Focus shifts to company audit
Anonymous. Businessline. Chennai: Dec 15, 2008.
Abstract (Summary)
B Pvt. Ltd has a turnover of Rs 45 crore, other income of Rs 7 crore and bank borrowings of Rs 9 crore c) C Ltd has appointed merchant bankers to prepare a red-herring prospectus for the purpose of filing the same with SEBI. Solution: As per clause F of the Companies (Accounting Standards) Rules 2006, an SMC is a company, i) Whose equity or debt instruments are not listed or not in the process of listing in any stock exchange in India or outside India; ii) Which is not a bank or a financial institution or an insurance company; iii) Whose turnover (excluding other income) does not exceed Rs 50 crore during the previous year; iv) Which does not have borrowings in excess of Rs 10 crore at any time during the year; v) Which is not a holding company or a subsidiary company of a company which is not an SMC. Based on the above, a) A Pvt. Ltd is a subsidiary of a multinational company listed on the London Stock Exchange.
By virtue of clause (i) the holding company is not an SMC. As per clause (v), A Pvt. Ltd being a subsidiary of a company which is not an SMC also does not qualify to be an SMC. b) This question is based on clauses (iii) and (iv) of the said rules. Clause (iii) says whose turnover (excluding 'other income') does not exceed Rs 50 crore during the previous year and (iv) says which does not have borrowings in excess of Rs 10 crore at any time during the year. B Pvt Ltd has a turnover of Rs 45 crore and other income of Rs 7 crore. For determining if the company is an SMC, other income is to be excluded. Turnover of the company (Rs 45 crore) is less than Rs 50 crore. Hence, it is an SMC by virtue of clause (iii). As per clause (iv), the company ceases to be an SMC if it has borrowings of Rs 10 crore or more. The borrowings are only Rs 9 crore. Hence, it is an SMC. Thus, by applying both the clauses, the company qualifies to be an SMC. c) As per clause (i), SMC is a company whose shares/debt are not listed or are in the process of being listed in a stock exchange in India or outside India. C Ltd has appointed merchant bankers to prepare the red-herring prospectus. Hence the process of listing has started. Therefore, it ceases to be an SMC. Unless the candidate is familiar with the rules, the question is better left alone.
from BUSINESS LINE, December 15, 2008 This time around, the focus in the CA (Final) advanced auditing paper has shifted from accounting standards to company audit. The allocation of marks is as follows: accounting and audit standards - 26 marks; company audit - 40 marks; code of conduct - 18 marks; banks and insurance companies - 24 marks; and others - 32 marks.
Conspicuous by their absence were questions on management audit, operations audit, and audit of share brokers.
Even on tax audit, there was but one question for eight marks, straight from the textbook. In miscellaneous audits, environment audit was preferred.
Code of conduct, company audit, AS (accounting standard) and AAS were on expected lines, accounting for 84 of the 100 marks that were required to be attempted by the candidates. Question 5, for 12 marks, on SMCs (small and medium companies) should have stumped quite a few.
Question-wise analysis Q1, for 18 marks, is dedicated to AS. The first two parts are straight from the book covering accounting for taxes and accounting for grants. There are clear indications in the standards. Parts C and D would have foxed students and prompted them to make guesses.
The paper has given emphasis on SMCs in terms of the Companies (Accounting Standards) Rules 2006.
A well-prepared candidate could have scored 12 marks for Q1(c) and Q5 out of the allotted 16 marks.
Q2, for 18 marks, is on code of conduct. The question is neither complicated nor too simpl. Candidates who have prepared well can hope to get 12-15 marks for this question.
Q3, for 16 marks, is from the Companies Act rather than company audit.
Eight marks for the question on auditors' duties with regard to disqualification of directors under Section 274(1)(g) are a bonus.
Same is the case with auditor's liability to third parties in relation to prospectus for eight marks. A candidate who has gone through company law well can hope to score well - 10 marks for this question would be reasonable.
Q4 is divided between company audit and audit of insurance companies - eight marks apiece.
