SA in Exams
June 2009 (New) 5
Marks
Q 1: While conducting statutory Audit of ABC Ltd., you come across
IOUs amounting to `.2 crores as against a cash balance shown in books of `.2.10
crores. You also observe that despite similar high balances throughout the
year, small amounts of `.50,000 are withdrawn from the bank to meet day-to-day
expenses ?
Hint: If IOU is outstanding since
long it indicates the existence of suspected misappropriation of cash.
According to SA-240 “The auditor’s responsibilities relating to fraud in an
audit of financial statements”, when the auditor assesses that there is a risk
at assertion indicating the possible misstatements resulting from procedure
to consider the effect of fraud on
auditor’s report. In this case, the circumstances indicate that the possible
misstatements in financial statements is due to fraud, the auditor must obtain
sufficient and appropriate audit evidence to confirm whether the fraud is there
or not.
The Guidance Note on Audit of Cash and
Bank balances also mentions that if the entity is maintaining an unduly large
balance of cash, he should carry out surprise verification of cash more
frequently to ascertain whether it agrees with the cash book. If cash in hand
is not in agreement with the book balance, he should seek explanations and if
the same are not satisfactory should state the said fact appropriately in his
Audit Report.
November, 2006 5 Marks
Q 2: You notice a misstatement resulting from fraud or suspected
fraud during the audit and conclude that it is not possible to continue the
performance of audit?
Hint: According to SA0-240(R) If, as
a result of a misstatement resulting from fraud or suspected fraud, the auditor
encounters circumstances that bring into question the auditor’s ability to
continue performing the audit, the auditor shall:
a) Determine the professional and legal
responsibilities like communication of such withdrawal to the person or persons
who made the audit appointment or, in some cases, to regulatory authorities;
b) Consider
withdrawal from the engagement is legally permitted; and
c) If
the auditor withdraws:
i) Discuss with the appropriate level of
management and those charged with governance, the auditor’s withdrawal from the
engagement and the reasons for the withdrawal; and
ii) Determine whether there is a
professional or legal requirement to report to the person or persons who made
the audit appointment or, in some cases, to regulatory authorities, the
auditor’s withdrawal from the engagement and the reasons for the withdrawal.
Q 3: What is the term non compliance with laws and regulation
means ?
Non-compliance means acts of omission
or commission by the entity, either intentional or unintentional, which are
contrary to the prevailing laws or regulations. Non-compliance does not include
personal misconduct (unrelated to the business activities of the entity) by
those charged with governance, management or employees of the entity.
JUNE, 2009 (Old) 8 Marks
Q 4: State briefly the Communication
/ Reporting requirements as per SA 250 revised on Non-Compliance in an audit of
financial statement:
i) To
the management
ii) To
the users of the auditor’s report on the financial statements.
iii) To
the regulatory and enforcement authorities.
Answer:
Non-compliance means acts of omission
or commission by the entity, either intentional or unintentional, which are
contrary to the prevailing laws or regulations. Non-compliance does not include
personal misconduct (unrelated to the business activities of the entity) by
those charged with governance, management or employees of the entity.
May 2010 (Old) 8 Marks
Q 5 As an auditor, what are the
indicators you would consider while verifying compliance with Laws and Regulations
?
Answer:
Following are the Duties of auditor
as per SA -250
1. Duty to
understand the entities environment and to obtain general understanding about
a) The legal and regulatory framework
applicable to the entity and the industry or sector in which the entity
operates; and
b) How
the entity is complying with that framework.
2. Duty to obtain
sufficient appropriate audit evidence
The auditor shall obtain sufficient
appropriate audit evidence regarding compliance with the provisions of those
laws and regulations generally recognized to have a direct effect on the
determination of material amounts and disclosures in the financial statements.
3. Duty to perform
procedures
The auditor shall perform the
following audit procedures to help identify instances of non-compliance with
other laws and regulations that may have a material effect on the financial
statements:
a) Inquiring of management and, where
appropriate, those charged with governance, as to whether the entity is in
compliance with such laws and regulations; and
b) Inspecting correspondence, if any, with
the relevant licensing or regulatory authorities.
4. Duty to Remain
Alert:-
The auditor shall remain alert to the
possibility that other audit procedures applied may bring instances of
non-compliance or suspected non-compliance with laws and regulations to the
auditor’s attention.
5. Duty to obtain
Representations by Management:-
The auditor shall request management
and, where appropriate, those charged with governance to provide written
representations that all known instances of non-compliance or suspected
non-compliance with laws and regulations whose effects should be considered
when preparing financial statements have been disclosed to the auditor.
Nov 2010 (Old) 4 Marks
Q 6: ‘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 or regular basis – comment ?
Answer:
If the auditor becomes aware of
information concerning an instance of non-compliance or suspected
non-compliance with laws and regulations, the auditor shall obtain:
a) An understanding of the nature of the
act and the circumstances in which it has occurred; and
b) Further information to evaluate the
possible effect on the financial statements
If the auditor suspects there may be
non-compliance, the auditor shall discuss the matter with management and, where
appropriate, those charged with governance. If management and TCWG are unable to
convince the auditor about compliance and in the auditor’s judgement, the
effect of the suspected non-compliance may be material to the financial
statements, the auditor shall consider the need to obtain legal advice. If
sufficient information about suspected non-compliance cannot be obtained, the
auditor shall evaluate the effect of the lack of sufficient appropriate audit
evidence on the auditor’s opinion (Will be discussed later on in SA- 700)
November, 2006 8 Marks
Q 7: “The auditors should communicate
audit matters of governance interest arising from the audit of financial
statements with those charged with the governance of an entity”. Briefly state
the matters to be included in such Communication.
