iSS (Rathore Institute) Auditing & assurance CA. Nitin Gupta ...
iSS (Rathore Institute)
Auditing & assurance
CA. Nitin Gupta
iSS(Rathore Institute)
Auditing & Assurance By CA. Nitin Gupta [Solution of May 2012 CA- IPCC/PCC Examination] Answer 1 (a) ü In July 2002 the Auditing Practices Committee has been converted into an Auditing and Assurance Board (AASB). ü The nomenclature of SAPs had also been changed to Auditing and Assurance Standards (AASs) ü The AASB in 2007 adopted the revised preface and AASs are now renamed based on type of assurance provided by the engagement undertaken by the member viz: v Standard on auditing v Standard on review engagement v Standards on Assurance engagement v Standard on Related Services ü The Standard on auditing (SAs) will apply whenever an independent audit is carried out i.e. in the independent examination of financial information of any entity. If for any reason a member has not been able to perform an audit in accordance with SAs, his report should draw to the material departures there from. ü The auditors are expected to follow SAs in the audits commencing on or after the date specified in the statement. ü The preface to the Standards on Quality Control, Auditing Review, Other Assurance and Related Services has been issued to facilitate understanding of the scope and authority of the pronouncement of the AASB issued under the authority of the Council of the Institute of the ICAI. Rathore Institute- 1/50, Lalita Park, Laxmi Nagar, New Delhi-110092. PH: 011-4307335, 8527336600
iSS (Rathore Institute)
Auditing & assurance
CA. Nitin Gupta
Answer 1 (b) ü A company, which has raised money by issue of shares to meet the cost of works or building or plant which cannot be made profitable for a long period, can pay interest on paid up capital for a period and subject to conditions specified under section 208. ü Authorization is required by the articles or by a special resolution ü Previous sanction of CG is required. Thus examine sanction letter. ü The payment of interest shall be made only for such period as may be determined by CG Ensure compliance with same. ü Rate of interest is 4% pa or a rate notified by CG. Examine that same has been complied with. ü The interest paid on capital shall be charged to capital as part of the cost of woks or building or plant (i.e., the interest shall be capitalized). ü Examine relevant entries w.r.t. same in books of accounts. Answer 1 (c) Basis Meaning
Provision It includes an amount- Written off
Reserve It includes amount in the business which cannot be classified as provisions
-Retained by way of providing for depreciation or reduction in the value of assets -Retained by way of providing for any known liability Provides for
Known liabilities and anticipated losses
Increase in capital employed
Nature
Charge against profits
An appropriation of profits
No profit in a year
Required even if absence of profits
Not required in absence of profits.
Example
Provision for tax, Provision for Bad Debt
General Reserve
Answer 1 (d) SA 299 is applicable on Joint Auditors. As per SA 299 ü
Where joint auditors are appointed, they should by mutual discussion divide the audit work among themselves. The division of work may be in following manner: v With reference of time period v Specified areas
Rathore Institute- 1/50, Lalita Park, Laxmi Nagar, New Delhi-110092. PH: 011-4307335, 8527336600
iSS (Rathore Institute)
ü
ü ü
ü
ü
ü
Auditing & assurance
CA. Nitin Gupta
v Components of financial statements v Geographical location Division of work among the joint auditors should be in writing and it should be properly documented. Division of work should be communicated to the client. Each joint auditor is entitled to rely upon on other joint auditors and there is no need to review work done by other joint auditor. If any joint auditor comes to know a matter relevant for other joint auditor, then he should communicate it immediately in writing to other joint auditor. The date of such communication should be before date of audit report. Joint auditor will be responsible for their work and drafting their own program and keeping appropriate documentation. The joint auditors are jointly and severally responsible in respect of work that is not divided and is carried out by all of them.
