IPCC-PAPER 6:
AUDITING & ASSURANCE Mock Test -4
Full Syllabus
Date: 19/10/2015
Duration: 3 Hrs.
Marks: 100 Marks.
QUESTION NUMBER ONE IS COMPULSORY.
ATTEMPT ANY FIVE QUESTIONS FROM THE REMAINING QUESTIONS.
Q 1.
Discuss the following:a.
b.
c.
d.
Q 2.
Advantages and disadvantages of Joint Audit.
Letter of Engagement.
Surprise checks.
Purpose for providing depreciation.
(5)
(5)
(5)
(5)
State with reasons in short whether the following statements are correct or incorrect:
2 marks each
a. Emphasis of matter paragraph in the auditor’s report is a substitute of Disclaimer of
Opinion.
b. The primary objective of an audit is to detect fraud and errors in financial
statement.
c. The Statutory Auditor is required to verify the inventory physically.
d. It is the responsibility of the auditor to ensure that Statement of Profit and Loss and
Balance Sheet of the company comply with the Accounting Standards.
e. Extracts and copies of important legal documents and agreements relevant to audit
is part of current audit file.
f. The first auditor is generally appointed by the company at a General Meeting.
g. Surprise checks are part of internal check.
h. The auditor shall express an unqualified opinion if the auditor is unable to obtain
sufficient audit evidence regarding the opening balances.
Page 1 of 8
Q 3.
How will you vouch the following?
4 marks each
a.
b.
c.
d.
Q 4.
Assets acquired on lease
Empties
Discounted bills receivable dishonoured
Remuneration paid to directors
Write a short note on the following :4 marks each
a.
b.
c.
d.
Q 5.
Powers of Comptroller and Auditor General of India
Inherent risk
Alteration of share capital
Inherent limitations of an audit
Answer the following:4 marks each
(a) How will you verify shares issued at premium?
(b) Write a short note on Audit Committee.
(c) Discuss Maintenance of Cost records
(d) Under what circumstances the retiring auditor cannot be re-appointed? Comment
Q 6.
Answer the following:1. Mention ant eight important points which an auditor will consider while
conducting audit of a School.
(8)
2. Write a short note on basic principles governing an Audit.
(8)
Q 7.
Comment on the following:1. X Ltd. has its registered office in Mumbai. During the current financial year it shifted
its Corporate Office to Delhi. The Managing Director of the Company wants to shift
company’s books of accounts to Delhi because he holds the view that there is no
legal bar in doing so. (8)
2.
3. Optimus Company Ltd. removed its first auditor before the expiry of his term
without obtaining prior approval of the Central Government. (8)
Questions and Solutions prepared by CS. Hemangini Suthar
website: www.ashishlalaji.net
Page 2 of 8
IPCC-PAPER 6:
SUGGESTED ANSWERS TO
AUDITING & ASSURANCE Mock Test -4
Full Syllabus
Date: 19/10/2015
Duration: 3 Hrs.
Marks: 100 Marks.
Q1
A1.
JOINT AUDIT
ADVANTAGES
1.
2.
3.
4.
Sharing of expertise
Advantage of mutual consultation
Lower workload
Improved service to client
DISADVANTAGES
1. The fees being shared
2. Superiority complex
3. Problems in co-ordinating work
A2. According to SA 210, “ Agreeing the terms of Audit Engagement”, the auditor shall agree the terms of
audit engagement with management and those charged with governance.
The letter is sent by the auditor to his client which documents the objective and scope of audit, the extent
of his responsibilities and form of report.
The agreed terms of the audit engagement shall be recorded in an audit engagement letter and shall
include the following:1.
2.
3.
4.
The objective and scope of audit
The responsibilities of the auditor
The responsibilities of the management
Form of report
Page 3 of 8
A3. Surprise checks are mainly intended to ascertain whether the system of internal control is operating
effectively and whether the accounting records are prepared concurrently.
They constitute an important part of normal audit procedures.
The need for and frequency of surprise checks is a matter to be decided having regard to the circumstances
of each audit.
The result of such checks should be communicated to the management. The auditor should satisfy himself
that adequate action is taken by the management on the matters communicated by him.
A4. Following are the purpose for providing depreciation:1. To keep capital intact – it will be evident that one of the effects of providing for depreciation on an
asset is to retain in the business out of the profits in each year, an amount equal to the proportion
of the cost of the asset employed in the business that has run off, estimated on the basis of the
period of its working life and scrap value.
2. To ascertain cost accurately – depreciation should be charged against revenue to depict true and
fair statements.
3. To charge initial cost against earnings – the objective of providing depreciation is to scientifically
ascertain the value of machine that has to be charged against revenue because it is an expense
incurred and cannot be appropriated out of profits.
4. To prepare true and fair financial statements – if depreciation is not provided, assets will be shown
at a higher amount thereby not showing a true and fair picture.
Q2. Correct or incorrect
1. Incorrect – Emphasis of matter paragraph is not a substitute of Disclaimer of opinion in an audit
report; it is indeed an opinion expressed for matters that do not affect auditor’s opinion and such
matters are seen in financial statements but are not mis-stated.
