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Wednesday, November 17, 2010

Advanced Auditing (CA Final) Amendments for May 2011

Auditing and Assurance Standards/ Standards on Auditing Amendments:

  1. SA 700;
  2. SA 705;
  3. SRE 2410;
  4. SA 800;
  5. SA 805


Chapter 14:

4.3 Core Investment Companies (RBI Circular August 12, 2010)

Core Investment Company means a NBFC carrying on the business of acquisition of shares and securities which satisfies the following conditions:

· it holds not less than 90% of its Total Assets in the form of investment in equity shares, preference shares, debt or loans in group companies;

· its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its Total Assets;

· it does not trade in its investments in shares, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment;

· it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the RBI Act, 1934 except investment in bank deposits, money market instruments, government securities, loans and investments in debt issuances of group companies or guarantees issued on behalf of group companies.

Core Investment Companies (CIC) with an asset size of less than Rs. 100 crores will not be required to register themselves with RBI.

Core Investment Companies (CIC) with an asset size of Rs. 100 crores or more, will be regarded as Systemically Important Core Investment Companies (CICs-ND-SI). Systemically Important Core Investment Companies will be required to get themselves registered with Reserve Bank of India.

A CIC-ND-SI which fulfills the following conditions , will not be required to meet the requirement for maintaining Net Owned Funds & capital adequacy and exposure norms as required under Non-Banking Financial (Non-Deposit Accepting or holding) Companies Prudential Norms (Reserve Bank) Directions, 2007:

  • Maintenance of minimum Capital Ratio where Adjusted Net Worth shall not be less than 30% of its Aggregate Risk Weighted Assets on Balance Sheet and risk adjusted value off-balance sheet items as on the date of the last audited Balance Sheet at the end of the financial year.
  • Ensuring that it’s outside liabilities at all times doesn’t not exceed 2.5 times of the Adjusted Net Worth as on last audited Balance Sheet date.

CICs-ND-SI will be required to submit an Annual Certificate from their statutory auditors regarding compliance with the above guidelines within one month from the date of finalisation of the Balance-Sheet.

Chapter 2:

Capital Profits:

1. Cannot be distributed as dividends until realised (Lubbock vs. The British Bank of South America); and

2. AOA should permit the distribution of realised capital profits; and

3. Equity is adequately represented by remaining assets after such distribution

Capital Receipts (such as securities premium, CRR, profit of reissue of forfeited shares) cannot be distributed as dividends

An unlisted public company or a private limited company can issue bonus shares even out of its revaluation reserve [SC in Bhagwati Developers vs. Peerless General Finance & Investment Company (2005)]

Fictitious Assets:

  1. Should be written off before declaration of dividends out of Capital Profits;
  2. Need not be written off before declaration of dividends from Revenue Profits

· Interim Dividend:

  1. Mere resolution by BOD to pay Interim Dividend does not create an enforceable debt against the company [PNB Ltd vs. UOI];
  2. BOD can rescind the resolution before payment

Excise Duty on Finished Goods: Accounting Aspect

For Excise Duty on finished goods in stock as at the end of the year, there is an option available to provide for the same or to show the same as a Contingent liability. Comment

(The AS-2 (Revised) on, "Valuation of Inventories" states that finished goods are to be valued by taking into account the costs of purchase, costs of conversion and other costs incurred in bringing the inventories to the present location and condition. The costs of conversion to be included would be all direct factory overheads related to the said finished goods. Excise duty is a duty which is payable on the manufacture of the finished goods inside a factory. Though the collection of the same is deferred till the goods leave the factory, the liability for the same arises when the manufacture takes place.