Answer:
1. The Auditor’s Responsibilities
in Relation to the Financial Statement Audit
The auditor shall communicate that he
is responsible for forming and expressing an opinion on the financial
statements that have been prepared by management with the oversight of those
charged with governance; and the audit of the financial statements does not
relieve management of those charged with governance of their responsibilities.
2. Planned Scope and
Timing of the Audit
The auditor shall communicate an
overview of the planned scope and timing of the audit.
3. Significant
findings from the Audit
a) The auditor shall communicate his views
about significant qualitative aspects of the entity’s accounting practices,
including accounting policies, accounting estimates and financial statement disclosures.
b) Significant
difficulties, if any, encountered during the audit;
c) Unless all of those charged with
governance are involved in managing the entity;
i) Material weaknesses, if any, in the
design, implementation or operating effectiveness of internal control that have
came to the auditor’s attention and have been communicated to management as
required by SA-315 or SA-330;
ii) Significant matters, if any, arising
from the audit that were discussed, or subject to correspondence with
management; and
iii) Written representations the auditor is
requesting; and
d) Other matters, if any, arising from the
audit that, in the auditor’s professional judgment, are significant to the
oversight of the financial reporting process.
November, 2011 (4 Marks)
Q 9: ABC & Co. and DEF & Co,
Chartered Accountants firms were appointed as joint auditors of Good Health
Care Ltd. for 2009-10. A special audit was conducted U/s. 233 A of the
Companies Act 1956 during March 2011 and observed gross understatement of
Revenue. The revenue aspects were looked after by DEF & Co., but there was
no documentation for the division of work between the joint auditors.
Answer:- Documentation for the division of Work between the Joint
Auditor’s : As per SA – 299 “Responsibility of Joint Auditor”, where joint
auditors are appointed, they should, by mutual discussion, divide the audit
work among themselves.
The division of work among joint
auditors as well as the area of work to be covered by of them should be adequately
documented and preferably communicated to the entity.
Further, Each joint auditor is
entitled to rely upon the other joint auditors for bringing to his notice any
departure from generally accepted accounting principles or any material error
noticed in the course of the audit.
In the present case, there is a
violation of SA – 299 as the division of work has not been documented for which
all the joint auditors are severally liable. As far as the carelessness for
allotted work is concerned DEF & Co. will be liable for negligence. If DEF
& Co. refuses to accept sole responsibility for the fault, ABC & Co.
have to prove that the particular area of audit was exclusively domain of DEF
& Co. only.
May, 2006 10 Marks
E 10 : Designing an Audit Strategy is the backbone of the “Audit
Planning” process. Discuss.
Hint: Audit strategy is includes designing optimized audit approaches to
achieve the reasonable assurance at the optimum cost within the constraints of
time and the information available. It is back bone of the audit planning
because it includes determination of :
- The
financial reporting framework on which the financial information to be
audited has been prepared, including any need for reconciliations to
another financial reporting framework.
- Industry-specific
reporting requirements such as reports mandated by industry regulators.
- The
expected audit coverage, including the number and locations of components
to be included.
- The
resources to deploy for specific audit areas – allocation of the work
amongst the engagement team according to their audit skills and
experience.
- How
such resources deployed as above are required to be managed, directed or
supervised,
- Engagement
budgeting, including considering the appropriate amount of time to set
aside for areas where there may be higher risks of material misstatement.
- The
entity’s timetable for reporting, such as at interim and final stages.
- The
organization of meetings with management and those charged with governance
to discuss the nature, timing and extent of the audit work.
- The
discussion with management and those charged with governance regarding the
expected type and timing of reports to be issued. Setting materiality for
planning purposes.
- Setting
and communicating materiality for auditors of components.
- Reconsidering
materiality as audit procedures are performed during the course of the
audit.
- Preliminary
identification of material components and account balances.
Q 11: IT systems also pose specific risks to an entity’s internal control
? What are those risks ?
Hint: Specific Risk to an Entity’s
internal Control:
As per SA-315 “Identifying and
Assessing the Risks of Material Misstatement through Understanding the Entity
and its Environment”, IT system also poses specific risks to an entity’s
Internal Control. They are –
I. Reliance on systems to data that may
result in destruction of data, processing inaccurate data or both
II. Unauthorized access to data that may
result in destruction of data or improper change to data, including the
recording of unauthorized or nonexistent transactions, or inaccurate recording
of transaction. Particular risk may arise when multiple users access a common
database.
III. The possibility of IT personnel gaining
access beyond those necessary to perform their assigned duties thereby breaking
down segregation of duties.
IV. Unauthorized
changes to data in Master files.
V. Unauthorized
changes to systems or programs
VI. Failure
to make necessary changes to systems or programs.
VII. In
appropriate manual intervention.
VIII. Potential
loss of data or inability to access data as required.
May 2010 (Old) 4 Marks
Q 11: What are the board matters to be considered while obtaining
knowledge of business for a new audit engagement of a manufacturing concern ?
Hint: Knowledge of business for a new audit engagement of a
manufacturing concern: The broad matters to be considered while obtaining
knowledge of business for a new audit assignment are set out in SA-315
Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and its Environment. These are:
I. Relevant industry, regulatory,
economic and other external factors including the applicable financial
reporting framework
II. The
nature of the entity, including:
III. The
entity’s selection and application of accounting policies.
IV. The entity’s objectives and strategies,
and those related business risks that may result in risks of material
misstatement.
V. The
measurement and review of the entity’s financial performance.