Answer 2 (a) General consideration in framing a system of internal check: • No single person should have an independent control over any important aspects of the business. • The duties of the staff members should be changed from time to time without any previous notice. • Every member of the staff should be encouraged to go on leave at least once in a year. Frauds successfully concealed by the employees are unearthed when they are on leave. • Persons having physical custody of the assets must not be permitted to have access to the books of accounts. • Mechanical devices such as automatic cash register may be employed to prevent loss or misappropriate of cash. Answer 2 (b) Audit of Dividend ü First of all, dividend is recommended by the Board (Sec. 217). ü The members in the AGM may declare the dividend by passing OR. Declaration of dividend at an AGM is an item of ordinary business (Sec. 173). ü The members may reduce the rate or amount recommended by the Board, but they cannot increase it. ü Examine that dividend has been declared only out of: Rathore Institute- 1/50, Lalita Park, Laxmi Nagar, New Delhi-110092. PH: 011-4307335, 8527336600
iSS (Rathore Institute)
Auditing & assurance
CA. Nitin Gupta
• Profits of current FY • Undistributed profits of previous FY(s) • Moneys provided by CG or SG ü Ensure compliance with following: • Profits for every FY shall be arrived at after providing for depreciation. • CG may allow a company to declare dividend for any FY without providing for depreciation. • If in any previous FY, depreciation has not been provided, it shall be provided before declaring dividend ü Companies (Transfer of Profits to Reserves) Rules, 1975. Before declaration or payment of dividend, profits shall be compulsorily transferred to reserves at the following rates: Rate of proposed dividend Minimum amount to be transferred to Reserves Not exceeding 10% Nil Exceeding 10% but not exceeding 12.5% 2.5% of current profits Exceeding 12.5% but not exceeding 15% 5% if current profits Exceeding 15% but not exceeding 20% 7.5% of current profits Exceeding 20% 10% of current profits ü Dividend shall be only payable in cash (except issue of bonus shares after capitalization ü Examine whether it has been deposited in a separate bank account within 5 days declaration of dividend. Check bank statement w.r.t. same. ü The amount so deposited shall be used only for the purpose of payment of dividend (Whether interim or final). ü The Co. has been given 30 days time from the date of declaration of dividend with which it must pay dividend or post dividend warrants to all shareholders entitled to the payment of dividend. ü Dividend which remains unpaid or unclaimed is required to be transferred to the special bank account “Unpaid Dividend Account of ____________”, within 7 days of the expiry of 30 days from the date of declaration. ü The unclaimed dividend should be shown as a liability in the Balance Sheet. ü The company cannot forfeit unpaid or unclaimed dividend if any divided remains unpaid or unclaimed period of 7 years from the date of transfer, the amount standing to the credit of special bank account has to be transferred by the company to the Fund called Investor Education and Protection Fund. ü Where dividend has been declared and not been paid or warrant' has not been posted within 30 days from the date of declaration to any shareholder, then every director of Co. shall if he is knowingly a party to default be punishable with simple imprisonment for a term which may extend to 3 years with fine Rathore Institute- 1/50, Lalita Park, Laxmi Nagar, New Delhi-110092. PH: 011-4307335, 8527336600
iSS (Rathore Institute)
Auditing & assurance
CA. Nitin Gupta
Answer 3 (a) Retirement Gratuity to Employees ü ü ü ü ü ü ü
Examine the relevant legal applicability or any contract entered into between employer & employee to check requirement to pay gratuity. Ensure that basis of computation of gratuity is valid and as per prevailing laws, if any. Check computation of gratuity with reference to number of years of service rendered by retiring employees. Trace the relevant payment entry in bank statement. If any insurance policy has been taken to fund gratuity liability, ensure that premium deposited has been taken to P&L Account. Check acknowledgement from employee who got gratuity in relevant financial years Ensure compliance with AS-15 (Retirement Benefits).
Answer 3 (b) ü The appointment or reappointment of an auditor shall be made by a special resolution if not less than 25% of the subscribed share capital (including preference share capital), whether singly or in any combination is held by: 1. A Public Financial Institution; 2. A Government Company 3. The Central Government 4. Any State Government 5. Any financial or other institution established by any Provincial or State Act in which a State Government holds not less than 51%of the subscribed share capital. 6. A Nationalized Bank. 7. An Insurance Company carrying on general insurance business. ü The material date to determine whether section 224A is attracted or not, is the date of AGM. ü In other words, if the shareholding of institutions specified u/s 224A is less than 25% as on the date of dispatch of notice of AGM, but the shareholding exceeds to 25% as on the date of AGM, section 224A must be complied with.
Rathore Institute- 1/50, Lalita Park, Laxmi Nagar, New Delhi-110092. PH: 011-4307335, 8527336600
iSS (Rathore Institute)
Auditing & assurance
CA. Nitin Gupta
Answer 4(a) ü
ü
ü
ü ü
ü
ü
SA-570 deals with the auditor’s responsibility in the audit of financial statements with respect to management’s use of the going concern assumption in the preparation and presentation of financial statements. Under the going concern assumption, an entity is viewed as continuing in business for the foreseeable future. When use of the going concern assumption is appropriate, assets and liabilities are recorded on the basis that the entity will be able to realise its assets and discharge its liabilities in the normal course of business. General purpose financial statements are prepared on a going concern basis. The financial reporting framework requires the management to make an assessment of the entity’s ability to continue as a going concern basis unless the management intends to liquidate the entity. In case the financial statements have not been prepared on a going concern basis, the fact would need to be appropriately disclosed, together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern basis. Events or conditions that may cast doubt about going concern assumption include
v Negative operating cash flows v v v v v
Net liability or Net current liability position Inability to comply with the terms of loan agreements Arrears or discontinue of dividends. Inability to pay creditors on due dates. Adverse key financial ratios.
Answer 4 (b) The following are some of the indications of doubtful and uncollectable debts, loans and advances: ü ü ü ü
ü
The terms of credit have been repeatedly ignored. There is stagnation, or lack of healthy turnover, in the account. Payments are being received but the balance is continuously increasing. Payments, though being received regularly are quite small in relation to the total outstanding balance. An old bill has been partly paid (or not paid), while later bills have been fully settled.
Rathore Institute- 1/50, Lalita Park, Laxmi Nagar, New Delhi-110092. PH: 011-4307335, 8527336600
iSS (Rathore Institute) ü ü ü
ü
Auditing & assurance
CA. Nitin Gupta
The cheques received from the debtors have been repeatedly dishonoured. The debt is under litigation, arbitration or dispute. Amount due from employees, which have not been repaid on termination of employment. Collection is barred by statute of limitation.
Answer 5 (a) Audit of Educational Institution ü ü ü ü ü
ü ü ü ü ü ü ü ü ü ü
Study the provisions of applicable statute. Whether it is a society or a trust. Study the minutes of meetings of governing body. Obtain list of accounting records & accounting policy adopted by them. Study the previous year's audit report Fees • Check the name entered in the students fee register for each month or term with the respective class register, showing names of the students on rolls and testing the amount of fees charged from them • Examine the entries in cash book/fee register with reference to counterfoils of the receipts issued against fee received. • Verify the admission fees collected with admission slip signed by the principal. • Check up the system of depositing the collection of fees regularly with the bank. • Check up the fees reconciliation statement i.e. fee receivable and actual fees received. • Fee received in advance and outstanding fee should be accounted carefully and separately. Where the institute has a hostel facility, examine that the bill raised for accommodation, mess charges etc. Examine where the payments of scholarship to students are properly authorized and conform to terms stipulated by the donors. Confirm that free studentship and concession have been granted by a person authorized to do so. Verify the rental income from landed property with the rent rolls. Confirm that the fines for late payments or absences have been either collected or remitted under proper authority. If the institution is an aided institution, examine the grants in aided by UGC; study the terms and conditions of UGC grants. Confirm that grants have been spent on sanction purposes. Pay special attention to unutilized grants. Special attention should be paid to trips arranged. Verify the inventories of furniture, stationery, laboratory equipments etc.
Rathore Institute- 1/50, Lalita Park, Laxmi Nagar, New Delhi-110092. PH: 011-4307335, 8527336600
iSS (Rathore Institute)
Auditing & assurance
CA. Nitin Gupta
Answer 5 (b) ü Subsequent Event means events occurring between the date of the financial statement and date of auditor’s report and facts become known to the auditor after the date of the auditor’s report. ü The auditor shall request the management to provided written representation that all event occurring subsequent to the date of financial statement have been adjusted of disclosed ü Factor which become known to the Auditor after the Auditor’s Report but Before the Date of Financial Statement are Issued
After the Date of the Financial Statement are issued
Discuss the matter with TCWG + Determine whether Financial Statement need amendment
Discuss the matter with TCWG + Determine whether Financial Statement need amendment
Management Amends
Provide a new Auditor Report on Amended Financial Statement
Auditor shall modify his opinion
Management do not amend
Report has not yet been provided to the entity
Report is already provided to entity
Management Amends
Management do not amend OR Do not take necessary Step
Review the steps taken by management to ensure that anyone in receipt of the provide issued financial statement information of the situation
Auditor will seek to prevent future reliance on auditor report
Auditor shall notify management not to issue the financial statement before amendments if management do not so, Auditor shall take appropriate action to seek to prevent reliance an auditor’s report
Answer 6 (a) Having regard to their size and nature of business, the auditor should report whether or not the following Companies have an internal audit system: Ø
Listed Company.
Rathore Institute- 1/50, Lalita Park, Laxmi Nagar, New Delhi-110092. PH: 011-4307335, 8527336600
iSS (Rathore Institute) Ø
Auditing & assurance
CA. Nitin Gupta
This info is required only if paid up capital and reserves is more than Rs 50 Lacs at the commencement of the financial year concerned, or average annual T/O is more than 5crores for preceding 3 years consecutively.
The auditor has to examine whether the internal audit system is commensurate with the size of the company and the nature of business. The following are some of the factors to be considered: 1. What is the size of the internal audit department? 2. What are the qualifications of the persons who undertake the internal audit work? 3. To whom does the internal auditor report? 4. What are the areas covered by the internal audit? 5. Has the internal auditor adequate technical assistance? 6. What are the reports which are submitted by the internal auditor or what other evidence is there of his work? 7. What is follow up? Answer 6 (b) Advantage of Independent Audit ü The need for auditor independence is provided in Standard on auditing. ü The Companies Act, 1956 also contains specific provision to ensure auditor’s independence. ü As per The chartered Accountants Act, 1949 as amended by The Chartered Accountants (Amendment) Act, 2006, independence of auditor is required. ü Independence means that the judgment of a person is not subordinate to wishes of another person. ü It requires that he should not act under any influence. ü If auditor maintains high degree of independence, credibility of financial statements is enhanced. ü Independent audit report will be accepted and respected by all the stakeholders. ü Advantage of Independent Audit • It safeguards the financial interest of persons not associated with the management like shareholders. • It acts as a moral check on the employees from committing fraud. • It is helpful in setting tax liability. • It ensures maintenance of adequate books and records, statutory registers etc. • Audited financial statements are the basis for determining amount receivable or payable in certain circumstances.
Rathore Institute- 1/50, Lalita Park, Laxmi Nagar, New Delhi-110092. PH: 011-4307335, 8527336600
iSS (Rathore Institute)
Auditing & assurance
CA. Nitin Gupta
Answer 7 (a) Preliminary Expenses ü Preliminary expenses are all expense relating to the formation of an enterprise such as registration fees, cost of printing of documents, legal fees etc. ü Examine the expenditure on various items of preliminary expenses by reference to the relevant supporting documents such as agreements, bills receipts statements etc. ü Examine resolution, of BOD and the power in AOA, in case such expenses incurred by the promoters have been reimbursed to them. ü Cross check the amount of preliminary expenses with that disclosed in the prospectus. ü Check that no expense other than those constituting preliminary expenses are included under this head e.g. brokerage, underwriting commission. Answer 7 (b) Initial audit engagement (SA 510) - An engagement in which either: (i) The financial statements for the prior period were not audited; or (ii)The financial statements for the prior period were audited by a predecessor auditor In conducting an initial audit engagement, the objective of the auditor with respect to opening balances is to obtain sufficient appropriate audit evidence about whether: (a) Opening balances contain misstatements that materially affect the current period financial statements; and (b) Appropriate accounting policies reflected in the opening balances have been consistently applied in the current period’s financial statements, or changes thereto are properly accounted for and adequately presented and disclosed in accordance with the applicable financial reporting framework. Answer 7 (c) Disadvantage of audit programme ü A hard and fast audit programme may kill the initiative of efficient and enterprising assistants. ü An audit programme can make the audit exercise rigid and mechanical. ü Inefficient assistants may take shelter behind the program saying that the matter does not contain any instruction. Rathore Institute- 1/50, Lalita Park, Laxmi Nagar, New Delhi-110092. PH: 011-4307335, 8527336600
iSS (Rathore Institute)
Auditing & assurance
CA. Nitin Gupta
ü Procedures may be undertaken which may be inappropriate to the circumstances of the client’s business. Answer 7 (d) Audit Techniques For collection and accumulation of audit evidence, certain methods and means are available and these are known as audit techniques. Some of the techniques commonly adopted by the auditors are the following: 1. Posting checking 2. Casting checking 3. Physical examination and count 4. Confirmation. 5. Inquiry 6. Year-end scrutiny 7. Re-computation 8. Tracing in subsequent period 9. Bank Reconciliation Answer 7 (e) Simple Random sampling ü Under this method each unit of the whole population e.g. purchase or sales invoices has an equal chance of being selected. ü The mechanics of selection of items may be choosing numbers from table of random numbers by computer or picking up numbers randomly drum. ü It is considered that random number tables are simple and easy to use and also provide assurance that the bias does not affect selection. ü This method is considered appropriate provided the population to be sampled consists of reasonably similar units and fall within a reasonable range.