The Institute, before the enactment of the revised AS-2, in its Guidance Note on Accounting Treatment for Excise Duty gave an option to entities to provide the excise duty payable on finished goods and add the same to the valuation of finished goods or not to make any provision but only make a disclosure of the said liability. After the revised AS-2 was issued, the ICAI revised its earlier guidance note and removed the alternative of not providing for the excise duty. Thus it is now mandatory for an entity to provide for liability for excise duty on finished goods lying in stock at the end of the year and add the same to the to the value of closing stock. According to Guidance Note on "Accounting Treatment of Excise Duty", excise duty should be considered as a manufacturing expense and like other manufacturing expenses be considered as an element of cost for inventory valuation. Where excise duty is paid on excisable goods and such goods are subsequently utilised in the manufacturing process, the duty paid on such goods, if the same is not recoverable from taxing authorities, becomes a manufacturing cost and must be included in the valuation of work-in-progress or finished goods arising from the subsequent processing of such goods. Further, where the liability for excise duty has been incurred but its collection is deferred, provision for the unpaid liability should be made.

Excise duty cannot be treated as a period cost. Accordingly excise duty now cannot be shown as a contingent liability. Thus, it is now mandatory for an entity to provide for liability for excise duty on finished goods lying in stock at the end of the year and add the same to the value of closing stock. If the said provision is not made, the revised Guidance Note on Accounting Treatment for Excise duty says that the auditor should qualify his report and, if possible, also mention the quantum of the duty not so provided).

Saturday, November 13, 2010

Suggested Hints to CA Final Advanced Auditing Nov 2010 Paper (Old Syllabus)

CA Final Old Syllabus, November 2010

Answers to questions are to be given only in English except in the case of candidates who have opted for Hindi medium. If a candidate has not opted for Hindi medium, his answers in Hindi will not be valued.

Question No. 1 is compulsory.

Answer any five from the remaining six questions.

1. As an auditor, how would you deal with the following?

(a) Mr. Honest, director of Truth Private Ltd., is also a director of another company — False Private Ltd,. which has not filed annual returns and accounts for the last three years , 2006-07; 2007-2008 and 2008- 09 with the registrar of companies. Truth Private Ltd, passed the following resolution reappointing Mr. Honest as director of the company at the annual general meeting held on 31-8-10. (Refer Section 274(1)(g) and Guidance Note on Reporting under Section 227(3)(e) & (f) of the Companies Act, 1956)

(b) 'A' Ltd. has not made any provision is its accounts as regards losses sustained by its subsidiary ' B' Ltd. However, it has credited to the profit & loss account the dividend declared by its subsidiary 'C' Ltd., on its investments made in the subsidiary. (Refer AS 4, AS 29 and Schedule VI)

(c) XYZ Ltd. purchased an equipment at a price of $ 1,00,000 on 2-4-09. Upon terms of credit that price should be settled within six months from the date of purchase. The company capitalize the asset in terms of Indian rupees at a rate of exchange prevailing as on date of purchase.

When the liability is settled as per terms on 10-9-2009, it incurs an additional amount of ` 3,50,000 due to exchange rate fluctuation on the date of settlement. The said sum is charged off to profit & loss account. (Refer AS 11 and Schedule VI)

(d) LMN Ltd. has obtained term loan from nationalized bank amounting to ` 10 crores for purchase of research and development equipments. Out of this company has utilized ` 10 lakhs towards purchase of office furniture and car to be used by the chief executive officer of the company. (Refer CARO)

2. Comment on the following with reference to the Chartered Accountant' Act, 1949 and schedules thereto:

(a) Mr. Moon is the auditor or M/s Sum Ltd., which has a turnover of ` 100 crores. The audit fee for the year is fixed at ` 25 lakhs. During the year the company offers Mr. Moon an assignment of management consultancy for a remuneration of ` 50 lakhs. (Refer Central Council General Guidelines 2008 on Statutory Audit Fees and Fees for Other Services)

(b) A firm of chartered accountants RJ & Co, was appointed by a company to evaluate the cost of products manufactured by it for its information system. One of the partners of the firm RJ & Co., was a non- executive director of the company. (Refer Clause 4 of Part I of Second Schedule, appointment not for expression of opinion)