2. Incorrect – the primary objective of an audit is to express an opinion whether the financial
statements are free from material mis-statement or not.
3. Incorrect – the Statutory Auditor is not necessarily required to physical verify the inventory;
representations made by management in this behalf can be relied upon.
4. Incorrect – it is the duty of management to make sure that the Statement of Profit and Loss is
prepared in accordance with relevant Accounting Standards and principles.
5. Incorrect – extract and copies of important legal documents and agreements form part of
permanent audit file and not current file.
6. Incorrect – the first auditor of a company under section 139(6) is generally appointed by the Board
of Directors within 30 days from the date of registration and if they fail to do so, the members
appoint in the general meeting.
7. incorrect – surprise checks form part of normal audit procedures and not internal check.
8. Incorrect – the auditor shall express an unqualified opinion when he concludes that the financial
statements give true and fair picture by complying to the relevant accounting standards and
principles.
Page 4 of 8
Q3. Vouching and verification:A1. Assets acquired on lease –
1.
2.
3.
4.
5.
Examine the terms and condition of the lease deed
Examine the tenant’s agreement, if a part of the leasehold property is sublet
Verify if the lease is an operating lease or a financial lease
Ensure assets acquired under finance lease are segregated from the assets owned
Ensure that the assets under lease are properly disclosed in the financial statements
A2. Empties –
1. When empties or containers in which goods necessarily have to be supplied are costly, the
manufacturers normally agree to purchase them back at a reduced price as compared to the one
charged for them.
2. In such a case, it is necessary to keep a separate account of the empties “issued and received” and
the number of them held by the accounts receivables.
3. The auditor should see that provision has been made against the contingency of containers being
returned by the account receivables and for the wear and tear too.
A3. Discounted bill receivable dishonoured
1.
2.
3.
4.
5.
Obtain the schedule of discounted bills receivables dishonoured
Check the entry in the bank statement regarding the amount
Verify the bills receivable returned with the bank
See if it is noted and protested by following proper procedure
Check the bank commission, if any, charged by the bank
A4. Remuneration paid to directors
1. Examine the entitlement – whether the remuneration is paid as per the articles or resolution made
in the meeting
2. Examine adherence to legal provisions – the auditor should examine adherence to following
sections1. Section 197(6) – manner of payment
2. Section 197(5) – payment of listing fees
3. Section 197(1) – overall limit to managerial remuneration
4. Schedule V – payment in case of companies not having profit
5. Proviso to schedule V – approval of Central Government in case of increase in remuneration
Q4. Short notes:A1. Powers of Comptroller and Auditor General of India
1. To inspect any office of accounts under the control of Union or a state Government including office
responsible for the creation of the initial or subsidiary accounts.
2. To require that any accounts, books, papers and other documents which deal with or are otherwise
relevant to the transactions under audit, be sent at specified places.
3. To put such questions or make such observations as he may consider necessary to the person in
charge of office.
4. To dispense with any part of detailed audit of any accounts and to apply such limited checks in
relation to such accounts.
Page 5 of 8
A2. Inherent risk
The susceptibility of an assertion about a class of transactions, account balances or disclosure to a
misstatement that could be material, either individually or when aggregated with other misstatements,
before consideration of any related controls. It is higher for some assertions and related class of
transactions, account balances and disclosures. External factors giving rise to business risks also take form
of inherent risk. Factors that relate to entity and its business environment also make part of inherent risks.
For example, lack o sufficient working capital, technological advancements, etc. form part of inherent risks.
A3. Alteration of Share Capital
Section 61 of the Companies Act, 2013, lays down power of limited company to alter its capital. According
to the provisions a limited company having a share capital, if authorised by articles, may alter its
memorandum in general meeting to –
1.
2.
3.
4.
5.
Increase its authorised paid up share capital
Consolidate and divide shares into larger amounts
Sub-divide shares into smaller amount
Convert shares into stock and vice versa
Cancel its shares and diminish the amount of its share capital
A4. Inherent limitations of audit
1. The nature of Financial Reporting – the preparation of financial statements require judgement by
the management in applying the requirements of the entity’s applicable financial reporting
framework to the facts and circumstances of the entity. So they are subject to an inherent level of
variability.
2. The nature of audit procedures – there always persists practical and legal limitations on the
auditor’s ability to obtain evidence which acts as a limitation in audit.
3. Timeliness of financial reporting and balance between benefit and cost – with the limitations of
time factor, it becomes imperative for the auditor to assess material misstatements with reliable
evidences and appropriate audit procedures which is a difficult task.
4. Other matters- possibility of some deep laid frauds or errors or related party transactions for
benefit is always there which in the normal procedure of audit cannot be enhanced.
Q5.
(a). Verification of shares issued at premium can be done as follows:1. Check whether the issue is done as per Section 52 of the Companies Act. 2013.
2. See that the amount received as premium is transferred to securities premium account.
3. See whether the application of securities premium account is done as per the provisions laid in the
Act.