Rathore Institute- 1/50, Lalita Park, Laxmi Nagar, New Delhi-110092. PH: 011-4307335, 8527336600
Auditing & assurance
CA. Nitin Gupta
iSS(Rathore Institute)
Auditing & Assurance By CA. Nitin Gupta [Solution of May 2012 CA- IPCC/PCC Examination] Answer 1 (a) ü In July 2002 the Auditing Practices Committee has been converted into an Auditing and Assurance Board (AASB). ü The nomenclature of SAPs had also been changed to Auditing and Assurance Standards (AASs) ü The AASB in 2007 adopted the revised preface and AASs are now renamed based on type of assurance provided by the engagement undertaken by the member viz: v Standard on auditing v Standard on review engagement v Standards on Assurance engagement v Standard on Related Services ü The Standard on auditing (SAs) will apply whenever an independent audit is carried out i.e. in the independent examination of financial information of any entity. If for any reason a member has not been able to perform an audit in accordance with SAs, his report should draw to the material departures there from. ü The auditors are expected to follow SAs in the audits commencing on or after the date specified in the statement. ü The preface to the Standards on Quality Control, Auditing Review, Other Assurance and Related Services has been issued to facilitate understanding of the scope and authority of the pronouncement of the AASB issued under the authority of the Council of the Institute of the ICAI. Rathore Institute- 1/50, Lalita Park, Laxmi Nagar, New Delhi-110092. PH: 011-4307335, 8527336600
iSS (Rathore Institute)
Auditing & assurance
CA. Nitin Gupta
Answer 1 (b) ü A company, which has raised money by issue of shares to meet the cost of works or building or plant which cannot be made profitable for a long period, can pay interest on paid up capital for a period and subject to conditions specified under section 208. ü Authorization is required by the articles or by a special resolution ü Previous sanction of CG is required. Thus examine sanction letter. ü The payment of interest shall be made only for such period as may be determined by CG Ensure compliance with same. ü Rate of interest is 4% pa or a rate notified by CG. Examine that same has been complied with. ü The interest paid on capital shall be charged to capital as part of the cost of woks or building or plant (i.e., the interest shall be capitalized). ü Examine relevant entries w.r.t. same in books of accounts. Answer 1 (c) Basis Meaning
Provision It includes an amount- Written off
Reserve It includes amount in the business which cannot be classified as provisions
-Retained by way of providing for depreciation or reduction in the value of assets -Retained by way of providing for any known liability Provides for
Known liabilities and anticipated losses
Increase in capital employed
Nature
Charge against profits
An appropriation of profits
No profit in a year
Required even if absence of profits
Not required in absence of profits.
Example
Provision for tax, Provision for Bad Debt
General Reserve
Answer 1 (d) SA 299 is applicable on Joint Auditors. As per SA 299 ü
Where joint auditors are appointed, they should by mutual discussion divide the audit work among themselves. The division of work may be in following manner: v With reference of time period v Specified areas
Rathore Institute- 1/50, Lalita Park, Laxmi Nagar, New Delhi-110092. PH: 011-4307335, 8527336600
iSS (Rathore Institute)
ü
ü ü
ü
ü
ü
Auditing & assurance
CA. Nitin Gupta
v Components of financial statements v Geographical location Division of work among the joint auditors should be in writing and it should be properly documented. Division of work should be communicated to the client. Each joint auditor is entitled to rely upon on other joint auditors and there is no need to review work done by other joint auditor. If any joint auditor comes to know a matter relevant for other joint auditor, then he should communicate it immediately in writing to other joint auditor. The date of such communication should be before date of audit report. Joint auditor will be responsible for their work and drafting their own program and keeping appropriate documentation. The joint auditors are jointly and severally responsible in respect of work that is not divided and is carried out by all of them.
