Search This Blog

Loading...

Tuesday, April 1, 2014

Important Topics for Advanced Auditing, May 2014

Important Topics for Advanced Auditing, May 2014

1.            Appointment of Auditor by Special Resolution: Material date for 25% holding of subscribed share capital (see page 13 of the book)
2.            Audit of Branch Accounts and Exemption thereto (see page 13 & 14 of the book)
3.            Appointment of Special Auditor u/s 233A and/ vis-à-vis communication under Clause 8 Part I of First Schedule of Chartered Accountants Act, 1949 (as amended) (See class notes)
4.            Audit Strategy (Short Note) (see page 17 of the book)
5.            Dividends and the related Rules on transfer of profits to reserves (see class notes)
6.            Declaration of Dividend in the event of presence of past losses (section 205) (see class notes)
7.            Final Dividend vs. Interim Dividend (see class notes (+) page 22 of the book)
8.            Corporate Form of Practice by CA (Management Consultancy Company, i.e., MCC) (see class notes) and KYC Norms (page 76 of the Book)
9.            New Disciplinary Mechanism (Distinction b/w powers of Board of Discipline and Disciplinary Directorate) (see class notes)
10.        Clause 2, 3, 4, 5, 6, 7, 8, 9 and 12 of Part I, First Schedule (see class notes)
11.        Clause 7 and Clause 10 of Part I, Second Schedule (see class notes)
12.        Part IV and Part III of Schedule First and Schedule Second respectively (see class notes)
13.        Council General Guidelines 2008 under Code of Ethics (see class notes)
14.        Guidelines for Website by CA (see class notes)
15.        Calculation of Turnover u/s 44AB (see page 85 of the book)
16.        Clause 12A, 17, 17A, 18, 21, 22, 24, 27 and 32 of Form 3CD (see class notes)
17.        Audit of Public Trusts (see page 105 of the book)
18.        Cost Audit Applicability, Steps, True and Fair cost of production, Contents of Cost Audit Report (see pages 112 to 114 of the Book)
19.        Propriety Cost audit (see page 115 of the book)
20.        Management Audit and its objectives (see page 116 of the book)
21.        Financial Audit vs. Management Audit vs. Operational Audit vs. Internal Audit (see page 118 of the book)
22.        Types of Management Audit Reports (see page 119 of the book)
23.        Practical question on drafting Management Control Questionnaire (MCQ) (general question to be answered as per guidelines discussed for ‘Due Diligence’ Chapter)
24.        Audit Trail (see class notes)
25.        Approaches to EDP Audit (see class notes)
26.        Service Bureau/ BPO (see SA 402, SAE 3402) (see class notes)
27.        “The objective and scope of audit does not change in CIS environment.” Comment (see class notes)
28.        Propriety Audit and its types (specially objective and scope of PSU audit whether different from statutory audit and Section 619 Questionnaire) (see para 2 and 3 of chapter 9 of the book, pages 133 to 135)
29.        Propriety elements in CARO (see class notes)
30.        Investigation on behalf of Incoming Partner (General Question: see class notes for Due Diligence chapter)
31.        Investigation for Advancing Loan (General Question: see class notes for Due Diligence chapter)
32.        Section 217 requirements for Board of Directors explanation about statutory auditors’ adverse remarks (see class notes)
33.        Due Diligence and contents of DDR (Due Diligence Review) Report (see class notes)
34.        CARO applicability on Private Limited Companies (see class notes)
35.        Clauses of CARO specially dealing with: (i) End use of Funds and Company Trading in Shares, (ii) Section 301, (iii) Statutory Dues, (iv) Other Dues, (v) Term Loans, (vi) Internal Audit, (vii) Frauds, (viii) Sick Company, (ix) Fixed Assets, and (x) Inventories [(see class notes)]
36.        Classification of Investments by Banks and Non-performing Assets with NPA Exemptions [(see class notes)]
37.        Concurrent Audit, Corporate Debt Restructuring and Credit Card Operations in a Bank [(see class notes)]
38.        AS 11, AS 17 and Banks (see class notes)
39.        Donations made by Banks – RBI Requirements (see class notes)
40.        NOSTRO and VOSTRO Accounts of Banks (see class notes)
41.        Solvency Margin (see class notes)
42.        Valuation of Investments by General Insurance Companies (see page 233 of the book)
43.        Reinsurance, Contents of Management Report for GIC (see class notes)
44.        NBFC vs. Banks (see class notes)
45.        Classification of NBFC as per new guidelines of RBI (see class notes)
46.        Appointment of Auditor in Cooperative Societies and Books of Accounts to be maintained by Society (see class notes)
47.        Borrowings and Loans for Cooperative Societies (see class notes)
48.        Appropriation of Profits, Overdue Principal and Interest in case of Cooperative Societies (see class notes)
49.        Features of Indirect Tax Audit (see para 2 at page 270), Excise Audit 2000 (see page 271 of the book)
50.        Accounting Aspects for Mutual Funds (specially the treatment of Underwriting Commission and Unit Premium Reserve), Contents of Audit Report (see class notes)
51.        Whole Chapter on Members of Stock Exchanges, specially Margins, Circuit Breakers, Contract Notes, Types of Market in NEAT system, Limit Orders, Types of books and records, Proprietary Trading (Beneficiary Account) and Pool Trading (Pool Account), Contents of Audit Report (see class notes)
52.        SEBI Investigation for question 50 and 51 above (see class notes)
53.        New definition of Independent Directors under Clause 49 (see class notes)
54.        CEO/ CFO certification under Clause 49 (see class notes)
55.        Whistle Blower Policy under Clause 49 (see class notes)
56.        Audit Committee under Clause 49 (see class notes)
57.        Energy Audit and Environmental Audit (see markings under chapter 20)
58.        Peer Review (can a peer reviewer access the clients’ premises and books of accounts, etc.)  (see class notes)
59.        SOX (Clause 49 known as Indian SOX) (see class notes)
60.        Clause 41 (see class notes)
61.        SA 240, 315, 330, 500 & 501, 620, 580, 299, 520, 530, 570, 560, 540, 510, 710, 505, 700, 705, 720, SRS 4410, 4400, SRE 2400, SAE 3400, SA 800 series (see class notes)
62.        Drafting of (i) Letter of Engagement and (ii) Management Representation Letter (see class notes and page 551 for a very general reference only)
63.        Guidance Notes: Independence of Auditors, Section 227(3)(e) and (f) reporting, Financial Information in Offer Document (see page 527 of Book), Consolidation of Financial Statements (specially the concept of permanent consolidated adjustments and current consolidated adjustments), Revision of Audit Report (see class notes)
64.        Auditor’s Right to Lien (Short Note) (see page 8 of the book)
65.        Auditor’s Right to attend General Meeting (Section 231) (see class notes)
66.        Xerox copies of books of accounts vis-à-vis Auditor’s obligations (see SA 580)
67.        From Company Law: Short Note on XBRL Filing, Buy Back and Deposit Acceptance Rules (see class notes)
68.        May 2004, May 2013 Question Papers and Practice Paper


Accounting Standards (see Financial Reporting Syllabus) and Revised Schedule VI form the integral part of Advanced Auditing and Professional Ethics Paper

Saturday, November 9, 2013

Analysis and Solutions to Audit Paper November 2013 Examination

Analysis and Solution for today's Audit Paper:

The paper was lengthy and technical. Not a tough paper considering CA Final Level. No spoon feeding types questions but only "Application of Mind" types questions. To a very large extent the paper is conceptual with "HARMONIOUS Application" of SA, SRS and SAE with provisions of Companies Act and Accounting Standards. This is evident from the following:

Suggested Hints to the Questions asked in November 2013 Examination:
Q.1.(a).
Refer Para 46A of AS 11 of Companies (Accounting Standards) Rules, 2006 [and not AS 11 issued by ICAI]. Vide Notification dated 29.12.2011, a new paragraph no. 46A was added by MCA to provide that exchange differences arising on reporting of long-term foreign currency monetary items (assets as well as liabilities) arising in respect of accounting periods commencing “ON or AFTER 1 April 2011” would be amortised over the tenure of the underlying long term monetary item. The financial statements should disclose this policy election and provide the details of the unamortised foreign exchange differences. Thus, the company should give the treatment in accordance with CASR AS 11 instead of ICAI AS 11.
Q.1.(b).
Discuss SA 402 read with SAE 3402 (based on Class Booklet Question below the heading “Service Bureau”)
Q.1.(c).
Refer Guidance Note on Audit of Consolidated Financial Statements, SA 705 for the new requirements of Audit Report Formats (Deficiencies involved, e.g. every paragraph to be given appropriate headings such as Basis of Opinion and Type of Opinion, Quantification of financial impact of qualification to the extent practicable). See the Class Notes for these SA points and also see illustrative language on quantification given under special point in Class Notes.
Q.1.(d).
Discuss AS 29 (as amount of provision for Rs. 60 lakhs is not correct), SA 580 (take written representation), SA 500 (other evidence such as TDS u/s 194J or 194C as the case may be etc.) read with SA 505 (external confirmation from the engineer), Communicate the matter with TCWG (SA 260), and SA 705 (issue qualified report with quantification of financial impact of qualification to the extent practicable). See the Class Notes for these SA points and also see illustrative language on quantification given under special point in Class Notes.
Q.2.(a).
Professional misconduct under Clause 2 of Part I of First Schedule for sharing profits with non-members (On the lines of discussions made in respect of Question 3 under Code of Ethics of Class Booklet)
Q.2.(b).
No professional misconduct under Clause 6 of Part I of First Schedule because the work is sought by a CA in practice from other CA who are in practice (On the lines of discussions made in respect of Question 8 under Code of Ethics of Class Booklet)
Q.2.(c).
Question based upon SRS 4410 and SA 210 (see the specimen format of engagement letter distributed in Class and also the special point dictated for “??”)
Q.2.(d).
Discuss the meaning of “Benchmark” as defined in SA 320. Various factors include (i) Audit Risk, Knowledge of Business as mentioned in SA 315 & SA 330, (ii) Analytical Procedures (SA 520), (iii) Fraud and Error (SA 240), (iv) Sampling Risk (SA 530), (v) Persuasive nature of Audit Evidence (SA 500) and (vi) Revised Schedule VI requirements. See the Class Notes for these SA and Revised Schedule VI points.
Q.3.(a).
Question based upon AS 15 (Revised) and AS 29. Accounting policy is not correct. Auditor accordingly should consider issuing qualified report on the basis of advice to the audit team to take Written Representation (SA 580), Assess the Audit Risk (SA 315 & 330), Take assistance of expert if required (SA 620), and Communicate the matter with TCWG (SA 260). See the Class Notes for these SA points.
