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Wednesday, September 30, 2009

Important Questions on Audit of General Insurance Companies

1. Write short notes on “Unexpired Risks Reserve”.
2. State the procedure for verification of Agents’ Balances in the course of Audit of GIC.
3. Write short notes on (i) Co-insurance; (ii) Re-insurance; (iii) Management Expenses of Insurance Companies; (iv) Valuation of Investments in GIC and (v) Solvency Margin.
4. What observations an auditor of a GIC is required to make in compliance of CAG directions u/s 619(3) of the Companies Act, in respect of (i) System of financial control; and (ii) Investments.
5. Part IV of Schedule B of IRDA (Preparation of Financial Statements and Auditor’s Report Of Insurance Companies) Regulations, 2000, requires a Management Report to be attached to the financial statements. What are the contents of such management report?
6. “In an audit of an insurance company, the Receipts and Payments Account is also subjected to audit”. Comment on this statement in brief.

Important Bank Audit Questions

1. Write a short note on income recognition and classification of advances by the banks.
2. An industrialist with surplus funds decided to form a Private Sector Bank. What are the guidelines issued by the Reserve Bank of India for formation of private sector banks?
3. Write short notes on Vostro and Nostro Accounts.
4. What are the duties of an auditor of a nationalised bank in respect of verification, valuation and disclosure of its investments?
5. Write short notes on (i) Concurrent Audit in case of banks, (ii) Returns submitted by banks to RBI, and (iii) Audit Committee of banks.
6. What are the eligibility criteria for the Banks to enter into Insurance business?
7. How is the income recognised in case of NPAs of the banks?
8. What is the procedure for verifying Branch Adjustment A/c and Contingent Liabilities?
9. Give a specimen of material accounting policies that may be followed by a bank in respect of its foreign exchange transactions.

Suggested Hints to the Practice Paper

1 (a)
As per Guidance Note on Treatment of Reserve Created on Revaluation of Fixed Assets, issued by ICAI, Revaluation Reserve is not a realised gain and hence cannot be so adjusted.
1 (b)
Refer AS-29 regarding Onerous Contracts
1 (c)
Discuss in light of AS-10, AS-28 and AAS-9
1 (d)
Refer AS-18
2 (a)
Section 224 (8) deals with mode of fixation of remuneration but does not specify the mode of recovery of the remuneration. Further, as a matter of professional ethics it is not proper to link the delivery of the audit report conditional upon the receipt of audit fees. Auditor’s Right to Lien may also be discussed.
2 (b)
Refer Notification No.1.CA(37)/70
2 (c)
See Clause 10 Part One Schedule I
2 (d)
Refer Notification No.1.CA. (153) 86
3 (a)
Refer AAS-6
3 (b)
Refer Chapter on Audit of Indirect Taxes
4 (a)
Refer Chapter on Audit of NBFCs
4 (b)
Refer Chapter on Investigations
5 (a)
Refer Guidance Note On Section 227 (3) (E) And (F) Of The Companies Act, 1956
5 (b)
Refer Chapter on EDP Audit
6 (a)
Refer Chapter on Bank Audit
6 (b)
Refer Chapter on Audit of General Insurance Companies
7 (a)
Refer Chapter on The Company Audit
7 (b)
Refer CARO, 2003
8 (a)
Refer Chapter on Other Aspects – Corporate Governance Clause 49
8 (b)
Refer Chapter on Audit of PSUs
8 (c)
Refer Chapter on Audit of Cooperative Societies
8 (d)
Refer AS-18
8 (e)
Refer Chapter on Audit of Members of Stock Exchanges

