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CA IPCC : Sample / Mock Test Paper (with Model Answers) - AUDITING & ASSURANCE Sep 2014

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Test Series: September, 2014 MOCK TEST PAPER 1 INTERMEDIATE (IPC): GROUP II PAPER 6: AUDITING AND ASSURANCE Question No.1 is compulsory. Attempt any five questions from the remaining six questions. Time Allowed 3 Hours 1. Maximum Marks 100 Discuss with reference to SAs: (a) The auditor shall communicate all significant findings with those charged with Governance. (5 Marks) (b) Factors effecting form, contents and extent of audit. (5 Marks) (c) Factors that are to be considered while designing a confirmation request. (5 Marks) (d) Auditor shall establish an overall strategy that sets the scope, timing and directions of the audit, and that guides the development of the audit plan. (5 Marks) 2 State with reason (in short) whether the following statements are true or false. (Answer any eight): (i) The overall objective of audit does not change in Computer Information System (CIS) environment. (ii) Interim dividend is not a part of dividend. (iii) Comptroller and Auditor General of India can be removed by the Prime Minister of India on the recommendation of his Council of Ministers. (iv) Examination in depth implies that the auditor vouches almost all transactions in a manner that the chances of not checking any transaction are left at minimum. (v) The first auditors appointed by the board of directors can be removed by the board at its subsequent meeting. (vi) SA 620 is applicable when an auditor seeks legal opinion from an advocate. (vii) If there is difference of opinion among the joint auditors with regard to any matter, majority joint auditors opinion will prevail while reporting. (viii) Procedural error arises as a result of transactions having been recorded in a fundamentally incorrect manner. (ix) An auditor may be removed from office before the expiry of his term, by the company in general meeting. The Institute of Chartered Accountants of India (x) Taking management representation is a convenient, economical and equally acceptable auditing method even where the direct access by auditor to audit evidence is possible. (8 x 2 = 16 Marks) 3. (a) What is Audit Evidence ? (2 Marks) (b) What are the various methods of obtaining audit evidence? Mention the same in brief. (6 Marks) (c) Comment on the following: (i) NM & Co., chartered accountants were appointed as the auditors of a public limited company in their Annual General Meeting. Various co-operative and term lending institutions held 51% of the paid-up share capital of the company. (ii) Mr. L, a chartered accountant in full-time practice, was acting as the statutory auditor of a public limited company, till it was wound up. Mr. L was appointed as the liquidator for purposes of winding up proceedings. (2 x 4 = 8 Marks) 4. (a) Give various factors which result in increase in Gross profit. (8 Marks) (b) Define depreciation and discuss various purposes of providing depreciation. (8 Marks) 5. (a) Mention the eight important points which an auditor will consider while conducting the audit of educational institutions. (8 Marks) (b) What special steps will you take into consideration in auditing the accounts of a hotel? (8 Marks) 6. (a) Ram Ltd. Co. gave a donation of Rs. 1,50,000 each to a Charitable Society running a school and a trust set up for the service of Blind during financial year ending on 31st March, 2014. The average net profits of the company for the last three years were Rs. 45 lakhs. Comment. (6 Marks) (b) Explain the meaning of term "Subsequent Events" as used in the SA560. Should all types of subsequent events be considered by the auditor in his attest functions? (6 Marks) (c) How will you verify/ vouch the retirement gratuity to employees? 7 (4 Marks) Write short notes on any four of the following: (a) Audit of Expenditure in Government Audit (b) Disclaimer of Opinion. (c) Disadvantages of the use of an audit programme. (d) Audit Techniques. (e) Simple random sampling. The Institute of Chartered Accountants of India (4 x 4 = 16 Marks) Test Series: September, 2014 MOCK TEST PAPER 1 INTERMEDIATE (IPC) : GROUP II PAPER 6: AUDITING AND ASSURANCE SUGGESTED ANSWERS/HINTS 1. (a) As per SA-260 Communication with Those Charged with Governance , the auditor shall communicate the following significant findings from the audit, with those charged with governance: (i) The auditor s views about significant qualitative aspects of the entity s accounting practices, including accounting policies, accounting estimates and financial statement disclosures. When applicable, the auditor shall explain to those charged with governance why the auditor considers a significant accounting practice, that is acceptable under the applicable financial reporting framework, not to be most appropriate to the particular circumstances of the entity; (ii) Significant difficulties, if any, encountered during the audit; (iii) Unless all of those charged with governance are involved in managing the entity: (1) Significant matters, if any, arising from the audit that were discussed, or subject to correspondence with management; and (2) Written representations the auditor is requesting; and (iv) Other matters, if