Guideline Answers for Auditing and Assurance

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1 Join with us Get More Updates From Guideline Answers for Auditing and Assurance Question 1(a): Discuss the following (4 5=20) Auditing as Behavioural Science The relationship of Auditing with other disciplines is highlighted as under Discipline Relationship 1. Behavioural Science During the course of his work, the Auditor is required to obtain information and explanations from the Client s staff. He has to interact with the organisation s staff in analysing the financial figures. Hence. the Auditor should have the knack of getting along with people, and obtain relevant information to meet his audit needs. Question 1(b): Discuss the following Disclosure requirement relating to Long Term Borrowings as per Schedule III Long Term Borrowings shall be classified as (a) Bonds/Debentures, (b) Term loans (i) from Banks, and (ii) from Other Parties, (c) Deferred Payment Liabilities, (d) Deposits, (e) Loans & Advances from Related Parties, (f) Long Term Maturities of Finance Lease Obligations, (g) Other Loans and Advances (specify nature). Notes: 1. Security wise Classification: Borrowings shall further be sub classified as Secured and Unsecured. Nature of Security shall be specified separately in each case. 2. Guarantees: Where Loans have been guaranteed by Directors or Others, the aggregate amount of such loans under each head shall be disclosed. 3. Maturity Date wise: Bonds / Debentures (along with the Rate of Interest and particulars of Redemption or Conversion, as the case may be) shall be stated in descending order of maturity or conversion, starting from farthest Redemption or Conversion Date, as the case may be. 4. Instalment Redemption: Where Bonds/Debentures are redeemable by Instalments, the Date of Maturity for this purpose must be reckoned as the Date on which the First Instalment becomes due. 5. Re issue Powers: Particulars of any redeemed Bonds/ Debentures which the Company has power to reissue shall be disclosed. 6. Terms of Repayment: Terms of Repayment of Term Loans and Other Loans shall be stated. Default: Period and amount of continuing default as on the Balance Sheet date in repayment of Loans and Interest, shall be specified separately in each case. Question 1(c): Discuss the following Inherent Limitations of Audit The Auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the Financial Statements are free from material mis statement due to fraud or error. This is because there are inherent limitations of an audit, which result in most of the audit evidence on which the Auditor draws conclusions and bases his opinion being persuasive rather than conclusive. The inherent limitations of an audit arise from 1

2 Get More Updates From Join with us (a) Nature of Financial Reporting accounting estimates like provisions cannot be accurately verified. Hence there is an inherent lack of precision. (b) Mgmt. may not provide information (intentionally / unintentionally) which is necessary for audit (c) Carefully laid schemes of frauds which are concealed from the Auditor, not capable of being found out by normal audit procedures (d) The powers of the Auditor are limited (for e.g. power to search is given to an Investigator, under the Companies Act, but not available to the Auditor) (e) Need for the audit to be conducted within a reasonable period of time and at a reasonable cost. Hence, the Auditor adopts only sampling. This results in Sampling Risk. (f) The Nature of evidence that the Auditor obtains is persuasive and not conclusive. (g) Other factors like existence of Related Parties Transactions, Non Compliance with laws and regulations, future events and conditions that may question the going concern of an entity are other limitations for an audit. Question 1(d): Discuss the following Mention any four information which assits the Auditor in accepting and continuing of relationship with the client as per SA Acceptance and continuance of Client Relationships and Audit Engagements: (a) The Engagement Partner shall be satisfied that appropriate procedures regarding the acceptance and continuance of Client Relationships and Audit Engagements have been followed, and shall determine that conclusions reached in this regard are appropriate. (b) If the Engagement Partner obtains information that would have caused the Firm to decline the Audit Engagement had that information been available earlier, he shall communicate that information promptly to the Firm, so that the Firm and the Engagement Partner can take the necessary action. 