Model Test Paper - 1 IPCC Gr. II Paper - 6 Auditing and Assurance No. 1

Transcription

1 Model Test Paper - 1 IPCC Gr. II Paper - 6 Auditing and Assurance Question No. 1 is compulsory. 1. Discuss the following: (a) Standards collectively known as the Engagements Standards issued by AASB under the authority of the council of ICAI. (5 marks) The following standards issued by the Auditing and Assurance Standards Board under the authority of the Council are collectively known as the Engagement Standards. 1. Standards on Auditing (SAs): To be applied in the audit of historical financial information. 2. Standards on Review Engagements (SREs): To be applied in the review of historical financial information. 3. Standards on Assurance Engagements (SAEs): To be applied in assurance engagements, dealing with subject matters other than historical financial information. 4. Standards on Related Services (SRSs): To be applied to engagements involving application of agreed-upon procedures to information, compilation engagements, and other related services engagements, as may be specified by the ICAI. (b) Is surprised checks desirable in audit, if so give important recommendations. (5 marks) 1. One of the most important parts of audit is the surprise check, the results of these checks are very helpful to the auditor as they help in deciding the scope of audit and also the reports. 2. Effectiveness of the audit is improved by the element of surprise. This element is also incorporated in audit programmes. 3. The element of surprise in an audit may be both in relation to the time of audit, that is selection of date, when the auditor will visit the clients office for audit and selection of the areas of audit. 6.1

2 6.2 O Solved Scanner IPCC Group- II Paper Auditor s visits for a surprise check in order to know whether the internal control system is working effectively or not and whether all accounting and other records are kept up to the date as per the statutory regulation. 5. These checks and surprise visits can bring good moral check on the client s staff. 6. Surprise checks also help in determining the errors and frauds. 7. Surprise checks are very helpful for the organization having weak internal control system, very large and diversified. 8. Extent of the check will depend upon the auditor. 9. The consequences of the surprise check should be communicated to the management. This is done to overcome the weakness. 10. The auditor gets satisfied only when proper actions are taken by the management on the matters communicated by him. (c) Filling of a casual vacancy of auditor in respect of a company audit. (5 marks) Filling of a Casual Vacancy As per Sec. 139(8) of Companies Act, 2013, any casual vacancy in the office of an auditor shall: (i) In the case of a company other than a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Board of Directors within thirty days. If such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within three months of the recommendation of the Board and he shall hold the office till the conclusion of the next annual general meeting; (ii) In the case of a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Comptroller and Auditor-General of India within thirty days:

3 Model Test Paper O 6.3 In case the Comptroller and Auditor-General of India does not fill the vacancy within the said period the Board of Directors shall fill the vacancy within next thirty days. (d) Director's responsibility statement. (5 marks) As per Sec. 134(3)(c) of Companies Act, 2013, the report of Board of Directors on annual accounts shall also include a Directors Responsibility statement. As per Sec. 134(5), the Directors Responsibility Statement shall state: 1. in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures; 2. the directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit and loss of the company for that period; 3. the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities; 4. the directors had prepared the annual accounts on a going concern basis; and 5. the directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively. Explanation: For the purposes of this clause, the term internal financial controls means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company s policies, the safeguarding of its assets, the prevention and detection of

4 6.4 O Solved Scanner IPCC Group- II Paper - 6 frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information; and 6. the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively. 2. State with reason. (Answer any eight) (i) SA deals with responsibility of the auditor of the service organisation. (2 marks) False : SA 402, Audit Considerations Relating to an Entity Using a Service Organisation, establishes standards for the auditors of an entity (i.e. client) that uses a service organisation. AAS-24 thus, does not deals with responsibility of the auditor of the service organisation. (ii) Confirmations received by the auditor directly from third parties are conclusive evidence in support of a transaction. (2 marks) False: Confirmations received directly from the third parties by the auditor are more reliable but same cannot be treated as conclusive evidence. (iii) Auditing in depth implies that the auditor vouches almost all transactions in a manner that the chances of not checking any transaction are left at minimum. (2 marks) False : Auditing in depth does not mean the 100% vouching. It is checking selected transactions from beginning to end to understand the entire system within which the transaction passes through. (iv) For the purpose of SA Principal Auditor means the partner of the firm signing the Audit report. (2 marks)

