CA Arvind Jain AUDIT IPCC NOV 2012 SOLUTIONS 1 Qn 1 (a) Shares issued at a discount : When shares are issued at a price, less than its nominal value, they are said to be issued at a discount. Section 79 states that shares may be issued at a discount, if all the following conditions are satisfied, namelyi) The shares must be of the class already issued ; ii) At least one year must have elapsed since the company became entitled to commence business ; iii)the issue must be authorised by resolution of general meeting, which must specify maximum rate of discount ; iv) The resolution must be confirmed by CG ; v) The rate of discount must not exceed 10%. But CG may allow higher rate as per special circumstances of case. vi) The shares must be issued within two months, from the date of sanction by CG. CG may extend time of two months. vii) Every prospectus must state the detail of discount allowed on issue of shares or extent to which it has not been written off on date of prospectus. If default is made, company and every officer in default shall be liable to penalty up to Rs. 500/-. Consequence of Issue of Shares at irregular discount : a. Every director is responsible to return the amount of discount to company, if illegal discount is given. b. Every person, who has applied for issue, can apply to court to remove his name, from Resister of Member. c. If a person had knowledge of irregularity, then if he is allotted any shares at discount, that person has to pay amount of discount to company. Qn (1) (b) CEILING ON NO. OF AUDITS SEC 224(1B) Before appointment is given to an auditor, the company must obtain a certificate from auditor to the effect that appointment if made, will not result in an excess holding of company audit by the auditor concerned over the limit in Section 224 (1B). Following are the ceiling limits as per Companies Act, 1956 : A company or its board of directors will not appoint or reappoint any person who is in full time employment elsewhere. Limit is 20 company audits per person. (Out of which not more than 10 shall have a paid up capital of 25 lakhs or more.) If a person is partner in a number of auditing firms, all the firms in which he is partner will be together entitled to 20 Company audits on his account. Subject to overall limit of 20 company audits, how they allocate audits between them is their affair. Before appointment is given to any auditor, the company must obtain a certificate from the auditor to the effect that the appointment, if made, will not result in excess holding of company audits by the auditor concerned over the limit laid down in section 224 (1B). Following audits will not be counted in above limit: (a) Branch audit (b) Audit of Private companies (c) Audit of Foreign companies (d) Special audit U/S 233A (e) Companies limited by guarantee and not having share capital (f) Bank audits Following audits shall be included in above mentioned limit: (a) Audit of companies under section 25 of Companies Act i.e. Non profit companies (b) Joint audits (c) Company limited by guarantee and having share capital. NOTIFICATION OF ICAI : Ceiling on number of audits is 30, including private companies, with a sub-limit of 10 companies with paid up capital of Rs. 25 lakhs or more.(these 10 companies can be public only) This limit of 30 company audits is per person who is not in whole time employment. In computing the above number of audits even branch audit will be included but appointment should be under section 228. A member of ICAI who fails to comply with the notification shall be liable for professional misconduct.
CA Arvind Jain AUDIT IPCC NOV 2012 SOLUTIONS 2 OVER ALL (COMBINED) EFFECT OF LIMITS : The total limit is 30. Within 30, the limit for public companies is 20. With in limit of 20 public companies, the sub limit in respect of public companies with paid up capital of Rs. 25 lakhs or more is 10. A chartered accountant in whole time employment cannot do any company audit. Qn (1) (c) Purpose of providing depreciation : The objectives of providing depreciation are as follows : True Financial Position: The assets are shown at proper (reduced) value at every balance sheet. Correct Income Measurement : The profit & Loss account shows true/proper profit or loss because some portion of fixed asset (in the form of dep.) which are used for earning the income are debited to P&L A/c Funds for Replacement : The depreciation reduces the profit, hence to that extent amount (funds) gets retained in the business, which can be used for replacement of this asset. Ascertainment of true cost of production: For ascertaining the cost of the production, it is necessary to charge depreciation as an item of cost of production. Qn (1) (d) APPOINTMENT IN CASE OF CASUAL VACANCY: The term casual vacancy in the office of an auditor has not been defined under Companies Act. Casual Vacancy means the vacancy caused by auditor ceasing to act as such after having accepted a valid appointment. Casual Vacancy may arise due to several reasons eg. Death, disqualification, dissolution of firm of auditors etc. A casual vacancy does not arise in the office of auditors on expiry of one year of their appointment if AGM is not hold in prescribed time. Section 224 (6) provides that BOD may fill any casual vacancy in the office of an auditor; but while such vacancy continues, the remaining auditors may act. However if such vacancy is caused by the resignation of any auditor, the vacancy shall only be filled by company in general meeting. Auditor appointed in casual vacancy shall hold the office until the conclusion of next AGM. Qn (2)(a) TRUE AND FAIR VIEW :- What constitute T/F has not been defined in any law. Section 211(5) of Companies Act states that accounts of company shall be deemed as NOT disclosing a true and fair view, if they don't disclose any matter which are required to be disclosed by virtue of provision of schedule VI to that Act or by virtue of a notification or any order of the CG modifying the aforesaid requirements. In case of companies which are governed by Special Acts, the auditor should see that disclosure requirements specified in relevant act is complied with. For example in case of Banking Co, Electricity Co, or Insurance Co, the disclosure requirement of Banking Regulation Act etc. will have to be complied. It must be noted that requirement of law are minimum disclosure requirement. If certain information is vital for showing T/F view, then it must be disclosed in a/c's even if law don't require its separate disclosure. What constitute T/F in particular circumstances depends upon auditor's judgement in a particular circumstance. In specific terms, while certifying T/F view of stat of affairs - (i) look that assets are neither undervalued, nor overvalued as per Normally Accepted Accounting Principles (ii) No material asset is omitted from recording, (iii) the charge, if any, on asset is disclosed. (iv) material liabilities have not been omitted. (v) the P&L Account discloses all matters required to be disclosed by Schedule VI Part II and Balance Sheet is prepared as per format given in Schedule VI Part I and discloses the information stated therein (vi) Accounting policies have been consistently followed (vii) all unusual, exceptional and non-recurring transactions have been separetely disclosed. For verifying whether a/c's are T/F or not, auditor will have to examine records with a view to certifying the same keeping in view the above objective. Qn (2)(b) At the time of preparation of financial Statement (i.e., Balance Sheet, Profit & Loss Account), there are many areas, which have more than one method of accounting treatment such as: Method of Depreciation Policies - Straight Line Method, WDV Method.
CA Arvind Jain AUDIT IPCC NOV 2012 SOLUTIONS 3 Treatment of Expenditure during construction : Written off, Capitalization, Deferment. Conversion or translation of foreign currency item: Average Rate, TT buying rate. Valuation of Inventories : FIFO, Weighted Average, Standard Cost, Retail Method. Valuation of Investment, Treatment of Retirement Benefits, Valuation of Fixed Assets, Treatment of Contingent Liabilities. There are many areas other than aforesaid, where more than one method can be followed for accounting which methods have been followed in preparation of Balance Sheet, profit and loss accounts is disclosed as accounting policies. Hence accounting policies contains the information about the method adopted for the preparation of financial statement. Statements of accounting policies are part of financial statement. Examples of Accounting Policies:- 1. Depreciation :- Depreciation on fixed assets has been provided for on straight-line method at the rates prescribed under Schedule XIV to the companies Act, 1956 as amended. 2. Inventories :- Inventories are valued at lower of cost and net realizable value. The cost comprises of cost of purchase, cost of conversion and other cost including appropriate production overhead incurred in bringing such inventories to their present location. Finished goods and raw materials are valued at cost or net realisable value, whichever is lower. For raw materials the cost is determined on FIFO method. 3. Retirement Benefits: Contribution to pension fund is made bused on actuarial valuation at the year-end in respect of employees who have opted for pension scheme. Contribution to the gratuity fund is made based on actuarial valuation at the year-end. Leave encashment is accounted for on 'PAY AS YOU GO' Method. Qn (3) (a) Duties of CAG : Compile and He shall compile the accounts of the Union/State/Union Territory and submit accounts Submit accounts submit those accounts to the President/Governor/Administrator respectively. The CAG shall prepare appropriation account on the basis of a/c's compiled by him showing under respective heads the annual receipt and expenditure for the purpose of union, state and union territory and shall submit these a/c's to president, governor or administrator, as the case may be. The CAG shall give such information to union/state/union territory and render such assistance regarding preparation of financial statement as they may require. To audit receipts and expenditure He shall audit all receipts and expenditure of any body, which has and expenditure been substantially financed from the Consolidated Fund of India/State/Union Territory. Note: A body or authority shall be treated as substantially financed if the amount of grant or loan in one year is greater than; (i) Rs. 25 lakhs, and (ii) 75% of the total expenditure of that body or Authority. To audit grants and loans To audit receipts of union or states To audit accounts of stores and stock He shall audit specific purpose loan or grant given to any body other than a foreign state or international organization, out of the Consolidated Fund of India/ State/Union Territory. He shall audit all receipts payable in to the Consolidated Fund of India/ State/Union Territory. He shall audit the accounts of stores and stock kept in any office or department of the union or state.
CA Arvind Jain AUDIT IPCC NOV 2012 SOLUTIONS 4 To audit accounts of Government CAG shall exercise powers and observe duties as per the provisions of the Companies Act, 1956 in relation to the Government Companies or Corporations. Companies and Corporations To audit and report CAG shall audit and report: (1) All expenditure from Consolidated Fund of India/ State/Union Territory. (2) All transactions of Union State relating to the 'Contingency Funds and Public accounts.' (3) All Trading, Manufacturing, Profit and Loss account and Balance Sheet and other subsidiary accounts kept in any department of the Union/ State. Qn (3)(b) Basic elements of Audit Report : Title It may be appropriate to use the term "Auditor' to distinguish the auditor's report from report issued by others. Addressee Opening Introductory paragraph or The auditor's report should be appropriately addressed as required by the circumstances of the engagement and applicable laws and regulations. 1. The report should identify the financial statements that have been audited including the date and period covered by the financial statements. 2. The report should include a statement of responsibility of the entity's management and of the auditor i.e. the report should include a statement that the financial statements are the responsibility of the entity's management and a statement that the responsibility of the auditor is to express an opinion on the financial statements based on the audit. Scope paragraph Opinion paragraph Date of the report Place of signature Auditor's signature 1. The report should describe the scope of the audit by stating that the audit was conducted in accordance with the auditing standards generally accepted in India. 2. The report should include a statement that the audit provides a reasonable basis for opinion. 3. The auditor's report should describe the audit as: Examining, on a test basis, evidence to support the amounts and disclosures in financial statements; Assessing the accounting principles used in the preparation of the financial statements; Assessing the significant estimates made by management in the preparation of the financial statements; and Evaluating the overall financial statements presentation. 1. The report should clearly express an opinion on the true and fair view and where appropriate, the compliance with the statutory and/or regulatory requirements. 2. The term used to express the auditor's opinion, "give a true and fair view", indicates, that the auditor considers only those matters that are material to the financial statements. 1. The report should be dated as of the completion date of the audit. 2. It should not be earlier that the date on which the financial statements are signed or approved by the management The report should name the specific location which is ordinarily the city where the audit report is signed The report should be signed in the name of the firm and the personal name of C.A. He must mention his membership number as well. Qn (4)(a) to be solved later Qn (4)(b) DISTINCTION BETWEEN AUDITING AND INVESTIGATION Basis Auditing Investigation Object To express an opinion For some particular purpose Scope Wide Limited
CA Arvind Jain AUDIT IPCC NOV 2012 SOLUTIONS 5 Period under examination A year or six months Two to four years Nature of examination Test checking Detailed Observance of accounting Ensure adherence to GAAP Not bound by GAAP principles Nature of evidence Persuasive Conclusive Submission of report To owner To appointing authority Qn (5)(a) AUDIT OF A HOSPITAL : Preliminary (i) Hospitals can be run as sole proprietorship or partnership or trust and even as a company etc. Auditor should ascertain the legal status & study applicable statute, if any. (ii) Examine the trust or partnership deed or MEMORANDUM, ARTICLES as per the status of hospital, (other points, same as in previous topic) Receipts From Patients (i) Check copies of bills issued to the patients with reference to register of patients to ensure that all patients have been billed properly. (ii) Check calculation of few bills. (iii) Examine whether bills are raised properly bifurcating into rent charges, services charges & payments regarding medicine. (iv) Check internal control & authorisation for bills raised at concessional rates. (v) Check cash collected shown in cash book with duplicate copies of receipts issued to the petients. From grants (i) Check copies of correspondence with the government or local bodies to ensure the purpose of grant. (ii) Ensure whether grant or donations received for specific purpose have been properly applied. (iii) Obtain MRL regarding use of grants. (iv) Examine accounting for grants with special attention to classification into capital & revenue. Income from Investment Payments With respect to purchases & various expenses (i) Examine investment register. (ii) Vouch interest, dividend etc. to ensure whether same has been properly accounted for. (iii) Check collection of various incomes received on investment with reference to entry in cash book/pass book. (i) Ensure authorisation of various payments specially capital expenditure. (ii) Compare various items of expenditure with those of previous year (ARP). (iii) Check few calculations w.r.t staff salary to check whether these are in accordance with the pay rules. (iv) Special attention should be given to purchase of high value medicines & injections. Also check whether there is strict control over their purchases and issues. (v) Obtain WR regarding abnormal item of expenses if any. Taxation (i) Examine calculation & accounting of provision for taxation. (ii) Check whether hospital is eligible for income tax exemption.