4. See whether proper disclosure Is made in the financial statements.
5. See whether the paid up capital of the company is increased accordingly or not.
(b). Audit Committee
Where a company is required to constitute an Audit Committee under Section 177, all appointments,
including the filling of casual vacancy of an auditor shall be made after taking into account the
recommendations of such committee.
Page 6 of 8
Following are the class of companies to mandatorily constitute an audit committee –
1. All listed companies
2. All public companies –
1. With paid up capital of ₹10 crore or more,
2. Having in aggregate outstanding loans, borrowings or debentures or deposits more than ₹ 50
crores,
3. Having turnover of more than ₹100 crores
The audit committee shall recommend the names of auditors to the Board as per their requirements. If the
Board disagrees with their recommendations, itmay revert back to such committee for reconsiderations.
On such reversal, the committee may reconsider and lay their decisions. If the committee doesn’t change
their decision then the Board shall present it to the members in the meeting with reasons for the
disagreement. The members shall take thefinal decision in the meeting. This is the manner of appointing
auditors as laid down in Rule 3 of CAAR, 2014.
(c). Maintenance of Cost Records
Rule 3 of Companies (cost records and audit) rules, 2014 provides the class of companies engaged in
production of goods or providing services required to include cost records in their books of accounts.
These companies include Foreign Companies but exclude small companies.
The said rule has divided the class of companies into regulated and non-regulated sectors such as –
Regulated Sectors – telecommunication services (excluding broadcasting), generation, transmission, supply
and distribution of electricity, petroleum products, drugs, pharmaceuticals, sugar, etc.
Non – regulated sectors – machinery used in defence, space and atomic energy, turbo jets, propellers,
tyres, tubes, steel cement, etc.
A(d). Following are the circumstances under which the retiring auditor cannot be re-appointed –
1. If he is disqualified from being appointed as an auditor.
2. If he has given in writing to the company of his unwillingness to be re-appointed.
3. If a special resolution has been passed at the meeting of the company to appoint some other
auditors.
4. if he has crossed his ceiling of number audit of companies
Q6.
A1. Following are the eight points to be considered by the auditor while audit of a school –
1. examine the trust deed or regulations under which it is established.
2. Check the names of students in the Students fee register for each month, class, and the amount of
fee charged.
3. Compare the counterfoils of fee received be the school with such fee register book.
4. See that the scholarship is granted on the basis of proper criteria.
5. Check the late fee fine deposited.
6. Vouch the hostel fees received with the names of such students.
7. Verify physically furniture, stationery, equipments, clothing, etc.
8. Vouch all the capital expenditure related to the minute books to ascertain the sanction obtained.
Page 7 of 8
A2. Following are the basic principles governing an audit –
1. Integrity, objectivity and independence – the auditor shall be honest and must be firm with his
decision and shall take the decision free from any kind of pressure.
2. Confidentiality – the auditor shall maintain secrecy regarding the information of his client.
3. Skills and competence –the auditor shall carry out his task with due professional care.
4. Work performed by others – while delegating work to other assistants, auditor shall see to it that
the work is done properly and the result is worth relying upon.
5. Documentation – auditor shall see to it that the work papers and audit note book is prepared
properly as it may serve as his proof of doing the work.
6. Planning – the auditor shall plan his work by properly understanding the entity and time allotted to
him along with his scope of work.
7. Audit evidence – auditor shall assess the reliability, sufficiency and appropriateness of data to serve
as evidence and shall collect such evidence to support his conclusion.
8. Audit conclusion and reporting – the auditor shall form an opinion by examining the statements
and sign the drafted auditor’s report.
Q7.
A1. Provisions and explanations –
As per Section 128(1) of the Companies Act 2013, every company shall keep at its registered office proper
books of accounts. It is permissible for all or any of the books of accounts to be kept at such office in India
as the Board of Directors may decide, but when such a decision is taking, then within 7 days, the company
shall file with the Registrar of Companies, a notice in writing giving full details of such place.
Conclusion –
In view of the above provisions, X Ltd. should maintain its books of accounts at its registered office at
Mumbai. The managing Director is not allowed to shift its books of accounts to Delhi, unless decision in this
behalf is taken by the Board and a notice is sent to the Registrar within 7 days of taking such a decision.
A2. Provisions and explanations –
As per Section 140(2) of the Companies Act 2013, an auditor appointed under Section 139 may be removed
from his office before the expiry of the term only by a special resolution of the company after obtaining
approval of the Central Government in that behalf as per Rule 7 under Companies (audit and auditors)
2014. The application to the Central Government shall be made in form ADT-2 and shall be accompanied by
prescribed fees. The application shall be made within 30 days of the resolution passed by the Board. The
company shall hold the general meeting within 60 days of receipt of such approval. Before taking any such
decision, the auditor concerned shall be given an opportunity of being heard.
Conclusions –
In the instant case, the first auditor was removed by the company before the expiry of his term without
obtaining approval of the Central Government. Therefore, it may be noted that the action of the company
is not justified and to remove the auditor it shall comply with the above mentioned procedure.
Page 8 of 8