5 Model Test Paper O 6.5 (v) (vi) (vii) (viii) False : As per SA 600, Using the Work of Another Auditor, Principal Auditor means the auditor with responsibility for reporting on the financial information of an entity when that financial information includes the financial information of one or more components audited by another auditor. Therefore, it is not correct to say that for the purpose of SA 600 Principal Auditor means the partner of the firm singing the Audit report. There is direct relationship between detection risk and combined level of inherent and control risk. (2 marks) False : There is an inverse relationship between detection risk and combined level of inherent risk and control risk, because if inherent and control risk decreases detection risk increases. The first auditor of a Government company was appointed by the Board in its meeting after 10 days from the date of registration. (2 marks) Incorrect: As per Sec. 139(7), the appointment of first auditor of a government company shall be done by Comptroller and Auditor General of India (CAG) within 60 days from the date of registration of the company. The Auditor shall express an unqualified opinion if the Auditor is unable to obtain sufficient audit evidence regarding the opening balances. (2 marks) This statement is incorrect. When auditor is unable to obtain sufficient audit evidence regarding the opening balances he shall express a qualified opinion. Internal auditor of the company cannot also be its cost auditor. (2 marks)

6 6.6 O Solved Scanner IPCC Group- II Paper - 6 (ix) (x) True : Internal auditor cannot be appointed as cost auditor. As per rule 14 of the Companies (Audit and Auditors) Rules, 2014, in case of companies which are required to constitute an audit committee the Board shall appoint a cost auditor who is a cost accountant in practice or a firm of cost accountants in practice on recommendation of audit committee. Taking management representation is a convenient, economical and equally acceptable auditing method even where the direct access by auditor to audit evidence is possible. (2 marks) False : If it is possible for auditor to check the transaction by himself through direct access, it is not fair for him to merely rely the management representation as prime audit evidence. An expert for the purpose of SA is a person, firm or association of persons possessing special skill, knowledge and experience in auditing. (2 marks) False : It has been clearly mentioned in SA 620 Using the work of an Auditor s Expert, an expert, (or a specialist), for the purpose of this statement, is a person, firm or other association of person possessing special skill, knowledge and experience in a particular field other than accounting and auditing. 3. How will you vouch/verify the following: (a) Payment for Acquisition of Assets (4 marks) Answer : Payment for Acquisition of Assets: The asset if acquired for the business, then payment made shall be in the capital nature expenditure and it should be included in the cost of fixed assets of the company. Such payment shall be either on the agreed term or quotation term or the market term. Such, payment shall be made in cash or through Bank.

7 Model Test Paper O 6.7 In this case, auditor should ensure that such payments are actually made and should also check the entry in seller books. He should also check the amount and validity of the payment. S. No. Documents to be vouched Aspects to be verified 1. Bill or Receipt The purchase of an asset must be duly supported by the receipt for the amount paid. 2. Title Deed in case of Purchase of Immovable Property 3. Registration Document in case of purchase of movable property 4. Authorisation of Purchase by Board In case of an immovable property the auditor must also inspect the title deeds. The title of an immovable property passes only on registration. It is therefore essential for an auditor to see that property has been registered in the purchaser s name as required by the relevant regulations and also that the title of the transfer to sell property has been verified by a solicitor or an advocate. In the case of movable property requiring registration of ownership, e.g., a car or a ship, it must be verified that such a registration has been made in favour of the purchaser. It is necessary for the auditor to satisfy himself generally as regards existence, value and title of the assets acquired. It must also be verified that the assets were purchased only by a person who had the authority to do so. Companies Act, 2013 provides that only the Board of Directors can invest the funds of the company. Thus the Board alone can sanction the purchase of a fixed asset.