2. Other factors affecting Acceptance: If the pre conditions for an audit are not present, the Auditor shall discuss the matter with Management. Further, the Auditor shall not accept the Proposed Audit Engagement, (a) if the Auditor has determined that the Financial Reporting Framework to be applied in the preparation of the Financial Statements is unacceptable or (b) if the Management s representation on its responsibility has not been obtained. Question 2: State with reasons (in short) whether the following statements are correct or incorrect: (Answer any Eight) (8 2=16) (a) In Audit of Partnership Firm, Auditor need not verify the remuneration paid to the Partners. (b) The C&AG can conduct audit of Government Companies. (c) A Special Resolution is required by Company to authorize issue of Shares at discount. (d) Stores and Spare Parts should be shown under Fixed Assets in the Balance Sheet as per Schedule III of the Companies Act, (e) A Company can consider an Useful Life of the Asset longer than the one prescribed by Schedule II of the Companies Act, (f) The overall objective of audit changes in Computer Information System (CIS) environment. (g) Specific disclosure is required of the Fundamental Accounting Assumptions followed in the Financial Statements. (h) The Investments made by the Company in Government Securities like NSC, Government Bonds, etc., should be kept in personal custody of Financial Controller of the Company. (i) Audit Procedures and Audit Techniques are not one and the same thing. (j) Confirmations received by the Auditor directly from Third Parties are conclusive evidence in support of a transaction. Question Correct / Reason (a) In Audit of Partnership Firm, Auditor need not verify the remuneration paid to the Partners. 2 Auditor needs to verify the nature and amount of remuneration paid to Partners and to confirm the correctness with Partnership Deed.

3 Get More Updates From Join with us (b) The C&AG can conduct audit of Government Companies. Question Correct / Reason (c) A Special Resolution is required by Company to authorize issue of Shares at discount. (d) Stores and Spare Parts should be shown under Fixed Assets in the Balance Sheet as per Schedule III of the Companies Act, (e) A Company can consider an Useful Life of the Asset longer than the one prescribed by Schedule II of the Companies Act, (f) The overall objective of audit changes in Computer Information System (CIS) environment. (g) Specific disclosure is required of the Fundamental Accounting Assumptions followed in the Financial Statements. (h) The Investments made by the Company in Government Securities like NSC, Government Bonds, etc., should be kept in personal custody of Financial Controller of the Company. (i) Audit Procedures and Audit Techniques are not one and the same thing. (j) Confirmations received by the Auditor directly from Third Parties are conclusive evidence in support of a transaction. Partly Correct / Correct CAs appointed by the C&AG as Statutory Auditor conducts the audit of Government Companies. The C&AG has a right to conduct Supplementary Audit. Company cannot issue Shares at a discount. Stores and Spares should be disclosed under Inventories and not under Fixed Assets. For Prescribed Class of Companies, longer Useful Life can be permitted if justification thereof is given. However, for other Companies, Longer Useful Life is not permissible. No change in overall audit objectives. See AS 1. Disclosure is required only if it is not followed. Investments should be under official Custody and not under personal Custody of Financial Controller. Audit Procedure represent broad Framework of verification, whereas Audit Technique is a part of Audit Procedure Third Parties Evidences are only confirmatory in nature, and not conclusive evidence. Question 3(a): How will you Vouch / Verify the following: (4 4=16) Intangible Assets. [Any Four Points] Minutes Book, Resolution and Agreement General Ledger Financial Statements Schedule of Copyrights Ascertain and note Board Authorisation for purchase or raising of Goodwill. Examine the relevant purchase agreement if Goodwill has been purchased. Examine the basis of revaluation of Goodwill, wherever applicable. Ascertain whether the business is earning any Super Profits, i.e. profit which is above Normal Profit in similar businesses. Ascertain the policy of writing off Goodwill and confirm compliance with AS 26 with regard to amortization of Intangible Assets. Examine the basis of working, when Goodwill has been raised in the books by way of a book entry only (i.e. without actual purchase). Internally Generated Goodwill (i.e. without actual purchase) should not be recognized as an asset. Ensure that the Carrying Amount of Goodwill has been adequately disclosed in the Balance Sheet in accordance with AS 26 requirements. Obtain a schedule of Copyrights and get the detailed information to confirm that all of them are shown in the Balance Sheet. 3