Q.3.(b).
Discuss IT Controls and Approaches to EDP Audit. See the Class Notes for both these aspects’ points.
Q.3.(c).
Discuss SA 520 and write points like reconciliation of total reported revenue with the multiplication of room rent with number of room occupancy days, and the like. See the Class Notes for these SA points.
Q.3.(d).
Professional Misconduct under Clause 11 of Part I of First Schedule as he is engaged in other occupation with ICAI permission (On the lines of discussions made in respect of Question 57 under Code of Ethics of Class Booklet)
Q.4.(a).
See AS 23 and accounting treatment suggested thereunder for equity method. As per ASI 16 of AS 23, while applying the equity method, proposed dividend provided by the associate in its separate financial statements is not considered by the investor
Q.4.(b).
Refer Chapter on Bank Audit. See the common points in Class Notes as these also would be sufficient in this question
Q.4.(c).
Refer Chapter on Audit of GIC. See Solvency Margin u/s 64VA in the Class Notes read with Section 7 of Insurance Act in your Allied Law Notes
Q.4.(d).
Discuss Steps of Audit (discussed in Class through ILU) alongwith SA 315 (Knowledge of Business, Audit Risk), SA 320 (Materiality), SA 500 (Persuasive nature of audit evidence). See Class Notes for these SA points
Q.5.(a).
Capitalisation not valid because as per para 50 & 51 of AS 26 internally generated brands, mastheads, publishing titles, customer lists and items similar in substance should not be recognised as intangible assets
Q.5.(b).
Refer Chapter on Due Diligence. See Class Notes for the same and hint discussed for second last question under the Chapter: Due Diligence given in the Class Booklet
Q.5.(c).
Direct Question from Chapter 4 of the Text Book
Q.5.(d).
Discuss Clause 4(1) and 4(2) of CARO, SA 570 (Going Concern) and Section 227(3)(e) for bold or italics reporting. See Class Notes for commentary on CARO. Question on the same lines of discussions made in respect as second and fifth bullet point questions given under the heading “Special Questions” in Class Booklet’s Chapter: CARO
Q.6.(a).
Very general question. The evidence may include for example, Written Representation, Copies of Resolution passed by the company permitting such expenditure, permission from Municipal Corporation for placing hoardings at various places, copies of contract with advertisement agency, if any, Examining quotation from various advertisement agencies, On Site visit to see hoardings, Comparing the scale of advertisement by other market players in the same sector, etc.
Q.6.(b).
Professional Misconduct under Clause 6 of Part I of First Schedule (On the lines of discussions made in respect of Question 13 under Code of Ethics of Class Booklet)
Q.6.(c).
Tax audit not applicable u/s 44AB. Very much a IPCC level question from PGBP. For a refreshing reference see Chart in Text Book in Chapter 5 for components of sales, turnover and gross receipts. [Trade discount, turnover discount, Return Inwards will be excluded from sales; Cash discount, commission, bad debts written off, etc. are not part of sales. These should be separately debited to the Profit and Loss Account]
Q.6.(d).
Refer Clause 49. See your Class Notes for Clause 49 on Audit Committee
Q.7.
(a). Refer Chapter: Other Aspects. See your Class Notes for Peer Review
(b). Refer Chapter: Cost Audit. See markings in text book
(c). Refer Chapter: Other Aspects for “Clause 49”. See your Class Notes for various contents of Clause 49
(d). Refer Chapter: Audit of Cooperative Societies. See Class Booklet for Notes for the Aspects
(e). Refer Chapter: Other Aspects. See your Class Notes for EIA
Visit at: www.kgma.in
Best Wishes
God Bless
CA Kamal Garg

Wednesday, October 9, 2013

Important Topics for Advanced Auditing, November 2013 CA Final Examination:

Important Topics for Advanced Auditing, November 2013 CA Final Examination:

1. Appointment of Auditor by Special Resolution: Material date for 25% holding of subscribed share capital (see page 13 of the book)
2. Audit of Branch Accounts and Exemption thereto (see page 13 & 14 of the book)
3. Appointment of Special Auditor u/s 233A and/ vis-à-vis communication under Clause 8 Part I of First Schedule of Chartered Accountants Act, 1949 (as amended) (See class notes)
4. Audit Strategy (Short Note) (see page 17 of the book)
5. Dividends and the related Rules on transfer of profits to reserves (see class notes)
6. Declaration of Dividend in the event of presence of past losses (section 205) (see class notes)
7. Final Dividend vs. Interim Dividend (see class notes (+) page 22 of the book)
8. Corporate Form of Practice by CA (Management Consultancy Company, i.e., MCC) (see class notes)
9. New Disciplinary Mechanism (Distinction b/w powers of Board of Discipline and Disciplinary Directorate) (see class notes)
10. Clause 2, 3, 4, 5, 6, 7, 8, 9 and 12 of Part I, First Schedule (see class notes)
11. Clause 7 and Clause 10 of Part I, Second Schedule (see class notes)
12. Part IV and Part III of Schedule First and Schedule Second respective (see class notes)ely
13. Council General Guidelines 2008 under Code of Ethics (see class notes)
14. Guidelines for Website by CA (see class notes)
15. Calculation of Turnover u/s 44AB (see page 85 of the book)
16. Clause 12A, 17, 17A, 18, 21, 22, 24, 27 and 32 of Form 3CD (see class notes)
17. Audit of Public Trusts (see page 105 of the book)
18. True and Fair cost of production (see class notes)
19. Propriety Cost audit (see page 115 of the book)
20. Management Audit and its objectives (see page 116 of the book)
21. Financial Audit vs. Management Audit vs. Operational Audit vs. Internal Audit (see page 118 of the book)
22. Types of Management Audit Reports (see page 119 of the book)
23. Practical question on drafting Management Control Questionnaire (MCQ) (general question to be answered as per guidelines discussed for ‘Due Diligence’ Chapter)
24. Audit Trail (see class notes)
25. Approaches to EDP Audit (see class notes)
26. Service Bureau/ BPO (see SA 402) (see class notes)
27. “The objective and scope of audit does not change in CIS environment.” Comment (see class notes)
28. Propriety Audit and its types (specially objective and scope of PSU audit whether different from statutory audit and Section 619 Questionnaire) (see para 2 and 3 of chapter 9 of the book, pages 133 to 135)
29. Propriety elements in CARO (see class notes)
30. Investigation on behalf of Incoming Partner (General Question: see class notes for Due Diligence chapter)
31. Investigation for Advancing Loan (General Question: see class notes for Due Diligence chapter)
32. Section 217 requirements for Board of Directors explanation about statutory auditors’ adverse remarks (see class notes)
33. Due Diligence and contents of DDR (Due Diligence Review) Report (see class notes)
34. CARO applicability on Private Limited Companies (see class notes)
35. Clauses of CARO dealing with: (i) End use of Funds and Company Trading in Shares , (ii) Section 301, (iii) Statutory Dues, (iv) Other Dues, (v) Term Loans, (vii) Internal Audit, (viii) Frauds, (ix) Sick Company, (x) Fixed Assets, and (xi) Inventories [(see class notes)]
36. Classification of Investments by Banks and Non-performing Assets with NPA Exemptions [(see class notes)]
37. Concurrent Audit, Corporate Debt Restructuring and Credit Card Operations in a Bank [(see class notes)]
38. AS 11, AS 17 and Banks (see class notes)
39. Donations made by Banks – RBI Requirements (see class notes)
40. NOSTRO and VOSTRO Accounts of Banks (see class notes)
41. Solvency Margin (see class notes)
42. Valuation of Investments by General Insurance Companies (see page 233 of the book)
43. Reinsurance, Contents of Management Report for GIC (see class notes)
44. NBFC vs. Banks (see class notes)
45. Classification of NBFC as per new guidelines of RBI (see class notes)
46. Appointment of Auditor in Cooperative Societies and Books of Accounts to be maintained by Society (see class notes)
47. Borrowings and Loans for Cooperative Societies (see class notes)
48. Appropriation of Profits, Overdue Principal and Interest in case of Cooperative Societies (see class notes)
49. Features of Indirect Tax Audit (see para 2 at page 270), Excise Audit 2000 (see page 271 of the book)
50. Accounting Aspects for Mutual Funds (specially the treatment of Underwriting Commission and Unit Premium Reserve), Contents of Audit Report (see class notes)
51. Whole Chapter on Members of Stock Exchanges, specially Margins, Circuit Breakers, Contract Notes, Types of Market in NEAT system, Limit Orders, Types of books and records, Proprietary Trading (Beneficiary Account) and Pool Trading (Pool Account), Contents of Audit Report (see class notes)
52. SEBI Investigation for question 50 and 51 above (see class notes)
53. New definition of Independent Directors under Clause 49 (see class notes)
54. CEO/ CFO certification under Clause 49 (see class notes)
55. Whistle Blower Policy under Clause 49 (see class notes)
56. Audit Committee (see class notes)
57. Energy Audit and Environmental Audit (see markings under chapter 20)
58. Peer Review (can a peer reviewer access the clients’ premises and books of accounts, etc.) (see markings under chapter 20)
59. SOX (Clause 49 known as Indian SOX) (see class notes)
60. Clause 41 (see class notes)
61. SA 240, 315, 330, 500 & 501, 620, 580, 299, 520, 530, 570, 560, 540, 510, 710, 505, 700, 705, 720, SRS 4410, 4400, SRE 2400, SAE 3400, SA 800 series (see class notes)
62. Drafting of (i) Letter of Engagement and (ii) Management Representation Letter (see class notes and page 551 for a very general reference only)
63. Guidance Notes: Independence of Auditors, Section 227(3)(e) and (f) reporting, Financial Information in Offer Document (see page 527), Consolidation of Financial Statements (specially the concept of permanent consolidated adjustments and current consolidated adjustments), Revision of Audit Report (see class notes)
64. Auditor’s Right to Lien (Short Note) (see page 8 of the book)
65. Auditor’s Right to attend General Meeting (Section 231) (see class notes)
66. Xerox copies of books of accounts vis-à-vis Auditor’s obligations (see SA 580)
67. From Company Law: Short Note on XBRL Filing, Buy Back and Deposit Acceptance Rules (see class notes)
68. May 2006, November 2006 Question Papers and Practice Paper

Accounting Standards (see Financial Reporting Syllabus) and Revised Schedule VI (see class notes) form the integral part of Advanced Auditing and Professional Ethics Paper. Those who are attending Satellite Classes may download relevant handouts (although already included in the Workbook given to students) from 
https://www.facebook.com/groups/ifrs.scholars/files/