Answer 2 (a) General consideration in framing a system of internal check: • No single person should have an independent control over any important aspects of the business. • The duties of the staff members should be changed from time to time without any previous notice. • Every member of the staff should be encouraged to go on leave at least once in a year. Frauds successfully concealed by the employees are unearthed when they are on leave. • Persons having physical custody of the assets must not be permitted to have access to the books of accounts. • Mechanical devices such as automatic cash register may be employed to prevent loss or misappropriate of cash. Answer 2 (b) Audit of Dividend ü First of all, dividend is recommended by the Board (Sec. 217). ü The members in the AGM may declare the dividend by passing OR. Declaration of dividend at an AGM is an item of ordinary business (Sec. 173). ü The members may reduce the rate or amount recommended by the Board, but they cannot increase it. ü Examine that dividend has been declared only out of: Rathore Institute- 1/50, Lalita Park, Laxmi Nagar, New Delhi-110092. PH: 011-4307335, 8527336600
iSS (Rathore Institute)
Auditing & assurance
CA. Nitin Gupta
• Profits of current FY • Undistributed profits of previous FY(s) • Moneys provided by CG or SG ü Ensure compliance with following: • Profits for every FY shall be arrived at after providing for depreciation. • CG may allow a company to declare dividend for any FY without providing for depreciation. • If in any previous FY, depreciation has not been provided, it shall be provided before declaring dividend ü Companies (Transfer of Profits to Reserves) Rules, 1975. Before declaration or payment of dividend, profits shall be compulsorily transferred to reserves at the following rates: Rate of proposed dividend Minimum amount to be transferred to Reserves Not exceeding 10% Nil Exceeding 10% but not exceeding 12.5% 2.5% of current profits Exceeding 12.5% but not exceeding 15% 5% if current profits Exceeding 15% but not exceeding 20% 7.5% of current profits Exceeding 20% 10% of current profits ü Dividend shall be only payable in cash (except issue of bonus shares after capitalization ü Examine whether it has been deposited in a separate bank account within 5 days declaration of dividend. Check bank statement w.r.t. same. ü The amount so deposited shall be used only for the purpose of payment of dividend (Whether interim or final). ü The Co. has been given 30 days time from the date of declaration of dividend with which it must pay dividend or post dividend warrants to all shareholders entitled to the payment of dividend. ü Dividend which remains unpaid or unclaimed is required to be transferred to the special bank account “Unpaid Dividend Account of ____________”, within 7 days of the expiry of 30 days from the date of declaration. ü The unclaimed dividend should be shown as a liability in the Balance Sheet. ü The company cannot forfeit unpaid or unclaimed dividend if any divided remains unpaid or unclaimed period of 7 years from the date of transfer, the amount standing to the credit of special bank account has to be transferred by the company to the Fund called Investor Education and Protection Fund. ü Where dividend has been declared and not been paid or warrant' has not been posted within 30 days from the date of declaration to any shareholder, then every director of Co. shall if he is knowingly a party to default be punishable with simple imprisonment for a term which may extend to 3 years with fine Rathore Institute- 1/50, Lalita Park, Laxmi Nagar, New Delhi-110092. PH: 011-4307335, 8527336600
iSS (Rathore Institute)
Auditing & assurance
CA. Nitin Gupta
Answer 3 (a) Retirement Gratuity to Employees ü ü ü ü ü ü ü
Examine the relevant legal applicability or any contract entered into between employer & employee to check requirement to pay gratuity. Ensure that basis of computation of gratuity is valid and as per prevailing laws, if any. Check computation of gratuity with reference to number of years of service rendered by retiring employees. Trace the relevant payment entry in bank statement. If any insurance policy has been taken to fund gratuity liability, ensure that premium deposited has been taken to P&L Account. Check acknowledgement from employee who got gratuity in relevant financial years Ensure compliance with AS-15 (Retirement Benefits).
Answer 3 (b) ü The appointment or reappointment of an auditor shall be made by a special resolution if not less than 25% of the subscribed share capital (including preference share capital), whether singly or in any combination is held by: 1. A Public Financial Institution; 2. A Government Company 3. The Central Government 4. Any State Government 5. Any financial or other institution established by any Provincial or State Act in which a State Government holds not less than 51%of the subscribed share capital. 6. A Nationalized Bank. 7. An Insurance Company carrying on general insurance business. ü The material date to determine whether section 224A is attracted or not, is the date of AGM. ü In other words, if the shareholding of institutions specified u/s 224A is less than 25% as on the date of dispatch of notice of AGM, but the shareholding exceeds to 25% as on the date of AGM, section 224A must be complied with.
Rathore Institute- 1/50, Lalita Park, Laxmi Nagar, New Delhi-110092. PH: 011-4307335, 8527336600
iSS (Rathore Institute)
Auditing & assurance
CA. Nitin Gupta
Answer 4(a) ü
ü
ü
ü ü
ü
ü
SA-570 deals with the auditor’s responsibility in the audit of financial statements with respect to management’s use of the going concern assumption in the preparation and presentation of financial statements. Under the going concern assumption, an entity is viewed as continuing in business for the foreseeable future. When use of the going concern assumption is appropriate, assets and liabilities are recorded on the basis that the entity will be able to realise its assets and discharge its liabilities in the normal course of business. General purpose financial statements are prepared on a going concern basis. The financial reporting framework requires the management to make an assessment of the entity’s ability to continue as a going concern basis unless the management intends to liquidate the entity. In case the financial statements have not been prepared on a going concern basis, the fact would need to be appropriately disclosed, together with the basis on which the financial statements are prepared and the reason why the entity is not regarded as a going concern basis. Events or conditions that may cast doubt about going concern assumption include
v Negative operating cash flows v v v v v
Net liability or Net current liability position Inability to comply with the terms of loan agreements Arrears or discontinue of dividends. Inability to pay creditors on due dates. Adverse key financial ratios.