In addition to the importance of
knowledge of the client’s business in establishing the overall audit plan, such
knowledge helps the auditor to identify areas of special audit consideration,
to evaluate the reasonableness both of accounting estimates and management
representations, and to make judgment regarding the appropriateness of
accounting policies and disclosures.
May 2011 4 Marks
Q 12: Z Ltd. has its entire
operations including accounting computerized. As the audit partner you are
concerned about inherent and control risk for material financial statement
assertions. What could be the area you look forward for deficiencies and risk
identification ?
Answer: Risk Assessment :- The auditor in accordance with SA-315
“Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and its Environment”, should make an assessment of
inherent and control risk for material financial statement assertions.
In a Computerized environment risk of
a Material financial statement ascertain being erroneously stated could arise
from the deficiencies in the following case as
i. Program
developed and maintenance have some defect since inception.
ii. System
software support is improper
iii. Operations
including processing of data are not regulated and ungoverned.
iv. Physical
CIS security may be lacking
v. Control
over access to specialized utility program is improper
These deficiencies would tend to have
a negative impact on all application systems that are processed through the computer.
May, 2006 8
Marks
Q 13 : A Company gets its accounting
data processed by a third party to achieve cost reduction. As a Statutory
Auditor of such a company, what are the additional precautions / checks that
you would consider for conduct of the audit ?
Hint: A client may use a service organization that executes transactions
and maintains accounting records transactions and process related data. If a
client uses a service organization, certain policies, procedures and records maintained
by the service organization might be relevant to the audit of the financial
statements of the client. Auditor shall consider the following.
a) The nature of the accounting services
provided by the service organization and the significance of that accounting
services to the user entity, including the effect thereof on the user entity’s
internal control;
b) The nature and materiality of the
transactions processed or accounts or financial reporting processes affected by
the service organization;
c) The degree of interaction between the
activities of the service organization and those of the user entity; and
d) The nature of the relationship between
the user entity and the service organization, including the relevant
contractual terms for the activities undertaken by the service organization.
e) Auditor may ask from the user entity to
produce service organizations auditor report on system procedures and internal
control.
f) On the basis of above auditor shall
determine the nature timing and extent of audit procedure.
May, 2011 4 Marks
Q 14: In the course of the audit of R Ltd., the
audit manager of ABC & Co. observed that R Ltd. has outsourced certain
activities to an outsourced agency. As the engagement partner guide the audit
manager in the assessment of services provided by the outsourcing agency in
relation to the audit.
Answer: This question belongs to situations explained in SA-402, “Audit
Considerations relating to an Entity Using a Service Organization” According to
this SA the auditor of the entity using service organization (User Auditor)
shall obtain an understanding of entity and its business in accordance with SA
315. The user auditor shall obtain an understanding of how a user entity uses
the services organization in the user entity’s operation including:
i. The nature of services provided by the
service organization and the significance of such services to the user entity,
including its effect on the internal control of user entity.
ii. The nature and materiality of the transactions
processed or accounts or financial reporting processes affected by the service
organization.
iii. The degree of interaction between the
activities of the service organization and those of user entity and
iv. The nature of the relationship between
the user entity and the service organization including the relevant contractual
terms for the activities undertaken by the service organization.
May, 2011 4 Marks
Q 15: In the course of audit of T Ltd., the
audit team is not sure of the possible source of misstatement in the financial
statements. As the audit manager identify the source of misstatements.
Answer: According to SA – 450 “Evaluation of Misstatements Identified
during the Audit”, auditor should consider that following may be the causes for
a misstatements a misstatement in financial statement.
i. An inaccuracy in gathering or
processing data from which the financial statements are prepared.
ii. An
omission of an amount of disclosure.
iii. An incorrect accounting estimate arising
from overlooking or clear misinterpretation of facts and
iv. Judgements of management concerning
accounting estimates that the auditor considers unreasonable or the selection
and application of accounting policies that the considers inappropriate.
May 2011 8 Marks
Q 16: Director of T Ltd. draws an
advance of US $ 200 per day in connection with the foreign trip undertaken on
behalf of the company. On his return he files a declaration stating that entire
advance was expended without any supporting or evidence. T Ltd. books the
entire expenses on the basis of such declaration. As the auditor of T Ltd. how
do you deal with this ?
Answer: SA – 500 “Audit Evidence” states that an auditor should obtain
sufficient appropriate audit evidence to optimize his audit risk at it low.
Auditor should ask for supporting and if expenditures are not supported by
documentary evidence, these expenses will be treated as personal expenses of
the director debited in profit and loss account and as per Section 227 (IA) (e)
the Companies Act, 1956 requires an auditor to report when personal expenses
have been it would not be treated as personal expenses if it is an allowance
given under the terms of employment contract. No evidence supporting the
expenditure is required for payment of allowance to the director. On the other
hand, if the payment is reimbursement should be against actual expenditure.
Hence on the basis of facts and circumstances of the case auditor shall report
accordingly.
Nov. 2008 (New) 5 Marks
Q 17 : You are the auditor of Easy
Communications Ltd. for the year 2007-08. The inventory as at the end of the
year i.e. 31.3.08 was `.2.25 crores. Due to unavoidable circumstances, you
could not be present at the time of annual physical verification. Under the
above circumstances how would you ensure that the physical verification
conducted by the management was in order ?
Hint: According to SA 501 “If the auditor is unable to attend physical
inventory counting due to unforeseen circumstances, the auditor shall make or
observe some physical counts on an alternative date, and perform audit
procedures on intervening transactions” perform alternative audit procedures may
include following
1. Recording the changes in inventory
between the date of physical count and the period end date are correctly
recorded.
