Audit - Hall Question Answer.

1. Give your opinion as an auditor on the following cases with specific reference to
criteria on which your opinion is based:

(5×4=20)

a) A state owned power generating, transmitting and distributing entity provides

cash rebates to its customers if they pay their dues within 7 days after the meter
reading days. There will be no rebate or fines if dues are paid within 8th to 22nd
day and after 23rd day to 30th day a fine of 5% is levied and so on. Income from
sale of electricity is accrued once the bills are raised.

The rebates allowed to customers are accounted for by the entity at the time of
payments against the energy bills by the customers. At the year end no provision
is made in the accounts towards cash rebate allowed on the payments received in
the subsequent year for bills raised in the year under audit as a consistent
practice.

Answer :

Criteria used to form an opinion

Definition of accrual basis of accounting, matching concept and point at which the
cash rebate is allowed for revenue recognition.

According to Nepal Accounting Standards 1 – Presentation of Financial statements,

an enterprise should prepare its financial statements, except for cash flow
information, under the accrual basis of accounting. Under the accrual basis of
accounting, transactions and events are recognized when they occur (and not as cash
or its equivalent is received or paid) and they are recorded in the accounting records
and reported in the financial statements of the periods to which they relate. Expenses
are recognized in the income statement on the basis of a direct association between
the costs incurred and the earning of specific items of income (matching).

As per the accrual basis of accounting, expenses should be recognized when they are
incurred by the enterprise. Similarly, the liabilities or provisions therefore should be
recognized when they occur. As per generally accepted accounting principles, a
liability or a provision therefore accrues when an obligation arises. In the case of cash
rebates of the nature explained in the question, the obligation of the company arises
as soon as the customer makes the payment within stipulated period. As far as
"matching concept" is concerned, which is an inherent aspect of accrual; the expense
of cash rebate allowed to the customers for prompt payment is matched with the
saving of interest to the enterprise due to early receipt of payment. This is because the
purpose of allowing cash rebate is to save interest on the monies help up pending
realization of payment form the customers before the end of the stipulated period.

Opinion
 On the basis of the above criteria I am of the opinion that the practice followed by the
entity to account for cash rebate for prompt payment, on settlement of bills by the
customers, is in compliance with the requirement of accrual basis of accounting and
there is no need for making provisions in the year-end accounts.

b) You are asked by your audit client to sign on a cheque leaving five cheques to be
prepared for payment to contractors who are erecting transformer but yet to be
transported to the site due to flushing out of the road, while taking cut-off at the
year-end.

Answer:

Criteria used to form an opinion

Accounting is a continuous process because the business never comes to halt. It is

therefore necessary that transactions of one period would be separated from those in
the ensuring period so that the results of the working of each period can be easily
ascertained. The arrangement that is made for this purpose is known as "cut-off
arrangement".

Also, as per Nepal Accounting Standards 1 – Presentation of Financial Statements, an

enterprise should prepare its financial statements, except for cash flow information;
under the accrual basis of accounting. Under the accrual basis of accounting,
transactions and events are recognized when they occur (and not as cash or its
equivalent is received or paid) and they are recorded in the accounting records and
reported in the financial statements of the periods to which they relate.

Opinion

On the basis of above discussion, it is important to note that the very purpose of
cutoff procedure is to ensure that transactions are recorded under accrual basis.
Hence, leaving few cheques to be prepared for accounting the payment of which work
has not been completed is against the generally accepted accounting practices and the
auditor should not agree for signing the cheques leaving five cheques to be prepared
for payment to contractors who are erecting transformer but yet to be transported to
the site due to flushing out of the road, wile taking cut-off at the year-end by your
audit client.

c) The company collects the dues in respect of sale of its products from its buyers
through cheques by post/ in person/ courier in addition to cash collected through
deputation of its representatives. At the year end for 2061/62, the cheques
bearing date 31st Ashad 2062 or before, though received and realized in the
month of Shrawan 2062 are accounted for as "cheques in hand" and presented
in the financial statements of 2061/62.

