18552pcc Sugg Paper Nov09 2 PDF
18552pcc Sugg Paper Nov09 2 PDF
18552pcc Sugg Paper Nov09 2 PDF
Answer
(i) False: It is not obligatory that the auditor must adopt sampling technique in auditing the
accounts. But he should ensure that the relevant standards on auditing has been
followed. It is in the interest of the auditor if he decides to form his opinion on the basis
of audit sample using standards and techniques which are widely followed and
recognised.
(ii) False: The definition of dividend has been amended by the Companies (Amendment)
Act, 2000 where the interim dividend has been treated as part of dividend. With an
amendment in Section 205, the interim dividend has been brought at par with dividends
declared in the normal course.
(iii) False: Casual vacancy caused by resignation of an auditor can be filled only in the
General Meeting of the company and not by the Board of Directors.
(iv) False: As per SA 620, “Using the Work of an Expert”, if the auditor, in the interest of the
users includes the name of the expert in his audit report, he can do so only after
obtaining the prior consent of the expert.
(v) True: Working papers are the property of the auditors. Auditee has no right to compel
the auditor’s firm to provide it with the copies of working papers. However, the auditors
may at their discretion make portions of or extracts from their working papers available
to the auditee.
(vi) False: The Comptroller and Auditor General of India cannot be removed by the Prime
Minister of India on the recommendation of his Council of Ministers. He can be removed
on the ground of proven misbehaviour or incapacity, when each House of Parliament
decides to do so by majority of not less than 2/3 of the members of the house present
and voting.
(vii) False: Companies (Auditor’s Report) Order, 2003 provides that it shall not apply to
companies which have been licensed to operate under Section 25 of the Companies Act,
1956 to promote commerce, art, science, religion, charity and which prohibit the
payment of any dividends to their members. Such companies include clubs, chambers of
commerce, research Institutes etc.
(viii) False: An employee Chartered Accountant cannot sign the auditor’s report on behalf of
the auditing firm. Only a partner in the firm can sign the audit report in compliance with
the provisions of Section 229.
(ix) False: The auditor is wrong in issuing a disclaimer. If the auditor disagrees with the
management in the matters relating to the acceptability of Accounting policies selected
and inadequacy of the disclosures in the financial statements, he should issue a qualified
report or express an adverse opinion.
(x) False: SA 520 “Analytical Procedure” states that application of analytical procedures
helps the auditor to find the aspects of the business of which he was unaware and it will
also assist him in determining the nature, timing and extent of audit procedures.
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(xi) False: In the case of the company which has not been able to negotiate its borrowings
with its bankers, there will be a substantial doubt in its ability to continue as a going
concern without such financial support.
Alternative Answer – True: If the company is not able to negotiate borrowings from its
bankers for reasons like delay/failure in the submission of adequate
documents/information or for other reasons other than the company’s financial status
then the statement is true.
(xii) False: Overall objective of audit does not change in Computer Information System (CIS)
environment. But the use of computer changes the processing and storage, retrieval and
communication of financial information.
Question 2
Comment on the following situations:
(a) XYZ Ltd. Co. gave a donation of Rs.50,000 each to a Charitable Society running a school
and a trust set up for the service of Blind during financial year ending on 31st March, 2009.
The average net profits of the company for the last three years were 15 lakhs. (8 Marks)
(b) Mr. X, a shareholder of the company pointed out that:
(i) The goodwill in the Balance Sheet of the company has appeared on same figure
during the past three years.
(ii) Premium received on issue of shares prior to the date of balance sheet has been
transferred to Profit and Loss account for arriving at the figure of commission
payable to the managing director. (6 Marks)
(c) A, B & C Company Ltd. removed its first Auditor before the expiry of his term without
obtaining approval of the Central Government. (6 Marks)
Answer
(a) Donation to Charitable Institutions
Section 293 of the Companies Act, 1956 provides that the Board of Directors of a public
listed company can contribute with the approval of the company in General Meeting to a
charitable organisation and other such organizations not directly related to the business
of the company or the welfare of its employees subject to the limit as under:
(i) Rs.50, 000/- or
(ii) 5% of the average net profits of the last three years, whichever is greater.
Facts of the case: The company has given donation of Rs.50,000/- each to the two
charitable organisations which amounts to 1,00,000. Assuming that the charitable
organisations are not related to the business of the company, the average profits of the
last 3 years is Rs. 15 lakhs and the 5% of this works out to Rs. 75,000. Hence the
maximum of donation could be Rs.75,000 only.
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PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
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PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
Question 4
(a) Explain concept of materiality and factors which act as guiding factors to this concept.
