Q- Any item of income or expenditure which exceeds 1% of the net
profit of the company or 2 lakh whichever is lower, is required to be
disclosed in Profit & Loss A/c..
Ans - Incorrect: A Company shall disclose by way of notes additional
information regarding any item of income or expenditure which exceeds one per
cent of the revenue from operations or
1,00,000, whichever is higher;
16 marks Question and Answer
May 2018
Q- Recovery of Bad debts written off (Year- may,
2018, Marks-4, Chapter- Vouching)
Ans- Recovery of Bad
Debts written off: Recovery of bad debts written off is verified with reference
to relevant correspondence and proper authorisation.
(i) Ascertain the total amount lying as bad debts and verify
the relevant correspondence with the trade receivables whose accounts were
written off as bad debt .
(ii) Ensure that all recoveries of bad debts have been
properly recorded in the books of account.
(iii) Examine notification from the Court or from bankruptcy
trustee. Letters from collecting agencies or from account receivables should
also be seen.
(iv) Check Credit Manager’s file for the amount received and
see that the said amount has been deposited into the bank promptly.
(v) Vouch acknowledgement receipts issued to account
receivables or trustees.
(vi) Review the internal control system regarding writing
off and recovery of bad debts
Q- Receipt of Insurance claims (Year- may, 2018,
Marks-4, Chapter- Vouching)
Ans- Receipt of
Insurance Claims: Insurance claims may be in respect of fixed assets or current
assets. While vouching the receipts of insurance claims -
(i) The auditor should examine a copy of the insurance claim
lodged with the insurance company correspondence with the insurance company and
with the insurance agent should also be seen. Counterfoils of the receipts
issued to the insurance company should also be seen.
(ii) The auditor should also determine the adjustment of the
amount received in excess or short of
the value of the actual loss as per the insurance policy.
(iii) The copy of certificate/report containing full
particulars of the amount of loss s hould also be verified.
(iv) The accounting treatment of the amount received should
be seen particularly to ensure that revenue is credited with the appropriate
amount and that in respect of claim against asset, the Statement of Profit and
Loss is debited with the short fall of the claim admitted against book value,
if the claim was lodged in the previous year
but no entries were passed, entries in the Statement of Profit and Loss
should be appropriately described.
Q- Payment of Taxes (Year- may, 2018, Marks-4,
Chapter- Vouching)
Ans- Payment of
Taxes:
(i) Obtain the computation of taxes prepared by the auditee
and verify whether it is as per the Income Tax Act/ Rules/ Notifications/
Circulars etc.
(ii) Examine relevant records and documents pertaining to
payment of advance income tax and self assessment tax.
(iii) Payment on account of income-tax and other taxes like
GST consequent upon a regular assessment should be verified by reference to the
copy of the assessment order, notice of demand and the receipted challan
acknowledging the amount paid.
(iv) The penal interest charged for non-payment should be
debited to the interest account.
(v) Nowadays, electronic payment of taxes is also in trend.
Such electronic payment of taxes by way of internet banking facility or credit
or debit cards shall also be verified.
(vi) The assessee can make electronic payment of taxes also
from the account of any other person. Therefore, it should be verified that the
challan for making such payment is clearly indicating the PAN No./TAN No./TIN
No./GSTIN etc. of the assessee on whose behalf the payment is made.
Q- Sale proceeds of scrap material (Year- may,
2018, Marks-4, Chapter- Verification)
Ans- Sale Proceeds of
Scrap Material:
(i) Review the internal control on scrap materials, as
regards its generation, storage and disposal and see whether it was properly
followed at every stage.
(ii) Ascertain whether the organisation is maintaining
reasonable records for the sale and disposal of scrap materials.
(iii) Review the production and cost records for
determination of the extent of scrap materials that may arise in a given
period.
(iv) Compare the income from the sale of scrap materials
with the corresponding figures of the
preceding three years.
(v) Check the rates at which different types of scrap
materials have been sold and compare the same with the rates that prevailed in
the preceding year.
Q- What are the provisions prescribed under
Companies Act, 2013 in respect of ceiling on number of audits in a company to
be accepted by an auditor? (Year- may, 2018, Marks-4, Chapter- Company Audit)
Ans- Ceiling on
number of Audits:
1. Section 141(3)(g) of the Companies Act, 2013 prescribes
that a person shall not be eligible for appointment as an auditor of a company
namely – a person who is in full time employment elsewhere or a person or a
partner of a firm holding appointment as its auditor, if such person or partner
is at the date of such appointment or reappointment holding appointment as
auditor of more than twenty companies other than one person companies, dormant
companies, small companies and private companies having paid-up share capital
less than 100 crore.
