What is secret reserve Class 11?

What is secret reserve Class 11?

Answer : Secret reserve is a reserve which generally does not appear in the balance sheet. Secret reserve is created by increasing the liabilities and decreasing the value of assets.

What is secret reserve and why it is created?

A secret reserve is created by intentionally hiding the actual net profit or showing net profit less than actual in the balance sheet of the organisation. Secret reserves are maintained by organisations such as insurance companies, banks and other types of financial institutions.

Is secret reserve illegal?

As per the provisions of the Companies Act a joint stock company is prohibited to create secret reserves but in the case of financial companies like the banking companies, insurance companies, and electricity supply companies have the provisions to create secret reserve.

What are the 3 types of reserves?

Reserves in accounting are of 3 types – revenue reserve, capital reserve and specific reserve.

Who is legally allowed to maintain secret reserve?

According to ‘Companies Act 1956’, creation of secret reserve is prohibited and only banking, insurance, and financial companies are allowed to create secret reserve but that also must be within a reasonable limit (Kumar & Sharma, 2005, p. 471).

Who audits financial?

Financial audits are typically performed by firms of practicing accountants who are experts in financial reporting. The financial audit is one of many assurance functions provided by accounting firms.

How is secret reserve done?

There are several ways to establish a secret reserve, such as accelerating the depreciation of fixed assets, writing off assets entirely, undervaluing the market value of assets and by creating excessively large reserves for various liabilities or asset write-downs.

What is reserve example?

A reserve is profits that have been appropriated for a particular purpose. Reserves are sometimes set up to purchase fixed assets, pay an expected legal settlement, pay bonuses, pay off debt, pay for repairs and maintenance, and so forth. Thus, funds designated as a reserve can actually be used for any purpose.

How reserve is created?

How are Reserves Created? When an appropriation for an amount for reserves, record an entry to create the reserve account by debiting retained earnings and crediting the general or specific reserve account.

What are 3 types of audits?

There are three main types of audits: external audits, internal audits, and Internal Revenue Service (IRS) audits. External audits are commonly performed by Certified Public Accounting (CPA) firms and result in an auditor’s opinion which is included in the audit report.

Is audit a risk?

Audit risk is a function of the risks of material misstatement and detection risk’. Hence, audit risk is made up of two components – risks of material misstatement and detection risk.

What is reserve explain?

A reserve is a retained earnings secured by a company to strengthen a company’s financial position, clear debt & credits, buy fixed assets, company expansion, legal requirements, investment and other plans. These are usually done to save the cash from being used in other purposes.

What is a secret reserve in accounting?

What is a Secret Reserve? A secret reserve is the amount by which the assets of an organization are understated or its liabilities are overstated. An entity might establish a secret reserve for competitive reasons, to hide from other businesses that it is in a better financial position than appears in its financial statements.

How to verify a secret reserve?

While verifying the secret reserve, the auditor should keep the following points in mind: 1. He should enquire and find out what is the necessity of creating a secret reserve. 2. He should study thoroughly the Articles of Association and examine the legality or otherwise of creating a secret reserve.

What are the inherent ideas of creating secret reserve?

The inherent ideas of creating secret reserve are as follows: 1. Maintaining a strong financial position. 2. Improving the solvency position of the entity. 3. Meeting sudden future financial losses. 4. Facing competitions. 5. Confusing the rivals regarding profitability. 6. Providing additional working capital.

Can a joint stock company have a secret reserve?

As per the provisions of the Companies Act, any joint stock company is unable to create secret reserves, but exemptions are applicable for financial institutions such as banks and insurance companies. The following are the objectives of creating a secret reserve: