Advanced Auditing and Professional Ethics

If, after performing the procedure, you are not satisfied about the correctness of 'Opening Balances', what approach you will adopt in drafting your Audit Report?
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Gurukripa’s Guideline Answers for May 2015 Exams CA Final – Advanced Auditing and Professional Ethics Exam

Gurukripa’s Guideline Answers to May 2015 Exam Questions CA Final – Advanced Auditing and Professional Ethics Question No.1 is compulsory (4 × 5 = 20 Marks). Answer any five questions from the remaining six questions (16 × 5 = 80 Marks). [Answer any 4 out of 5 in Q.7] Note: Page Numbers in the Answer/ References are as indicated below – For Issues / Questions relating to Page References are given from Padhuka’s Students’ Referencer on Standards on Auditing– CA Inter/Final



Standards on Auditing



Padhuka’s Students’ Handbook on Advanced Auditing– CA Final Others Students’ may also refer to Padhuka’s Easy Guide to Advanced Auditing – CA Final, for quick revision.

(a)

(b)

1.

(c)

(d)

(a)

2.

(b)

(c) (a) 3.

Question As an Auditor of RST Ltd, Mr. P applied the concept of materiality for the Financial Statements as a whole. On the basis of obtaining additional information of significant contractual arrangements that draw attention to a particular aspect of a Company’s business, he wants to re–evaluate the Materiality Concept. Please guide him. The Financial Statements of TC & Co. have been prepared by Management of an Entity in accordance with the Financial Reporting provisions of a contract (that is, a Special Purpose Framework) to comply with provision of the contract. Based on the contract, Management does not have a choice of Financial Reporting Frameworks. As an Auditor what considerations would be undertaken while planning and performing audit? When a Sub–Service Organization performs services for a Service Organization, there are two alternative methods of presenting the description of controls. The Service Organization determines which method will be used. As a User Auditor what information would you obtain about controls at a Sub–Service Organization? In an Initial Audit Engagement, the Auditor will have to satisfy about the sufficiency and appropriateness of ‘Opening Balances’ to ensure that they are free from mis–statements, which may materially affect the current Financial Statements. Lay down the Audit procedure, you will follow, when Financial Statements are audited for the first time. If, after performing the procedure, you are not satisfied about the correctness of ‘Opening Balances’, what approach you will adopt in drafting your Audit Report? As an Auditor of a Garment Manufacturing Company for the last 5 years, you have observed that new venture of online shopping has been added by the Company during Current Year. As an Auditor, what factors would be considered by you in formulating the Audit Strategy of the Company? A Ltd holds the ownership of 10% of Voting Power and Control over the composition of Board of Directors of B Ltd. While planning the Statutory Audit of A Ltd, what factors would be considered by you for Audit of Financial Statements? Write short notes on – Corporate Responsibility under Sarbanes and Oxley Act. MG & Co. Ltd seeks your advice while preparing Financial Statements, the General Instructions to be followed while preparing Balance Sheet under Companies Act, 2013 in respect of Current Assets and Current Liabilities.

May 2015.1

 

Answer/Reference

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SA 320– Page No.65, Point C, Para 12, 13, A.13.

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SA 800–Page No. 189, Point B, Para 9, 10.

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SA 402– Page No.76, Point H & Page No. 75, Point B

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SA 510– Page No. 92, Para 6, A2 – A4. & Para 10–13 [N 04]

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SA 300– Page No. 51, Point B, Para 6,7, 9, Items in Note, & SA 315– Page No. 57 Para 18

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SA 550– Page No. 116, Para 18, 19, A.29, A.30

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Page No. 18.2, Para 18.1.2 [N11].

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Page No. 4.14, Q. No. 9

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Gurukripa’s Guideline Answers for May 2015 Exams CA Final – Advanced Auditing and Professional Ethics Exam

Question

Answer/Reference

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(b) CA Ashwin was appointed as Auditor of Bristol Ltd, for the year 2013–2014. Since he declined to accept the appointment, the Board of Directors appointed CA John as the Auditor in place of CA Ashwin and the appointment was accepted by CA John. Discuss.

Hint: Since appointment pertains to year 2013–14, Provisions of Companies Act, 1956 shall be applicable. 1. In the given case, BOD cannot appoint CA John, as there is no Casual Vacancy at all. 2. As per Sec.224(3) of Companies Act, 1956, where at the AGM, no Auditors are appointed or re–appointed, the Central Government may appoint a person to fill the vacancy. 3. As per Clause (9) Part I of First Schedule to the CA Act, CA John should enquire whether the requirements of Companies Act, in respect of his appointment have been duly complied with.