2. The auditor would also verify the
procedure adopted by management for physical verification and treatment given for
the discrepancies noticed during the physical count.
3. He should ensure that appropriate cut
off procedures were followed by the management.
4. He should obtain written representation
from management about
a) the completeness of information
provided regarding the inventory and
b) assurance with regard to adherence to
laid down procedures for physical inventory.
Nov. 2007 4 Marks
Q 18 : Situations
where external confirmations can be used.
Answer: As defined in SA –
505 “External confirmation is the process of obtaining and evaluating audit
evidence through a direct communication from a third party in response to a
request for information about a particular item affecting assertions made by management
in the financial statements. The process of external confirmations, ordinarily,
consists of the following:
- Selecting
the items for which confirmations are needed.
- Designing
the form of the confirmation request.
- Communicating
the confirmation request to the appropriate third party.
- Obtaining
response from the third party.
- Evaluating
the information or absence thereof.
Q 19 : External Confirmations in Audit 4 Marks
H
Answer: Following are the Examples of situations where external confirmations
may be used include the following:
Bank balances and
other information from bankers.
Accounts receivable
balances.
Stocks held by
third parties.
Property title
deeds held by third parties.
Investments
purchased but delivery not taken.
Loans from lenders.
Accounts payable
balances.
Long outstanding
share application money.
Nov. 2009 (New) 5 Marks
Q 20 : Moon Limited replaced its
statutory auditor for the financial year 2008-09. During the course of audit,
the new auditor found a credit item of `.5 lakhs. On enquiry, the company
explained him that it is, a very old credit balance. The creditor had neither
approached for the payment not he is traceable. Under the circumstances, no
confirmation of the credit balance is available.
Hint: In the given case the creditor is pending since long. It creates a
suspicion to the auditor that why a litigation has not been instituted by the
creditor against the entity. It might be a case that an income of `.5 lakhs had
been hidden in previous years by debiting fraudulent credit purchase. Auditor
should obtain sufficient evidence in support of the balance. He should apply
alternative audit procedures to get documentary proof of the transaction/s and
should not rely entirely on the management representation. Finally, he should
include the matter by way of a qualification in his audit report to the members
according to SA 705 if disagreement with management.
May 2010 (Old) 5 Marks
Q 21 : When the audit team visited
the client to perform substantive audit of debtors, the client produced ledger
accounts of customers and confirmations for the top 10 debtors. One of the
debtors was more than 5 years old, but it had confirmed his balance.
Hint: As in the given case one of the debtors of more than 5 year old
had confirmed his balance. The auditor should enquire about the debtor to
confirm the external confirmations
1. Who
is the debtor ? Whether he is related with the client.
2. Debtor’s
financial abilities and
3. Reasons
for non payment
4. Reason
for the company why not filling a suit for recovery ?
He should also ensure that proper
control has been exercised over the external confirmation procedures. The
auditor should also ensure that whether the information is original and not
forged.
May 2011 6 Marks
Q 22: The management of S Ltd.
requests you not to seek confirmation from its debtors. As the auditor of S
Ltd., what can be an appropriate response ?
Hint: SA – According to SA 505 “External Confirmations”, If the
management refuses to allow the auditor to send a confirmation request, the
auditor shall
i. Get the clarification from management
why an external confirmation should not be sent and should obtain audit
evidence for validity and reasonableness of reservations.
ii. Evaluate
whether such refusal increases the Audit Risk.
iii. Perform alternative audit procedures
designed to obtain relevant and reliable audit evidence.
If the auditor is of opinion that
management’s refusal is unreasonable or the auditor is unable to obtain
relevant and reliable audit evidence from alternative audit procedures, the
auditor shall communicate with those in charge of governance and also determine
its implication for the audit and his opinion. He may reserve his opinion on
accounting estimates or he may issue a disclaimer of opinion if such restriction
is pervasive.
June 2009 (Old) 4 Marks
Q 23 : Purposes for which analytical
procedures are used by auditors ?
Answer: “Analytical Procedures” means the analysis of significant ratios
and trends, including the resulting investigation of fluctuations and
relationships that are inconsistent with other relevant information or which
deviate from predicted amounts.
The auditor should apply analytical procedures at the planning and
overall review stages of the audit.
Analytical procedures may also be
applied at other stages. Analytical procedures are used for the following
purposes:
a) to assist the auditor in planning the
nature, timing and extent of other audit procedures;
b) as substantive procedures when their
use can be more effective or efficient than tests of details in reducing
detection risk for specific financial statement assertions; and
c) as an overall review of the financial
statements in the final review stage of the audit.
d) In
investigating the unusual fluctuations.
A. Analytical
Procedures in Planning the Audit
The auditor should apply analytical
procedures at the planning stage to assist in understanding the business and in
identifying areas of potential risk.
B. Analytical
Procedures as Substantive Procedures
The auditor’s reliance on substantive
procedures to reduce detection risk relating to specific financial statement
assertions may be derived from tests of details, from analytical procedures, or
from a combination of both. The decision about which procedures to use to
achieve a particular audit objective is based on the auditor’s judgement about
the expected effectiveness and efficiency of the available procedures in
reducing detection risk for specific financial statement assertions.
C. Analytical
Procedures in the Overall Review at the End of the Audit
The auditor should apply analytical
procedures at or near the end of the audit when forming an overall conclusion
as to whether the financial statements as a whole are consistent with the
auditor’s knowledge of the business.
