Audit new hall question

1. Comment on the following

a. A company purchases Plant & Machine .which will be obsolete after 4 years. Management
decides charge depreciation ¼ of the cost in this year. However this depreciation is higher
than depreciation to be allowed as per IT Act.
b. Auditor team thinks that further audit procedures do need as in previous auditors never
modified their report of Xxxx Company.
c. Supplier files claim to the company…at the end of year court against the company.
Management decides not to make provision.
d.

2. Comment on the following with reference to the Nepal Chartered Accountants Act, Code of
Ethics and Schedules to the Act:
(a) P, a Chartered Accountant in practice provides management consultancy and other services to his
clients. During 2005, looking to the growing needs of his clients to invest in the stock markets, he
also advised them on Portfolio Management Services whereby he managed portfolios of some of his
clients.
(b) B, a Chartered Accountant in practice is a partner in 3 firms. While printing his personal letter
heads, B gave the names of all the firms in which he is a partner.
(c) XYZ & Associates, a firm with 5 partners developed a website www.xyzassociates.com. The
website also contained a link to “All India Chartered Accountants Association”, a voluntary
association where X, a partner of the firm is currently the Vice-president.
(d) M/s LMN, a firm of Chartered Accountants responded to a tender from a State Government for
computerization of land revenue records. For this purpose, the firm also paid Rs.50, 000 as earnest
deposit as part of the terms of the tender.
Answer
(a) Advising on Portfolio Management Services: The Council of the Institute of Chartered
Accountants of India (ICAI) pursuant to section 2(2) (IV) of the Chartered Accountants Act, 1949
has passed a resolution permitting “Management Consultancy and other Services” by a Chartered
Accountant in practice. A clause of the aforesaid resolution allows Chartered Accountants in
practice to act as advisor or consultant to an issue of securities including such matters as drafting of
prospectus, filing of documents with SEBI, preparation of publicity budgets, advice regarding
selection of brokers, etc. It is, however, specifically stated that CAs in practice are not permitted to
undertake the activities of broking, underwriting and portfolio management Services. Thus, a
chartered accountant in practice is not permitted to manage portfolios of his clients.
In view of this, P would be guilty of misconduct under the Chartered Accountants Act, 1949.
(b) Advertisement of Professional Attainments: Clause 7 of Part I of the First Schedule to the
Chartered Accountants Act, 1949 prohibits advertising of professional attainments or services of a
member. It also restrains a member from using any designation or expression other than that of a
Chartered Accountant in documents through which the professional attainments of the member
would come to the notice of the public. Even a member is not permitted to specify the date of
setting up of practice or establishment of firm. However, there is no prohibition for printing names
 of all the three firms on the personal letterheads in which a member holding Certificate of Practice is
a partner. Thus B is not guilty of any misconduct under the Chartered Accountants Act, 1949.
(c) Developing Website: As per the guidelines laid down under Clause (6) of Part I of the First
Schedule to the Chartered Accountants Act, 1949 in respect of websites by chartered accountants in
practice, it is permitted that website may provide a link to the website of ICAI, its Regional
Councils, Branches and Government Departments and other professional Bodies like AICPA,
ICAEW, CICA. In this case, M/s XYZ Associates provided a link to “All India Chartered
Accountants Association” which is not permitted. Hence the firm would be liable for misconduct
under Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949.
(d) Responding to Tenders: Clause (6) of Part I of the First Schedule to the Chartered Accountants
Act, 1949 lays down guidelines for responding to tenders, etc. As per the guidelines if a matter
relates to any services other than audit, members can respond to any tender. Further, in respect of a
non-exclusive area, members are permitted to pay reasonable amount towards earnest
money/security deposits.
In the instance case, since computerization of land revenue records does not fall within exclusive
areas for chartered accountants, M/s LMN can respond to tender as well as deposit Rs.50, 000 as
earnest deposit and shall not have committed any professional misconduct.