(c) Mr. A, Chartered Accountant in practice as a sole proprietor has an office near Egmore. Due to increase in professional work, he opens another office in Tambaram which is approximately 30 Kms away from his existing office. For running the new office, he has employed a retired Income Tax officer. (Refer Section 27 of the CA Act, 1949 as amended)

(d) A partner of a firm of chartered accountants during a T.V interview handed over a bio data of his firm to the chairperson. Such biodata detailed the standing with international firm and also his achievements and recognition as an expert in the field of taxation. The biodata was read out during the said interview. (Refer Clause 6 and Clause 7 of Part I of First Schedule)

3. (a) The auditors need not review accounting policies unless there is a change in the basis of accounting — Comment. (Refer SA 320, SA 400, SA 315 and SA 330)

(b) (i) 'A' Ltd. having fixed assets at 10 different locations, in total valuing ` 5,000 crores, have been physically verifying the assets every third year. Auditor insists for yearly verification of the same — Comment. (Refer CARO, SA 400, SA 315 and SA 330)

(ii) 'B' Ltd. manufacturing cycles has 150 employees. Auditors observe that it has not registered itself for Provident Fund and ESI purposes, not remitting the dues in time and auditor insists for qualifying the Report. Management contends that in the absence of registration it can't be construed that the company is in default of statutory dues on regular basis — Comment. (Refer CARO and SA 250)

4. (a) The Company ABC Ltd. has passed a Special Resolution at the Annual General Meeting held on 30-9-2009 for buy back of shares to the extent of ` 12,50,000.

Summary of Financial Position of ABC Ltd. as on 31-3-2009

Subscribed & Paidup Share Capital 25,00,000; Reserves and Surplus 20,00,000; Current Liabilities 15,00,000

Fixed Assets 40,00,000; Current Assets 12,00,000; Loans & Advances 8,00,000

Comment whether the action of the Company is valid. (Refer Section 77A of the Companies Act, 1956)

(b) PQR Private Ltd. has prepared the financial statements for the year ended 31-3-2010 and submitted the same to you for audit. Comment whether sundry debtors and loans and advances has been disclosed as required under Schedule VI of the Companies Act, 1956. (Refer Schedule VI)

Balance Sheet of PQR Private Ltd. as on 31-3-2010





Share Capital

Fixed Assets

Authorised 1,00,000 Equity

Gross Block

Share of ` 10 each


Less deprecation


Subscribed & Paid up 1,00,000 Equity Shares of ` 10 each


Current Assets

Loans & Advances

Cash & Bank


Reserves & Surplus

Sundry Debtors


Profit & Loss A/c


Loans & Advances


Secured Loans

Indian Bank

(against hypothecation of Fixed Assets)


Current Liabilities & Provisions

Creditors for Trade




5. (a) (i) For determining the liability for Gratuity, Actuary's Report is produced to the auditor. On examination auditor notices a serious wrong assumption in the report. Auditor challenges the Actuary's report — Comment. (Refer SA 620)

(ii) The loss as per Profit and Loss Account of a Ltd. Company is converted in to profits due to crediting of time barred liability relating to the purchase of Plant & Machinery. Directors propose to declare dividend out of such profits — Comment. (Refer Section 205 of the Companies Act vis-à-vis Capital Profits vs. Revenue Profits)

(b) You have been approached by an organization to suggest a system where the user wants to access data immediately. What would be your suggestions if they want to process it after validation? (Refer Chapter on EDP Audit)

6. (a) (i) ARG Bank has granted loans to the extent of ` 1500 crores. 10 parties have not been repaying the principal amount and servicing the interest for more than 36 months. During the year ended 31-3-2010, it was found that two of the ten parties have paid interest partly and bank has accounted full amount of interest accrued as income in respect of two parties — Comment. (Refer Chapter on Bank Audit)

(ii) ARG Bank has paid money on the drafts issued by other branches. But later on it was found that this amount is shown under suspense account — Comment. (Refer Chapter on Bank Audit)