Answer 4 (b) The following are some of the indications of doubtful and uncollectable debts, loans and advances: ü ü ü ü
ü
The terms of credit have been repeatedly ignored. There is stagnation, or lack of healthy turnover, in the account. Payments are being received but the balance is continuously increasing. Payments, though being received regularly are quite small in relation to the total outstanding balance. An old bill has been partly paid (or not paid), while later bills have been fully settled.
Rathore Institute- 1/50, Lalita Park, Laxmi Nagar, New Delhi-110092. PH: 011-4307335, 8527336600
iSS (Rathore Institute) ü ü ü
ü
Auditing & assurance
CA. Nitin Gupta
The cheques received from the debtors have been repeatedly dishonoured. The debt is under litigation, arbitration or dispute. Amount due from employees, which have not been repaid on termination of employment. Collection is barred by statute of limitation.
Answer 5 (a) Audit of Educational Institution ü ü ü ü ü
ü ü ü ü ü ü ü ü ü ü
Study the provisions of applicable statute. Whether it is a society or a trust. Study the minutes of meetings of governing body. Obtain list of accounting records & accounting policy adopted by them. Study the previous year's audit report Fees • Check the name entered in the students fee register for each month or term with the respective class register, showing names of the students on rolls and testing the amount of fees charged from them • Examine the entries in cash book/fee register with reference to counterfoils of the receipts issued against fee received. • Verify the admission fees collected with admission slip signed by the principal. • Check up the system of depositing the collection of fees regularly with the bank. • Check up the fees reconciliation statement i.e. fee receivable and actual fees received. • Fee received in advance and outstanding fee should be accounted carefully and separately. Where the institute has a hostel facility, examine that the bill raised for accommodation, mess charges etc. Examine where the payments of scholarship to students are properly authorized and conform to terms stipulated by the donors. Confirm that free studentship and concession have been granted by a person authorized to do so. Verify the rental income from landed property with the rent rolls. Confirm that the fines for late payments or absences have been either collected or remitted under proper authority. If the institution is an aided institution, examine the grants in aided by UGC; study the terms and conditions of UGC grants. Confirm that grants have been spent on sanction purposes. Pay special attention to unutilized grants. Special attention should be paid to trips arranged. Verify the inventories of furniture, stationery, laboratory equipments etc.
Rathore Institute- 1/50, Lalita Park, Laxmi Nagar, New Delhi-110092. PH: 011-4307335, 8527336600
iSS (Rathore Institute)
Auditing & assurance
CA. Nitin Gupta
Answer 5 (b) ü Subsequent Event means events occurring between the date of the financial statement and date of auditor’s report and facts become known to the auditor after the date of the auditor’s report. ü The auditor shall request the management to provided written representation that all event occurring subsequent to the date of financial statement have been adjusted of disclosed ü Factor which become known to the Auditor after the Auditor’s Report but Before the Date of Financial Statement are Issued
After the Date of the Financial Statement are issued
Discuss the matter with TCWG + Determine whether Financial Statement need amendment
Discuss the matter with TCWG + Determine whether Financial Statement need amendment
Management Amends
Provide a new Auditor Report on Amended Financial Statement
Auditor shall modify his opinion
Management do not amend
Report has not yet been provided to the entity
Report is already provided to entity
Management Amends
Management do not amend OR Do not take necessary Step
Review the steps taken by management to ensure that anyone in receipt of the provide issued financial statement information of the situation
Auditor will seek to prevent future reliance on auditor report
Auditor shall notify management not to issue the financial statement before amendments if management do not so, Auditor shall take appropriate action to seek to prevent reliance an auditor’s report
Answer 6 (a) Having regard to their size and nature of business, the auditor should report whether or not the following Companies have an internal audit system: Ø
Listed Company.
Rathore Institute- 1/50, Lalita Park, Laxmi Nagar, New Delhi-110092. PH: 011-4307335, 8527336600
iSS (Rathore Institute) Ø
Auditing & assurance
CA. Nitin Gupta
This info is required only if paid up capital and reserves is more than Rs 50 Lacs at the commencement of the financial year concerned, or average annual T/O is more than 5crores for preceding 3 years consecutively.