Q4(a), on CARO requirement for Section 58AA and carrying eight marks, should have been too good to resist. But Q4(b), on Section 619(3)(A), on requirements for insurance companies, might have taken the candidates by surprise.
Surprisingly , two questions, carrying eight marks, have been asked from the topic 'issue of prospectus and acceptance of deposits'. But this are the only questions on audit of insurance companies.
Springing a surprise Q5 is in two parts, 12 marks for SMC as per Companies (Accounting Standards) Rules 2006 and four marks for financial indicators for the 'going concern'.
This question is out of the blue, and some candidates might not even have been aware of the existence of such rules.
The question reads thus: Comment whether the following companies can be classified as a small and medium-size company (SMC) as per the Companies (Accounting Standards) Rules 2006: a) A Pvt Ltd, a subsidiary of a multinational company listed on London Stock Exchange. It has a turnover of Rs 12 crore and borrowings of Rs 5 crore.
b) B Pvt. Ltd has a turnover of Rs 45 crore, other income of Rs 7 crore and bank borrowings of Rs 9 crore c) C Ltd has appointed merchant bankers to prepare a red-herring prospectus for the purpose of filing the same with SEBI. Solution: As per clause F of the Companies (Accounting Standards) Rules 2006, an SMC is a company, i) Whose equity or debt instruments are not listed or not in the process of listing in any stock exchange in India or outside India; ii) Which is not a bank or a financial institution or an insurance company; iii) Whose turnover (excluding other income) does not exceed Rs 50 crore during the previous year; iv) Which does not have borrowings in excess of Rs 10 crore at any time during the year; v) Which is not a holding company or a subsidiary company of a company which is not an SMC. Based on the above, a) A Pvt. Ltd is a subsidiary of a multinational company listed on the London Stock Exchange. By virtue of clause (i) the holding company is not an SMC. As per clause (v), A Pvt. Ltd being a subsidiary of a company which is not an SMC also does not qualify to be an SMC. b) This question is based on clauses (iii) and (iv) of the said rules. Clause (iii) says whose turnover (excluding 'other income') does not exceed Rs 50 crore during the previous year and (iv) says which does not have borrowings in excess of Rs 10 crore at any time during the year. B Pvt Ltd has a turnover of Rs 45 crore and other income of Rs 7 crore. For determining if the company is an SMC, other income is to be excluded. Turnover of the company (Rs 45 crore) is less than Rs 50 crore. Hence, it is an SMC by virtue of clause (iii). As per clause (iv), the company ceases to be an SMC if it has borrowings of Rs 10 crore or more. The borrowings are only Rs 9 crore. Hence, it is an SMC. Thus, by applying both the clauses, the company qualifies to be an SMC. c) As per clause (i), SMC is a company whose shares/debt are not listed or are in the process of being listed in a stock exchange in India or outside India. C Ltd has appointed merchant bankers to prepare the red-herring prospectus. Hence the process of listing has started. Therefore, it ceases to be an SMC. Unless the candidate is familiar with the rules, the question is better left alone. More or less these conditions have been laid down in the Accounting Standards. Q5(b), for four marks, can be answered based on AAS 16 on 'going concern'. Overall, a candidate with good knowledge of the rules could have scored well in this question. Q6 for 16 marks is again textual and can be answered easily, particularly Q6(b) on tax audit (for eight marks), as the candidates should have been fresh from the just concluded season of tax audits. Scoring 12 marks is possible. Q7, for 16 marks (on environmental audit and drafting a report on compiling of financial statements for obtaining a bank loan), is again a tough nut to crack. It would be difficult to write convincing answers for this question. The question is abstract and it is better left alone. Even if a candidate attempts, he/she would end up scoring only single digit marks. Q8, for 16 marks, is on short notes.
There are six parts and the candidates are required to answer any four for four marks each. Parts (d) and (f) on permanent consolidation adjustments and stages in risk-based internal audit are a bit difficult to comprehend. Others do not pose a big problem. The paper has dwelt more on company law than on company audit. There is a shift away from the Accounting Standards. Code of conduct has been the constant factor. Scoring more than 60 in this paper would be difficult. It would have been better to leave out Q(5) and Q(7) in the choice. Q4(b) is again a difficult question to score marks of.