8 6.8 O Solved Scanner IPCC Group- II Paper Financial Treatment If the benefit of an item of expense has been acquired by the purchaser along with the asset, its value should be debited to a separate account, e.g., when a motor car has been purchased on which certain taxes and insurance charges were paid by the seller for a period that had not expired. In the case of an asset constructed or manufactured by the client himself, e.g., where a building has been constructed or a plant or machinery manufactured by the concern with its labour and materials, it must be verified that the cost of labour, materials and other direct expenses incurred has been charged as cost of the asset on a proper allocation of the total expenditure debited under these heads. It must also be seen that neither e x p e n ses o n repairs a n d maintenance have been capitalised nor the cost of additions to assets charged off as revenue expenses. (b) Recovery of bad debts written off (4 marks) Recovery of Bad Debts written off can be verified as follows Sl. Document to be Aspects to be verified No. vouched 1. Schedule of bad debts Verify whether the amount of bad debts recovered has been shown in the bad debts schedule of the preceding years.

9 2. Proof of collection 3. Credit manager's file Model Test Paper O 6.9 Verify the relevant proof of recovery submitted, e.g: Court/Tribunal decree, notice from bankruptcy trustee, letters from collecting agency or lawyer or party etc. (i) Verify whether amount received has been noted in the file. (ii) Ascertain any specific matter materially affecting accounts has been noted in the file. 4. Bank statement (i) Trace receipt of amount in Bank statement (ii) Confirm that the cheque received from party has not been dishonoured. 5. Receipt Verify whether proper acknowledgments have been issued to parties. (c) Proposed dividend. (4 marks) Proposed dividend : 1. Proposed dividend is to be provided for even though it is proposed and is to be declared after the end of the accounting period in terms of AS 4 and also Schedule III disclosure requirements. 2. The auditor should check the amount of paid up share capital and verify the quantum of dividend proposed by checking the calculations. 3. The auditor should check the minutes of the Board for the amount of dividend proposed to be considered for its declaration in general meeting. 4. Dividend tax payable on proposed dividend should be provided for.

10 6.10 O Solved Scanner IPCC Group- II Paper The interim dividend if any paid should be checked and ascertained that the proposed dividend is properly computed by adjustment to it, if the same had been reckoned for the total dividend. 6. The account should be properly disclosed in statement of P&L account and also in Financial Statement according to the requirements of Schedule III to the Companies Act, (d) Advances to suppliers. (4 marks) Advance given to Suppliers : Sl. No. Document to be vouched 1. Schedules and Ledgers 2. Accounting Treatment Aspects to be verified Get the debit balance schedule in the account of creditors and give particular attention to the age of the balances. Also examine in detail Bought Ledger. Investigate the unadjusted outstanding and check if any of them require provisioning. Also examine that according to Section 143(1)of the Indian Companies Act, 2013, the advances have not been shown as deposits in the B/S. 3. Final Documents Obtain the confirmation of balances and ensure that any discrepancies or differences have been properly reconciled. 4. (a) As an auditor of a Limited Company, you observe that during the month of March, 2009, sales invoices were not recorded in books of accounts. You also observe that payment of wages was much higher compare to last year. Keeping in mind above, analyse possible ways of manipulation of accounts. (6 marks)

11 Model Test Paper O 6.11 Manipulation of Accounts : Accounts are falsified in order to conceal the true position of the business for some purpose. They are always intentional, for a predetermined purpose and are generally committed either by the owners or top management personnel or senior officers of the business. This type of fraud is generally committed: 1. to avoid incidence of income-tax or other taxes by showing profits at a lower figure. 2. to withhold declaration of dividend even there is adequate profit. 3. for receiving higher remuneration where managerial remuneration is payable by reference to profits. 4. for delaying a dividend when there are insufficient profits by showing profits at inflated figures. Such types of frauds are difficult to be detected as they are committed by persons holding position of trust and use carefully guarded by them. Such frauds are generally of the following nature: 1. Recording fictitious purchases or suppression of purchases 2. Recording fictitious sales or omission of sales 3. Recording fictitious expenses or omission of expenses 4. Over valuation or under valuation of stock. 5. Taking credit for accrued income not likely to be received or omission of income. 6. Revenue expenses changed to capital and vice-versa. AAS 4 (new SA 240) Auditor s Responsibility to consider fraud and Error in an Audit of Financial Statements deals with the auditor s responsibilities for the detection of material misstatement resulting from fraud and error. It requires a considerable skill and vigilance on the part of an auditor. In doubtful cases he may refuse to believe the information supplied to him by any officer of the concern. An auditor who uses adequate skill and reasonable care, is legally exempt from liability if he fails to discover a well concealed detection. But an auditor by a skilled auditor should rarely permit such a failure.