3.
a. Briefly describe the auditor's responsibility regarding subsequent events.
Subsequent Events and Auditor's Responsibility: When the auditor draws up his audit plan,
checking of subsequent events is an important audit procedure irrespective of the level of test checks
employed for checking of the transactions during the year. In fact more detailed check is normally
required for subsequent events to confirm certain assertions contained in the financial statements,
e.g., the payment made by debtors after the close of accounting period would confirm that
outstanding debtors on the date of the balance sheet date have been realized. AAS-19 on
"Subsequent Events" establishes standards on the auditor's responsibility regarding subsequent
events. AAS-19 on "Subsequent Events" states that the term "subsequent events" refers to
significant events occurring between the balance sheet date and the date of the auditor's report. AS 4
on " Contingencies and Events Occurring after the Balance Sheet Date" deals with all those
significant events, both favorable and unfavorable, that occur between the balance sheet date and the
date on which the financial statements are approved by the Board of Directors in the case of a
company and by the corresponding approving authority in the case of any other entity. As per AS 4,
events can be identified as adjustable events which provide further evidence of conditions that
existed at the balance sheet date; and, non-adjusting events are those which are indicative of
conditions that arose subsequent to the balance sheet date. AAS-19 lays down that the "auditor
should consider the effect of subsequent events on the financial statements and on the auditor's
report". When the time between the close of the year-end and the adoption of accounts is about to
take place, examination of subsequent events gains more importance.
AAS-19 further requires that the auditor should perform procedures designed to obtain sufficient
appropriate audit evidence that all events up to the date of auditor's report that may require
adjustment of, or disclosure in, the financial statements have been identified. The procedures to
identify events that may require adjustment of, or disclosure in, the financial statements would be
performed as near as practicable to the date of the auditor's report and ordinarily include the
following:
 (i) Reviewing procedures that the management has established to ensure that subsequent events are
identified.
(ii) Reading minutes of the meetings of shareholders, the board of directors and audit and executive
committees held after the balance sheet date and inquiring about matters discussed at meetings for
which minutes are not yet recorded.
(iii) Reading the entity's latest available interim financial statements and, as considered necessary and
appropriate, budgets, cash flow forecasts and other related management reports.
(iv) Inquiring, or extending previous oral or written inquiries, of the entity's lawyers concerning
litigation and claims.
(v) Inquiring of management as to whether any subsequent events have occurred after the balance sheet
date which might affect the financial statements.
When the auditor becomes aware of events which materially affect the financial statements, the
auditor should consider whether such events are properly accounted for in the financial statements.
When the management does not account for such events that the auditor believes should be
accounted for, the auditor should express a qualified opinion or an adverse opinion as appropriate.

b. Features of audit of government office , local bodies

c. Internal control system in credit card system
Evaluation of internal control system in the area of credit card operations : The evaluation of internal
control system in the area of credit operations in the bank would have to be done in respect of following
aspects:
1. Segregation of Responsibilities: The activities relating to credit card operations can be divided in
specific areas, namely, beginning from the receipt of application form, evaluating the credit
assessment, sanctioning the issuance of card, making and dispatch of card would form part one of
operations. Later on, particularly, from the accounting view, the significant operations would
include receipt of statement from vendors/merchants, raising bills to customers, realisation either by
directly debiting the customers’ accounts or payment received through cheques, periodic
reconciliation, etc. While evaluating internal controls, it would have to be seen that adequate
division of responsibilities have been carried out to avoid any collusion and independent checks
have been built in the system. While evaluating the internal control, it may also be considered
whether some part of the operations have been outsourced or performed in-house.
2. Credit Assessment System: Each application is scrutinised with reference to different parameters
for assessing the credit limits to be awarded. The system must be able to generate exception reports
at this stage itself. In fact, at the application stage itself, the system must ensure that the applicant
was holding one card earlier or has defaulted in respect of any other agency.
3. Control over Issuance of Cards: The internal control system must ensure that the cards are under
the control of responsible official. Detailed records along with relevant pin codes, etc. have been
kept. See that the system has built-in features that it is almost impossible to make counterfeit cards
as also photographs are affixed to prohibit any unauthorised use of the same.
4. Reconciling Merchant Records: It is to be checked whether the system has built-in flexibility of
reporting of the payments to be made to merchants and making prompt payment to them.
Simultaneously, it should be seen that customer statements are also generated automatically and
dispatched to them.
5. Periodic Reconciliation and follow-up: It may be seen whether periodic reconciliation of
customers’ accounts is done and regular follow-up of overdue accounts takes place. The person who
are responsible for maintaining customers’ records are not entrusted with the responsibility of
reconciliation and follow-up.

