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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

Liabilities

`

Assets

`

Share Capital

Fixed Assets

Authorised 1,00,000 Equity

Gross Block

Share of ` 10 each

10,00,000

Less deprecation

25,00,000

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

10,00,000

Current Assets

Loans & Advances

Cash & Bank

2,00,000

Reserves & Surplus

Sundry Debtors

7,00,000

Profit & Loss A/c

1,50,000

Loans & Advances

2,50,000

Secured Loans

Indian Bank

(against hypothecation of Fixed Assets)

20,00,000

Current Liabilities & Provisions

Creditors for Trade

5,00,000

36,50,000

36,50,000

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)

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