D. Investigation
Unusual Items
When analytical procedures identify
significant fluctuations or relationships that are inconsistent with other
relevant information or that deviate from predicted amounts, the auditor should
investigate and obtain adequate explanations and appropriate corroborative
evidence.
May 2010 (New) 4 Marks
Q 24 : While planning the audit of S Ltd. you want to apply
sampling techniques. What are the risk factors you should keep in mind ?
Hint: As per SA -530 (R) “Audit Sampling”, sampling risk is the risk
that the auditor’s conclusion based on a sample may be different from the
conclusion if the entire population were subjected to the same audit procedure.
Sampling risk can lead to two types of erroneous conclusions.
I. In the case of a test of controls,
that controls are more effective than they actually are, or in the case of
tests of details, that a material misstatement does not exist when in fact it
does. The auditor is primary concerned with this type of erroneous conclusion
because it affects audit effectiveness and is more likely to lead to an
inappropriate audit opinion.
II. In the case of test of controls, the
controls are less effective than they actually are, or in the case of test of
details, that a material misstatements exists when in fact it does not. This
type of erroneous affects audit efficiency as it would usually lead to
additional work to establish that initial conclusions were incorrect.
May 2011 6 Marks
Q 25 While auditing Z Ltd., you
observe certain material financial statement assertions have been based
estimates made by the management. As the auditor how do you minimize the risk
of material misstatement ?
Answer:- As per SA – 540 “Auditing Accounting Estimates, Including
Fair Value Accounting Estimates, and Related Disclosures”, it is auditor’s duty
to obtain sufficient and appropriate audit evidence that accounting estimates
by management are reasonable in present circumstances or not. Auditor first
apply to RAP (Risk assessment Procedure to decide the nature timing and extent
of FAP (Further audit procedure). Audit should consider.
i. The requirements of the applicable
financial reporting framework relevant to the accounting estimates, including
related disclosures (For example provisioning norms in case of banking company
as required by RBI).
ii. How management identifies those
transactions, events and conditions that may give rise to the need for
accounting estimates to be recognized or disclosed, in the financial
statements, in obtaining this understanding, the auditor shall make inquiries
of management about changes in circumstances that may give rise to new, or the
need to revise existing, accounting estimates.
iii. The
estimation making process adopted by the management including
1. The method, including where applicable
to model, used in making the accounting estimates
2. Relevant controls applied over the
process of estimation
3. Whether management has used services of
an expert for estimations of complex nature ?
4. The assumption underlying the
accounting estimates whether reasonable in present circumstances
5. Whether there has been or ought to have
been change from the prior period in the methods of estimations, and if so,
whether there is sufficient reason to do the same.
6. Whether and, if so, how the management
has assessed the effect of estimation of uncertainty;
May, 2006 8 Marks
Q 26 : Elaborate how the Statutory
Auditor can verify the existence of related parties for the purpose of
reporting under Accounting Standard 18 ?
OR
Nov. 2009 (Old) 8 Marks
Q 27 : As a Statutory Auditor, how do
you verify the existence of Related Parties and disclosure of Related Party Transactions
?
Answer: During the audit, the auditor may inspect records or documents
that may provide information about related party relationships and
transactions, for example:
- Review
the working papers for the prior years for names of known related parties;
- Review
the entity’s procedures for identification of related parties;
- Inquire
as to the affiliation of directors and key management personnel, officers
with other entities;
- Entity
income tax returns.
- Information
supplied by the entity to regulatory authorities.
- Shareholder
registers to identify the entity’s principal shareholders.
- Records
of the entity’s investments and those.
- Contracts
and agreements with key management or those charged with governance.
- Significant
contracts and agreements not in the entity’s ordinary course of business.
- Specific
invoices and correspondence from the entity’s professional advisors.
- Internal
auditor’s reports.
- Documents
associated with the entity’s filings with a securities regulator (e.g.
prospectus).
Where the financial reporting
framework requires disclosure of related party relationships, the auditor
should satisfy himself that disclosure is adequate.
Finally, if the auditor is unable to
obtain sufficient appropriate audit evidence concerning related parties and
transactions with such parties or conclude that their disclosure in the
financial statements is not adequate, the auditor should express a qualified
opinion or a disclaimer of opinion in the report, as may be appropriate.
Nov. 2009 (New) 4 Marks
Q 28 : Audit procedures on subsequent events ?
Hint: As per SA – 560 (R) “Subsequent Events”, The Auditor should
perform the following procedure to obtain sufficient appropriate evidence to
find out the adjustments or disclosures of those subsequent events :
i) Review the procedures adopted by the
management to identify subsequent events.
ii) Examine the minutes of the Board of
Directors, Executive Committees and the General Meetings of the shareholders.
iii) Collect information from the other
sources like budgets / estimates, cash flows, forecasts, interim financial
statements etc.
iv) Make
enquiries and hold discussions with the top management.
v)
Details from company’s lawyers for any litigation matter.
Nov. 2010 (New) 5 Marks
Q 29 : A Co. Ltd. has not included in
the Balance Sheet as on 31-03-2010 a sum of `.1.50 crores being amount in the
arrears of salaries and wages payable to the staff for the last 2 years s a
result of successful negotiations which were going on during the last 18 months
and concluded on 30-04-2010. The auditor wants to sign the said Balance Sheet
and given the audit report on 31-05-2010. The auditor came to know the result
of the negotiations on 15-05-2010.
Answer: Auditor shall consider following technical standards to obtain a
reasonable conclusion for the above case
- SA
– 560 (R) “Subsequent Events”,
- AS
– 4 “Contingencies and Events occurring after the Balance Sheet Date” and
- AS
– 29 “Provision, Contingent liabilities and Contingent Assets”.