4 Join with us Get More Updates From Agreement General Ledger Financial Statements Schedule of Patents Patent Purchase Agreement Receipts given by Vendor Asset /Patent Register General Ledger Balance Sheet Examine the written agreement of assignment along with the price paid to the Author for such Copyrights. In case of Trademarks, verify the assignment deed. Ensure that such assignment is properly registered. Ascertain that the legal life of the Copyright has not expired. Ensure that the Cost of the Trademark / Copyright has been ascertained properly in accordance with AS 26. Ensure that the amount paid for Copyright is properly amortised based on appropriate accounting, legal and commercial considerations. (AS 26) See that the Copyright having no commercial value (e.g. a copyright that does not command any sale of books) has been completely written off. Ensure that the Carrying Amounts of Trademark / Copyright have been adequately disclosed in the Balance Sheet in accordance with AS 26 requirements. Obtain the list of Patents owned by the Entity as on the Balance Sheet date. Examine the dates of registration of Patents with the related authorities and the dates in respect of the last renewal. Verify and note the following items Powers of Vendor (Seller of Patents) to sell Patent Rights. Proper transfer / conveyance of title in favour of the Client (buyer of Patent Rights). Manner of payment of purchase consideration whether lumpsum payment or lumpsum plus annual royalties, etc. Period during which rights are alive details of fees to be paid in order to renew Patent Rights. Verify whether Amount of consideration paid to Vendor is in tune with the agreement. Details of incidental expenses relating to patent purchase e.g. stamp duty, have been properly capitalised. Confirm that Patents are included in the Asset Register or Patent Register for the period under consideration. In case of self generated Patent Rights, ensure that all costs incurred on their development including legal and registration expenses for registration are included in the cost. Verify the accounting entries as regards Capital / Revenue distinction (a) Capitalisation of Lumpsum or other purchase consideration for patent purchased. (b) Revenue Expenditure for renewal fees paid in respect of patents. Examine the valuation of the Patent Rights. It should be seen that the Patent Rights have been valued at Cost less Depreciation attributable to the expired legal life of the Patent Rights. When the product covered by the Patent Rights does not have any sale value, then patents should be shown at Nil value, irrespective of any residual value. Ensure that the Carrying Amount of Patents has been adequately disclosed in the Balance Sheet in accordance with AS 26 requirements. Question 3(b): Retirement Gratuity to Employees. [Any Four Points] Agreement or Trust Deed Computation Sheets Examine the basis on which the gratuity payable to employees is worked out. The liability for gratuity should preferably be worked out on actuarial valuation on the Balance Sheet Date. Ensure that the basis of computing gratuity is valid and is being consistently followed by the Client. Ensure compliance with the Payment of Gratuity Act, wherever applicable. Verify computation of Gratuity Liability on an aggregate basis. Check the amount of gratuity paid to employees who have retired during the year with reference to number of years of services rendered by them. Confirm whether gratuity payments have been acknowledged by way of stamped receipts / vouchers from the workers. 4

5 Join with us Get More Updates From Financial Statements See that the annual premium has been charged to Statement of Profit and Loss, in case the concern has taken a policy from LIC / Other Insurer. Verify any alteration in the Retirement Benefit Costs arising from (a) introduction of new scheme, or (b) improvements to existing scheme or (c) changes in actuarial methods, or (d) change in assumptions. Ensure that changes are properly displayed and disclosed as per AS 5 requirements. Verify compliance with AS 15 Requirements. Question 3(c): Machinery acquired on Hire Purchases Basis. [Any Four Points] Minutes Book and Resolution HP Agreement Payment Vouchers General Ledger Financial Statements Examine the General Meeting or Board Meeting Resolution for proper approval for the acquisition of asset on HP basis. Obtain the Hire Purchase Agreement and note the description of the assets, cost of the assets, hire purchase charges, terms of payment and date of purchase. Verify instalment payments made to the HP Company and confirm whether they are as per the terms of agreement. Ascertain whether valid receipts have been issued by the HP Company. In case of default in payment, see that a Note is given in the Financial Statements that the assets are liable to be repossessed due to default. Ascertain that the assets have been capitalized at their cash value and ensure computation of depreciation on that price only. Verify whether Hire Charges / Finance Charges for the period have been duly charged as an expenditure. Wherever applicable, ensure adequate disclosure of the manner of acquisition of asset on HP basis. Ensure that the liability to the HP Company has been properly