The auditor has to examine whether the internal audit system is commensurate with the size of the company and the nature of business. The following are some of the factors to be considered: 1. What is the size of the internal audit department? 2. What are the qualifications of the persons who undertake the internal audit work? 3. To whom does the internal auditor report? 4. What are the areas covered by the internal audit? 5. Has the internal auditor adequate technical assistance? 6. What are the reports which are submitted by the internal auditor or what other evidence is there of his work? 7. What is follow up? Answer 6 (b) Advantage of Independent Audit ü The need for auditor independence is provided in Standard on auditing. ü The Companies Act, 1956 also contains specific provision to ensure auditor’s independence. ü As per The chartered Accountants Act, 1949 as amended by The Chartered Accountants (Amendment) Act, 2006, independence of auditor is required. ü Independence means that the judgment of a person is not subordinate to wishes of another person. ü It requires that he should not act under any influence. ü If auditor maintains high degree of independence, credibility of financial statements is enhanced. ü Independent audit report will be accepted and respected by all the stakeholders. ü Advantage of Independent Audit • It safeguards the financial interest of persons not associated with the management like shareholders. • It acts as a moral check on the employees from committing fraud. • It is helpful in setting tax liability. • It ensures maintenance of adequate books and records, statutory registers etc. • Audited financial statements are the basis for determining amount receivable or payable in certain circumstances.
Rathore Institute- 1/50, Lalita Park, Laxmi Nagar, New Delhi-110092. PH: 011-4307335, 8527336600
iSS (Rathore Institute)
Auditing & assurance
CA. Nitin Gupta
Answer 7 (a) Preliminary Expenses ü Preliminary expenses are all expense relating to the formation of an enterprise such as registration fees, cost of printing of documents, legal fees etc. ü Examine the expenditure on various items of preliminary expenses by reference to the relevant supporting documents such as agreements, bills receipts statements etc. ü Examine resolution, of BOD and the power in AOA, in case such expenses incurred by the promoters have been reimbursed to them. ü Cross check the amount of preliminary expenses with that disclosed in the prospectus. ü Check that no expense other than those constituting preliminary expenses are included under this head e.g. brokerage, underwriting commission. Answer 7 (b) Initial audit engagement (SA 510) - An engagement in which either: (i) The financial statements for the prior period were not audited; or (ii)The financial statements for the prior period were audited by a predecessor auditor In conducting an initial audit engagement, the objective of the auditor with respect to opening balances is to obtain sufficient appropriate audit evidence about whether: (a) Opening balances contain misstatements that materially affect the current period financial statements; and (b) Appropriate accounting policies reflected in the opening balances have been consistently applied in the current period’s financial statements, or changes thereto are properly accounted for and adequately presented and disclosed in accordance with the applicable financial reporting framework. Answer 7 (c) Disadvantage of audit programme ü A hard and fast audit programme may kill the initiative of efficient and enterprising assistants. ü An audit programme can make the audit exercise rigid and mechanical. ü Inefficient assistants may take shelter behind the program saying that the matter does not contain any instruction. Rathore Institute- 1/50, Lalita Park, Laxmi Nagar, New Delhi-110092. PH: 011-4307335, 8527336600
iSS (Rathore Institute)
Auditing & assurance
CA. Nitin Gupta
ü Procedures may be undertaken which may be inappropriate to the circumstances of the client’s business. Answer 7 (d) Audit Techniques For collection and accumulation of audit evidence, certain methods and means are available and these are known as audit techniques. Some of the techniques commonly adopted by the auditors are the following: 1. Posting checking 2. Casting checking 3. Physical examination and count 4. Confirmation. 5. Inquiry 6. Year-end scrutiny 7. Re-computation 8. Tracing in subsequent period 9. Bank Reconciliation Answer 7 (e) Simple Random sampling ü Under this method each unit of the whole population e.g. purchase or sales invoices has an equal chance of being selected. ü The mechanics of selection of items may be choosing numbers from table of random numbers by computer or picking up numbers randomly drum. ü It is considered that random number tables are simple and easy to use and also provide assurance that the bias does not affect selection. ü This method is considered appropriate provided the population to be sampled consists of reasonably similar units and fall within a reasonable range.
Rathore Institute- 1/50, Lalita Park, Laxmi Nagar, New Delhi-110092. PH: 011-4307335, 8527336600