any, arising from the audit that, in the auditor s professional judgment, are significant to the oversight of the financial reporting process. (b) As per SA-230 on Audit Documentation , the form, content and extent of audit documentation depend on the following factors: (i) The size and complexity of the entity. (ii) The nature of the audit procedures to be performed. (iii) The identified risks of material misstatement. (iv) The significance of the audit evidence obtained. (v) The nature and extent of exceptions identified. (vi) The need to document a conclusion or the basis for a conclusion not readily determinable from the documentation of the work performed or audit evidence obtained. (vii) The audit methodology and tools used. The Institute of Chartered Accountants of India (c) As per SA -505 External Confirmations , the design of a confirmation request may directly affect the confirmation response rate, and the reliability and the nature of the audit evidence obtained from responses. The following factors should be considered while designing a confirmation request:(i) The assertions being addressed. (ii) Specific identified risks of material misstatement, including fraud risks. (iii) The layout and presentation of the confirmation request. (iv) Prior experience on the audit or similar engagements. (v) The method of communication (vi) Management s authorisation to the confirming parties to respond to the auditor. Confirming parties may only be willing to respond to a confirmation request containing management s authorisation. (vii) The ability of the confirming party to provide the requested information. (d) Establishment of overall strategy for development of audit plan: According to SA 300, Planning an Audit of Financial Statements the auditor shall establish an overall audit strategy that sets the scope, timing and directions of the audit, and that guides the development of the audit plan. In establishing the overall audit strategy, the auditor shall: (i) Identify the characteristics of the engagement that define its scope; (ii) Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required; (iii) Consider the factors that, in the auditor s professional judgment, are significant in directing the engagement team s efforts; (iv) Consider the results of preliminary engagement activities and, where applicable, whether knowledge gained on other engagements performed by the engagement partner for the entity is relevant; and (v) Ascertain the nature, timing and extent of resources necessary to perform the engagement. 2. (i) True : Overall objective of audit does not change in Computer Information System (CIS) environment. But the use of computer changes the processing and storage, retrieval and communication of financial information. (ii) False : The definition of dividend has been amended by the Companies (Amendment) Act, 2000 where the interim dividend has been treated as part of dividend. With an amendment in Section 205, the interim dividend has been brought at par with dividends declared in the normal course. The Institute of Chartered Accountants of India (iii) False : The Comptroller and Auditor General of India cannot be removed by the Prime Minister of India on the recommendation of his Council of Ministers. He can be removed on the ground of proven misbehavior or incapacity, when each House of Parliament decides to do so by majority of not less than 2/3 of the members of the house present and voting. (iv) False : Examination in depth implies examination of a few selected transactions from the beginning to the end through the entire flow of the transaction. This examination consists of studying the recording of transactions at the various stages through which they have passed. At each stage, relevant records and authorities are examined; it is also judged whether the person who has exercised the authority in relation to the transactions is fit to do so in terms of the prescribed procedure. (v) False : The first auditor appointed by the board of directors may be removed at general meeting of the shareholders and not meeting of the board of directors. (vi) True : SA 620 on using the work of an expert applies when the auditor seeks opinion/reports of an expert on any audit matter. Therefore, SA 620 is applicable when an auditor seeks legal opinion from an advocate. (vii) False : As per SA 299 Responsibility of Joint Auditors , where the joint auditors are in disagreement with regard to any matter to be covered by the audit report, each one of them should express his own opinion through a separate report. (viii) False : Procedural error arises when there is error in implementation of the procedure. If transaction has been recorded in a fundamentally incorrect manner it will result in error of principle. (ix) False : As per Section 224(7), the auditor may be removed from the office before the expiry of his term by the company in general meeting obtaining the prior approval of the Central Government. But such approval is not required for the removal of the first auditor appointed by the Board of Directors. (x) False : Where it is possible for auditor to check the transaction by himself through direct access, it is not fair for him to merely rely the management representation as prime audit evidence. 