disclosed. Obtain a statement of account from the HP Company for confirmation purposes. Question 3(d): Recovery of Bad Debts written off [Any Four Points] Schedule of Bad Debts Proof of Collection Credit Manager s File Bank Statement Receipt Verify whether the amount of Bad Debts Recovered has been shown in the Bad Debts Schedule of the preceding years. Verify the relevant proof of recovery submitted, e.g. Court Decree, Notice from Bankruptcy Trustee, Letters from Collecting Agency or Lawyer or Party, if any. Verify whether amount received has been noted in the file. Ascertain that any specific matter materially affecting accounts has been noted in the file. Trace receipt of amount in the Bank Statement. Confirm that the cheque received from party has not been dishonoured. Verify whether proper acknowledgements have been issued to parties. Question 4(a): (4 4=16) Bikram was appointed as an Auditor of Raj Ltd, for the year ended in the AGM held on Bikram was indebted to the Company for a sum of ` 5,50,000 as on , the opening date of the accounting year which had been the subject to his audit. Upon learning the proposed appointment as Auditor, Bikram repaid the amount on Ravi, a Shareholder, complained that the appointment of Bikram as Auditor was invalid and he incurred disqualification u/s 143 and his independence had been vitiated in relation to the accounting year of his audit. Comment. 5

6 Join with us Get More Updates From 1. Disqualification u/s 141(3) applies only if the person is indebted to the Company on or after the date of appointment as the Statutory Auditor of that Company. 2. In this case, Bikram was a Debtor of the Company before (date of appointment), but not on or after that date. So, he is eligible to be appointed as the Auditor of the Company. The Shareholder s contention is invalid. Question 4(b): Adivesh & Co, a Firm of CA s, is appointed as Auditor of a Company in the name of the Firm. Mr. Adivesh, who is a Partner of the Firm, is related to one of the Directors of the Company. Is the appointment of the Firm as Company Auditors valid? 1. The following persons are disqualified u/s 141(3) (a) a Person who, or his Relative or Partner is holding any security of or interest in the Company or its Subsidiary, Holding or Associate Company or a Subsidiary of such Holding Company. (b) a Person whose Relative is a Director or is in the employment of the Company as a Director or Key Managerial Personnel, 2. So, the Firm / Partner is not qualified to be appointed as Company Auditor, since his relationship is likely to affect his duties as an Auditor and impair his independence. Question 4(c): A Ltd has its Registered Office at New Delhi. During the current accounting year, it has shifted its Corporate Head Office to Indore, though it has retained the Registered Office at New Delhi. The Managing Director of the Company wants to shift its books of account to Indore from New Delhi, as he feels that there is no legal bar in doing so. Comment. 1. Sec.128 Requirements: Sec.128 provides as under (a) The books of account shall be kept at the Registered Office of the Company. (b) All or any of the books of account may be kept at such other place in India as the Board of Directors may decide. The Company shall file with the ROC, a notice in writing giving the full address of that other place. 2. Conclusion: The Board of Directors of the Company may decide to keep the books of accounts of the Company in any other place other than the Registered Office of the Company by fulfilling the requirements of Notice to ROC. Question 4(d): Explain the applicability of Corporate Social Responsibility as per Sec.135 of Companies Act, Particulars Applicability [Sec.135(1)] Description Every Company having (a) Net Worth ` 500 Crores, or (b) Turnover ` 1,000 Crores, or (c) Net Profit ` 5 Crores during any of three preceding financial years. Note: (a) CSR applies to every Company including its Holding or Subsidiary, and a Foreign Company as per Sec.2(42) having its Branch Office or Project Office in India, which fulfills the above criteria. (b) Net Profit means Net Profit as per Financial Statement prepared in accordance with the applicable provisions of the Act, but does not include Profits from any Overseas Branch(es) of the Company, whether operated as a separate Company or otherwise, Dividend received from other Companies in India, which are covered under and complying with the provisions of Sec

