT ACT in future by Authority

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yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 04 March 2021

Your auditor is correct. WIP is consumption of resources like material, labor and overheads.

You need to understand two things waste & scrap

waste- is included into the finished goods and not downgraded

scrap- has a recovery value and can be measured. Here, once scrap is resold, it is credited to WIP (debit expenses). Cost principle also prescribes that, for unrealised scrap (no resale) it must be expensed. However, I will treat it as waste and include it in total cost per unit.

Finally, nothing mentioned about income tax in Indian tax act from my googling. COS is general operating expenditure. While calculating current tax, tax department prescribed a list of deductible and non deductible expenses to derive trading income. Nothing is exempt from it and can’t cheat the system. You seem to have 1000₹ as waste. If u include it in Cos, gross profit will increase and once you expense that waste pbt will decrease.

Rajlaxmi inc (5 Points)
Replied 04 March 2021

You have not understood my query .

Problem is they have shown material consumed means disappeared. How can steel materials can be shown as consumed.

Business is renting out the steel Products for reuse and not sales.

Please revisit

Rajlaxmi inc (5 Points)
Replied 04 March 2021

Yes correct.

Please send the reference of documents to prove this as wrong .so that I can take up with Auditors

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 04 March 2021

Sry for your loss. Actually your version is more convincing that there is a mistake. The only flaw in auditing is not following the AS. You don’t need special documents because by statute, an auditor should follow local standards. You seem smart as you already know your maths, investigate at the warehouse and log in fraud or what ever necessary actions you want to like. Fortunately AS 240 doesn’t need any endorsed documents from the tax authorities to conduct an investigation. https://cleartax.in/s/standard-on-auditing-sa-240-the-auditors-responsibility-relating-to-fraud-in-an-audit-of-financial-statements#documentation

Here, the documents YOU need are evidences like bills, vouchers, expenses etc., e-mail communications and auditors rectification. All the best.

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