B Pvt. Ltd has a turnover of Rs 45 crore, other income of Rs 7 crore and bank borrowings of Rs 9 crore c) C Ltd has appointed merchant bankers to prepare a red-herring prospectus for the purpose of filing the same with SEBI. Solution: As per clause F of the Companies (Accounting Standards) Rules 2006, an SMC is a company, i) Whose equity or debt instruments are not listed or not in the process of listing in any stock exchange in India or outside India; ii) Which is not a bank or a financial institution or an insurance company; iii) Whose turnover (excluding other income) does not exceed Rs 50 crore during the previous year; iv) Which does not have borrowings in excess of Rs 10 crore at any time during the year; v) Which is not a holding company or a subsidiary company of a company which is not an SMC. Based on the above, a) A Pvt. Ltd is a subsidiary of a multinational company listed on the London Stock Exchange.
By virtue of clause (i) the holding company is not an SMC. As per clause (v), A Pvt. Ltd being a subsidiary of a company which is not an SMC also does not qualify to be an SMC. b) This question is based on clauses (iii) and (iv) of the said rules. Clause (iii) says whose turnover (excluding 'other income') does not exceed Rs 50 crore during the previous year and (iv) says which does not have borrowings in excess of Rs 10 crore at any time during the year. B Pvt Ltd has a turnover of Rs 45 crore and other income of Rs 7 crore. For determining if the company is an SMC, other income is to be excluded. Turnover of the company (Rs 45 crore) is less than Rs 50 crore. Hence, it is an SMC by virtue of clause (iii). As per clause (iv), the company ceases to be an SMC if it has borrowings of Rs 10 crore or more. The borrowings are only Rs 9 crore. Hence, it is an SMC. Thus, by applying both the clauses, the company qualifies to be an SMC. c) As per clause (i), SMC is a company whose shares/debt are not listed or are in the process of being listed in a stock exchange in India or outside India. C Ltd has appointed merchant bankers to prepare the red-herring prospectus. Hence the process of listing has started. Therefore, it ceases to be an SMC. Unless the candidate is familiar with the rules, the question is better left alone.
from BUSINESS LINE, December 15, 2008 This time around, the focus in the CA (Final) advanced auditing paper has shifted from accounting standards to company audit. The allocation of marks is as follows: accounting and audit standards - 26 marks; company audit - 40 marks; code of conduct - 18 marks; banks and insurance companies - 24 marks; and others - 32 marks.
Conspicuous by their absence were questions on management audit, operations audit, and audit of share brokers.
Even on tax audit, there was but one question for eight marks, straight from the textbook. In miscellaneous audits, environment audit was preferred.
Code of conduct, company audit, AS (accounting standard) and AAS were on expected lines, accounting for 84 of the 100 marks that were required to be attempted by the candidates. Question 5, for 12 marks, on SMCs (small and medium companies) should have stumped quite a few.
Question-wise analysis Q1, for 18 marks, is dedicated to AS. The first two parts are straight from the book covering accounting for taxes and accounting for grants. There are clear indications in the standards. Parts C and D would have foxed students and prompted them to make guesses.
The paper has given emphasis on SMCs in terms of the Companies (Accounting Standards) Rules 2006.
A well-prepared candidate could have scored 12 marks for Q1(c) and Q5 out of the allotted 16 marks.
Q2, for 18 marks, is on code of conduct. The question is neither complicated nor too simpl. Candidates who have prepared well can hope to get 12-15 marks for this question.
Q3, for 16 marks, is from the Companies Act rather than company audit.
Eight marks for the question on auditors' duties with regard to disqualification of directors under Section 274(1)(g) are a bonus.
Same is the case with auditor's liability to third parties in relation to prospectus for eight marks. A candidate who has gone through company law well can hope to score well - 10 marks for this question would be reasonable.
Q4 is divided between company audit and audit of insurance companies - eight marks apiece.
Q4(a), on CARO requirement for Section 58AA and carrying eight marks, should have been too good to resist. But Q4(b), on Section 619(3)(A), on requirements for insurance companies, might have taken the candidates by surprise.