7 Get More Updates From Join with us Question 5(a): Discuss with reference of SA s (2 8=16) The Auditor is faced with sampling risk in both tests of control and substantive procedures. Comment on this statement with reference to SA 530 on Audit Sampling. Audit Sampling (Sampling) Sampling Risk The application of audit procedures to less than 100% of items within a population of audit relevance, such that all sampling units have a chance of selection, in order to provide the Auditor with a reasonable basis on which to draw conclusions about the entire population. 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 Error Type Type I Type II In case of Test of Controls That Controls are more effective than they actually are (i.e. Risk of over reliance) That Controls are less effective than they actually are (i.e. Risk of under reliance) In case of Test of Details That a material mis statement does not exist, when in fact it does (i.e. Risk of incorrect acceptance) That a material mis statement does exist, when in fact it does not (i.e. Risk of incorrect rejection) Effect of this erroneous conclusion This affects audit effectiveness, and is more likely to lead to an inappropriate audit opinion. This affects audit efficiency, as it would usually lead to additional work to establish that initial conclusions were incorrect.. Question 5(b): Discuss with reference of SA s Under SA 315, an Auditor shall obtain an understanding of the Entity and its Environment. What aspects of the environment should the Auditor cover in this regard? Understanding the Entity and its Environment (5 s) : In the process of obtaining an understanding of the entity, the Auditor shall obtain an understanding of the following aspects in its environment 1. Relevant Industry, Regulatory, and Other External Factors including the applicable financial reporting framework. 2. Nature of the Entity, including (a) its operations, (b) its ownership and governance structures, (c) the types of investments that the Entity is making and plans to make (including investments in Special Purpose Entities), and (d) the way that the Entity is structured and how it is financed, (e) existence of Special Purpose Entities, if any (See Note below) to enable the Auditor to understand the classes of transactions, account balances, and disclosures to be expected in the Financial Statements. 3. The Entity s selection and application of accounting policies, including the reasons for changes thereto. The Auditor shall evaluate whether the entity s accounting policies are appropriate for its business and consistent with the applicable financial reporting framework and accounting policies used in the relevant industry. 4. The Entity s objectives & strategies, and those related business risks that may result in risks of material mis statement. 5. Measurement and Review of the Entity s financial performance. Question 6(a): What special points will you take into consideration in auditing the accounts of Hotels? (8 Marks) 7

8 Join with us Get More Updates From [Any 10 Points] The following matters deserve the Auditors attention in the audit of a Hotel Auditors Duties Internal Control Room Sales Internal Control Restaurant Billing and Sales Internal Control Stocks Casual Labour Commission Payments Fixed Assets Statutory Compliance Analytical Review Verify the Room Sales Collections from the Guest Register. Sometimes, daily occupancy reports and extra bed supply reports are prepared. In such cases, test check a few reports with the Guest Register and with the individual guest s bill, to ensure proper billing. See whether standard room rates have been charged in various guests bills. In case of difference, obtain satisfactory explanation and sanction for the same. All sales points in a hotel make both cash and credit sales. The Auditor should examine the internal control system as regards (a) procedure for billing customers for room service and sundry services, (b) procedure for issue of provisions and commodities, and (c) safe custody of edibles, beverages, drinks, crockery, cutlery, linen, furniture, etc. The Auditor should Perform compliance tests to ensure that the internal control system operates effectively. Reconcile the total sales reported with the total of the bills issued by the sale point, either in the form of a bill roll or a series of numerically controlled bills. Check the numerical control system to ensure that all bills are included in the total. Verify a few restaurant bills by reference to KOT s (Kitchen Order Tickets) or basic record. Trace the cash element of sales into the Cash Scroll / Cash Book and the credit sales in total and detail to the guest s bills. Examine the documentation procedure in respect of stocks, since Hotel Stocks are readily (a) movable /portable, and (b) saleable, e.g. Provisions, Food, Beverages, etc. Perform compliance tests to ensure that all such documentation is accurately processed. See whether stocks are kept under safe custody under the supervision of the Department Manager. Ensure that movement of provisions and goods in or out of the stores takes place only after proper authorisation and recording. Supervise the physical stock taking and test check pricing calculations. Verify the basis of valuation adopted for stocks. In case of specialized professional valuation, examine whether the valuation is done reasonably and consistently on a systematic basis. Generally, hotels