(6 Marks)
(b) Describe a set of instructions, which an auditor has to give to his client before the start of
actual audit. (4 Marks)
Answer
(a) Concept of materiality: SA 320 “ Materiality in Planning and Performing an Audit”,
establishes standards on the concept of materiality and the relationship with audit risk
while conducting an audit. Hence, the auditor requires more reliable evidence in support
of material items. SA 320 defines material items as relatively important and relevant
items, i.e., items the knowledge of which would influence the decision of the user of
financial statements. Financial statements materially affect if such statement is
erroneously stated or omitted to be stated there in and economic decision of the users
taken on the basis of such information is influenced by such misstatements or omissions.
The auditor has to ensure that such items are properly and distinctly disclosed in the
financial statements.
The concept of materiality is fundamental to the process of accounting. It covers all the
stages from recording to classification and presentation. It is very important for the
auditor who has constantly to judge whether a particular item is material or not.
There is an inverse relationship between materiality and the degree of audit risk. The
higher the materiality level, the lower the audit risk and vice versa. For example, the risk
that a particular account balance or class of transactions could be misstated by an
extremely large amount might be very low but the risk that it could be misstated by an
extremely small amount might be very high.
Factors to be considered for determining materiality
(i) Item of materiality may be determined individually or in aggregate.
(ii) The materiality depends on the regulatory or legal considerations.
(iii) Materiality is not often reckoned with respect to quantitative details above. It has
qualitative dimensions as well.
(iv) Even insignificant items in terms of quality may be material in special
circumstances.
(v) Sometimes the materiality of an item in terms of quantity is described in law itself.
For example, Schedule VI requires disclosure of items of expenditures which are in
excess of one percent or Rs.500, whichever is less.
(vi) An item whose impact is insignificant at present, but in future it may be significant,
may be material item.
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(b) Following instructions are given by the auditor to the client before the start of
audit:
(i) The accounts should be totalled up and trial balance and final accounts be kept
ready.
(ii) Vouchers should be serially arranged.
(iii) Schedule of debtors and creditors should be prepared.
(iv) Schedule of outstanding expenses, prepaid expenses and accrued income to be
kept ready.
(v) A list of bad and doubtful debts should be prepared.
(vi) Schedule of investments should be prepared.
(vii) Certified list of goods returned to be prepared.
(viii) Statement of permanent capital expenditure to be prepared.
(ix) Schedule of deferred revenue expenditures to be prepared.
(x) Names and addresses of managers and other officers should be kept ready.
Alternative answer
(1) It is the responsibility of the management to prepare the financial statements, to
select and consistently apply the appropriate accounting policies
(2) Management is responsible for the maintenance of adequate accounting records
and internal controls for safeguarding assets of the company
(3) Unrestricted access to whatever records, documentation and other information
required in connection with the audit.
(4) Management’s responsibility for making judgements of estimates that are
reasonable and prudent so as to give a true and fair view of the state of affairs of
the entity.
(5) Management’s responsibility for preparation of the financial statements as a going
concern.
Question 5
(a) What are the six important points that will attract your attention in the case of audit of a
Hotel? (5 Marks)
(b) State the information to be disclosed in the financial statements according to the
requirements of AS 6. (5 Marks)
Answer
(a) Audit of a hotel
Following important points will attract the attention of the auditor in the case of audit of a
Hotel:
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PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
(i) Internal Controls: In view of the problems of pilfering in any hotel, the importance of
internal controls cannot be overstressed. It is the responsibility of the management
to introduce controls which will minimise the leakage as far as possible. If the
internal control in a hotel is weak then there exist serious problems for the auditor.
The hotel must prepare regularly (preferably weekly) its trading accounts for each sale
point and undertake detailed scrutiny of the resulting profit percentages to ensure that is
within the anticipated percentage. If the variation is above the permissible limit, he has
to get the explanation from the concerned persons.
(ii) Room Sales: The charge for room sales is posted to guest bills by the receptionist
and 1 night auditor. The source of these entries is the guest register and test
checks should be carried out to ensure that the correct number of guests is
charged for the current period. Difference, if any, should be investigated to ensure
that they have been properly authorised.
(iii) Stocks: The stocks in the hotels are readily portable and salable such as food and
beverages stocks. All movements and transfers of such stocks should be properly
documented to exercise control over each individual stored areas and sale points.
The auditor should carry out test checks to ensure that all such documentation is
accurately processed.
Areas where large quantities are stored should be kept locked by the manager.
Unauthorised persons should not be permitted to enter the store area.
