SECTION B

1 ) The Cosco Tennis Club owns 12 tennis courts. The club uses “all weather” tarmac tennis courts, which
have floodlights for night-time use. The club’s year end is 31 December 2016. Members pay an annual
fee to use the courts and participate in club championships. The club had 430 members as at 1 January
2017. Income is derived from two main sources: 
1. Membership fees. Each member pays a fee of $200 per annum. Fees for the new financial year
are payable within one month of the club year end. Approximately 10% of members do not
renew their membership. New members joining during the year pay 50% of the total fees that
would have been payable had they been members for a full year. During 2016, 50 new members
joined the club. No members pay their fees before they are due. 
2. Court hire fees: Non-members pay $5 per hour to hire a court. Non-members have to sign a list
in the club house showing courts hired. Money is placed in a cash box in the club house for
collection by the club secretary. 
All fees (membership and court hire) are paid in cash. They are collected by the club secretary
and banked on a regular basis. The paying-in slip shows the analysis between fees and court hire
income. The secretary provides the treasurer with a list of bankings showing member’s names (for
membership fees) and the amount banked. Details of all bankings are entered into the cash book by the
treasurer. 
Main items of expenditure are: 
1. Court maintenance including repainting lines on a regular basis. 
2. Power costs for floodlights. 
3. Tennis balls for club championships. Each match in the championship uses 12 tennis balls. 
The treasurer pays for all expenditure using the club’s debit card. Receipts are obtained for all expenses
and these are maintained in date order in an expenses file. The treasurer also prepares the annual
financial statements. Under the rules of the club, the annual accounts must be audited by an
independent auditor. The date is now 13 April 2017 and the treasurer has just prepared the financial
statements for audit. 
 
Required: 
A. Describe the audit work that should be performed to determine the completeness of income for
the Cosco Tennis Club.
B. Describe the audit procedures that should be performed to check the completeness
and accuracy of expenditure for the Cosco Tennis Club.
 
Ans 1)
A) The following steps should be done:
·         When audit work is done on income to check its completeness, income should not be undermined
or inaccurate. The Cosco Tennis Club should ensure that the existing members pay their fee within the
first month and the new members pay 50% of their fees when inducted.
·         Cosco Tennis Club should ensure that the payments are recorded in the financial statement in the
correct time period i.e. according to the revenue recognition policy of the entity. Here the financial
statements should be updated as and when the members pay the fee.
·         Cosco Tennis Club should also ensure that the payments are recorded in the correct amount as well.
Recalculation can be done by the auditors to check the accuracy of transactions and it can be compared
with the source documents i.e. the paying in slip and list of the member’s name.
·         The auditor should also be aware of what are the various procedures within the Cosco Tennis Club.
For instance, in this case study, new members pay only 50% and the existing members can pay within a
time period of 1 month. This will help the auditor in detecting and correcting any material misstatement.
·         Analytical procedures can also be used to test the completeness of the income. The auditor can
compare with previous income levels, analyze why or how the income levels have risen or fallen and this
will provide sufficient and relevant evidence of completeness of income.
·         For better understanding, he can also go through the members’ accounts individually and cross
check to verify whether all the entries are correct and complete and nothing is left out.
B) The following steps should be done:
·         The auditor should ensure that the expenses actually take place. He can use the bank statement of
the company’s debit card to verify the various transactions.
·         The auditor should also ensure that the expenses have been recorded completely which have
happened within a time period. He can go through various financial statements and source documents
to ensure that there are no missing transactions. The misuse of any processes should be made certain.
·         He should ensure that expenses are classified according to applicable accounting standards. Since
it’s a tennis club classification of expenses should be done accurately and by an experienced person to
ensure no mistakes.
·         He can also check the ledgers, compare with the last year expenses to ensure analytical procedures
in place.
·         They can also ask management to give a written representation stating that there are no unsettled
obligations that will arise before the end of the year.
 