(b) AB & Co., Chartered Accountants, was appointed to compile Financial statements of Y & Co., a firm for Tax Audit purposes. During the course of work, the audit firm has noticed that the stock valuation was grossly understated. When it was pointed out, the management told that AB & Co. are not the statutory auditors of the company and need not be concerned about valuation of stock — Comment. (Refer SRS 4410)

7. Write short note on any four the following:

(a) Other Misconduct (Refer Part IV and Part III of First Schedule and Second Schedule respectively of CA Act, 1949 as amended)

(b) Rolling Settlement (Refer Chapter on Audit of Members of Stock Exchanges. In examination there seems to be a typographical error whereby it was asked as ‘Rolling Statement’)

(c) Corporate Governance (Refer Clause 49 in the Chapter on Other Aspects)

(d) Enquiry (Refer SA 500, SA 501 and Section 227(1A) of the Companies Act, 1956)

(e) Reconciliation of cost and financial records. (Refer Chapter on Cost Audit)

Suggested Hints to CA Final Advanced Auditing Nov 2010 Paper (New Syllabus)

CA Final New Syllabus, November 2010

Answers to questions are to be given only in English except in the case of candidates who have opted for Hindi Medium. If a candidate has not opted for Hindi medium, his answers in Hindi will not be valued.

Question No. 1 is compulsory. Answer any five from the rest.

1. Comment on the following:

(a) A Co. Ltd. has not included in the Balance sheet as on 31-3-2010 a sum of ` 1.50 crores being amount in the arrears of salaries and wages payable to the staff for the last 2 years as a result of successful negotiations which were going on during the last 18 months and concluded on 30-4-2010. The auditor wants to sign the said Balance Sheet and give the audit report on 31-5-2010. The auditor came to know the result of the negotiations on 15-5-2010. (Refer AS 4, AS 5 and AS 29)

(b) B Co. Ltd. is engaged in the business of developing mass scale housing projects including development of small commercial complexes. The flats/commercial spaces are booked by the public and are allotted by way of allotments letter to each allottee. Major construction activities pertaining to buildings are undertaken after allotment is over. After completing the construction, possession of flats/commercial spaces is given to allottees by executing legal document. The CEO of the B Co. Ltd. says that AS 7 is not applicable to the company. (Refer AS 7)

(c) In the notes to accounts of C Co. Ltd. as on 31-3-2010 Note no. 11 states that 'Certain machinery items are lying at customs warehouses and company has paid ` 900 lakhs up to 30-6-2009 as detention charges, out of which a sum of ` 580 lakhs is written back during the year 2009-10 based on settlement with the concerned authorities in respect of a major spares of machinery. For the remaining machinery items negotiations are pending and a provision of ` 44 lakhs is made. As such total amount of ` 364 lakhs paid/provided on account of detention charges have been capitalized and included in the Fixed Assets/Capital work in progress. The management is of the view that these expenses are directly attributable to the acquisition of the related Fixed Asset.' (Refer AS 10)

(d) During the course of audit of D Co. Ltd. you as an auditor have observed that Inter Corporate deposit of ` 50 lakhs has been overdue. The D Co. Ltd. have disclosed this in the notes to Accounts Note No. 15 in schedule no. 21 stating that '` 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'. (Refer Schedule VI, CARO)

2. Give your comments with reference to Chartered Accountants Act, 1949 and schedules thereto:

(a) PQR and Associates, Chartered Accountants have their website and on the letterhead of the firm it is mentioned that "Visit our website: PQR. com". In the website the nature of assignments handled, names of prominent clients and fees charged is also displayed. (Refer ICAI Guidelines for Website)

(b) Mr. B is a practising Chartered Accountant holding a valid certificate of practice. He accepted the appointment as Director of the Green World Co. Ltd. Mr. C, a partner of Mr. B is statutory auditor of the said company. (Refer Clause 11 of Part I of First Schedule and Clause 4 of Part I of Second Schedule) 4