12 6.12 O Solved Scanner IPCC Group- II Paper - 6 All possible opportunities for dishonesty and manipulation of the accounts must be considered and guarded against and the degree of checking and investigation should be determined by the circumstances surrounding the transactions and the effectiveness of the system of intended check in operation. (b) State clearly provisions of the Companies Act, 2013 with regard to issue of shares at a discount. (6 marks) Issue of Shares at a Discount: According to Sec. 53 of the Companies Act, 2013, except sweat equity issued as mentioned in Sec. 54, any share issued by a company at a discounted price shall be void. Where a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees and every officer who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both. (c) What is the importance of having the accounts audited by an independent auditor? (4 marks) Independent Audit 1. Meaning Independence implies that the judgement of a person is not subordinate to the wishes or directions of another person who might have engaged him or to his own self-interest. 2. Nature Independence is a condition of mind and personal character and should not be confused with the superficial and visible standards of independence, which are imposed by law.

13 Model Test Paper O Visibility Independence of the auditor should not only exist, but should also appear to so exist to all reasonable persons. The relationship maintained by the auditor shall be such that no reasonable man can doubt his objectivity and integrity. There is a collective aspect of independence that is important to the accounting professional as a whole. The advantages of an Independent Audit are : 1. Protection of interest It safeguards the financial interest of persons who are not associated with the management of the organization whether they are partners or shareholders. 2. Moral check It acts as a moral check on the employees from committing defalcations. 3. Tax liability Audited statements of account are helpful in setting liability for taxes. 4. Credit negotiation Financers and bankers use audited financial statements in evaluating the credit worthiness of individuals in negotiating loans. 5. Trade dispute settlement 6. Control over inefficiency Audited statements are useful in settling the trade disputes for higher wages, or bonus, etc. It helps in detection of wastages and losses and also helps in recommending ways to correct it. 7. Funds-in-trust It is an agency, which ensures that persons acting for others have properly accounted for the amounts collected by them.

14 6.14 O Solved Scanner IPCC Group- II Paper Arbitration It is helpful in settling disputes by arbitration. 9. Appraisal Audit reviews the existence and operations of various controls in the organization and reports in adequacies, weaknesses, etc in them. Management can take suitable action based on the reports. 10. Assistance to government Government may require audited and certified statements before it gives assistance or issues a license for a particular trade. 5. (a) Discuss the provisions of Section 134 of the Companies Act, 2013 regarding the authentication of financial statements. (6 marks) As per provisions of Sec. 134(1), before submission to the auditor for his report, the financial statements, including consolidated financial statement, shall be approved by the Board of Directors: The signing of the financial statements shall be done: (a) by the chairperson of the company; where he is authorised by the Board, or (b) by two directors out of which one shall be Managing Director. And (a) The chief executive officer, if he is a director in the company, wherever appointed. (b) The chief financial officer, wherever appointed and. (c) The Company Secretary of the company wherever appointed. In case of one Person Company, the financial statements shall be signed only by one Director. A signed copy of every financial statement, including consolidated financial statement, if any shall be issued, circulated or published along with copy of each of: (a) any notes annexed to or forming part of such financial statements.

15 Model Test Paper O 6.15 (b) the Auditor s Report, and. (c) the Board s report referred u/s 134(3). The auditor s report shall be attached to every financial statements as per Sec. 134(2). (b) What are the duties of Comptroller and Auditor General? (6 marks) The main duties of C & AG within the framework of the constitution of India may be as follows 1. Compilation and submission of Accounts 2. Rendering Assistance in Accounts Maintenance 3. Auditing and Reporting The C & AG should compile the accounts pertaining to annual receipts and disbursements of the Union or State or Union Territory and submit these to the President or Governor or Administrator. The C & AG should provide such information to the Union or State as they may require from time to time and render such assistance for preparing annual financial statements as they reasonably ask for. The C & AG should audit and report on: (i) All the expenditures from C o n s o l i d a t e F u n d o f India/State/Union Territory having a Legislative Assembly and to determine whether the monies disbursed were legally available for and applicable to the purpose and service for which they are applied and whether the expenditures comply with the authority governing it.