employ casual labour to a very large extent, in many of their departments. Hence, the Auditor should Examine the wage payment registers and attendance records to see whether any manipulation has been made. Verify whether adequate records, as required by law, wherever applicable, have been maintained. In case of bookings through travel agents, hospitality agents, corporates (for their guests) or other booking agencies, the Auditor should Verify that the amounts due are recovered from agents as per the terms of credit allowed. Check the commission, if any, paid to agents by reference to the agreement. Obtain a schedule of Fixed Assets and verify whether adequate depreciation has been provided at the prescribed rates. Verify whether the capitalization and depreciation policies followed by the Institution have been consistently followed. Conduct physical inspection of Fixed Assets and obtain management certificates for periodic inspection thereof. Examine the method of recording certain assets e.g. Silver Cutlery taken as stock items in certain hotels and as Fixed Assets in other hotels. It is important that comprehensive definition of stock items exists and the Auditor should consider that whether or not the same have been properly followed in reality. Note the provisions, rules and regulations of various laws governing the operation of hotels, e.g. the Shops and Establishments Act, Local Sales Tax Acts, Regulations laid down by the Department of Tourism, RBI regulations in respect of foreign exchange transactions, etc. Verify whether the conditions of licence for running the hotel have been complied with. See whether all foreign exchange transactions have been properly entered into and appropriately reported in the accounts. See whether all taxes collected on food and occupation have been remitted to the proper authorities. Trace the consumption shown in various physical stock accounts, to customers bills on a sampling basis wherever practicable or to appropriate consumption account to ensure that all issues have been billed and accounted for. 8

9 Get More Updates From Join with us General Auditors Duties Work out the occupancy rate and compare the same with other similar hotels and with the previous year. Investigate material deviations. Compare the expenses and receipts with the figures of the previous year having regard to the average occupancy of visitors and changes in the rates. Verify whether payments made to foreign collaborator, if any, are in accordance with the terms of agreement. Vouch receipts on account of letting out of the Auditorium space and other spaces for shops and boutiques and for special shows etc. with reference to respective agreements. Examine the Customers' Ledger on a sample basis but in depth to see that all charges that should be made to the customers are in fact made. Check whether income receivable but not yet billed has been accounted for in respect of (a) Room Charges, and (b) Value of services rendered to customers still in occupancy on the closing day. Check whether costs of re decoration and renovation of buildings and facilities have been properly accounted for. See whether provision for replacement of Current Assets like carpets, linen, etc. is made. Verify the Share Capital, Reserves and Surplus, Secured and Unsecured Loans. Verify whether the form and manner of presentation of financial information conforms to Accounting Standards and applicable legal requirements. Obtain appropriate Management Representations and Certificates, in respect of the various aspects covered during the course of audit. Question 6(b): What are the powers of C&AG in the discharge of his audit duties? (4 Marks) The C&AG Act gives the following powers to the C&AG in the performance of his duties 1. Inspection: To inspect any office of accounts under the control of the Union or a State Government including office responsible for the creation of the initial or subsidiary accounts. 2. Transmission: To require that any accounts, books papers and other documents, which deal with or are otherwise relevant to the transactions under audit, shall be sent to specified places. 3. Inquiry and Call for Information: To put such questions or make such observations as he may consider necessary to the persons in charge of the office and to call for such information for the preparation of any account or report. 4. Sample Check: (a) To dispense with any part of detailed audit of any accounts or class of transactions, and (b) To apply such limited checks in relation to such accounts or transactions as he may deem fit. Question 6(c): How will you verify issue of Bonus Shares? (4 Marks) MOA / AOA Minutes Books Verify that the Bonus Issue is authorised by the Articles. Ensure that the procedure prescribed by the Articles has been followed. Verify whether the Company has sufficient Unissued Shares well within the Authorised Capital, to cover the Bonus Issue. Inspect the Minutes Book of Shareholders for Resolution authorising declaration of Bonus and Directors Minutes for Resolution appropriating profits to apply in Bonus Shares allotted to Shareholders. Inspect the Minutes of the Directors Meetings to see that they are properly recommended after complying with the applicable Legal and Regulatory requirements. See the nature of Bonus Issue, i.e. (a) issue of fully paid Shares, or (b) making partly paid Shares into fully paid. Special Trace the allotment of Shares as per particulars contained in the Allotment Book / Sheets, into the 9