(iv) Fixed Assets: Accounting policies for fixed aspects are likely to differ. Many hotels
account for quasi-fixed assets such as silver cutlery on stock basis. This may lead
to confusion between each stock items and similar assets. In these cases, it is
important that very detailed definitions of stock items exist and the auditor should
carry out tests to ensure that the definitions have been closely followed.
(v) Casual labour: The hotel trade operates, to a very large extent, on casual labour.
The record maintained of such wage payments is frequently found to be
inadequate. Hence the auditor should ensure that proper internal control system
exists to ensure that defalcation on this account does not take place.
(vi) Booking of hotel for special parties: The auditor should ensure that the adequate
and proper records are being maintained for booking of halls and other premises
for special parties and receipts from guests are made on the basis of the tariff.
(b) Requirements of AS 6: AS 6 requires following information to be disclosed in the
financial statements:
(i) Historical cost or other amount substituted for historical cost of each class of
depreciating asset;
(ii) Total depreciation for the period for each class of assets.
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PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
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(ii) Ascertain that all the conditions, the failure of which may result in cancellation of
the lease have been complied with, e.g. payment of ground rent, insurance
premium, maintenance of lease and property in satisfactory state etc.
(iii) Ensure that due provisions for any claims that might arise under the dilapidation
clause on the expiry of the lease have been made. If such provision has not been
made, the auditor should draw the client’s attention to it.
(iv) Ensure that the outlay and legal expenses incurred to acquire lease property have
been capitalised. The property must be written off in such a way that it completely
wipes off the asset at the end of the lease period.
(v) He should ascertain that the clause entitles the lessee to sub let any part of the
leased property and ensure its proper compliance.
OR
Goods sent out on sale or return basis
(i) A record of goods sent out on sale or return basis should be kept in a specially ruled
day book. In this book, first memoranda entries are made.
(ii) When the goods are sold, entry is made by debiting the party and crediting the
Sales Account.
(iii) The auditor should refer the memoranda record to confirm that on receipt of
acceptance from each party, his account is debited and corresponding sales
account is credited.
(iv) For the goods in respect of which period of approval has expired are either
received back subsequently and customer’s accounts debited.
(v) He should ensure that for the stock of goods sent out on approval, the period of
approval, in respect of which had not expired till the close the year, are included in
closing stock.
(c) Bank Overdraft
(i) The auditor should ensure that the facility of overdraft is authorised by the Board’s
resolution / partner’s resolution.
(ii) Persue the agreement with the bank and see whether the overdraft is clean or
against hypothecation or pledge of company’s property.
(iii) Verify the register of charges and ensure that the charge has been registered with
Registrar of Companies.
(iv) Verify the rate of interest and other terms and conditions from the agreement.
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PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
(v) Verify the amount of overdraft from the books of accounts and compare it with the
passbook.
(vi) If the overdraft is against hypothecation of assets like stocks, a certificate from the
bank should be obtained.
(vii) If the overdraft is against hypothecation of assets or pledge of company’s property,
see that overdraft is properly shown under ‘secured loans’ and nature of security
has been property disclosed.
Question 8
(a) X, a Chartered Accountant was engaged by PQR & Co. Ltd. for auditing their accounts.
He sent his letter of engagement to the Board of Directors, which was accepted by the
Company. In the course of audit of the company, the auditor was unable to obtain
appropriate sufficient audit evidence regarding receivables. The client requested for a
change in the terms of engagement. (5 x 2 = 10 Marks)
Offer your comments in this regard.
Note: Write short notes on the following. (Answer anyone):
(b) Cut-off arrangements
Or
Audit risk at the account balance level and at the class of transactions level.
(c) Powers of C & AG in connection with the performance of his duties.
Answer
(a) Change in terms of engagement
1. An auditor who is required to change the engagement which requires lower level of
assurance before the completion of engagement should consider the
appropriateness of doing so.
2. But when the terms of engagement are changed, both the auditor and the client
should agree on the new terms.
3. However, the auditor should not agree to a change in terms where there is no
reasonable justification for doing so.
4. In the instant case, the auditor was unable to obtain sufficient evidence regarding
receivables. The client requested him for a change in the terms of the agreement to
avoid qualified/adverse opinion. Hence there is no reasonable justification for
change in the terms of engagement.
5. Thus the auditor should not agree for change in the terms of engagement letter.
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PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009
(iii) To put such questions or make such observations as he may consider necessary to
the person in-charge of the office and to call for such information as he may require
for preparation of any account or report, which is his duty to prepare.
In carrying out the audit, the C&AG has the power to dispense with any part of detailed
audit of any accounts or class of transactions and to apply such limited checks in relation
to such accounts or transaction as he may determine
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