According to AS -4 “Contingencies and
Events occurring after the Balance Sheet Date”, adjustments to assets and
liabilities are required for events occurring after the balance sheet date that
provide additional information materially affected the determination of the
amount relating to conditions existing at the balance sheet date. Similarly as
per AS-29 “Provision, Contingent liabilities and Contingent Assets”, future
events that may affect the amount required to settle an obligation should be
reflected in the amount of a provision where there occurrence is probable (more
likely than not)
In the given case, the amount of
`.1,50 crores is a material amount and it is the result of an event, which has
occurred after the Balance Sheet date. The facts have become known to the
auditor before the date of issue of the Audit Report and Financial Statements.
The auditor has to perform the
procedure to obtain sufficient, appropriate evidence covering the period from
the date of the financial statements to the date of Auditor’s Report. It will
be observed that as a result of long pending negotiations a sum of `.1.50
crores representing arrears of salaries of the year 2008-09 and 2009-10 have
not been included in the financial statements. It is quite clear that the obligation
requires provision for outstanding expenses as per AS-4 and AS-29.
As per SA-560 “Subsequent Events”,
the auditor should assure that all events occurring subsequent to the date of
the financial statements and for which the applicable financial reporting
framework requires adjustment or disclosure have been adjusted or disclosed.
So the auditor should request the
management to adjust the sum of `.1.50 crores by provision for expenses. If the
management does not accept the request the auditor should qualify the audit
report as per SA-705.
June, 2009 (New) 4 Marks
Q 30 : A company’s net worth is
eroded and creditors are unpaid due to liquidity constraints. The management
represents to the statutory auditor that the promoter’s wife is expected to
give an unsecured loan to meet the liquidity constraints and that negotiations
are underway to secure large export orders ?
Hint: See P (29.1)
Answer: According to SA-570 (R) when events or conditions have been
identified that may cast significant doubt on the entity’s ability to continue
as a going concern, the auditor shall obtain sufficient appropriate audit
evidence to determine whether or not a material uncertainty exists through
performing additional profit procedures, including consideration of mitigating
factors (made available to auditor by management as their belief towards going
concern). These procedures shall include:
a) When management assessment of the
entity’s ability to continue as a going concern,
b) Evaluating management’s plans for
future actions in relation to its going concern assessment,
c) When the entity has prepared a cash
flow forecast, and analysis of the forecast is a significant
i) Evaluating the reliability of the
underlying data generated to prepare the forecast; and
ii) Determining whether there is adequate
support for the assumptions underlying the forecast.
d) Requesting written representations from
management regarding their plans for future action and the feasibility of these
plans.
In the given case auditor’s
conclusion after applying the above audit procedures would be as follow:-
As wife of the director is expected
to give personal guarantee question may arise
1. Why
she is giving personal guarantee
2. Whether
she is capable of becoming surety for the company
3. By infusion of such fund whether cash
flow will improve to cope up with financial crunch
4. How many orders are hand to execute, on
the basis of which decision of management is to take personal guarantee.
5. Taking written representation from director
and external confirmation from director’s wife is needed.
Q 31 : The statutory auditor of the Holding Company demands for
the working papers of the auditors of the subsidiary company, of which you are
the auditor ?
As per SA 230, “Audit Documentation”
working papers are the property of the auditor.
The auditor may, at his discretion,
make portion of or extracts of his working papers available to his client.
SA 600 “Using the Work of Another
Auditors” also states that an auditor should respect the confidentiality of
information acquired during the course of his audit work and should not
disclose such information unless there is a legal or professional duty to
disclose. Clause 1 to the Part I of the Second Schedule to the Chartered
Accountants Act, 1949 also provides that a chartered accountant in practice
shall be deemed to be guilty of professional misconduct if he “Discloses
information acquired in the course of his professional engagement to any person
other than his client, without the consent of his client, or otherwise than as
required by any law for the time being in force”.
The ICAI has clarified that except to
the extent stated above, the auditor is not required to provide the client or
the other auditors of the same enterprise or its related enterprises such as a
parent or a subsidiary, access to his audit working papers. The statutory
auditor of an enterprise do not have right of access to the audit working
papers of the branch auditor. An auditor can rely on the work of another
auditor, without having any right of access to the audit working papers of
other auditor.
In view of the above guidelines,
issued by the Council of ICAI, the statutory auditor of Holding company cannot
have access to audit working papers of the subsidiary company’s auditor. He can
however, ask the auditor to answer certain questions about the manner in which
the audit is conducted and certain other clarifications regarding audit.
June, 2009 (New) 4 Marks
Q 32 : The statutory auditor of the
Holding Company demands for the working papers of the auditors of the
subsidiary company, of which you are the auditor ?
Q 33: You have been appointed auditor
of a large industrial company which has an established internal audit department.
You are required to state the main aspects that would be considered to find out
the effectiveness of the department.
Hint: As per SA-610 (R) (Using The Work of Internal Auditor)
organizational status, scope of work, technical competence, due professional
care, evaluation of plan, evaluation of the care taken at the time of using the
work performed by others, collection of sufficient and appropriate audit
evidences, documentation, exception reported upon and management reaction to
it.
June, 2009 (New) 8 Marks
Q 34: You are appointed
statutory auditor of X Ltd., has an internal audit system and reports for the
same are given to you. Mention the factors you will consider to ensure that the
said system of internal audit of X Ltd. is commensurate with the size of the
company and nature of its business ?