16 6.16 O Solved Scanner IPCC Group- II Paper Auditing Receipts and Expenditure 5. Auditing Grants or Loans (ii) (iii) All the transactions of Union or State pertaining to Contingency Funds and Public Accounts. All the trading, manufacturing, Profit & Loss Accounts and Balance Sheets and other subsidiary accounts kept in any department of a Union or State. The C & AG should audit and report on all the receipts and expenditure of any body or authority substantially financed by Consolidated Fund of India or State or Union Territory. For such purpose, a body or authority shall be treated as substantially financed if the amount of grant or loan in year is : (i) More than ` 25 lakhs (ii) More than 75% of the total expenditure of that body or authority. This applies to the grant or loan of any specific purpose, provided from the Consolidate Fund of India or State or Union Territory, to any body or authority other than a Foreign State or International Organisation. The C & AG should examine in detail the procedures by which the approving authority satisfies itself the fulfillment of the conditions of providing such grants or loans.

17 Model Test Paper O Auditing Receipt of Union or State 7. Auditing Stores and Stock Accounts 8. Auditing Government Companies and Corporation Accounts The C & AG should audit all the receipts payable into the Consolidated Funds of India or State or Union Territory. He may satisfy himself that the rules and procedures have been designed to make an effective check on the assessment, collection and proper allocation of revenue and are duly being observed. The C & AG should be authorised to audit and report on the stores and stock accounts kept in any office or department of the Union or State. The C & AG should exercise such powers and duties according to the provisions of Companies Act, 2013, pertaining to Government Companies and Corporations. (c) R.K. & Company are the auditors of PQR Company Ltd. The Managing Director of the Company demands copies of the working papers from the auditors. Are the auditors bound to oblige the Managing Director? (4 marks) Working papers : Ownership and Custody Facts : According to SA-230 Audit Documentation, the working papers are the property of the auditor, the auditor may, at his discretion make portion of or extracts from his working papers available to the client. The auditor is entitled to retain them. (Chantrey Martin and Co. Vs Martin) Analysis : In the given case the managing director of the company has demanded copies of the working papers from the auditor. He

18 6.18 O Solved Scanner IPCC Group- II Paper - 6 has no right to obtain copies of the working papers from the auditor because they are the property of the auditor. But the auditor may at his discretion make portions of or extracts from the working paper to the managing director of R K & Company. Inference : The auditor is not bound to oblige the managing director by supplying copies of the audit working papers. 6. (a) State any five special points which you, as an auditor, would look into while examining the income and collection of fund by an NGO engaged in providing relief work for flood victims. (6 marks) Receipt of Donations S. No. Aspects to be verified Verification 1. Internal Control Ensure that the internal control system exists particularly referring the division of responsibilities with respect to authorised collection of donation, custody of receipt books and safe custody of money. 2. Receipt Books Custody 3. Receipt of Cheque Ensure that unused receipt books are returned and are verified physically including checking of number of receipt books and numbering sequence therein. Ensure that receipt book has a carbon copy for duplicate receipt and signed by a responsible official and also all details pertaining to the date of cheque, bank s name, date, amount etc. should be clearly indicated.

19 4. Reconciliation of Bank Statement Model Test Paper O 6.19 Ensure reconciliation of bank statement with reference to all cash deposits referring to the date, amount and also receipt book, 5. Receipt of Cash Ensure that registers of cash donations have been vouched extensively. 6. Contributions from Abroad S. No. Any contribution made from abroad should comply with the applicable laws and regulations. Remittance of Donation Aspects to be Verification Verified 1. Mode of Remittance 2. Confirmation of Receipt of Remittance All remittances are sent through A/c Payee Cheque. Remittance made through Demand Draft should also be scrutinized thoroughly with reference to recipient. All remittances should have been supported by receipts and acknowledgments. 3. Identity The recipient NGO is a genuine entity. The address, 80 G Registration No., etc. should be verified. 4. Procedure of Direct Confirmation Ensure that confirmation letters have been sent to those entities to whom donation have been paid. 5. Use of Donation Ensure that donation has been used for the purpose required i.e. to provide relief to Tsunami victims. 6. Selecting system for NGO Ensure the system for selecting NGO to whom donations have been sent.