2. In the case of a firm of auditors, it has been further
provided that ‘specified number of companies’ shall be construed as the number
of companies specified for every partner of the firm who is not in full time
employment elsewhere. This limit of 20 company audits is per person. In the
case of an audit firm having 3 partners, the
overall ceiling will be 3 × 20 = 60 company audits.
3. Sometimes, a chartered accountant is a partner in a
number of auditing firms. In such a case, all the firms in which he is partner
or proprietor will be together entitled to 20 company audits on his account.
Subject to the overall ceiling of company audits, how they allocate the 20
audits between themselves is their affairs.
Q- What are the considerations for an auditor
regarding the operating effectiveness of controls using audit evidence obtained
in previous audits? (Year- may, 2018, Marks-6, Chapter- SA)
Ans- Using Audit
Evidence Obtained in Previous Audits: In determining whether it is appropriate
to use audit evidence about the operating effectiveness of controls o btained
in previous audits, and, if so, the length of the time period that may elapse
before retesting a control, the auditor shall consider the following:
(i) The effectiveness of other elements of internal control,
including the control environment, the entity’s monitoring of controls, and the
entity’s risk assessment process;
(ii) The risks arising from the characteristics of the
control, including whether it is manual or automated;
(iii) The effectiveness of general IT-controls;
(iv) The effectiveness of the control and its application by
the entity, including the nature and extent of deviations in the application of
the control noted in previous audits, and whether there have been personnel
changes that significantly affect the application of the control;
(v) Whether the lack of a change in a particular control
poses a risk due to changing circumstances; and
(vi) The risks of material misstatement and the extent of
reliance on the control.
If the auditor plans to use audit evidence from a previous
audit about the operating effectiveness of specific controls, the auditor shall
establish the continuing relevance of
that evidence by obtaining audit evidence about whether significant
changes in those controls have occurred subsequent to the previous audit.
Q- As an auditor, how would you consider the
acceptance of a change in audit engagement? (Year- may, 2018, Marks-6, Chapter-
SA)
Ans- Acceptance of a
Change in Engagement:
1. An auditor who, before the completion of the engagement,
is requested to change the engagement to one which provides a lower level of
assurance, should consider the appropriateness of doing so.
2. A request from the client for the auditor to change the
engagement may result from a change in circumstances affecting the need for the
service, a misunderstanding as to the nature of an audit or related service
originally requested or a restriction on the scope of the engagement, whether imposed
by management or caused by circumstances. The auditor would consider carefully
the reason given for the request, particularly the implications of a
restriction on the scope of the engagement,
especially any legal or contractual implications.
3. If the auditor concludes that there is reasonable
justification to change the engagement and if the audit work performed complied
with the SAs applicable to the changed engagement, the report issued would be
appropriate for th e revised terms of
engagement. In order to avoid confusion,
the report would not include reference
to:
(1) the original engagement; or
(2) any procedures that may have been performed in the
original engagement, except where the engagement is changed to an engagement to
undertake agreed-upon procedures and thus reference to the procedures performed
is a normal part of the report.
4. The auditor should not agree to a change of engagement
where there is no reasonable justification for doing so.
5. If the terms of the audit engagement are changed, the
auditor and management shall agree on and record the new terms of the
engagement in an engagement letter or other suitable form of written agreement.
6. If the auditor is unable to agree to a change of the
terms of the audit engagement and is not permitted by management to continue
the original audit engagement, the
auditor shall:
(a) Withdraw from the audit engagement where possible under
applicable law or regulation; and
(b) Determine whether there is any obligation, either
contractual or otherwise, to report the circumstances to other parties, such as
those charged with governance, owners or regulators.
Q- The Auditor is fully satisfied with the audit
of an entity in respect of its systems and
procedures and wants to issue a
report without any hesitation. What type of opinion can be give and state give reasoning. (Year- may,
2018, Marks-4, Chapter- SA 705)
Ans- Unqualified Opinion:
1. An unqualified opinion should be expressed when the
auditor concludes that the financial statements give a true and fair view in
accordance with the financial reporting framework used for the preparation and
presentation of the financial statements.