Monday, September 28, 2009

Practice Paper

1. As a Statutory Auditor, how would you deal with the following?
(a) The Balance Sheet of Meera Rescue Services Limited as at 31.03.2005 shows Revaluation Reserves amounting to Rs. 5 crores. The company incurred a loss of Rs. 4 crores during the year 2005-2006. The chief accountant of the company proposes to adjust the aforesaid loss against the Revaluation reserve.
(b) ABC Ltd. has taken a factory on operating lease at NOIDA. During the year 2005 it relocated its operations to Ghaziabad. However the old lease cannot be cancelled and it has to continue for the next few years. The old factory can also not be re-let to another user.
(c) XYZ Limited is in the business of making bricks. The company uses furnace to heat the bricks. During the year 2005-06, one furnace bursted due to high steam pressure. The company spent Rs. 2,60,000 to get the furnace in order. The Engineers said that the furnace can now work in the usual manner.
(d) Mr. Lal is the Director (Sales) in Hum-Tum Limited. He is drawing a monthly remuneration of Rs. 75,000 plus sales incentives of 10% on the sales made.
2. Comment on the following with reference to the Chartered Accountants Act, 1949 and Schedules thereto:
(a) The liability of audit fees of a company has been outstanding since last two years. This year after completing the audit, the auditor informs the secretary of the company over phone to bring the cheque of all the three years and take the delivery of the audit report. Discuss briefly the above statement in the context of the right of auditor to receive the remuneration.
(b) M/s Suraj and Co. are the Cost Auditors of Beauty Cosmetics Limited duly appointed u/s 233B of the Companies Act, 1956. Mr. Kiran, a chartered accountant is a part time employee of the M/s Suraj and Co. and accepts his appointment as a statutory auditor u/s 224 of the Companies Act, 1956, of Beauty Cosmetics Limited.
(c) Mr. L has charged a fee for representing his client in an Income Tax Appeal based on the expected relief to his client as a result of the appeal.
(d) Mr. Rahim is a practicing Chartered Accountant. He does not maintain the books of accounts.
3. Answer the following:
(a) What do you understand by Audit Risk? What is the relationship between different types of Audit Risks?
(b) What is your understanding about the term “Audit of Indirect Taxes”? Explain the steps involved in the indirect tax audit.
4. Answer the following:
(a) What are the matters that should be included in the Auditor’s Report on NBFC?
(b) Mr. Rahul (Director – Finance) of M/s XYZ Limited, approached to Good Bank Limited with a request to avail loan for the import of machinery costing Rs. 80 lacs. The Bank appointed you to investigate whether it is worthwhile to give loan to the company. What steps would you follow in this regard?
5. Answer the following:
(a) “There is no need to report in thick type or italics such matters which do not have any effect on the financial statements.” Comment.
(b) What are the different kinds of Internal Controls that should be considered by the auditor to determine the nature, timing and extent of his audit procedures in an EDP audit?
6. Answer the following:
(a) What steps should be followed by the auditor to verify the donations made by the bank?
(b) State the provisions regarding the management expenses in the context of general insurance business.
7. Answer the following:
(a) What are the provisions as regards remuneration of auditor? Mr. A is an auditor of a company. He was paid Rs. 45,000 towards his remuneration (comprising Rs. 25,000 as audit fees, including service tax; Rs. 10,000 towards preparing and filing Form 8, 13 regarding registration of charges and Rs. 10,000 as other charges). How would you disclose this remuneration in the Profit and Loss Account?
(b) What are the requirements of CARO, 2003 as regards the internal audit system?
8. Write short notes on any four of the following:
(a) Audit Committee.
(b) Propriety Elements of CARO, 2003.
(c) Special Report to the Registrar of Co-operative Societies.
(d) Key Management Personnel.
(e) Rolling Settlement.

Wednesday, September 23, 2009

Audit Risk Model

The three components of audit risk (RMMi, 1 - Pr(De), and 1 - Pr(Da)), are referred to respectively as inherent risk [IR], control risk [CR] and detection risk [DR]. This gives rise to the audit risk model of: AR = IR x CR x DR, where
  • IR, inherent risk, is the perceived level of risk that a material misstatement may occur in the client's unaudited financial statements, or underlying levels of aggregation, in the absence of internal control procedures;
  • CR, control risk, is the perceived level of risk that a material misstatement in the client's unaudited financial statements, or underlying levels of aggregation, will not be detected and corrected by the management's internal control procedures 70%;
  • DR, detection risk, is the perceived level of risk that a material misstatement in the client's unaudited financial statements, or underlying levels of aggregation, will not be detected by the auditor.
    In practice, however, auditors evaluate risk components using terms such as LOW, MODERATE or HIGH rather than using precise probabilities.

Wednesday, September 2, 2009

Retention Period for Working Papers

The Council of the Institute of Chartered Accountants of India, at its 289th meeting held on August 19, 2009 at New Delhi, pursuant to the provisions of Rule 12 of the Chartered Accountants (Procedures of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007, has decided to amend paragraph 83 of the SQC 1 as follows:
“83. The needs of the firm for retention ………………………………...............................................
In the specific case of audit engagements, the retention period ordinarily is no shorter than seven years from the date of the auditor’s report, or, if later, the date of the group auditor’s report.” (emphasis added)