Answer:
 Criteria used to form an opinion

The periodicity concepts, events after the balance sheet date and definition of asset as
provided in the framework for the preparation and presentation of financial
statements.

According to periodicity concept, an event or transaction that occur or replace to the

accounting period for which the financial statements are prepared shall be recorded in
the accounts for the period. Thus, where the accounting period ends on 31st Ashad
2061, all transactions and events that take place upto 31st Ashad 2061 should be
reflected in the financial statements as of that date. Events occurring after the balance
sheet date should be incorporated as of that date. Events occurring after balance sheet
date should be incorporated in the financial statements only where they assist the
estimation of amounts relating to conditions existing at the balance sheet date.
Therefore, cheques that are received after the balance sheet date should be accounted
for in the period in which they are received even though the same may be dated 31st
Ashad 2061 or before.

Further, according to definition given in the framework for preparation and

presentation of financial statements of Nepal Accounting Standards, an asset is a
resource controlled by the enterprise as a result of past events and from which future
economic benefits are expected to flow to the enterprise. Thus, cheques, which are
not in possession or in possession of its representatives on the Balance Sheet Date,
cannot be termed as its assets as it has no control over the cheques on that date.
Cheque in hand should be the cheques that are in the possession of the company so
that is has power to use or direct the use of those cheques for its purposes on the
balance sheet date.

Opinion

The practice followed by the company to recognize the cheques bearing the date of
31st Ashad 2062 or before, though received and realized after that date as "cheques in
hand" in the financial statements of 2061/62 is not correct.

The acceptable practice would be to recognize such cheques only when these are
received by the company or its representative, i.e. 2062/63, irrespective of the date
borne by the cheques.

d) A company wants to adjust the bank balance on the balance sheet date by
reversing the entry for a cheque issued in the normal course of business and
cancelled after the year end but before the finalization of accounts. The cheque
was returned on the ground that the signature differs.

Answer:
 According to the Accounting Standard – Events Occurring After the Balance Sheet
Date, assets and liabilities should be adjusted for significant events occurring after the
balance sheet date that provide additional evidence to assets estimation of amounts
relating to conditions existing at the balance sheet date. Since the difference in
signature existed on the balance sheet due even though it is known after the balance
sheet date the reversal of the entry can be made as on the balance sheet date if the
amount is material.

2. a) Is it necessary for an auditor to satisfy himself about the sufficiency and

appropriateness of Opening balances to ensure that they are free form material mis-
statements? What steps will you perform for the purpose when financial statements
were audited last year by another auditor? 6

b) How will you distinguish a change in an accounting estimate from a change in the
accounting policy? Does a change in an accounting estimate need any disclosure? 6

Accounting Estimates: It means an approximation of the amount of an item in

absence of a precise means of measurement.
Management is responsible for making accounting estimates included in
financial statements. These estimate are often made in conditions of uncertainty
regarding the outcome of events that have occurred or likely to occur and
involved the use of judgment. As a result, the risk of material misstatement is
greater when accounting estimates are involved.
Examples:
 Accrued revenue
 Provision for taxation
 Provision for a loss from a lawsuit
 Provision to allocate the cost of fixed assets over their estimated useful lives
 Insurer’s liability for outstanding claims
 Provision for retirement benefits in the financial statements of employers
 Amortization of certain items like goodwill and deferred revenue
expenditure

Accounting policies are the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial statements

Disclosures Relating to Changes in Accounting Estimate

Disclose:

 the nature and amount of a change in an accounting estimate that has an effect in the
current period or is expected to have an effect in future periods
 if the amount of the effect in future periods is not disclosed because estimating it is
impracticable, an entity shall disclose that fact.

c) Explain "Loan Loss Provisioning" and its implication to a commercial bank. 3

2 OR:

a) Audit act… objectives of government audit

b) Related party disclosure. And related parties.
c)

3.
a) Corporate governance… role of audit committee in corporate governance. 7
b) Loan loss provision Case study 7

4. a) Misconduct CA Act……….7
Answer:

CA's indicted of professional misconduct

A chartered accountant in practice shall be deemed to be guilty of professional

misconduct if he/ she:

 Allows any person to practice in his name as a CA in practice and is in partnership

with or employed by him.