Saturday, July 20, 2013

8 Questions on Advanced Auditing for CA Final: Check your progress

8 Questions on Advanced Auditing for CA Final: Check your progress:

Important Questions (specially see red questions):

1. CA X was appointed as the statutory auditor of ABC Limited for the year 2010-2011. He is also the tax auditor of its subsidiary PQR Limited. He owes Rs. 15,000/= to PQR Limited. Examine the appointment under the provisions of Companies Act, 1956 and/ or The Chartered Accountants Act, 1949 (as amended) for both the companies. [Hint: Section 226, Clause 9, Part I, First Schedule of the CA Act, Central Council General Guidelines, 2008]


2. ABC Limited, a public company, was having 10 members up to 31st July 2012. Five members died in a road accident and the company has not filled this decline up to 31st March, 2013. Comment as a statutory auditor [Hint: Impact on going concern because the number of members fallen below statutory minimum. See section 433 of Companies Act, 1956]
 

3. A Company’s net worth is eroded and creditors are unpaid due to liquidity constraints. The management represents to the statutory auditors that the promoter’s wife is expected to give an unsecured loan to meet the liquidity constraints and that negotiations are underway to secure large export orders [Hint: SA 570, CARO Clause 4(iii)]

4. Mr. Ram a relative of a Director was appointed as an auditor of the company. Comment [Hint: being relative not a disqualification u/s 226. Discuss Clause 4, Part I, Second Schedule of the CA Act, Familiarity Threat under Guidance Note on Independence of Auditor]

5. Mr. X, director of ABC Limited made a purchase contract for Rs. 10,00,000 with the company. Comment [Hint: Section 301, Clause 4 (v) of CARO]

6. The audit report of P Limited for the year 2010-2011 contained a qualification regarding non-provision of doubtful debts. As the statutory auditor of the company for the year 2011-2012, how would you report, if:
(i) The company does not make provision for doubtful debts in 2011-2012.
(ii) The company makes adequate provision for doubtful debts in 2011-2012 [Hint: SA 540, SA 510, and SA 710]

7. While conducting the statutory audit of ABC Limited, you come across IOUs ("I Owe You") amounting to Rs. 2 crores as against a cash balance shown in the books at Rs. 2.10 crores. You also observe that despite similar high balances throughout the year, small amounts of Rs. 50,000 are withdrawn from the Bank to meet day to day expenses. Comment. [Hint: SA 240, CARO Clause 4 (vii), 4 (xxi), Section 227 (3) (e)]

8. Whether CARO, 2003 (as amended) would be applicable to ABC Producer Company Limited [Hint: Yes, just like private limited companies]

