Auditing skill

MENTOR: How good are your auditing skills?

Anonymous. Businessline. Chennai: Oct 6, 2008.

Abstract (Summary)
Hence, the company is justified in including the interest component on the cash credit account attributable to such stocks in the valuation of its stocksc) Dividends are to be paid only in cash. The company is not justified in its proposal to pay dividend by giving cloth at cost price to its share holders. Audit considerationsQ3(a) What are the points to be considered by an auditor under Section 227 (1A)? (7 marks) Section 227(1A), applicable to all audits, requires an auditor to examine the following and offer a comment only if it is not complied with: Where the company makes loans and advances against a security, whether such loans and advances are properly secured and whether the terms of such loans are not prejudicial to the interest of the company or its members. Where certain transactions are represented by mere book entries, whether such transactions are not prejudicial to the interest of the company. Where the company, not being an investment company, sells its investments, whether the sale is not below the purchase price and that the terms of sale are not prejudicial to the company. Whether advances and loans are disclosed as deposits. Whether any expenditure of a personal nature has been debited to the profit and loss account. Where it has been mentioned that shares have been allotted for cash, whether the company has actually received cash. b) What is auditor's lien? (3 marks) Auditor lien is a right of the Q4(a) What are the different methods of substantive procedures?

from BUSINESS LINE, October 06, 2008 State whether the following are true or false giving reasons: (2x10 = 20 marks) a) Internal auditor need not send his audit report to the statutory auditor.

b) Tolerable error is the difference in balance sheet acceptable to the auditor.

c) An auditor has no access to a company's non-financial records.

d) Board of directors can appoint the first auditor of any company.

e) Private limited company, which is a subsidiary of a public limited company, is not included in the ceiling of 20 audits.

f) Cost audit cannot be carried out by a chartered accountant.

g) An income-tax officer cannot add taxable income arbitrarily.

h) Propriety audit is audit of proprietary concerns.

i) Test audit is the other name of test check.

j) Deferred revenue expenditure is capital in nature, hence taken to the balance sheet.

Answers: a) True. Confidentiality is applicable to internal auditors also. Statutory auditor is a third party. There is no legal or professional requirement to submit the report.

b) False. It is the error acceptable between the inferences from sampling as compared to the bulk (AAS 15).

c) False. Section 227 of the Companies Act gives him a statutory right of access to any information, which, in his opinion, is necessary for the purposes of the audit.

d) False. They cannot appoint the first auditors of a government company.

Such an appointment can only be done by the C&AG.

e) True. Any private limited company is excluded from the ceiling of 20 audits f) True. Cost audit can be carried out by cost accountants only.

g) True. Assessment is to be done as per the provisions of law.

h) False. It is an audit in to the justification of expenditure incurred by an officer.

i) False. It is another name of supplementary audit. It is carried out by the C and AG. It is a type of audit, whereas test check is an audit technique.

j) False. It is revenue in nature, having benefits extending beyond the accounting period.

Statement analysis Q2: Give your views on the following: a) During the course of the audit, the auditor comes across a fraud committed by the director of a company, who makes good the loss suffered by the company. The auditor does not qualify the report. (6 marks) b) A company dealing in timber holds its stocks for long durations for seasoning.

The company proposes to include the interest component on the cash credit account attributable to such stocks in the valuation of its stocks. (7 marks) c) A textile company proposes to give the cloth manufactured by it to the shareholders at its cost of production by way of dividend. (7 marks) Answers: a) When an auditor finds a fraud, he should bring it to the notice of the higher authorities. If a director commits a fraud, the auditor should bring it to the notice of the shareholders of the company, the fact that he has made good the loss notwithstanding.

An auditor is governed by confidentiality, which prohibits him from divulging information to a third party, unless he is legally or professionally required so to do.

An audit report is a public document. By qualifying his report, the auditor is communicating with persons such as bankers, tax authorities, etc, who are not the shareholders of the company. Therefore, such qualification in the report would be violative of the concept of confidentiality.

Hence he is justified.

b) AS 16 defines a "qualifying asset" as an asset which requires a substantial period of time before it is ready for its intended use. It does not distinguish between fixed assets and current assets.

In the given case, if timber is to be stored for substantially long period of time before it is ready for its intended use, that is, sale, it also becomes a "qualifying asset".

Once it is a "qualifying asset", borrowing costs expended for it can be capitalised.

Hence, the company is justified in including the interest component on the cash credit account attributable to such stocks in the valuation of its stocksc) Dividends are to be paid only in cash. The company is not justified in its proposal to pay dividend by giving cloth at cost price to its share holders. Audit considerationsQ3(a) What are the points to be considered by an auditor under Section 227 (1A)? (7 marks) Section 227(1A), applicable to all audits, requires an auditor to examine the following and offer a comment only if it is not complied with: Where the company makes loans and advances against a security, whether such loans and advances are properly secured and whether the terms of such loans are not prejudicial to the interest of the company or its members. Where certain transactions are represented by mere book entries, whether such transactions are not prejudicial to the interest of the company. Where the company, not being an investment company, sells its investments, whether the sale is not below the purchase price and that the terms of sale are not prejudicial to the company. Whether advances and loans are disclosed as deposits. Whether any expenditure of a personal nature has been debited to the profit and loss account. Where it has been mentioned that shares have been allotted for cash, whether the company has actually received cash. b) What is auditor's lien? (3 marks) Auditor lien is a right of the Q4(a) What are the different methods of substantive procedures? How are they used? (6 marks) b) What are the advantages of an audit plan? (4 marks) Q5(a) What points are to be considered in an examination in depth? (5 marks) b) What are the precautions to be taken while resorting to a test check? (5 marks) Q6(a) What are the drawbacks of an audit of a small company? (6 marks) b)

What are the considerations for audit of income by the C&AG? (4 marks) Short notesQ7: How do you vouch/verify any two of the following? (2x5 = 10 marks) a) Cenvat credit receivable; b) contingencies; c) write off of bad debtsQ8: Write short notes on any two of the following: (2x5 = 10 marks) a) Computer aided audit techniques; b) audit trail; and c) concept of true and fair.