3. (a) Audit Evidence: As per SA 500 Audit evidence Information used by the auditor in arriving at the conclusions on which the auditor s opinion is based. Audit evidence includes both information contained in the accounting records underlying the financial statements and other information. (b) Methods of Obtaining Audit Evidence: The auditor obtains evidence by one or more of the following methods: Inspection: Inspection involves examining records or documents, whether internal or external, in paper form, electronic form, or other media, or a physical examination of an asset. Inspection of records and documents provides audit evidence of varying The Institute of Chartered Accountants of India degrees of reliability, depending on their nature and source and, in the case of internal records and documents, on the effectiveness of the controls over their production. An example of inspection used as a test of controls is inspection of records for evidence of authorisation. Some documents represent direct audit evidence of the existence of an asset, for example, a document constituting a financial instrument such as a inventory or bond. Inspection of such documents may not necessarily provide audit evidence about ownership or value. In addition, inspecting an executed contract may provide audit evidence relevant to the entity s application of accounting policies, such as revenue recognition. Inspection of tangible assets may provide reliable audit evidence with respect to their existence, but not necessarily about the entity s rights and obligations or the valuation of the assets. Inspection of individual inventory items may accompany the observation of inventory counting. Observation: Observation consists of looking at a process or procedure being performed by others, for example, the auditor s observation of inventory counting by the entity s personnel, or of the performance of control activities. Observation provides audit evidence about the performance of a process or procedure, but is limited to the point in time at which the observation takes place, and by the fact that the act of being observed may affect how the process or procedure is performed. External Confirmation: An external confirmation represents audit evidence obtained by the auditor as a direct written response to the auditor from a third party (the confirming party), in paper form, or by electronic or other medium. External confirmation procedures frequently are relevant when addressing assertions associated with certain account balances and their elements. However, external confirmations need not be restricted to account balances only. For example, the auditor may request confirmation of the terms of agreements or transactions an entity has with third parties; the confirmation request may be designed to ask if any modifications have been made to the agreement and, if so, what the relevant details are. External confirmation procedures also are used to obtain audit evidence about the absence of certain conditions, for example, the absence of a side agreement that may influence revenue recognition. Recalculation: Recalculation consists of checking the mathematical accuracy of documents or records. Recalculation may be performed manually or electronically. Reperformance: Reperformance involves the auditor s independent execution of procedures or controls that were originally performed as part of the entity s internal control. Analytical Procedures: Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and The Institute of Chartered Accountants of India non-financial data. Analytical procedures also encompass the investigation of identified fluctuations and relationships that are inconsistent with other relevant information or deviate significantly from predicted amounts. Inquiry: Inquiry consists of seeking information of knowledgeable persons, both financial and non- financial, within the entity or outside the entity. Inquiry is used extensively throughout the audit in addition to other audit procedures. Inquiries may range from formal written inquiries to informal oral inquiries. Evaluating responses to inquiries is an integral part of the inquiry process. Responses to inquiries may provide the auditor with information not previously possessed or with corroborative audit evidence. Alternatively, responses might provide information that differs significantly from other information that the auditor has obtained, for example, information regarding the possibility of management override of controls. In some cases, responses to inquiries provide a basis for the auditor to modify or perform additional audit procedures. Although corroboration of evidence obtained through inquiry is often of particular importance, in the case of inquiries about management intent, the information available to support management s intent may be limited. In these cases, understanding management s past history of carrying out its stated intentions, management s stated reasons for choosing a particular course of action, and management s ability to pursue a specific course of action may provide relevant information to corroborate the evidence obtained through inquiry. In respect of some matters, the auditor may consider it necessary to obtain written representations from management and, where appropriate, those charged with