Specific Reserve | Objectives of creation | Duties of Auditor

What is Specific Reserve?

A specific reserve is one, which is created for some specific purpose by debiting Profit and Loss Appropriation Account. Normally, it is available for the purpose for which it has been created.

Examples of Specific Reserve

Some of the examples of specific reserves are as below:

  1. Dividend Equalization Reserve.
  2. Investment Fluctuation Reserve.
  3. Debenture Redemption Reserve.
  4. Plant and Machinery Replacement such as Sinking Fund Reserve or Depreciation Fund Reserve.

However, sometimes, at the discretion of the Board of Directors in a company, a specific reserve may be utilized for a purpose other than one of its creation, e.g., Investment Fluctuation Reserve may be utilized by the Board, after passing the necessary resolution, in paying dividends to shareholders.

Objects of Creating Specific Reserve

Generally, the specific reserve is created with the following objectives:

1. To meet out outstanding liabilities for expenses due.

2. To write off loss arising out of depreciation or diminution in assets such as depreciation reserve.

3. To meet specific contingency such as provision for bad and doubtful debts, provision for discount, and provision for fluctuation in the investment.

Auditor’s Duty in specific reserve audit

In case of specific reserve, the auditor should follow the following procedure:

1. Auditor should verify the objective with which provisions have been made.

2. He should see that the provision made is adequate to meet the objective.

3. If the provision made is not adequate he should ask the management to do the needful to increase it; otherwise he should disclose the same in his audit report.

4. He should see whether the provisions are properly shown on the liability side of the Balance Sheet.

5. In case specific reserve holds any other purpose other than the one for which it is created, the auditor should see that the Board has authorized it properly.

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