www.kgma.in

Monday, April 22, 2013

Advanced Auditing Practice Paper for November 2013 CA Final Examination

Practice Paper by FCA Kamal Garg [www.kgma.in]
1.
As a Statutory Auditor, how would you deal with the following?
(a)
Mr. Rajesh is appointed as the auditor of NOIDA Travels Ltd. with audit fees of Rs. 35,000. He purchased air ticket from Delhi to Kolkata and back for Rs. 18,000 from the client for his personal work and the amount remains unpaid at the end of the year as it is a general practice of the client to give credit to all. Mr. Rajesh claims that he does not incur any disqualification as contained in Section 226(3) of the Companies Act. Would your answer be different if his spouse’s brother would have purchased such ticket who is a director in the subsidiary of NOIDA Travels Ltd.
(b)
Apex Ltd., a well reputed manufacturing public limited company has made a contribution of Rs. 2.5 lacs during the financial year ended 31.3.2013 to a political party for running, a school, situated in the village, where most of the workers of the company reside. It is admitted that the benefit of the school is mostly for the children of the workers of the company. The company has not made any profits in the last four years.
(c)
Dark Ltd. has received a grant of Rs. 20 lacs under the Government's Subsidy Scheme for acquiring imported machinery for setting up, an oil exploration plant and the entire grant received is credited to Profit and Loss Statement.
(d)
You notice a misstatement resulting from fraud or suspected fraud during the audit and conclude that it is not possible to continue the performance of audit.
2.
Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules thereto:
(a)
Mr. Rahul, a locally based Chartered Accountant, accepted the statutory audit of ABC Limited at a fee lower than that charged by the previous auditor, who was stationed in another town and had to spend a lot of money on travel for which he did not charge separately. He also communicated to previous auditor through registered post acknowledgement due mode and the previous auditor advised him not to accept the audit as his audit fees is not paid by the company.
(b)
The superannuation-cum-pension fund for the employees of a listed company was under a separate `trust'. Both the company and the trust were under the same management. The auditor, who was auditing the accounts of the company as well as the trust noted some irregularities in the operation of the trust and commented upon these irregularities in the confidential report given to the trustees, but did not mention about these irregularities in his report on the Annual accounts of the Trust. He also charged a statutory audit fees of Rs. 2.50 lacs from the company and Rs. 3.00 lacs as audit fees from the trust for the ensuing year under audit
(c)
M/s XYZ a firm of Chartered Accountants received Rs. 2 lakhs in January, 2012 on behalf of one of their clients, who has gone abroad and deposited the amount in their Bank account, so that they can return the money to the client in July, 2012, when he is due to return to India.
(d)
Mr. J.J. a practicing Chartered Accountant engages himself as part time finance manager of Quick Return Securities Limited. He is of the view that as both functions are independent, he need not take permission from the Institute.
Would your answer be different if he is appointed as a statutory auditor of Quick Return Securities Limited in which his father is the finance manager and he quoted his fees to be paid only if it earns profits from its portfolio management services.
3. (a)
Draft audit report u/s 227(3)(f) of the Companies Act, 1956 on the following three situations in respect of XYZ Ltd. as on 31.3.2012:
(i)              Where all directors have given written representations that they have not defaulted u/s 274(1)(g) of the Companies Act, 1956.
(ii)            Where one of the directors, Mr. Flexible has failed to produce written representation that he has not defaulted u/s 274(1)(g) of the Companies Act, 1956.
(iii)          Where on the basis of written representations received from the directors it is noticed that one of the directors, Mr. Rigid has defaulted in terms of Section 274(1)(g) of the Companies Act, 1956.
   (b)
State the important characteristics of an effective system of Computer Audit Programme.
4. (a)
Enumerate the main areas to be covered by the auditor in the case of energy and environment audit of an industrial unit.
    (b)
State the salient features of the directions (questionnaire) to the auditors of Government companies issued by the Comptroller and Auditor General of India u/s 619(3) of the Companies Act, 1956 in relation to: (i) Assets and Investments, and (ii) Inventory and Contracting.
Examine the directors’ responsibility, if any, when the statutory auditor as well as C&AG have issued qualified report for the Government Company.
5. (a)
Explain the common/ similar reportable elements in the Companies (Auditor’s) Report Order, 2003 and Form 3CD under Tax Audit reporting.
    (b)
"The auditor should communicate audit matters of governance interest arising from the audit of financial statements with those charged with the governance of an entity." Briefly state the matters to be included in such Communication.
6. (a)
Explain the scope of concurrent audit of a bank with reference to Reserve Bank of India guidelines.
    (b)
(i) The auditor of the company requested one of its vendors to confirm the account balances appearing in its books of account. Despite several repeated requests the vendor did not reply and hence the auditor assumed that balances are not misstated.
(ii) Advise as a statutory auditor under CARO:
1.      ABC Limited has taken one year short term loan of Rs. 15 lakhs from NBFC without getting authorisation from the finance manager and Rs. 45 lakhs as term loan from Punjab National Bank. These loans have been used for purchasing the plant and machinery worth Rs. 50 lakhs. The balance term loan was invested temporarily in high risk equity.
2.      During the course of audit of D Co. Ltd. (incorporated 6 years back) whose net worth is eroded, you as an auditor have observed that Inter Corporate deposit of Rs. 50 lakhs has been overdue. The D Co. Ltd. has disclosed this in the notes to Accounts Note No. 15 in schedule no. 21 stating that 'Rs. 50 lakhs is overdue from XYZ Co. Ltd. and the said company is in the process of liquidation. The management is taking steps to appoint the liquidator'. Would your answer be different if D Co. Ltd. was incorporated only 3 years back.
7. (a)
(i) The auditor and the client may have strained relations during the professional engagement. In this context:
(a) Advise about how to avoid the possibility of such strained relationship;
(b) Enumerate the matters which may result in such strained relationship.
(ii) What are the major sources of obtaining information about the client’s business?
    (b)
State the reporting responsibility of an auditor in the context of non-compliance of Law and Regulation in an audit of Financial Statement.
8.
Write short notes on any four of the following:

