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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
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Best Wishes
God Bless
CA Kamal Garg

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