 Pays or allows or agrees to pay or allow, directly or indirectly, any share, commission
or brokerage in the fees or profits of his/ her professional business, to any person
other than a member of the Institute or a partner or a retired partner or the legal
representative of a deceased partner.

 accepts or agrees to accept any part of the profits of the professional work of a
lawyer, auctioneer, broker or other agent who is not a member of the Institute,

 enters into partnership with any person other than CA in practice,

 Secures, either through the services is a person not qualified to be his partner or by
means, which are not open to a CA, any professional business.

 solicits client or professional work either directly or indirectly, by circular,

advertisement, personal communication or interview or by any other means;

 advertises his professional attainments or services, or uses and designation or

expressions other than the CA on professional documents;

 charges or offers to charge, accepts or offer to accept in respect of any professional

employments fees, which are based on percentage of profits or which are contingent
upon findings, or results of such employment, except in cases, which are permitted
under any regulations;

 engages in any business or occupation other than the profession of CAs unless
permitted by the council so to engage;
  accepts a position as auditor previously held by some other CA or registered auditor
in such conditions as to constitute undercutting;

 allows a person not being a member of the Institute or a member not being his/ her
partner to sign or on behalf of his/ her firm, any balance sheet, profit and loss
account, report or financial statements

b. Instances where the auditor cannot put reliance with the work of branch auditor.

5. Short notes20

1. Materiality
2. Restricted and unrestricted fund for not for profit organization
3. Peer review objectives.
Objectives of Peer Reviews and Establishing a PAQRS
 Evaluate quality of performance on engagements
 Provide reasonable assurance that the work performed confirm to the generally
accepted government auditing and accounting standards and the OAG’s laid down
policies and procedures
 Provide reasonable assurance that adequate work has been performed to support
the reports issued and that the underlying working papers provide sufficient
evidence of this
 Evaluate the performance of individual audit team or staff in relation to
understanding and implementation of the OAG’s policies and guidelines and to
facilitate the process of educating the value of complying with such policies and
guidelines
 Corroborate the implementation and effectiveness of action plans for
correcting deficiencies
 Identify significant deficiencies in operations and quality assurance procedures
 Provide constructive recommendation for improving the efficiency and effectiveness
of the OAG’s PAQRS and enhancing service and satisfaction to the audited entity.

4. Access control
Access control is a system which enables an authority to control access to areas and
resources in a given physical facility or computer-based information system. An access
control system, within the field of physical security, is generally seen as the second layer in
the security of a physical structure.
Access control is, in reality, an everyday phenomenon. A lock on a car door is essentially a
form of access control. A PIN on an ATM system at a bank is another means of access
control. Bouncers standing in front of a night club is perhaps a more primitive mode of
access control (given the evident lack of information technology involved). The possession
of access control is of prime importance when persons seek to secure important, confidential,
or sensitive information and equipment.

5. performance Audit
 Definition:
The concepts of “economy, efficiency and effectiveness (3Es)” are termed as follows.
 “Economy” means the acquisition of the appropriate quality and quantity of
human, financial, physical and information resources at the appropriate times and
at the lower cost.
 “Efficiency” means the use of human, financial, physical and information
resources such that the output is maximised for any given set of resource
inputs, or input is minimised for any given quantity and quality of output.

 “Effectiveness” means the achievement of the objectives or other intended

effects of activities.
A performance audit assignment may include all/one or a combination of two aspect
of “3Es”.
Regularity and propriety related issues which impact performance may be considered
in the conduct of performance audits.

6. Difference between 20
1. Qualified reports and adverse opinion
Qualified Opinion: Where the auditor disagrees with or is uncertain about one or
more particular items in the financial statements which are material but not
fundamental to an understanding of the statements, a qualified opinion should be
given. The wording of the opinion normally indicates a satisfactory outcome to the
audit subject to a clear and concise statement of the matters of disagreement or
uncertainty giving rise to the qualified opinion.
.