2. An unqualified opinion indicates, implicitly, that any
changes in the accounting principles or in the method of their application, and
the effects thereof, have been properly determined and disclosed in the
financial statements.
3. An unqualified opinion also indicates that:
(i) the financial statements have been prepared using the
generally accepted accounting principles, which have been consistently applied;
(ii) the financial statements comply with relevant statutory
requirements and regulations; and
(iii) there is adequate disclosure of all material matters
relevant to the proper presentation of the financial information, subject to
statutory requirements, where applicable.
Q- A junior accountant of a limited company has
not separated transactions of one period
from those in the ensuing period. As an Auditor, state the correct
procedure to be followed and the areas in which it can be applied. (Year- may, 2018, Marks-6,
Chapter- SA)
Ans- Cut-off
Arrangement:
1. Accounting is a continuous process because the business
never comes to halt. It is, therefore, necessary that transactions of one
period would be separated from those in
the ensuing period so that the results of the working of each period can be
correctly ascertained. The arrangement that is made for this purpose is
technically known as “cut-off arrangement”.
2. It essentially forms part of the internal control system
of the organisation.
3. Accounts, other than sales, purchase and inventory are
not usually affected by the continuity of the business and therefore, this arrangement is generally applied only to sales, purchase and
inventory.
4. The auditor satisfies by examination and test-checks that
the cut-off procedures are adequately followed and ensure that:
(i) Goods purchased, property in which has already been
passed on to the client, have in fact been included in the inventories and that
the liability has been provided for in case credit purchase.
(ii) Goods sold have been excluded from the inventories and
credit has been taken for the sales. If the value of sales is to be received,
the concerned party has been debited.
5. The auditor may examine a sample of documents, evidencing
the movement of inventory into and out of stores, including documents pertaining
to period shortly before and after the cut-off date and check whether
inventories represented by those documents were included or excluded as
appropriate during inventory taking for perfect and correct presentation in the
financial statements.
Q- During the course of audit of an entity, the
Auditor ascertains that the internal control system is not effective and rather
weak with certain lapses. Give in detail the communication in this regard the
Auditor will have with the management. (Year- may, 2018, Marks-6,
Chapter- SA)
Ans- Communication of
Weaknesses in Internal Control:
1. Weakness in Internal Control: As a result of obtaining an
understanding of the accounting and internal control systems and tests of
control, the auditor may become aware of weaknesses in the systems. The auditor
should make management aware, as soon as practical and at an appropriate level
of responsibility, of material weaknesses in the design or operation of the
accounting and internal control systems, which have come to the auditor's
attention. The communication to management of material weaknesses would
ordinarily be in writing. However, if the auditor judges that oral communication is appropriate, such
communication would be documented in the audit working papers. It is important
to indicate in the communication that only weaknesses which have come to the
auditor's attention as a result of the a udit have been reported and that the
examination has not been designed to determine the adequacy of internal control
for management purposes.
2. Identification of weakness: The auditor shall determine
whether, on the basis of the audit work performed, the auditor has identified
one or more deficiencies in internal control. If the auditor has identified one
or more deficiencies in internal control, the auditor shall determine, on the
basis of the audit work performed, whether,
individually or in combination, they constitute significant
deficiencies.
3. Communication to the management - The auditor shall
communicate in writing significant deficiencies in internal control identified
during the audit to those charged with governance on a timely basis.
The auditor shall also communicate to management at an
appropriate level of responsibility on a timely basis:
(1) In writing, significant deficiencies in internal control
that the auditor has communicated or intends to communicate to those charged
with governan ce, unless it would be inappropriate to communicate directly to
management in the circumstances; and
(2) Other deficiencies in internal control identified during
the audit that have not been communicated to management by other parties and
that, in the aud itor’s professional judgment, are of sufficient importance to
merit management’s attention.
4. Content of communication of weakness: The auditor shall
include in the written communication of significant deficiencies in internal
control:
(1) A description of the deficiencies and an explanation of
their potential effects; and
(2) Sufficient information to enable those charged with governance
and management to understand the context of the communication. In particular,
the auditor shall explain that:
(i) The purpose of the audit was for the auditor to express
an opinion on the financial statements;
(ii) The audit included consideration of internal control
relevant to the preparation of the financial statements in order to design
audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of internal control; and
(iii) The matters being reported are limited to those
deficiencies that the auditor has identified during the audit and that the
auditor has concluded are of sufficient importance to merit being reported to
those charged with governance.