Hint: According to SA-610 (R) Auditor shall consider following before
relying on the internal auditor’s report
1. What
is status of the internal audit function within the entity
2. Whether the internal audit function
reports to those charged with governance or an officer with appropriate
authority
3. Whether the internal auditors are free
of any conflicting responsibilities (i.e. maker and checker).
4. Whether there are any constraints or
restrictions placed on the internal audit function by management or those
charged with governance.
5. Whether, and to what extent, management
acts on the recommendations of the internal audit function, and how such action
is evidenced.
6. Whether the internal auditors have
adequate technical training and proficiency as internal auditors.
7. Whether activities of the internal
audit function are properly planned, supervised, reviewed and documented.
8. The existence and adequacy of audit
manuals or other similar documents, work programs and internal audit
documentation.
After considering the above auditor
shall conclude whether the internal audit system is commensurating with the
nature and size of the business.
Q 35: The auditor, in the interest of the users, while explaining
the nature of his reservation, can describe the work of the expert with his
name, in the audit report without obtaining prior consent of the expert.
Hint: 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.
Q 36: The management has obtained the certificate from an actuary
regarding provision of gratuity payable to employees ?
Hint: SA-620 (R) Using the Work of an Auditor’s Expert – to be verified
– data supplied to expert, method and assumptions appropriateness, other audit
evidence available.
Nov. 2011 5 Marks
Q 37: The auditor of SS Ltd. accepted
the gratuity liability valuation based on the certificate issued by a qualified
actuary. However, the auditor noticed that her retirement age adopted is 65
years as against the existing retirement age of 60 years. The company is
considering a proposal to increase the retirement age.
Answer: According to SA – 620 “Using the Work of an Auditor’s Expert”,
although an expert is responsible for his methods and assumptions and auditor
due to his limited competence cannot challenge the methods and assumptions of
an expert. But as per SA 200 he should exercise the professional skepticism and
should not accept the work of an expert without applying any considerations
thereon. So, the auditor shall evaluate the adequacy of the auditor’s expert’s
work for the auditor’s purpose, including the relevance and reasonableness of
that expert’s findings or conclusions, and their consistency with other audit
evidence as per SA 500.
In the instant case, a qualified
actuary has issued a certificate for gratuity liability valuation, for which
retirement age adopted is 65 years against the existing retirement age of 60
years; however the company is considering a proposal to increase the retirement
age. In view of SA -500 alongwith SA-620, the assumption made by actuary are
not relevant and consistent. Hence the auditor is required to communicate to
the management and advice the modifications accordingly. In case of failure of
compliance of the same the auditor may qualify the report.
Q 38: 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.
Hint:
i) As per the provisions of AS -14
Goodwill shall be amortized within five years of acquisition of business unless
any longer period is justifiable to the management. If such accounting policy
is not being followed by the company it will be violation of AS -14 which is a
subject matter of qualification in auditor’s report.
ii) Premium received on issue of shares is
capital receipt and should not credited to profit and loss account. As per the
provisions of Section 349 of the Companies Act, premium on issue of shares
should not be considered in computation of net profit for the purpose of
managerial remuneration. The auditor should have qualified the audit report and
qualified the amount by which the profit stands inflated.
May, 2006 8 Marks
Q 39 : Discuss the various aspects to
be considered by the Statutory Auditor before qualifying his report ?
Answer: The auditor shall express a qualified opinion when:
a) The auditor, having obtained sufficient
appropriate audit evidence, concludes that misstatements, individually or in
the aggregate, are material, but not
pervasive, to the financial statements; or
b) The auditor is unable to obtain
sufficient appropriate audit evidence on which to base the opinion, but the
auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could
be material but not pervasive.
Nov. 2007 8 Marks
Q 40 : What are the features of a
qualified Audit Report ?
Hint : REFER MY NOTES
June, 2009 (Old) 5 Marks
Q 41 : When should an auditor make a
disclaimer opinion in his Audit Report ?
Answer: The auditor shall disclaim an opinion when the auditor is unable
to obtain sufficient appropriate profit evidence on which to base the opinion,
and the auditor concludes that the possible effects on the financial statements
of undetected misstatements, if any, could be both material and pervasive.
The auditor shall disclaim an opinion
when, in extremely rare circumstances involving multiple uncertainties, the
auditor concludes that, notwithstanding having obtained sufficient appropriate
profit evidence regarding each of the individual uncertainties, it is not
possible to form an opinion on the financial statements due to the potential
interaction of the uncertainties and their possible cumulative effect on the
financial statements.
Nature of Matter
Giving Rise to the Modification
|
Auditor’s Judgment
about the pervasiveness of the Effects or Possible Effects on the Financial
Statements
|
Material but Not
Pervasive
|
Material and
Pervasive
|
Financial statements are materially
misstated
|
Qualified opinion
|
Adverse opinion
|
Inability to obtain sufficient
appropriate audit evidence
|
Qualified opinion
|
Disclaimer of
opinion
|
June, 2009 OLD 4 Marks
Q 42 : Unqualified opinion in the
context of the Auditor’s report.
Answer: According to SA-700 (R) The auditor shall express an unmodified
opinion (generally an unqualified opinion) when the auditor concludes that the
financial statements are prepared, in all material respects, in accordance with
the applicable financial reporting framework. In different situations the auditor’s
conclusion will be different for example
Situation-1:- If auditor concludes that, based on the audit evidence
obtained, the financial statements as a whole are not free material
misstatement, or is unable to obtain sufficient appropriate audit evidence to
conclude that the financial statements as a whole are free from material
misstatement, the auditor shall modify the opinion in the auditor’s report in
accordance with SA – 705.