(a)            Peer Review
(b)            Powers and duties of an auditors of a multi-state Cooperative Society
(c)            CEO/ CFO Certification in Annual Report
(d)            Audit Committee and matters to be referred to it
(e)            Types of market under NEAT (National Exchange Automated Trading) System
(f)             Broad objectives and types of reports in operational audit.
(g)            Independent Auditor
(h)            Management Bias
Answers/ Hints:
1(a).
1.      The Research Committee of ICAI in this context recommends that “a question of indebtedness may also be raised where an auditor of a company purchases goods or services from the company audited by him.
2.      In such a case, if the amount outstanding exceeds Rs. 1000, irrespective of the nature of the purchase or period of credit allowed to other customers, the provisions concerning disqualification of auditor as contained in sec 226 (3) (d) will be attracted.
3.      This is applicable in the case of purchase of air tickets for personal work by the auditor of a company on normal terms and conditions of the business of the company as the amount outstanding at the end of the year exceeded Rs. 1000.
4.      Therefore, the contention of Mr. Rajesh that he does not incur disqualification is not correct as he has purchased a ticket of the value of Rs. 18,000. The audit fees receivable even cannot be adjusted with the amount payable towards purchase of ticket to claim that there is net receivable of Rs. 17,000. The provisions concerning disqualifications of auditor as contained in Sec 226 (3) (d) will be attracted.
Further, if his spouse’s brother would have purchased such ticket who is a director in the subsidiary of NOIDA Travels Ltd., then section 226 (3) would not be applicable because it does not contain any disqualification on grounds of relatives present in the company
1 (b).
1.      Section 293-A of the Companies Act 1956 deals with prohibitions and restrictions regarding political contribution.
2.      A non-Government company which has been in existence for not less than three years may contribute any amount or amounts directly or indirectly to any political party or for any political purpose to any person provided that the aggregate of the amounts which may be so contributed by a company in any financial year shall not exceed 5% of its average net profits determined in accordance with the provisions of Section 349 and 350 during the three immediately preceding financial years.
3.      The company in question has not made any profit in last four years and contributed Rs. 2.5 lacs during the year to a political party for running a school. This is violation of the provisions of Section 293-A of the Companies Act although the children of its workers are benefited.
4.      Accordingly, the auditor would have to qualify his report stating the contravention of the provisions of the Companies Act by considering the principles contained in SA 250 in relation to consideration of laws and regulations in an audit of financial statements read with SA 705 in relation to modified reports. The audit report can be furnished in the following manner:
“On the basis of information and explanations given to us, together with our audit examination, subject to making of political contributions in non-compliance of section 293A of the Companies Act, 1956 which has resulted in understatement of current year profits and reserves & surplus by Rs. 2.5 lacs respectively, we report that financial statements are reflecting true and fair view for the year ended on 31.3.2013”
1 (c).
1.      According to AS 12 where Government grant is received for the acquisition of a specific fixed assets, the same cannot be credited to Profits and Loss Account. It fails to match revenue with the cost.
2.      As per AS 12, it should be presented in the Balance Sheet showing the grant as a deduction from the gross value of the asset concerned in arriving at its book value. Alternatively, the Government grants related to a depreciable fixed asset may be treated as deferred income which should be recognised in the Profit and Loss Account on a systematic and rational basis over the useful life of the asset.
3.      By crediting the entire amount of grant to Profit and Loss Accounts the company has treated it as a revenue income which is not in accordance with the requirements of the accounting standard.
4.      Therefore, the statutory auditor would have to qualify the impact that the income has been overstated to appropriately that extent in qualifying the audit report.
Frame draft comment on your own as per guidance given in class and draft comment mentioned in 1(b) above
1 (d). If an auditor concludes that it is not possible to continue the performance of auditing because of misstatement resulting from fraud or suspected fraud, he should take action in accordance with the requirement of SA 240 in relation to the Auditor’s Responsibility to consider Fraud and Error:
(i) He should consider the professional and legal responsibilities applicable in the circumstances including whether there is a requirement for the auditor to report to the person(s) who made the audit appointment.
(ii) He should consider whether he has to report to the regulatory authorities.
(iii) If the auditor withdraws, he should discuss with the appropriate level of management and those who charged with the governance about the reasons for the withdrawal.
In view of the exceptional nature of circumstances and the need to consider the legal requirement, he may also seek legal advice for determining the appropriate course of action.
2 (a). See Code of Ethics class notes for Q 108 plus Clause 8 Part I of First Schedule. No professional misconduct for undercutting of fees on justifiable grounds, no professional misconduct under aforesaid Clause 8, It is immaterial whether the predecessor has advised to accept or reject the audit assignment
2 (b). See Code of Ethics class notes for Q 73 plus Council General Guidelines, 2008 on Statutory Audit and Other Work Remuneration. Note that there is no professional misconduct under these guidelines as Company and Trust are separate entities/ clients
2 (c). See Code of Ethics class notes for Clause 10 Part I of Second Schedule
2 (d). See Code of Ethics class notes for Clause 11 of Part 1 of First Schedule, Clause 4 of Part I of Second Schedule, Clause 10 of Part I of First Schedule and Regulation 190A
3 (a).
(i) Where the directors have not defaulted:
“On the basis of the written representations received from the directors and taken on record by the Board of Directors, we report that none of the directors is disqualified as on 31 March, 2012 from being appointed as a directors in terms of Section 274(1)(g) of the Companies Act, 1956.”
(ii) Where one of the directors failed to produce written representation.
“Mr. Flexible who is also a director of XYZ Ltd. has not produced any written representation to the company as to whether XYZ Ltd. as at 31.03.12 had not defaulted in terms of Section 274(1)(g) of the companies Act. In the absence of the representation we are unable to comment whether Mr. Flexible is disqualified from being appointed as director in terms of section 274(1)(g). As far as other directors are concerned on the basis of the written representation received from such directors and taken on record by the Board, we report that none of the remaining directors is disqualified as on 31.3.2012 from being appointed as a director in terms of Section 274(1) (g) of the Companies Act, 1956”.
(iii) Where a director is found to be disqualified.
“On the basis of the written representation received from Mr. Rigid who is a director of XYZ Ltd. as on 31.3.2012 and taken on record by the board, we report that Mr. Rigid is disqualified from being appointed as a director in terms of Section 274(1)(g) of the Companies Act, 1956. As far as other directors are concerned, on the basis of written representations received and taken on record by the board we report that none of the remaining directors is disqualified as on 31.3.2012 from being appointed as director in terms of Section 274 (1) (g) of the Companies Act.”