Q- A limited company has disclosed Trade
Receivables in its Balance Sheet as Gross receivable less provision for Bad debts. Mention disclosure requirements
of the same in its financial statements as per Companies Act, 2013. (Year- may, 2018,
Marks-4, Chapter- Company Audit)
Ans- Disclosure
requirement of Trade Receivables as per the Companies Act, 2013:
(i) Aggregate amount of Trade Receivables outstanding for a
period exceeding six months from the Date they are due for payment should be
separately stated.
(ii) Trade receivables shall be sub-classified as:
(a) Secured, considered good;
(b) Unsecured considered good;
(c) Doubtful.
(iii) Allowance for bad and doubtful debts shall be
disclosed under the relevant heads separately.
(iv) Debts due by directors or other officers of the company
or any of them either severally or jointly with any other person or debts due
by firms or private companies respectively in which any director is a partner
or a director or a member should be separately stated.
Q- What is the basis on which the judgement is
formed by Auditor to express his opinion after the audit? (Year- may, 2018,
Marks-6, Chapter- )
Ans- Process of
Judgement Formation by Auditor:
1. After the audit, the opinion that the auditor expresses
is the result of exercise of judgement on facts, evidence and circumstances
which he comes across in the course of audit.
2. The judgement is formed on the following basis-
a. Identification of the assertions to be examined.
b. Evaluation of the assertion as to relative importance.
c. Collection of the information or evidence about the
assertions to enable him to give an informed opinion.
d. Evaluation of evidence as valid or invalid, pertinent or
not pertinent, sufficient or insufficient.
e. Formulation of judgement as to the fairness of the
assertions under consideration.
Q- At the time of scrutiny of General Ledger the
Auditor observes that certain expenses essentially of a revenue nature are
wrongly treated as capital expenditure. State examples of such expenses and the
duties of auditor in this regard. (Year- may, 2018, Marks-6, Chapter- Audit)
Ans- Revenue expenses
wrongly treated as capital expenditure
Expenses which are essentially of a revenue nature, if
incurred for non-creation of an asset or which do not result in achieving
higher productivity of the existing asset, are to be treated as revenue, and
not as capital expenditure.
Examples of such revenue expenses which may be wrongly
treated as capital expenditure are as under
(i) Material and wages – Expenses which are incurred on the
normal repairs of a building or machinery
(ii) Legal expenses – Expenses incurred to protect existing
assets
(iii) Freight – Transport expenses incurred for repairing
the machinery at the
manufacturer’s site.
(iv) Repair – Repairs to existing plant & machinery
which do not increase its productivity
(v) Wages – Wages paid for regular repair to plant &
machinery
(vi) Interest – Interest paid on loan for the construction
of a building after the qualification period as per AS-16 i.e. after the building
is constructed
Auditor’s duty: Whenever, therefore, a part of the
expenditure ostensibly of a revenue nature is wrongly capitalized, it is the
duty of the auditor to assess the implications on the financial statements and
include it in his report.
Q- Techniques of suppressing cash receipts.
(Year- may, 2018, Marks-4, Chapter- Short Note)
Ans- Techniques of
Supressing Receipts: Few Techniques of how receipts are suppressed are:
(1) Teeming and Lading: Amount received from a customer
being misappropriated; also to prevent its detection the money received from
another customer subsequently being credited to the account of the customer who
has paid earlier. Similarly, moneys received from the customer who has paid
thereafter being credited to the account of the second customer and such a
practice is continued so that no one account is outstanding for payment for any
length of time, which may lead the management to either send out a statement of
account to him or communicate with him.
(2) Adjusting unauthorised or fictitious rebates,
allowances, discounts, etc. to customer’
accounts and misappropriating amount paid by them.
(3) Writing off as debts in respect of such balances against
which cash has already been received but has been misappropriated.
(4) Not accounting for cash sales fully.
(5) Not accounting for miscellaneous receipts, e.g., sale of
scrap, quarters allotted to the employees, etc.
(6) Writing down asset values in entirety, selling them
subsequently and misappropriating the proceeds.