governance to confirm responses to oral inquiries. (c) (i) Appointment of Auditors : The implication of shareholding of 51% of paid-up capital by various co-operative and term lending institutions is two fold as discussed below: In terms of Section 224A of the Companies Act, 1956, a company in which not less than 25% of the subscribed share capital is held, whether singly or in any combination, by: (1) a public financial institution or a Government company or the Central Government or any state government; or (2) any financial or other institution established by any Provincial or State Act in which a State Government holds not less than 51% of subscribed share capital; or (3) a nationalised bank or an insurance company carrying on general insurance business, the appointment or re-appointment of an auditor in the Annual General Meeting The Institute of Chartered Accountants of India shall be made only by passing a special resolution. In this case, NM & Co. were appointed as auditors of the public limited company where 51% of the paid-up share capital was held by co-operatives and term lending institutions. Presuming that such institutions are covered by the aforesaid criteria, passing a special resolution was necessary. Hence, the appointment of NM & Co., chartered accountants, was null and void provided such institutions are covered by Section 224A. Section 619 B read with Section 619 of the Companies Act, 1956 requires that a company in which the central government or any state government or any government company or any government corporation hold either singly or jointly not less than 51% of the paid-up share capital, the auditors of such companies are to be appointed by the central government on the advice of the Comptroller and Auditor General of India. However, the co-operative and term lending institutions are not covered within the definition of corporation/institution owned by the Central/State Government. Accordingly, the provisions of Section 619 will not apply in this case, although the co-operatives and term lending institutions hold majority share capital. (ii) Appointment of auditor as a liquidator: The Chartered Accountants Regulations allows a chartered accountant in practice, subject to the control of the Council, to act as a liquidator. But a chartered accountant at the same time cannot act both as liquidator and auditor of the company. The Institute of Chartered Accountants of India, in order to establish a healthy convention, recommended that in cases where a chartered accountant acts as a liquidator, the statement of accounts to be filed u/s 551(1) of the Companies Act, 1956 should be audited by a qualified chartered accountant other than the chartered accountant who is the liquidator of the company. The appointment of Mr. L, chartered accountant, to carry out both the functions as a liquidator and as an auditor will not be proper having regard to the concept of auditor s independence. Thus Mr. L, chartered accountant, cannot act both as the liquidator and the auditor. 4. (a) Factors which increase the gross profit: (i) Undervaluation of opening stock; it may be either the effect of non-inclusion of certain items of stocks or that of valuation of the stock at a rate lower than that warranted by the basis of valuation adopted or miscalculation of the value of one or more items of stock. In such a case, the increase in the rate of gross profit would be preceded by a fall in the rate of gross profit in the previous year. (ii) Overvaluation of closing stock, either by the inclusion therein of fictitious items The Institute of Chartered Accountants of India of stock or over-statement of values of some of them. (iii) Alteration of the basis of valuation of closing stock, e.g., where the opening stock was valued at cost or market rate whichever was lower, valuing the closing stock at the market price which is higher than cost. (iv) Increase in the value of some of the items included in the opening stock above cost, on account of which the unsold stock of these items at the close of the year is valued at cost. (v) Under-statement of opening stock or over-statement of closing stock, due to adjustment of the amount of sales, when goods sold but not delivered are included in the closing stock or when goods were delivered and taken out of stock last year, but sales invoices is raised in the current year. (vi) Entry of fictitious purchases to boost up the profits, if such a practice has been resorted to, it would have the effect of reducing the rate of gross profit in the ensuing year. (vii) Inclusion in the closing stock of goods returned awaiting despatch to supplier, the cost of which has been debited to them or goods returned by customers, the cost whereof has not been credited to parties. (viii) Inclusion in the closing stock of goods received for the sale on approval or on a consignment basis. (ix) Treatment of goods sent out for sale on consignment basis as regular sales. (x) No provision or under-provision in the expenses accounts included in the Trading Account. For example, purchase may be understated; provision for outstanding wages or carriage inward may not have been made. (xi) Wrong allocations of expenses, e.g., carriage inwards either in whole or in part may be wrongly taken to the Profit and Loss Account. (b) Depreciation: Definition : According to AS-6 Depreciation Accounting issued by the Institute of Chartered Accountants of India Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time, obsolescence through technology and market charges. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortisation of assets whose usefulness is predetermined . The term depreciable amount of a depreciable asset as per the standard is its historical cost, or other amount substituted for historical cost in the financial statements less the estimated residual value. The Institute of Chartered Accountants of India The accounting standard recommends that the depreciable amount of a depreciable asset should be allocated on a systematic basis to each accounting period during the useful life of the asset. Purpose of Providing Depreciation: (i) To keep capital intact: It will be evident that one of the effects of providing for depreciation on an asset is to retain 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 its scrap value) in the business out of the profits in each year. (ii) To ascertain cost accurately: Unless a proper charge on account of depreciation is included in the Profit and Loss Account, the true cost of manufacture of different products will not be ascertained. This is because depreciation is as much a charge against revenue as any other expenditure and must be included in accounts irrespective of the fact whether the final result of a working is profit or loss. (iii) To charge initial costs against earnings : The cost of a machine less its scrap value can, in effect, be regarded as the price for use of the machine paid in advance for the period it will be rendering service. According to this view unless an appropriate part of this price is charged to the profits of the business each year, the profit earned on its working will not be correctly ascertained. (iv) To prepare true and fair statements: Unless depreciation is provided, the assets will be shown at an amount higher than their true value and the profit shown will be more than the real profit. In other words, the Balance Sheet and the Profit and Loss Account will not be true and fair. 5. (a) Audit of Educational Institutions : The important points which an auditor should consider while conducting the audit of education institutions are as follows: (i) Examine the Trust Deed or Regulations, in the case of school or college and note all the provisions affecting accounts. In the case of a university, refer to the Act of Legislature and the Regulation framed thereunder. (ii) Read through the minutes of the meetings of the Managing Committee or Governing Body, noting resolutions affecting accounts to see that these have been duly complied with, specially the decisions as regards the operation of bank accounts and sanctioning of expenditure. (iii) Check names entered in the Students Fee Register for each month or term, with the respective Class Registers, showing names of students on rolls and test amount of fees charged; and verify that there operates a system of internal check which ensures that demands against the students are properly raised. (iv) Check fees received by comparing counterfoils of receipts granted with entries The Institute of Chartered Accountants of India in the Cash Book and tracing the collections in the Fee Register to confirm that the revenue from this source has been duly accounted for. (v) Total up the various columns of the Fees Register for each month or term to ascertain that fees paid in advance have been carried forward and that the arrears that are irrecoverable have been written off under the sanction of an appropriate authority. (vi) Check admission fees with admission slips signed by the head of the institution and confirm that the amount has been credited to a Capital Fund, unless the Managing Committee has taken a decision to the contrary. (vii) See that free studentship and concessions have been granted by a person authorised to do so, having regard to the Rules prescribed by the Managing Committee. (viii) Confirm that fines for late payment or absence, etc. have been either collected or remitted under proper authority. (ix) Confirm that hostel dues were recovered before student s accounts were closed and their deposits of caution money refunded. (x) Verify rental income from landed property with the rent rolls, etc. (xi) Vouch income from endowments and legacies, as well as interest and dividends from investment; also inspect the securities in respect of investments held. (xii) Verify any Government or local authority grant with the relevant paper of grant. If any expense has been disallowed for purposes of grant, ascertain the reasons and compliance thereof. (xiii) Report any old heavy arrears on account of fees, dormitory rents, etc. to the Managing Committee. (xiv) Confirm that caution money and other deposits paid by students on admission, have been shown as liability in the balance sheet not transferred to revenue, unless they are not refundable. (xv) See that the investments representing endowment funds for prizes are kept separate and any income in excess of the prizes has been accumulated and invested along with the corpus. (xvi) Verify that the Provident Fund money of the staff has been invested in appropriate