20 6.20 O Solved Scanner IPCC Group- II Paper - 6 (b) State any six important points to be examined by you, as an auditor, in verifying the correctness of bank balance of an Educational Institution which deposits all its collection/ receipt in separate collection account of a bank. (6 marks) The various points to be examined in verifying the correctness of Bank balance of an educational institution which deposits all its collection/ receipt in separate collection account of a bank are : 1. Concurrent Banking: It should be checked that all receipts are daily banked completely whether they relate to fee, fines or other miscellaneous receipts. 2. Reconciliation of fee: Reconcile the number of students and the fee collected with the total amount credited in the fee account. 3. Cut- off procedure for fee: All fee should be received by cut-off date. Hence it should be properly seen that all amounts have been received, deposited and credited. 4. Checking of counterfoils and slips: Checking and comparing the counterfoils and fee-slips signed by the head of institution and confirm that the amount has been credited to bank Collection Account. 5. Other receipts: Confirm that fines and late payments, postal dues and rental incomes etc. have been all accounted for in the bank statement. 6. Bank charges: Auditor should check all bank charges, bouncing charges and charges for other agency services. 7. Interest: Agreement with the bank regarding interest, if any to be received on the out standing amount in the bank account to be checked and calculated. 8. Unrecorded expenses: It should be strictly seen that no expenses have been made from such account as it is strictly a collection account.

21 Model Test Paper O 6.21 (c) Comment on the following situation: On , Amudhan Company Limited has invested ` 45 lakhs in cumulative fixed deposits of Algar Bank Ltd. The deposits carry 10% per annum compoundable quarterly and amount of interest is added to the principal and is due and payable at the maturity date which is 5 years from the date of investments. For the year ended 31st March, 2009, the company did not book any revenue of interest on the ground that interest amount is not available at their disposal till maturity date of investment. (4 marks) (i) According to Sec. 148 of the Companies Act, 2013 books are to be maintained on accrual basis. Accrual method of accounting is also a fundamental assumption of accounting policies. (ii) When the interest becomes due for payment only at maturity date, it accrues each quarter. Interest accrued but not due should be shown under current assets in the balance sheet as per Schedule III Part I requirement. (iii) As such, the profits and current assets are understated and true and fair view of the accounts are thus vitiated. (iv) On considerations of materiality of the item, the auditor can appropriately decide to qualify the audit report. 7. Write short note on any four: (a) Reliability of audit evidences. Reliability of Audit Evidence (4 marks) SA 500 on Audit Evidence provides that the reliability of information to be used as audit evidence and therefore of the audit evidence itself, is influenced by its source and its nature and the circumstances under which it is obtained, including the controls over its preparation and maintenance where relevant.

22 6.22 O Solved Scanner IPCC Group- II Paper - 6 Therefore, generalisations about the reliability of various kinds of audit evidence are subject to important exceptions. Even when information to be used as audit evidence is obtained from sources external to the entity, circumstances may exist that could affect its reliability. The reliability of audit evidence is influenced by Generalisations useful in assessing reliability of audit evidence 1. Its source i.e. internal and external. 2. Its nature i.e. visual, documentary or oral. 3. Circumstances under which it is obtained. 4. Consistency of evidence obtained from different sources or nature. 5. Nature of assertion obtained and its materiality. 1. External evidence (e.g.: confirmation received from third party) is more reliable than internal evidence. 2. Internal evidence is more reliable when related internal control is satisfactory. 3. Evidence in the form of documents and written representations are usually more reliable than oral representation. 4. Evidence obtained by the auditor himself is more reliable than that obtained through the entity. (b) Write short note on Examination in depth. (4 marks) Examination in depth: Examination in Depth means an examination of a few selected transactions from the beginning to the end through the entire flow of transaction. This examination includes studying, the recording of transactions at each stage and judging, whether the person who has exercised the authority in relation to the transaction is fit to do so.