Situation-2:- If financial statements prepared in accordance with the
requirements of a fair presentation framework do not achieve fair presentation,
the auditor shall discuss the matter with management and, depending on the
requirements of the applicable financial reporting framework and how the matter
is resolved, shall determine whether it is necessary to modify the opinion in
the auditor’s report in accordance with SA-705. For example Financial
statements are not in agreement with schedule VI in such situation the matter
shall be discussed with management.
May, 2008 4 Marks
Q 43: Emphasis of matter paragraph in
Audit Reports ?
Answer:
According to SA-706 A paragraph
included in the auditor’s report that refers to a matter appropriately
presented or disclosed in the financial statements that, in the auditor’s
judgment, is of such importance that it is fundamental to user’s understanding
of the financial statements. When the auditor includes an Emphasis of Matter
paragraph in the auditor’s report, the auditor shall:
a) Include
it immediately after the Opinion paragraph in the auditor’s report;
b) Use
the heading “Emphasis of Matter”; or other appropriate heading;
c) Include in the paragraph a clear
reference to the matter being emphasized and to where relevant disclosures that
fully describe the matter can be found in the financial statements; and
d) Indicate that the auditor’s opinion is
not modified in respect of the matter emphasized.
For Example: If there is uncertainty relating to a pending
exceptional litigation matter. This is highlighted in the auditor’s report by
an Emphasis of Matter paragraph.
After opinion paragraph following
shall be added
“We draw attention to Note X to the
financial statements which describes the uncertainty related to the outcome of
the lawsuit filed against the Company by XYZ Company. Our opinion is not
qualified in respect of this matter.”
Nov. 2009 (Old) 8 Marks
Q 44 : Give an illustration of an
Audit Report containing ‘Emphasis of Matter’ for a significant uncertainty ?
Hint :An Illustration of an Audit Report containing emphasis of matter
paragraph for a significant uncertainty.
1. An illustration of an emphasis of
matter paragraph for a significant uncertainty in an auditor’s report is as
follows:
“Without qualifying our opinion, we
draw attention to Note X of Schedule….. to the financial statements. The entity
is the defendant in a lawsuit alleging infringements of certain patent rights
and claiming royalties and punitive damages.
The entity has filed a counter
action, and preliminary hearings and discovery proceedings and both actions are
in progress. The ultimate outcome of the matter cannot presently be determined,
and no provision for any liability, that may result, has been made in the
financial statements.
In our opinion……………
In our opinion and to the best of our
information and according to the explanation given to us, the financial
statements give a true and fair view in conformity with the accounting
principles generally accepted in India:
a) in the case of the balance sheet, of
the State of affairs of …… as on 31st March 2xxxx and
b) in the case of the profit and loss
account, of the profit/loss for the year ended on that date.
2. The
addition of a paragraph, emphasizing a going concern problem or significant uncertainty
is ordinarily adequate to meet the auditor’s reporting responsibilities
regarding such matters. However, in extreme cases, such as situations involving
multiple uncertainties that are significant to the financial statements, the
auditor may consider it appropriate to express a disclaimer of opinion instead
of adding an emphasis of matter paragraph.
June, 2009 (New) 8 Marks
Q 45 : The audit report of P Ltd. for
the year 2007-08 contained a qualification regarding non provision of doubtful
debts. As the statutory auditor of the company for the year 2008-09, how would
you report, if :
i) The
company does not make provision for doubtful debts in 2008-09 ?
ii) The
company makes adequate provision for doubtful debts in 2008-09 ?
Hint: Auditor’s responsibilities in cases where audit report for an
earlier year is qualified is given in SA – 710 “Comparative”. Hint : As per SA
– 710, when the Audit Report on the prior period intended a qualified opinion
and the said matter is :
i) Unresolved and results in an
modification of the auditor’s report regarding current year’s figures, his
report should be modified regarding corresponding figures.
ii) Resolved
and properly dealt with in the financial statements, the current report should
ordinarily not refer to such modification. If however, the matter is material,
he may include an “emphasis of matter” paragraph. In the instant Case, if P
Ltd. does not make provision for doubtful debts the auditor will have to modify
his report for both current and previous year’s figures. If however, the
provision is made, the auditor need not refer to the earlier years
modification.
May 10 (New) 4 Marks
Q 46 : What are the auditor’s
responsibilities’ in respect of corresponding figures ?
Answer: Auditor’s responsibility in respect of corresponding figures
As per SA-710 “Comparatives”, in
respect of corresponding figures,
I. The auditor should obtain sufficient
appropriate audit evidence that the corresponding figures meet the requirements
of the relevant reporting framework. The extent of audit procedure performed on
the corresponding figures is significantly less than that for the audit of
current period figures and is ordinarily limited to ensuring that the
corresponding figures have been correctly reported and are appropriately
classified. This involves the auditor assessing whether:
a) Accounting policies used for
corresponding figures are consistent with those of the current period or
whether appropriate adjustments and/or disclosures have been made and
b) Corresponding figures agree with the
amounts and other disclosures presented in the prior period whether appropriate
adjustments and/or disclosures have been made.
II. When the financial statements of the
prior period have been audited by another auditor, the incoming auditor should
assess whether the corresponding figures meet the conclusions specified above.
III. When the financial statements of the
prior period have not been audited, the incoming auditor nonetheless should
assess whether the corresponding figures meet the conditions specified above.
IV. If the auditor becomes aware of a
possible misstatement in the corresponding figures when performing the current
period audit, the auditor should perform such additional procedures as are
appropriate in the circumstances.