securities. (xvii) Vouch donations, if any with the list published with the annual report. If some donations were meant for any specific purpose, see that the money was utilised for the purpose. (xviii)Vouch all capital expenditure in the usual way and verify the same with the The Institute of Chartered Accountants of India sanction for the Committee as contained in the minute book. (xix) Vouch, in the usual manner, all establishment expenses and enquire into any unduly heavy expenditure under any head. If there was any annual budget prepared, see that any excess under any head over the amount budget was duly sanctioned by the Managing Committee. If not, bring it to the Committee s notice in your report. (xx) See that increase in the salaries of the staff have been sanctioned and minuted by the Committee. (xxi) Ascertain that the system ordering inspection on receipt and issue of provisions, foodstuffs, clothing and other equipment is efficient and all bills are duly authorised and passed before payment. (xxii) Verify the inventories of furniture, stationery, clothing, provision and all equipment etc. These should be checked by reference to Stock Register or corresponding inventories of the previous year and values applied to various items should be test checked. (xxiii)Confirm that the refund of taxes deducted from the income from investment (interest on securities etc.) has been claimed and recovered since the institutions are generally exempted from the payment of income-tax. (xxiv)Finally, verify the annual statements of account and, while doing so see that separate statements of account have been prepared as regards Poor Boys Fund, Games Fund, Hostel and Provident Fund of staff, etc. (b) Audit of Hotels: The business of running a hotel is very much dissimilar to running an industrial unit for manufacturing of products. It is a service-oriented industry. The business is characterized by handling of large amounts of liquid cash, stock of foods providing a variety of services, and keeping watch on customers to ensure that they do not leave hotel without settling the dues. In view of these, the following matters require special attention by the auditor. (i) Internal Control: Pilferage is one of the greatest problems in any hotel and it is extremely important to have a proper internal control to minimize the leakage. The following points should be checked: (a) Effectiveness of arrangement regarding receipts and disbursements of cash. (b) Procedure for purchase and stocking of various commodities and provisions. (c) Procedure regarding billing of the customers in respect of room service, telephone, laundry, etc. The Institute of Chartered Accountants of India (d) System regarding recording and physical custody of edibles, wines, cigarettes, crockery and cutlery, linen, furniture, carpets, etc. (e) Ensure that are trading accounts are prepared preferably weekly, for each sales point. A scrutiny of the percentage of profit should be made, and any deviation from the norms is to be investigated. (ii) Room Sales and Cash Collections (a) There are various sales points scattered in a hotel and sales are both for cash and credit. The control over cash is very important. The charge for room sales is made from the guest register, and tests are to be carried out to ensure that the correct numbers of guests are charged for the exact period of stay. Any difference between the rate charged to the guests and standard room rent is to be investigated to see that it is properly authorized. (b) The total sales reported with the total bills issued at each sales point have to be reconciled. (c) Special care must be taken in respect of bills issued to customers who are staying in the hotel, because they may not be required to pay the bills immediately in cash but at a future date or by credit cards. Billing is to be done room-wise. It must be ensured that all customers pay their bills on leaving the hotel or within specified dates. (iii) Stock: the stocks in a hotel are all saleable item like food and beverages. Therefore, following may be noted in this regard: (a) All movement and transfer of stocks must be properly documented. (b) Areas where stocks are kept must be kept locked and the key retained by the departmental manager. (c) The key should be released only to trusted personnel and unauthorized persons should not be permitted in the stores area. (d) Many hotels use specialized professional valuers to count and value the stocks on a continuous basis throughout the year. (e) The auditor should ensure that all stocks are valued at the year end and that he should himself be present at the year end physical verification, to the extent practicable, having regard to materiality consideration and nature and location of inventories (iv) Fixed Assets: The fixed assets should be properly depreciated, and the Fixed Assets Register should be updated. (v) Casual Labour: In case the hotel employs a casual labour, the auditor should consider, whether adequate records have been maintained in this respect and The Institute of Chartered Accountants of India there is no manipulation taking place. The wages payment of the casual labour must also be checked thoroughly. (vi) The compliance with all statutory provisions, and compliance with the Foreign Exchange Regulations must