2)  Rosemond Ltd. is a luxury hotel and resorts chain worldwide. It has 54 branches around the world.
You are the auditor of the New Delhi branch of the hotel brand. Draft a note on what shall be the audit
procedure adopted by the auditor to audit revenue from the hotel’s  ‘Bukhara’ restaurant of the New
Delhi branch.
 
Meanwhile, the procurement manager in New Delhi has requested for miniature India Gate souvenirs
for its hotel guests which shall be gifted to the guests on arriving at the hotel as memorabilia. 
How shall you audit the procurement of such mementos?
 
Ans 2)
 
The following steps are done to audit revenue of a hotel:
1.       Rosemund’s auditors should be aware of the various people and processes within the restaurant
and the culture around it. Since the restaurant is in Delhi, the audit procedures will be different from the
rest of the branches. These differences should be made aware of to tailor recommendations and identify
and resolve potential roadblock in the processes
2.       Measurement of KPI’s will help understand the financial position of the restaurant and how it aids
the hotel branch to attract and retain customers. This can also be compared with previous years and
with competitors to understand how much we have improved.
3.       Daily sales reports need to be accurate, complete and observed on a regular basis. In case of any
shortfall, the reasons, internal or external, should be identified.
4.       The inventory should be regularly updated and the days the hotel can use its inventory should be
measured. The kitchen operations and menu should be properly audited.
5.       The various technologies used like databases and other transactions through cards, etc. should have
a source document through a bank statement to double check the accuracy and non-omission of the
entries.
6.       Labour costs should also be properly accounted for. The payroll system can be automated to ensure
accuracy as it is not a complex or strategically important activity.
The following steps are done to audit procurement of gifts/ mementos:
1.       The auditors should first have a meeting with the managers to have an understanding about the
various processes and procedures of the department to consider all these pointers while auditing.
2.       After the meeting, the various processes have to be prioritized. This will help in tackling any
problems while acquiring the mementos from the suppliers or vendors
3.       The purchase orders and forms should have all the necessary details with signatures of the
necessary persons.
4.       The vendors should have an approved list to ensure that the processes and supply are up to date
and meets the standards that the company wants
5.       Reviewing of the procedures will help us find any mistakes or inaccuracies and will ensure all
processes were fulfilled correctly and on time.
6.       All these can then be compiled and provided as a report and any suggestions can be offered to
improve the processes.

 
 
3)  You are one of the board of directors of Skyfall Ltd. a large departmental store chain headquartered
at MG Road, Pune.
The store caters items ranging from grocery, frozen foods, milk products, meat, liquor to personal care
items, cleaning and hygiene items, household appliances, crockery etc.
 
a. Based on above, list the points of internal control which you shall place in the departmental
store as a director of Skyfall Ltd.
b. How shall the auditor test the assertions placed on inventory by the management?
 
 
 
 
 
 
 
Ans 3)
a)
The store caters items ranging from grocery, frozen foods, milk products, meat, and liquor to personal
care items, cleaning and hygiene items, household appliances, crockery etc.
·         The internal controls for groceries are that they must be stored properly for ensuring salability.
Employees should be assigned specific duties so that a double check can be done regularly to ensure
good inventory management. Audit can also be done on the inventory by counting the products on the
shelves and in the warehouse and comparing the number to the quantity recorded in the store’s
records.
·         Ensure that the frozen foods, meat and milk should be kept at a certain degree of temperature to
retain quality and avoid wastage or expiry.
·         The internal controls should be such that there will be no theft and the age of liquor should be
properly recorded. The employees should have specific duties so as to have easier checking procedures.
·          Personal care items and cleaning and hygiene items should not be kept beyond a time period and
they should be of good and usable quality.
b)
The management may have various assertions placed on the inventory. These can be tested by the
following:

1.       Transaction-Level Assertions can be checked by:

Accuracy. The assertion is that the full amounts of all transactions were recorded, without error.
Classification. The assertion is that all transactions have been recorded within the correct accounts in
the general ledger.
Completeness. The assertion is that all business events to which the company was subjected were
recorded.
Cutoff. The assertion is that all transactions were recorded within the correct reporting period.
Occurrence. The assertion is that recorded business transactions actually took place.