23 Model Test Paper O 6.23 The selection must be correct and proper. A sample size may be small but it should be a true representative of the universe of transaction. Infact, the size depends upon the auditor s level of confidence, there is a inverse relationship between them. For example: A purchase of goods may commence when the company reaches its re-order level. The probable steps of purchase are as follows : 1. Requisition: pre-printed, pre-numbered, authorised. 2. Formal purchase order: sequentially pre-numbered and authorised- placed with the approved supplier only. 3. Receipt of supplier s invoice. 4. Receipt of supplier s statement. 5. Entries made in purchase day book. 6. Posting to purchase ledger and purchase ledger control A/c. and 7. Cheque issued in settlement. 8. Entry on bank statement and returned paid cheque if requested. 9. Entry in cash book. 10. Posting from cash book to ledger and it s ledger control (taking into account the discounts, if any). 11. Receipt of goods, along with delivery or advice note. 12. Issuance of goods received note and inspection certificate containing initials or rubber stamp to show that goods are verified and inspected. 13. Admission of goods to store. 14. Entries of goods to store. It should be kept in mind that the above list is not a fixed list and its sequence can be changed. So we can see that as soon as the company reaches the re-order level, it has to follow a chain of events, also leaving an audit trail. Thus, examination in depth is necessary, as if it is conducted properly, then it will reveal both the functioning or malfunctioning of the client s system.

24 6.24 O Solved Scanner IPCC Group- II Paper - 6 (c) Reissue of redeemed debentures. (4 marks) Reissue of Redeemed Debentures 1. See whether the expenses on re-issue are properly treated in the accounts. 2. Verify whether there is any alteration in the rights & privileges of the Debenture holders in respect of debentures re-issued. 3. See that the collateral security is disclosed against the liability concerned in the inner column of Balance Sheet. (d) Defalcation of cash with examples. (4 marks) Defalcation of Cash Defalcation of cash may take place in following ways: 1. By Inflating cash payment 2. By suppressing cash receipts 3. By casting wrong total in the cash book. The defalcation of cash is occurred due to the transaction affecting the cash balances which are as follows: The cash payment made for purchases The payment made to supplier for credit purchases The payment made for expenses Cash in transit in case of consignment Bad debt incurred Purchase of fixed assets Redemption of debentures and buyback of the share capital Dividend paid for the year etc. (e) Verification of credit sales. (4 marks) Verification of the credit sales : The credit sales should be verified by reference to copies of invoices issued to customers and, in the process. The Auditor should consider the following points: 1. The credit sales should be verified by reference to copies of invoices issued to customers and in the process, attention should be paid to the following matters: (i) that each item of sales relates to the period of account under audit.

25 Model Test Paper O 6.25 (ii) that the goods are those that are normally dealt in by the concern. (iii) that the sale price has been correctly arrived at and the copy of the requisition slip issued by the Sales Department and the copy of the Despatch Notes showing the date and mode of despatch of goods are attached with the invoice. (iv) that the amount of the invoice has been adjusted in an appropriate account; and (v) that the sale has been authorised by a responsible official and in token thereof he has initialed the invoice also that any alteration in the invoice has been attested by the same person. 2. If any additional charges are recovered along with the sale price, these should be credited to separate accounts, appropriately headed, and not to the sales account. 3. When a trade discount is allowed, the amount thereof should be deducted from the sale price. When any special trade discount has been allowed, the reason thereof should be ascertained. 4. Small concerns generally do not have well organised sales and despatch departments. In such cases, for verifying sales the auditor should trace a small preparation of sales invoice into the stock book, specially of goods sold at the beginning and at the close of the year. 5. The sale of goods on hire-purchase basis or goods sent out on sale or return basis or on consignment basis should be separately recorded. 6. When credit sales are not adjusted in the account at the time they are made but at the time sale proceeds are collected, there can be no guarantee that any amount collected in such sales has not been misappropriated. The auditor should, therefore, draw the attention of the management to the risk involved in adopting such practice.