also be verified by the auditor, especially because hotels offer facility of conversion of foreign exchange to rupees. (vii) Other special aspects are to be verified as under (a) Consumption shown in various physical stock accounts must be traced to the customers bills to ensure that all issues to the customers have been billed. (b) All payments to the foreign collaborator, it any, are to be checked. (c) Expenses and receipts are to be compared with figures of the previous year, having regard to the average occupancy of visitors and changes in rates. (d) Special receipts on account of letting out of auditorium, banquet hall, spaces for shops, boutiques, and special shows should be verified with the arrangements made. (e) In depth check should be carried out on the customers' ledgers to verify that all charges have been properly made and recovered. (f) The occupancy rate should be worked out, and compared with other similar hotels, and with previous year. Material deviations should be investigated. (g) Expenses for painting, decoration, renovation of building, etc. are to be properly checked. (h) It is common that hotels get their bookings done through travel agents. The auditor should ensure that the money is recovered from the travel agents as per credit terms allowed. Commission paid to travel agents should be checked by reference to the agreement on that behalf. (i) Apart from control over stock of edibles, control over issue and physical stock of linen crockery, cutlery, glassware, silver, toilet items, etc. should be verified. (j) The auditor should verify the restaurant bills with reference to KOT (Kitchen order Ticket). (k) The auditor should ensure that all taxes have been included in the client's bills. (I) Computation and payment of salaries and wages vis-a-vis number of employees must be checked. The Institute of Chartered Accountants of India 6. (a) Donation to Charitable Institutions: Section 181 of the Companies Act, 2013 provides that the Board of Directors of a company may contribute to bona fide charitable and other funds with prior permission of the company in general meeting for such contribution in case any amount the aggregate of which, in any financial year, exceed five per cent of its average net profits for the three immediately preceding financial years. Facts of the case: In the instant case, the company has given donation of Rs. 1,50,000/- each to the two charitable organisations which amounts to Rs. 3,00,000. Assuming that the charitable organisations are not related to the business of the company, the average profits of the last 3 years is Rs. 45 lakhs and the 5% of this works out to Rs. 2,25,000. Hence the maximum of donation could be Rs. 2,25,000 only. For excess of Rs. 75,000 the company is required to take prior permission in general meeting which is not been taken. Conclusion: By paying donations of Rs. 1,50,000 which is more than Rs. 75,000, the Board has contravened the provisions of Section 181 of the Companies Act, 2013. (b) Meaning of Subsequent Events : SA 560 on Subsequent Events , defines the term subsequent events as events occurring between the date of the financial statements and the date of the auditor s report, and facts that become known to the auditor after the date of the auditor s report, subsequent events also refer to significant events which occurred up to the date of report of the auditor of that component. Thus, subsequent events are those events which occur after the date of the balance sheet till the audit report is signed by the auditor. Consideration of Subsequent Events by the Auditor : SA 560 requires that the auditor should consider the effect of subsequent events on the financial statements and the auditor s report. However, the exact manner of treatment would depend upon whether the event falls in the category of adjusting event or non-adjusting event . As per Accounting Standard (AS) 4, events occurring after the date of the balance sheet are of two types, viz., adjusting events which provide further evidence of conditions that existed at the date of the balance sheet; and, nonadjusting events are those which are indicative of conditions that arose subsequent to the date of the balance sheet. Therefore, an auditor is required to consider all subsequent events while discharging his duties and determine whether those shall have to be adjusted or simply required to be disclosed. However, the auditor should perform work as near as practicable to the date of the auditor s report. (c) Vouching / Verification of Retirement Gratuity to Employees (i) Examine the basis on which the gratuity payable to employees is worked out. The liability for gratuity may either be worked out on actuarial rules or The Institute of Chartered Accountants of India agreement or on the presumption that all employees retire on the balance sheet date. (ii) Verify computation of liability of gratuity on the aggregate basis. (iii) Check the amount of gratuity paid to employees who retired during the year with reference to number of years of service rendered by them. (iv) See that the annual premium has been charged to Profit and Loss account in case the concern has taken a policy from LIC. (v) Ensure that the basis of computing gratuity is valid. (vi) Ensure that the accounting treatment is in accordance with Accounting Standards. 