Disclaimer of Opinion: Where the auditor is unable to arrive at an opinion

regarding the financial statements taken as a whole due to an uncertainty or scope
restriction which is so fundamental that an opinion which is qualified in certain
respects would not be adequate, a disclaimer is given. The wording of such a
disclaimer makes clear that an opinion cannot be given, specifying clearly and
concisely all matters of uncertainty.

2. Certificate of reports and audit reports

3. Audit techniques and audit principles
4. Audit and investigations---
5. Explanatory notes and qualificatory notes

(a) Difference between Report and Certificate: A certificate is written confirmation of

the accuracy of the facts stated therein and does not involve any estimate or opinion.
A report on the other hand, is a formal statement usually made after an enquiry,
examination or review of specified matters under report and includes the reporting
auditor’s opinion thereon. These words are fundamentally distinct from each other.
Etymologically, the word ‘certificate’ is derived from Latin words certus (Certain)
and facere (to make). So, the certificate connotes verification of certain and exact
facts. However, the rendition of this type of statement is an impossible task and the
auditor’s duty indeed becomes onerous. The dictionary meaning of the word ‘report’
refers to formal account of results after an enquiry, examination or review given by
an authorised person or group of reasons.
In other words, when a certificate is issued, the auditor is responsible for the factual
accuracy of what is contained therein. However, when a report is given, the auditor
is responsible for ensuring that the report is based on factual data, that his opinion is
in due accordance with facts and that it is arrived at by the application of due care
and skill.

Explanatory notes and Qualificationary notes:

An explanatory note is meant to explain or supplement a matter contained in or
related to financial statements. The matter on which an explanatory note is given is
one on which the auditor has not taken adverse view, e.g., note on regrouping of
figures of previous year or an information on the basis of allocation of a common
expense. Explanatory notes are given by the directors of the company and are usually
shown under “Notes to accounts”. Such notes may also appear elsewhere in the
statements of account. All notes to account, wherever shown, including those
required by the Schedule VI to the Companies Act, 1956 constitute an integral part of
the accounting statement.
Qualificatory notes also refer to the matters stated in the statements of account and
usually are included under “Notes to accounts”. Such notes may also appear
elsewhere in the statements of account. All notes to account, wherever shown,
including those required by the Schedule VI to the Companies Act, 1956 constitute an
integral part of the accounting statement.
Qualificatory notes also refer to the matters stated in the statements of account and
usually are included under “Notes to Accounts” along with the explanatory notes.
Qualificatory notes are such notes on which the auditor has taken an adverse view e.g.
payment of managing director’ remuneration when the government’s approval is
awaited. In view of their impact on the statements of account and on the resulting
audit report, the auditors refer to the qualificatory notes in the audit report itself in a
specific manner by identifying the notes on which they have taken an adverse view
and drawing attention of the shareholders thereto. The auditors usually refer to the
qualificatory notes by the use of the prefix “subject to” in their report. One important
point to be noted in this connection. Qualificatory notes are put by the directors as
they are also equally obliged to make the disclosure of the adverse position. Since,
both the directors and the auditors require to make the qualificatory notes to accounts
with mutual agreement, thereby dispensing with the necessity of repeating the same
note twice, one under the notes to accounts and again under the audit report.

Audit and Investigation: Audit and investigation differ in objectives and in their
nature. Auditing is general while investigation is specific. The object of auditing is
to ensure that the financial statements are free and fair not misleading or unreliable.
The merit of auditing lies in its ability to pronounce in general terms whether the
accounts are basically reliable or not and in accordance with the legal requirements
and regulations applicable to the particular audit. Audit is not based on suspicion
unless circumstances exist to arouse suspicion of the auditor.
Investigation implies systematic, critical and special examination of the records of a
business for a specific purpose. The examination conducted under investigation is
intensive as well as exhaustive so far as the activities or areas of accounting is
concerned. Investigation requires a concentrated focus on the subject matter of
inquiry and related matters. Often, investigations may be spread over a period longer
than one year and its scope may extend to inquiry beyond the books of accounts if the
circumstances so require.