The Overstated Closing Stock
Sundarban Traders reported net profit of ৳8,40,000 for the year ended 31 December 2023. During a 2024 review, the auditor discovered that closing stock at 31 December 2023 had been valued at ৳6,20,000, but ৳90,000 of that stock belonged to a customer on consignment and should have been excluded. In addition, ৳1,10,000 of goods received on 30 December 2023 were omitted from the count entirely. Opening stock for 2023 was ৳4,50,000, purchases were ৳52,00,000, and the owner had withdrawn goods worth ৳25,000 for personal use, recorded correctly. The accountant says the net effect is 'small' and wants to leave the accounts unchanged.
1. Compute the corrected closing stock and the corrected net profit for 2023.
Read the worked answer
Corrected closing stock = 6,20,000 − 90,000 (consignment goods not owned) + 1,10,000 (goods received but not counted) = ৳6,40,000.
Original reported closing stock was ৳6,20,000, so the correction increases closing stock by ৳20,000.
Effect on profit: closing stock is deducted from cost of goods sold, so a ৳20,000 higher closing stock reduces COGS and raises gross profit and net profit by ৳20,000.
Corrected net profit = 8,40,000 + 20,000 = ৳8,60,000.
Note that the two errors partly offset each other: excluding consignment stock alone would have raised COGS by ৳90,000 and cut profit; including the omitted goods alone would have raised profit by ৳1,10,000. The net is ৳20,000.
2. Explain why the accountant's 'small' characterisation is misleading, and identify the carry-forward effect on 2024.
Read the worked answer
The net profit effect is ৳20,000, about 2.4% of reported profit, which looks small. But the two component errors are ৳90,000 and ৳1,10,000, each over 10% of profit, and they offset only by coincidence. Judging materiality on the net figure hides two separate control failures: goods on consignment were counted as owned, and a cut-off failure omitted goods received before year-end.
Carry-forward: the corrected 2023 closing stock of ৳6,40,000 becomes 2024 opening stock. If 2024's books use the uncorrected ৳6,20,000 as opening stock, 2024 COGS will be understated by ৳20,000 and 2024 profit overstated by ৳20,000. The error therefore reverses, not disappears.
The owner's drawings of ৳25,000 are correctly recorded and do not affect profit. Recommendation: restate 2023, disclose the correction, and fix the cut-off and consignment procedures rather than leave the accounts unchanged.