(c) YKS & Co., a proprietary firm of Chartered Accountants was appointed as concurrent auditor of a bank. YKS used his influence for getting some cheques purchased and thereafter failed to repay the loan/overdraft. (Refer Clause 2 of Part IV of First Schedule)

(d) Mr. Mohan is a practising Chartered Accountant. He issued a certificate of consumption which did not reflect the correct factual position of the consumption of raw material by the concerned entity. It is found that the certificate is given on the basis of data appearing in the minutes of meeting of the Board of Directors. (Refer Clause 7 and Clause 8 of Part I of Second Schedule)

3. (a) XYZ Ltd. appoints you as the Auditor of the company. You observe that previous auditors A & Co., resigned. Also Balance Sheet as at 31-3-2010 shows an audit fee payable of ` 25,000. What precautions you will take before commencing the audit work? (Refer SA 510, Section 225, Clause 8 and Clause 9 of Part I of First Schedule and Central Council General Guidelines on Undisputed Audit Fees)

(b) While doing audit, Ram, the Auditor requires reports from experts for the purpose of Audit evidence. What types of reports/opinions he can obtain and to what extent he can rely upon the same? (Refer SA 620)

(c) Different types of controls which operate over data moving into, through and out of the computer, Auditor is required to review such controls. Comment. (Refer Chapter on EDP Audit)

4. (a) Mr. Ram, a relative of a Director was appointed as an auditor of the company. Comment. (Refer Clause 4 of Part of Second Schedule, SA 200 and Guidance Note on Independence of Auditors)

(b) Mr. X, Director of ABC Ltd. made a purchase contract for ` 10,00,000 with the company. Comment. (Refer Section 297, 299 and 301 of Companies Act and CARO)

(c) PQR Ltd., a listed company and having an average annual turnover of more than ` 5 crores has no Internal Audit System. Give your views. (Refer CARO)

5. (a) "Examination of overdue debts, audit classification of society, and reporting the infringement of provisions of the Act are the special features of audit of a co-operative society." Do you agree? (Refer Chapter on Audit of Cooperative Societies)

(b) Mr. R, the Tax Auditor finds that some payments inadmissible under section 40A(3) were made, and advised the client to report the same in Form 3CD. The client contends that case payments were made since the other parties insisted upon the same and did not have Bank Accounts. Comment. (Refer SA 200, Section 40A(3) and Form 3CD)

(c) Your client is contemplating taking over a manufacturing concern and desires that in the course of due diligence review, you should specifically look for hidden liabilities and over valued assets, if any, State in brief the major areas you would examine for the above. (Refer Chapter on Investigations)

6. (a) While doing the audit, X, the Statutory Auditor of ABC Ltd. observes that certain loans and advances were made without proper securities, certain debtors and creditors were adjusted inter se, and personal expenses were charged to revenue. Comment. (Refer Section 227(1A) of the Companies Act, 1956)

(b) XYZ, a manufacturing unit does not accept the recommendations for improvements made by the Operational Auditor. Suggest an alternative way to tackle the hostile management. (Refer Chapter on Management and Operational Audit)

(c) "Corporate accountability and civil and criminal penalties for white collar crimes." Comment on the major provisions of Sarbanes Oxley Act. (Refer Chapter on Other Aspects)

7. Write Short notes on any of the four:

(a) Circuit filters. (Refer Chapter on Audit of Members of Stock Exchange)

(b) Reversal of Income under Bank Audit. (Refer Chapter on Bank Audit)

(c) Guidance not on Audit of Miscellaneous Expenditure (revised), (Refer PCC/IPCC Study Material for Chapter on Vouching & Verification)

(d) Verification of Outstanding Premium and Agents' Balances. (Refer Chapter on Audit of GIC)

(e) Reconciliation of Cost and Financial Accounts. (Refer Chapter on Cost Audit)