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(c) During the Bank Audit, AB & Co. a new Chartered Accountant Firm, observed the Sale/Purchase of NPAs. Please help them by narrating the aspects, relating to Sale/Purchase of NPAs, to be considered

Page No 8.25 Para.8.3.3 Hint: As per RBI Guidelines, following points shall be considered: 1. Non – Performing Financial Assets that may be purchased / sold. 2. Norms and Procedure for Purchase / Sale of such Financial Assets. 3. Valuation Procedure to be followed to ensure that the economic value of Financial Assets is reasonably estimated based on the Estimated Cash Flows arising out of repayments & recovery prospects. 4. Delegation of Powers of various functionaries for taking decision on the purchase/ sale of the Financial Assets and its Accounting policy.

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(d) Draft an Audit Report under following circumstances: (i) Under the Payment of Bonus Act 1965, a ‘Report’ on the computation of Bonus Payable. (ii) Auditor’s Report in accordance with Regulation 54 of the SEBI (Mutual Fund) Regulations, 1993.

Page No.5.16, Para 5.3.4. Refer Format of Draft Report below

(a) R and M is a an Audit Firm having Partners CA R, CA M and CA G. Mr. S is the Relative of CA R holding Shares of STP Ltd, having a Face Value of ` 1,51,000. Whether CA R and CA M are qualified to be appointed as Auditors of STP Ltd?

Page No.2.1, Para 2.1.2, Point d(i) Both CA R & CA M are not qualified for appointment as Auditor, as Shareholding of Relative exceeds ` 1,00,000. However, corrective action can be taken within 60 days, in case of subsequent acquisition of Shares by Relative.

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SA 315, Page No.57, Para 14–23.

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Page No. 3.11, Refer “Consolidated Financial Statements” Point. Hint: Parent should prepare Consolidated Financial Statements for both 2013–2014 and 2014–2015. Auditor should also verify the Compliance of AS–21,23 &27.

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Note: Answer in the next column is given under Companies Act, 1956 since the appointment is for the year 2013–2014. However, if the issue were to be considered under Companies Act 2013, the position will be as under–

4.



It is assumed that “appointed” as given in the question is by way of appointment at the AGM.

• •

CA Ashwin is not deemed appointed at all, since he has declined.



BOD is not empowered to appoint CA John as Auditor.

If at any AGM, the Auditor is not appointed or re–appointed, the Existing Auditor shall continue to be the Auditor of the Company. [Sec.139(10) of Companies Act, 2013]

(b) As an Auditor, during your interim visit at Marathon Ltd, you observed that Internal Controls were not in use throughout the period covered under audit. What are the Controls Objectives you would like to consider to achieve your purpose? (c) Parent Ltd acquired 51% Shares of Child Ltd, during the year ending 31–03–2014. During the Financial Year 2014–2015 the 20% Shares of Child Ltd, were sold by Parent Ltd. Parent Ltd, while preparing the Financial Statements for the year ending 31–03–2014 and 31–03–2015 did not consider the Financial Statements of Child Ltd, for consolidation. As a Statutory Auditor how would you deal with it? May 2015.2

 

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Gurukripa’s Guideline Answers for May 2015 Exams CA Final – Advanced Auditing and Professional Ethics Exam

Question

Answer/Reference

Comment with respect to Chartered Accountant Act, 1949: (a) Mr. SP, a Chartered Accountant obtains registration as Category IV Merchant Banker under the SEBI’s Rules and Regulations and act as Advisor to a Capital Issue of MB Co. Ltd. He designated himself under the caption “Merchant Banker” in Client Offer Documents and ‘Advisor to issue’ in his own Letterheads, visiting Cards and Professional Documents. 5. (b) A Chartered Accountant having COP entered into Partnership with persons, who are not the Members of the Institute, for the purpose of carrying on business. The Share of the Chartered Accountant in the Profit and Losses was 25%. He was to take part in the business and was entitled to represent the Firm before Govt. Authorities, etc. He was operating the Bank Account of the Firm, was receiving moneys from the customers and was also looking after the affairs of the Partnership.

(c) CA SG, a practicing CA agreed to select and recruit personnel, conduct Training Program for and on behalf of the Client.

Hint: CA not holding COP can act as Merchant Banker and he can use the designation as Merchant Banker. Refer Page No.20.6, Para 20.1.6 CA holding COP is permitted to as Advisor to a Capital Issue. But cannot use a designation other than a CA in his Letterheads, Visiting Cards and in Professional Documents. Refer: Page No.20.2, Point 19 & Page No.20.25, Para 20.3.18 Page No.20.17, Para 20.3.8 & Page No.20.37, Para 20.3.27 Hint: CA will be guilty of Professional Misconduct under Clause (4) and (11) of Part I of First Schedule.