Q- Monitoring of controls. (Year- may, 2018,
Marks-4, Chapter- Short Note)
Ans- Monitoring of
Controls:
1. The auditor shall obtain an understanding of the
major activities that the entity
uses to monitor internal control over financial reporting, including those
related to those control activities relevant to the audit, and how the entity
initiates remedial actions to deficiencies in its controls.
2. Monitoring of controls is a process to assess the
effectiveness of internal control performance over time. It involves assessing
the effectiveness of controls on a timely basis and taking necessary remedial actions.
Management accomplishes monitoring of controls through ongoing activities,
separate evaluations, or a combination of the two. Ongoing monitoring
activities are often built into the normal recurring activities of an entity and include regular management
and supervisory activities.
3. Management’s monitoring activities may include using
information from communications from external parties such as customer
complaints and regulator comments that may indicate problems or highlight areas
in need of improvement.
4. In case of small entities, management’s monitoring of
control is often accomplished by management’s or the owner-manager’s close
involvement in operations. This involvement often will identify significant
variances from expectations and inaccuracies
in financial data leading to remedial action to the control.
Q- Performance audit under government accounting
system. (Year- may, 2018, Marks-4, Chapter- Short Note)
Ans- Performance
audit -
1. The scope of audit has been extended to cover efficiency,
economy and effectiveness audit or performance audit, or full scope audit.
2. Efficiency audit looks into whether the various
schemes/projects are executed and their operations conducted economically and
whether they are yielding the results expected of them, i.e., the relationship
between goods and services produced and resources used to produce them; and
examination aimed to find out the extent to which operations are carried out in
an economical and efficient manner.
3. Economy audit looks into whether government have acquired
the financial, human and physical resources in an economical manner, and
whether the sanctioning and spending authorities have observed economy.
4. Effectiveness audit is an appraisal of the performance of
programmes, schemes , projects with reference to the overall targeted
objectives as well as efficiency of the means adopted for the attainment of the
objectives. Efficiency -cum-performance audit, wherever used, is an objective
examination of the financial and operational performance of an organisation,
programme, authority or function and is oriented towards identifying
opportunities for greater economy, and effectiveness. The procedure for
conducting performance audit covers identification of topic, preliminary study,
planning and execution of audit, and reporting. While the trend towards a
comprehensive approach for conducting performance of full scope audit is
visible, the coverage and depth of evaluation vary according to the statutory
limitations, and the organisational constraints of C&AG.
Q- Physical verification of Fixed assets “at
reasonable intervals”. (Year- may, 2018, Marks-4, Chapter- Short Note)
Ans- Physical
verification of Fixed Assets at Reasonable Intervals:
1. Physical verification of fixed assets is primarily a
responsibility of the management. The management is required to carry out
physical verification of fixed assets a t appropriate intervals in order to
ensure that they are in existence.
2. However, the auditor should satisfy himself that such
verification was done by the management wherever possible and by examining the
relevant working papers. The auditor should also examine whether the method of
verification was reasonable in the circumstances relating to each asset. The
reasonableness of the frequency of verification should also be examined by the
auditor in the circumstances of each case.
3. The auditor should test check the book records of fixed
assets with the physical verification reports. He should examine whether
discrepancies noticed on physical verification have been properly dealt with.
4. Further, it is duty of the auditor to report as per
clause 1(b) of Para 3 of CARO 2016 that whether these fixed assets have been
physically verified by the management at reasonable intervals; whether any material
discrepancies were noticed on such verification and if so, whether the same
have been properly dealt with in the books of account. What constitutes
‘reasonable interval’ depends on the circumstances of each case.
Q- External confirmation as audit procedure
(Year- may, 2018, Marks-4, Chapter- Short Note)
Ans- External
Confirmation as audit procedure:
1. An external confirmation represents audit evidence
obtained by the auditor as a direct written response to the auditor from a
third party (the confirming party), in paper form, or by electronic or other
medium.
2. External confirmation procedures frequently are relevant
when addressing assertions associated with certain account balances and their
elements. However, external confirmations need not be restricted to account
balances only.
3. For example, the auditor may request confirmation of the
terms of agreeme nts or transactions an entity has with third parties; the
confirmation request may be designed to
ask if any modifications have been made to the agreement and, if so, what the relevant details are.
4. External confirmation procedures also are used to obtain
audit evidence about the absence of certain conditions, for example, the
absence of a “side agreement” that may influence revenue recognition.