2.       Account Balance Assertions can be tested by:

Completeness. The assertion is that all reported asset, liability, and equity balances have been fully
reported.
Existence. The assertion is that all account balances exist for assets, liabilities, and equity.
Rights and obligations. The assertion is that the entity has the rights to the assets it owns and is
obligated under its reported liabilities.
Valuation. The assertion is that all asset, liability, and equity balances have been recorded at their
proper valuations.

3.       Presentation and Disclosure Assertions can be tested by:

Accuracy. The assertion is that all information disclosed is in the correct amounts, and which reflect
their proper values.
Completeness. The assertion is that all transactions that should be disclosed have been disclosed.
Occurrence. The assertion is that disclosed transactions have indeed occurred.
Rights and obligations. The assertion is that disclosed rights and obligations actually relate to the
reporting entity.
Understandability. The assertion is that the information included in the financial statements has been
appropriately presented and is clearly understandable.
 
 
4) Mr. Amrit Desai is the CEO of Neon Bank Ltd. The shareholders of Neon Bank Ltd. have appointed you
as the auditor of Neon Bank Ltd.
Neon bank has lent Rs.1000 crore loan to its 50,000 borrowers.
As an auditor of the bank, how will you verify that the above statement is legitimate? 
The auditor has also been requested to take up additional work to redesign the internal control system
of the bank. Can the auditor take up such an assignment? Give reasons for your answer.
 
Ans 4)
Bank audits can be carried out through the following steps:
The first step is to begin with a triple check, comparing the balance on the three documents and
confirming that it is correct. 
The next step is to review every transaction on the bank account and check them against general
accounting records. When this process is complete, attention must be focused on items that do not
appear on both documents, in order to ensure that they appear correctly on the reconciliation
document, along with a description of what they are.  
Finally, we must check that the sum of the outstanding items from the reconciliation is equal to the
difference between the final balance of the bank account and the final balance in the general accounting
records. 
The individual accounts can also be checked to ensure that the people have actually received the loans.
The request to take up additional work to redesign the internal control system of the bank is a non-audit
work.
During the audit process, the auditor gains an understanding about the client’s system of internal
control to assess control risk.
In integrated audits, auditors often rely on controls to reduce their substantive testing of financial
statement accounts and disclosures. Thus, deficiencies in testing and evaluating internal control can lead
to inadequate testing of accounts and disclosures in the financial statement audit.
The auditor must ensure and rank these controls according to their functionality. This can be done
through making inquiries to management about employees, inspecting source documents, observing
inventory counts and re-performing client procedures.
If the auditor finds any default or defect in the control he/she can suggest changes in the auditor’s
report by pointing them out. However, a complete redesign of the internal controls is not the duty of
the auditor and he/she is responsible only for checking the accuracy of financial statements and
providing a valid opinion .
First, the ethical code forbids auditors to provide non-audit services to audit clients as it would present a
threat to independence for which no adequate safeguards are available. In such circumstances, the firm
must either resign as auditor or refuse to supply the non-audit services. The code includes examples of
specific activities where no acceptable safeguards are available - for example the promotion of the
shares of audit clients - which are therefore effectively prohibited. This is because it will create a
familiarity threat, as the auditor becomes more familiar with the organization.
Second, under the provisions of corporate governance, the audit committee, as representative of the
shareholders, is required to oversee the relationship with the auditors and keep the nature and extent
of non-audit services under review. The audit committee must satisfy itself that the independence and
objectivity of the auditor are not compromised.  There may also rise a threat of self review as the
auditor will be auditing documents prepared by himself, which may make him ignore certain important
defects.
This is why an auditor should refrain from providing any other services other than audit to its client.