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Note: If the persons with whom Partnership is entered is covered under the exceptions provided under Clause (4), he is not guilty. Page No.20.2, Para 20.1.2 & Page No.20.3, Illustration [N 98, N 07] Hint: CA SG is not guilty of Professional misconduct.

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However as per Sec.144, as a Statutory Auditor he shall not engage in any Management Services which is prohibited.

(d) Mr. P a practicing Chartered Accountant acting as Liquidator of AB & Co. charged his Professional Fees on percentage of the Realization of Assets.

Page No.20.36, Para 20.3.26 (N 98) Hint: CA P is not guilty of any Professional Misconduct.

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(a) The Auditor Report of Company states that proper books of accounts as required by law have been maintained by the Company, when a Company be said to have not maintained Proper Books of Account?

Page No.3.8, Para 3.2.1 and Page No.2.17, Para 2.3.6 Hint: CA to report under 143(3)(b).

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(b) Comment with respect to computation of Total Sales, Turnover or Gross Receipts in business exceeding the prescribed limit under Section 44AB of Income Tax Act, 1961 and VAT Law. (i) 6.

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Discount Allowed in the Sales Invoice.

(ii) Cash Discount. (iii) Price of Goods returned related to earlier year. (iv) Sale Proceeds of Fixed Assets. (c) Explain the step–wise approach adopted by the Peer Reviewer. (d) AB Pvt. Ltd, a Company having outstanding Loans or Borrowings from Banks exceeding ` 100 Crores wants to appoint Internal Auditor. Please guide him who can be appointed as Internal Auditor and what would be reviewed by him.

Page No.10.2, Para 10.1.3

Hint: All these items are excluded from Turnover. Note: Sales Returns, even if relates to earlier year(s), is not included in Turnover.

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Page No.21.5, Para 21.1.11.

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Page No.3.6, Para 3.1.9. Hint: Refer Conditions and Other Points in above page.

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Page No.12.2, Para 12.1.2.

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Page No.9.12 Para.9.2.9 Point C

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1 1 1

Write short notes/comments on any four of the following: 7.

(a) Core Investment Companies. (b) Investible Funds as defined by IRDA. May 2015.3

 

Gurukripa’s Guideline Answers for May 2015 Exams CA Final – Advanced Auditing and Professional Ethics Exam

Question

Answer/Reference

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(c) Areas in which Due Diligence can take place.

Page No.16.20, Para 16.3.1.

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(d) Operational Auditing arose from the need of Managers responsible for areas beyond their direct supervision.

Page No.15.15, Para 15.4.2.

(e) “Review of the Internal Audit function has become the statutory responsibility for the Statutory Auditor.”

Page No.3.8, Illustration Hint: Compliance with SAs in the conduct of Statutory Audit, requires consideration of SA–610.

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Answer to Question No.3(d) – Draft Auditor Report Report on Computation of Bonus Payable: Under the Payment of Bonus Act, 1965 a Chartered Accountant may be required to issue a ‘Report’ on the computation of Bonus Payable. The report may be as under: “We have reviewed the figures in the above computation in comparison with the books and records produced to us, the audit of which has already been completed by us and report that subject to the Notes given on face of the computation in our opinion, and to the best of our knowledge and belief and according to the information and explanation given to us, the above computation is in due accordance therewith and has been made on a basis reasonably consistent with the provisions of the Payment of Bonus Act, 1965.” Report under Regulation 54 of the SEBI(Mutual Fund) Regulations, 1993. Note: All Mutual Funds are required to get their accounts audited in terms of a provision to that effect in their Trust Deeds. The Auditor’s Report shall form a part of the Annual Report. It should accompany the Abridged Balance Sheet and Revenue Account. The Auditor shall report to the Board of Trustees and not to the Unitholders. 1. 2. 3.

We have obtained all information and explanation which, to the best of his knowledge and belief, were necessary for the purpose of his Audit. The Balance Sheet and the Revenue Account are in agreement with the books of account of the Fund. In our opinion, and according to the information and explanation given to us – (a) The Balance Sheet gives a true and fair view of the Scheme–wise State of Affairs’ of the Fund as at the Balance Sheet Date, and (b) The Revenue Account gives a true and fair view of the Scheme–wise Surplus/Deficit of the Fund for the year/period ended at the Balance Sheet Date.

May 2015.4