CA Arvind Jain AUDIT IPCC NOV 2012 SOLUTIONS 6 Assets & (i) Examine whether all fixed assets are properly accounted for. liabilities (ii) Check ownership & existence of fixed assets by verifying records & conducting physical verification respectively. (iii) Verify whether depreciation has been properly calculated on each class of fixed assets. (iv) Obtain WR for existence, ownership & valuation of assets. (v) Verify corpus/ capital fund with special attention to any increase in the same as compared to that of previous year. (vi) Examine adequacy of internal controls over purchase and issue of stock. (vii) Examine whether any claim against the hospital has been properly accounted for. Qn (5)(b) Verification of Application & Allottment money received on shares issued for cash I. Stage-I (a) Test check a few original applications received w.r.t entries in application & Application allotment register. (b) Examine money received with corresponding entries in cash book. (c) Examine letter of regret in case sum -is refunded to unsuccessful applicants. (d) Check correctness of accounting treatment in share capital account. (e) Examine arithmetical accuracy of totals in application & allotment Register. 2. Stage-II Allotment 3. Stage-III Calls (a) Examine minute book of director's meeting w.r.t allotment of shares. (b) Examine letter of allotment sent to successful applicants. (c) Check whether money received on allotment has been appropriately credited to share capital account. (d) Trace relevant entries in cash book /bank statements. (e) Ensure appropriateness of accounting treatment on allotment. (f) Ascertain whether share certificates have been delivered within 3 months of allotment. (g) Ensure that return of allotment has been filed with ROC. (a) Examine minute book of director's meeting to check resolution Calls making a call. (b) Test check some call letters with reference to calls register. (c) Examine amount received on calls with copies of receipt issued to shareholders. (d) Trace relevant entries in cashbook / Bank statements. (e) Examine whether share capital account has been properly credited. (f) In case of calls in arrears, examine appropriateness of disclosure in balance sheet. (g) Examine calculations of interest charged on calls in arrears. (h) Examine schedule of calls received in advance to ensure its accuracy of treatment in books of accounts. (i) Examine calculation of interest paid on calls in advance. Qn (6)(a) Working papers are the written records kept by auditor. SAP-3 entitled "Documentation" states that "the auditor is required to document matters which are important in providing evidence that the audit was carried out in accordance with basic principles". Hence basic purpose of working papers is to provide evidence. These papers also include the details of methods and procedure adopted. Also, a summary of all matters which require judgement of auditor, with the conclusions reached are also included. Various contents of a current file normally includes : 1. Correspondence regarding annual reappointment. (Copy of letter of engagement) 2. Audit programme and evidence of audit. 3. Nature, timing, extent of audit procedure and the results. 4. Evidence that work done by others was reviewed and supervised. 5. Copies of communication with other auditor, experts etc. 6. Letter of representation or confirmation received from client. 7. Copies of financial statement and audit report for that year.