Surprisingly , two questions, carrying eight marks, have been asked from the topic 'issue of prospectus and acceptance of deposits'. But this are the only questions on audit of insurance companies.
Springing a surprise Q5 is in two parts, 12 marks for SMC as per Companies (Accounting Standards) Rules 2006 and four marks for financial indicators for the 'going concern'.
This question is out of the blue, and some candidates might not even have been aware of the existence of such rules.
The question reads thus: Comment whether the following companies can be classified as a small and medium-size company (SMC) as per the Companies (Accounting Standards) Rules 2006: a) A Pvt Ltd, a subsidiary of a multinational company listed on London Stock Exchange. It has a turnover of Rs 12 crore and borrowings of Rs 5 crore.
b) B Pvt. Ltd has a turnover of Rs 45 crore, other income of Rs 7 crore and bank borrowings of Rs 9 crore c) C Ltd has appointed merchant bankers to prepare a red-herring prospectus for the purpose of filing the same with SEBI. Solution: As per clause F of the Companies (Accounting Standards) Rules 2006, an SMC is a company, i) Whose equity or debt instruments are not listed or not in the process of listing in any stock exchange in India or outside India; ii) Which is not a bank or a financial institution or an insurance company; iii) Whose turnover (excluding other income) does not exceed Rs 50 crore during the previous year; iv) Which does not have borrowings in excess of Rs 10 crore at any time during the year; v) Which is not a holding company or a subsidiary company of a company which is not an SMC. Based on the above, a) A Pvt. Ltd is a subsidiary of a multinational company listed on the London Stock Exchange. By virtue of clause (i) the holding company is not an SMC. As per clause (v), A Pvt. Ltd being a subsidiary of a company which is not an SMC also does not qualify to be an SMC. b) This question is based on clauses (iii) and (iv) of the said rules. Clause (iii) says whose turnover (excluding 'other income') does not exceed Rs 50 crore during the previous year and (iv) says which does not have borrowings in excess of Rs 10 crore at any time during the year. B Pvt Ltd has a turnover of Rs 45 crore and other income of Rs 7 crore. For determining if the company is an SMC, other income is to be excluded. Turnover of the company (Rs 45 crore) is less than Rs 50 crore. Hence, it is an SMC by virtue of clause (iii). As per clause (iv), the company ceases to be an SMC if it has borrowings of Rs 10 crore or more. The borrowings are only Rs 9 crore. Hence, it is an SMC. Thus, by applying both the clauses, the company qualifies to be an SMC. c) As per clause (i), SMC is a company whose shares/debt are not listed or are in the process of being listed in a stock exchange in India or outside India. C Ltd has appointed merchant bankers to prepare the red-herring prospectus. Hence the process of listing has started. Therefore, it ceases to be an SMC. Unless the candidate is familiar with the rules, the question is better left alone. More or less these conditions have been laid down in the Accounting Standards. Q5(b), for four marks, can be answered based on AAS 16 on 'going concern'. Overall, a candidate with good knowledge of the rules could have scored well in this question. Q6 for 16 marks is again textual and can be answered easily, particularly Q6(b) on tax audit (for eight marks), as the candidates should have been fresh from the just concluded season of tax audits. Scoring 12 marks is possible. Q7, for 16 marks (on environmental audit and drafting a report on compiling of financial statements for obtaining a bank loan), is again a tough nut to crack. It would be difficult to write convincing answers for this question. The question is abstract and it is better left alone. Even if a candidate attempts, he/she would end up scoring only single digit marks. Q8, for 16 marks, is on short notes.
There are six parts and the candidates are required to answer any four for four marks each. Parts (d) and (f) on permanent consolidation adjustments and stages in risk-based internal audit are a bit difficult to comprehend. Others do not pose a big problem. The paper has dwelt more on company law than on company audit. There is a shift away from the Accounting Standards. Code of conduct has been the constant factor. Scoring more than 60 in this paper would be difficult. It would have been better to leave out Q(5) and Q(7) in the choice. Q4(b) is again a difficult question to score marks of.
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