7. (a) Audit of Expenditure in Government Audit: The various standards set for audit of expenditure are: (i) Audit against Rules & Orders: The auditor has to see that the expenditure incurred conforms to the relevant provisions of the statutory enactment and is in accordance with the financial rules and regulations framed by the competent authority. (ii) Audit of Sanctions: The auditor has to ensure that each item of expenditure is covered by a sanction, either general or special, accorded by the competent authority, authorising such expenditure. (iii) Audit against Provision of Funds: It contemplates that there is a provision of funds out of which expenditure can be incurred and the amount of such expenditure does not exceed the appropriations made. (iv) Propriety Audit: It is required to be seen that the expenditure is incurred with due regard to broad and general principles of financial propriety. The auditor aims to bring out cases of improper, avoidable, or infructuous expenditure even though the expenditure has been incurred in conformity with the existing rules and regulations. (v) Performance Audit: This involves that the various programmes, schemes and projects where large financial expenditure has been incurred are being run economically and are yielding results expected of them. (b) Disclaimer of Opinion: Where an auditor fails to obtain sufficient information to warrant an expression of opinion, and, thus, is unable to form an opinion, he issues a disclaimer of opinion. Accordingly, the auditor may state that he is unable to express an opinion because he has not been able to obtain sufficient and appropriate audit evidence to form an opinion. The necessity of a disclaimer of opinion may arise due to many reasons such as the The Institute of Chartered Accountants of India scope of examination is restricted or in certain circumstances the auditor may not have access to all the books of account for certain reasons, e.g., books are seized by excise authorities or destroyed in fire, etc. It is but natural that the auditor must make all efforts to verify and substantiate the events. In case he is unable to obtain audit evidence even from alternative sources, then the auditor can only state that he is unable to form an opinion. (c) Disadvantages of the use of an Audit Programme : There are some disadvantages in the use of audit programmes but most of these can be removed by taking some steps which otherwise also contribute to the making of a good audit. The disadvantages are : (i) The work may become mechanical and particular parts of the programme may be carried out without any understanding of the object of such parts in the whole audit scheme. (ii) The programme often tends to become rigid and inflexible following set grooves; the business may change in its operation of conduct, but the old programme may still be carried on. Changes in staff or internal control may render precaution necessary at points different from those originally decided upon. (iii) Inefficient assistants may take shelter behind the programme i.e. defend deficiencies in their work on the ground that no instruction in the matter is contained therein. (iv) A hard and fast audit programme may kill the initiative of efficient and enterprising assistants. All these disadvantages may be eliminated by imaginative supervision of the work carried on by the assistants; the auditor must have a receptive attitude as regards the assistants; the assistants should be encouraged to observe matters objectively and bring significant matters to the notice of supervisor/principal. (d) Audit Techniques : For collection and accumulation of audit evidence, certain methods and means are available and these are known as audit techniques. Some of the techniques commonly adopted by the auditors are the following: (i) Posting checking (ii) Casting checking (iii) Physical examination and count (iv) Confirmation (v) Inquiry (vi) Year-end scrutiny (vii) Re-computation The Institute of Chartered Accountants of India (viii) Tracing in subsequent period (ix) Bank Reconciliation The audit techniques stand for the methods employed for carrying out the procedure. For example, procedure requires an examination of the documentary evidence. This job is performed by the procedure known as vouching which would involve techniques of inspection and checking computation of documentary evidence. (e) Simple random sampling: Under this method each unit of the whole population e.g. purchase or sales invoice has an equal chance of being selected. The mechanics of selection of items may be by choosing numbers from table of random numbers by computers or picking up numbers randomly from a drum. It is considered that random number tables are simple and easy to use and also provide assurance that the bias does not affect the selection. This method is considered appropriate provided the population to be sampled consists of reasonably similar units and fall within a reasonable range. For example the population can be considered homogeneous, if say, debtors balances fall within the range of Rs. 5,000 to Rs. 25,000 and not in the range between Rs. 25 to Rs. 2, 50,000. The Institute of Chartered Accountants of India

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