CA Arvind Jain AUDIT IPCC NOV 2012 SOLUTIONS 7 8. Conclusion reached by auditor on special matter including the manner in which exceptional and unusual matters are treated by auditor. 9. Notes on audit matters and queries discussed with client, including material weaknesses in internal control system. Qn (6)(b) Vouching of traveling expenses : 1. Ensure that all payments w.r.t. travel have been authorized/ sanctioned by proper official. 2. Check reasonableness of payments as per client's internal rules and regulations. 3. Vouch copies of the air/railways tickets and hotel bills. 4. Check whether permission of RB1 has been obtained for expenditure in foreign currency. 5. Ensure reasonableness of sundry expenses such as daily allowance, conveyance and tips etc. 6. For travelling expenses claimed by directors, check whether these were incurred by them in the interest of the business. 7. Trace relevant entry in bank pass book. 8. Check posting in travelling expenses account. 9. Compare amount of travelling expenses with the previous year's figures and inquire into abnormal changes, if any. Qn (7)(a) Verification of discounted bills receivable dishonoured : (a) Obtain a list of such bills. (b) look bank statement to see that A/C of client is debited by bank (c) Inspect the copy of bill returned alongwith bank advice (d) See that bill is noted and protested (e) See that debtor is debited with amount of bill and noting and protesting charges etc. (f) Bank commission charged by bank should be debited to party. Qn (7)(b) AUDITOR'S LIEN: As per general principal of law, any person having the lawful possession of somebody else's property, on which he has worked, may retain the property for non-payment of his dues on a/c of the work done on the property. On this premise, auditor can exercise lien on books and documents placed at his possession by the client for non-payment of fees, for work done and documents. The Institute of Chartered Accountants in England and Wales has expressed a similer view on the following conditions - (i) Documents retained must belong to the client who owes the money. (ii) Documents must have come into possession of the auditor on the authority of the client. They must not have been received through irregular or illegal means. In case of a company client, they must be received on the authority of the Board of Director after giving intimation to R.O.C. (iii) The auditor can retain the documents only if he has done work on the documents assigned to him. (iv) Such of the documents can be retained which are connected with the work on which fees have not been paid. Qn (7)(c) Inherent Risk : Meaning Inherent risk is the susceptibility of an account balance or class of transaction to a material misstatement, assuming that there were no internal controls. FACTORS AFFECTING INHERENT RISK At level of Financial Statement 1. Integrity of management. 2. Management experience and knowledge 3. Unusual pressure on management. 4. Nature of entity s business. 5. Factors affecting Industry. At level of Account Balance & Transaction 1. Quality of Accounting System. 2. Accounts prone to misstatement. 3. Complex transaction. 4. Judgment involved in determining balances. 5. Assets prone to misappropriation. 6. Unusual transaction at or near period end. 7. Transaction not subjected to ordinary processing. Qn (7)(d) Cut-off-procedures Meaning It refers to segregation of transaction of one period from the other so that the result of working of each period can be correctly ascertained. The arrangement that is made to ensure such separation is
CA Arvind Jain AUDIT IPCC NOV 2012 SOLUTIONS 8 technically known as cut-off procedure. It is part of the internal check of the organization. Applicability This procedure is generally applied to transactions affected by the continuity of business like sales, purchase and stock. Cut-off procedures are also relevant in other areas, such as determining the cut-offs for cash and bank balances. Advantages This procedure ensures that goods purchased during a year have been included in inventory and the liability has been provided in the case of credit purchase. Similarly goods sold have been excluded from the inventories and credit has been taken for the sales. Answer 7.e) Examination in depth Meaning Examination of a few selected transactions from the beginning to the end through the entire flow of the transaction, i.e., from initiation to the completion of the transaction by receipt or payment of cash and delivery or receipt of the goods. Aspects covered Examine the recording of transactions at the various stages through which they have passed. Examination of relevant records and authorities; Determining whether the person who has exercised the authority in relation to the transactions is fit to do so in terms of the prescribed procedure. Example Examination of Purchase of Goods It covers the examination of following aspects: (i) Requisitions are pre-printed, pre-numbered and authorised; (ii) Official company order, also sequentially pre-numbered, authorised and placed with approved suppliers only; (iii) Receipt of supplier s invoice; (iv) Entries in purchases day book; (v) Postings to purchase ledger and purchase ledger control account; (vi) Cheque in settlement; (vii) Entry on bank statement and returned paid cheque (if requested) (viii) Receipt of goods, together with delivery/advice note; (ix) Admission of goods to stores; (x) Indication, by initials or rubber stamp on internal goods inwards note, of compliance with other regarding specification, quantity and quality; (xi) Entries in stores records.