3 (b). Important characteristics of an effective system of computer audit program:
(i) The system has to be simple to use and eliminate the need to remember countless details normally required in writing or revising computer programs.
(ii) It has to be easily understandable even by those with little computer expertise and easy to use.
(iii) It has to be capable of being used with different configuration of computers.
(iv) The package has to include adequate support at the time of installation, provide adequate training to the staff and to provide documentation. There should be a provision for future revision of the program.
(v) The package should have statistical sampling capability.
(vi) The system has to be acceptable to all users in terms of easy execution and compatible with the existing system.
(vii) The program has to be capable of processing different types of applications.
(viii) The program should have strong report writing function including the ability to prepare multiple reports in a single program run and to generate flexible output report formats.
4 (a). See Chapter on Other Aspects (Direct Theory Question)
4 (b). See Chapter on Audit of Government Companies for Questionnaire u/s 619 (3) and Section 217 for Directors’ Responsibilities in your class notes (Direct Theory Question)
5 (a). Refer CARO and Form 3CD (General Question). For example, reporting about statutory dues (TDS, PF, ESI etc.), reporting about section 301 parties and section 40A(2) parties, reporting about fixed assets schedule, inventory, etc.
5 (b). The following are the audit matters of governance interest which are to be communicated as per SA 260:
(i) The general approach and overall scope of audit including expected limitations.
(ii) The selection of or change in significant accounting policies and practices that have a material effect on the entity’s financial statements.
(iii) The potential effect on the financial statements of any significant risks and exposures.
(iv) Adjustment to financial statements arising out of audit which have a significant effect on the financial statement.
(v) Material uncertainties that may cast significant doubt on the entity’s ability to continue as a going concern.
(vi) Disagreement with management on matters which could have significant impact to the financial statements and to audit report.
(vii) Expected modifications to the audit report.
(viii) Others matters like material weakness in internal control measures, questions on management integrity and fraud involving management.
(ix) Other matters agreed in terms of audit engagement.
6 (a). Scope of concurrent audit of banks with reference to RBI guidelines:
(i) Daily cash transactions with reference to abnormal receipts and payments. This will include currency chest transactions, major expenses met by cash, high value receipts and disbursements.
(ii) Purchase and sale of shares securities etc. Physical verification of investments and rates at which they are entered into.
(iii) Verification of procedure and documentation to open new current, savings, term deposit accounts, etc. Unusual operations noticed have to be thoroughly examined.
(iv) Verification of advances, overdrafts, temporary OD, Cash credit accounts, term loans, bills purchase, letters of credit etc. Procedure for sanction and documentation to be verified. Any deviation noticed to be examined in great detail.
(v) Foreign exchange transactions to be verified with reference to RBI guidelines.
(vi) Verification of balancing of all ledgers and registers, inter branch reconciliation calculation and verification of interest, discount, commission etc.
(vii) Revenue leakage to be detected.
(viii) Special efforts to be made in all fraud prone areas. The attempt should be to ensure that all effective measures are taken to prevent frauds.
(ix) Verification of high value transactions.
(x) Procedure for safe custody of security forms with the branch.
(xi) Whether all procedures for tax deduction at source are followed and the tax so deducted
are deposited into Government Account within the time fixed.
(xii) Verification of returns, statements, calculation of capital adequacy ratio and compliance with requirements of government business.
(xiii) Study of RBI and Internal Inspection reports statutory auditors report and compliance thereto.
(xiv) Whether the customers’ complaints are dealt with promptly.
6 (b) (i). Refer Case Study in Class Notes under the heading “External Confirmations”
Auditors assumption signifies that he is also guilty under Clause 7 & 8 of Part I of Second Schedule (primarily) to the CA Act
6 (b) (ii).
1. Reporting required under Clause 4 (xvii), (xvi) and (xi)
2. Reporting required under Clause 4 (iii) and (x)
7 (a) (i). Problematic/ unusual relationships b/w auditor and management: These may arise because of one or more of the following factors (SA 240):
          Denial of access to records, facilities, etc for seeking evidence;
          Undue time pressures to resolve complex issues;
          Complaints by management about conduct of audit team;
          Key IT & other operational areas, systems etc. denied to be accessed;
          Overlooking weakness in Internal Control System;
          Unwillingness by mgmt to permit auditor communicate to those charged with governance;
          Tolerance of violations of entity’s code of conduct
The possibility of such strained relationships can be avoided by entering into a mutual agreed letter of engagement clearly specifying the objective and scope of audit, regular communication with Those Charged with Governance, etc.
7 (a) (ii). Refer SA 315 in Class Notes (Direct Theory Question)
7 (b). Refer SA 250.
The auditor should as soon as practicable, either communicate with the audit committee, the Board of Directors and senior management or obtain evidence that they are appropriately informed regarding non-compliance that comes to the auditors attention.
If in the auditor’s Judgment, the non compliance is believed to be intentional and/ or material, the auditor should communicate the findings without delay.
If the auditor suspects that members of senior management, including members of the Board of Directors, are involved in non-compliance, the auditor should communicate the matter to the next higher level of authority at the entity, such as, the audit committee or Board of Directors, to the users of the auditors report or financial statements.
If the auditors concludes that the non-compliance has a material effect on the financial statements and has not been properly reflected in the financial statements the auditor should express a qualified or an adverse opinion.
If the auditor is precluded by the entity from obtaining sufficient and appropriate audit evidence to evaluate whether non-compliance is, or is likely to have occurred that have or may have material impact on the financial statements, the auditor should express a qualified opinion or a disclaimer of opinion on the financial statements on the basis of a limitation on the scope of the audit.
If the auditor is unable to determine whether non compliance has occurred because of limitations imposed by the circumstances rather then by the entity, the auditor should consider the effect on the auditor’s report.
The auditor’s duty of confidentiality would ordinarily preclude reporting non compliance to a third party. However, in certain circumstances, that duty of confidentiality is overridden by statement, law or by courts of laws.
8. (a) to ( g). All the questions are Direct Theory Questions. Refer relevant chapters for the same
8. (h). Management Bias: It refers to the lack of neutrality of the management in the preparation and presentation of financial statements. This bias generally takes place during the course of making management estimates. This biasedness may result in misstatement which is commonly referred to as judgemental misstatements under SA 450.