Answer

4
a. Discuss some problems that will be encountered in an EDP system in implementation of internal
control.
Problems in Implementation of Internal Control in EDP System: The internal controls over
computer processing, which help to achieve the overall objectives of internal control, include both
manual procedures and procedures designed into computer programs. Such manual and computer
control procedures comprise the overall controls affecting the EDP environment (general EDP
controls) and the specific controls over the accounting applications (EDP application controls). The
following problems normally arise in implementation of internal control in an EDP system:
(i) Separation of duties: In a manual system, separate individuals are responsible for initiating
transactions, recording them and the custody of the assets. This separation of duties helps in
preventing or detecting errors and other irregularities. In the EDP environment, this traditional
segregation of duties may not always apply. For example, a program may reconcile a vendor invoice
against a receiving document and print a cheque for the amount owed to a creditor. Thus, the
program is performing functions that in a manual systems would be considered incompatible.
(ii) Delegation of authority and responsibility: Normally a clear line of authority and responsibility is
essential aspect of control in any system. In a computer system, however, delegating authority and
responsibility may prove difficult because some resources are shared among multiple users. When
multiple users have access to the same data, it is not always easy to trace or find out who is
responsible for any corruption of the data and for identifying and correcting errors. Some
organizations have attempted to overcome these problems by designating a single user as the owner
of data. This user assumes ultimate responsibility for the integrity of the data.
(iii) Competent and trustworthy personnel: A good EDP system requires competent and trustworthy
personnel for its flawless operation. Highly skilled personnel are needed to develop, modify,
maintain and operate the computer systems. Getting competent and trustworthy personnel for
working in the EDP environment is, however, difficult as well-trained and experienced people in
this field are normally in short supply.
(iv) System of authorizations: Any good system of internal control has a system of authorizations at
various levels. General authorizations establish policies for the organization to follow; for example,
a fixed price list is issued for personnel to use when products are sold. Specific authorisations apply
to individual transactions; for example, acquisitions of major capital assets may have to be approved
by the board of directors. In a manual system, auditors can evaluate the adequacy of procedures for
authorisation by examining the work of employees. In a computer system, however, the procedures
are often embedded within a computer program. In such a case when evaluating the adequacy of
authorisation procedures, auditors will not only have to examine the work of the employees but also
find out the veracity of program processing.
(v) Adequate documents and records: In a manual system, adequate documents and records are
necessary to provide an audit trail of the various activities within the system. In a computer system,
however, documents may not be used to support the initiation, execution and recording of some
transactions. There would be therefore no visible audit trail to trace a transaction. This absence of a
visible audit trail will not hinder the auditor’s work if systems are designed to maintain a record of
all events and there is a means of accessing these records. The auditor therefore needs to find out
whether the computer system environment provides for such a record of the events and also enables
access to the records.
(vi) Physical control over assets and records: Physical control over access to their assets and records is
critical in both manual systems as well as computer systems. In computer systems, however, there is
a concentration of the data processing assets and records of an organisation. This means that in such
an environment, if any fraud is to be perpetrated, the person does not have to go to long distances
but only have access to the computer systems. Hence it is important that a good EDP environment
restricts access to the data processing assets and records.
(vii) Adequate management supervision: In a manual system, the management supervision of employee
activities is relatively simple because the managers and employees are often at the same physical
location. In computer systems, however, the employees handling the data processing may be
remotely located. Supervisory controls must therefore be built into the computer system to
compensate for the controls that usually can be exercised through observation and inquiry.
(vii) Comparing recorded accountability with assets: In any good system, the data and their assets that
the data purports to represent should be compared to determine the completeness and accuracy of the
data. In a manual system, there is normally an independent staff to prepare the basic data for such
comparison. In a computer system, however, programmes are used to prepare this data. Therefore,
care must be taken that there are no unauthorised modifications to this programs or to any of the
data files database programs use otherwise the irregularity may not be discovered.

b. Role of audit committee in corporate governance.

c. State the procedure for verification of Agents’ Balances in the course of audit of a General
Insurance Company.
General Insurance Company – Verification of Agents’ Balances: The following are the audit
procedures for verification of outstanding agents’ balances:
(i) Scrutiny and review of control accounts debit balances and their nature should be enquired into.
(ii) Examination of inoperative balances and treatment given for old balances is looked into.
(iii) Enquiring into the reasons for retaining the old balance.
(iv) Verification of old debit balances which may require provision or adjustment. Explanation is
obtained from the management in this regard.
 5.
a.As an internal auditor how will you proceed abnormal losses arise suddenly in the month of Sept.
Month abnormal loss %
June 1.1
July 1.3
Aug. 1.2
Sept. 3.6
b. Performance audit & its objectives..?
c. what are the reporting responsibility of auditor in the case of audit of public sector enterprises?
The results of an audit are generally given in the form of a formal written report. � Before and after such a final
report is prepared and sent to the auditee and others, the auditor may have to take a number of steps to conclude
the audit. The steps include communications with the auditee, obtaining responses, holding a final meeting and
verifying the implementation of the report. These standards consist of:

� Concluding the audit work;

� Review of audit working paper files;
� Reporting standards

6. Short notes
a. audit techniques in EDP system
b. Professional indemnity insurance.
c. Management Audit.
d. Accuracy disclosure.
e.