10 Get More Updates From Join with us consi derations Register of Members. Confirm that all statutory requirements / SEBI Guidelines relevant to the Bonus Issue have been complied with. Ensure that the particulars of the Bonus Shares allotted are filed with the ROC together with a copy of the Resolution pursuant to which allotment has been made. See whether the Bonus Issue is made out of Securities Premium Account or Capital Redemption Reserve Account, which cannot be used for other purposes, or out of Free Reserves. Ensure that Share Certificates are issued in accordance with the effective internal control procedures employed by the Company. Question 7(a): Write short notes on any Four of the following. (4 4=16) Auditing in Depth 1. Meaning: Examination in Depth means examination of a few selected transactions from the beginning to the end through the entire flow of the transaction. It involves studying the recording of transactions at the various stages through which they have passed. 2. s of Verification: (a) At each stage, relevant records and authorities are examined, it is also judged whether the person who has exercised the authority in relation to the transactions is fit to do so in terms of the prescribed procedure. (b) While auditing in depth, the Auditor reviews all the accounting and operational aspects of the transaction from the origin to the end. This enables him to have an overall view and evaluate the procedures through selected transactions. 3. Examination in depth reconstructs the audit trail and reveals more about the functioning (or malfunctioning) of the Client s system in practice than the haphazard and mechanical approach to testing. Question 7(b): Independence of Auditors 1. Basic Principle: Integrity, Objectivity and Independence as one of the basic principles governing an audit. The Auditor should be straight forward, honest and sincere in his approach to his professional work. He must be fair and must not allow prejudice or bias to override his objectivity. He should maintain an impartial attitude and both be and appear to be free of any interest which might be regarded, whatever its actual effect, as being incompatible with integrity and objectivity. 2. Meaning: Independence implies that the judgement of a person is not sub ordinate to the wishes or directions of another person who might have engaged him or to his own self interest. 3. 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. For example, the Companies Act has certain provisions, which guarantee the independence of the Auditor. 4. Visibility: Independence of the Auditor should not only exist in fact, 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 profession as a whole. Question 7(c): Qualified Opinion 10

11 Join with us Get More Updates From Qualified Opinion: The Auditor shall express a Qualified Opinion when (a) The Auditor, having obtained sufficient appropriate audit evidence, concludes that mis statements, 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 mis statements, if any, could be material but not pervasive. Question 7(d): Fundamental Accounting Assumptions The fundamental accounting assumptions are 1. Going Concern: the enterprise is normally viewed as a Going Concern, i.e. as continuing in operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of operations. 2. Consistency: The accounting policies are consistent from one period to another. 3. Accrual: Revenues and Costs are accrued, i.e. recognized as they are earned or incurred and recorded in the Financial Statement of the period to which they relate, and not when money is received or paid. Disclosure Requirements: If the above assumptions are followed Disclosure is not required, since their acceptance and use are assumed. If the above assumptions are not followed Disclosure is necessary specifying that the general accounting assumptions are not followed. Question 7(d): CAAT s 1. Meaning: CAATs are computer programs and data, that the Auditor uses as part of the audit procedures to process data of audit significance, contained in an entity s information systems. In a CIS environment, the application of auditing procedures may, require the Auditor to consider CAATs that use the computer as an audit tool, for enhancing the effectiveness and efficiency of audit procedures. 11

12 Get More Updates From Join with us STUDENTS NOTES 12