Question 1
An auditor of Sagar Ltd. was not able to get the confirmation about the existence and value of certain machineries. However, the management gave him a certificate to prove the existence and value of the machinery as appearing in the books of account. The auditor accepted the same without any further procedure and signed the audit report. Is he right in his approach?
Answer:
Validity of Written Representation:
The physical verification of fixed assets is the primary responsibility of the management. The auditor, however, is required to examine the verification programme adopted by the management. He must satisfy himself about the existence, ownership and valuation of fixed assets. In the case of Sagar Ltd., the auditor has not been able to verify the existence and value of some machinery despite the verification procedure followed in routine audit. He accepted the certificate given to him by the management without making any further enquiry.
As per SA 580 “Written Representations”, when representation relate to matters which are material to the financial information, then the auditor should seek corroborative audit evidence from other sources inside or outside the entity.
He should evaluate whether such representations are reasonable and consistent with other evidences and should consider whether individuals making such representations can be expected to be well informed on the matter. “Written Representations” cannot be a substitute for other audit evidence that the auditor could reasonably expect to be available.
If the auditor is unable to obtain sufficient appropriate audit evidence that he believes would be available regarding a matter which has or may have a material effect on the financial information, this will constitute a limitation on the scope of his examination even if he has obtained a representation from management on the matter. Therefore, the approach adopted by the auditor is not right.
Question 2
PRSH & Co is the statutory auditor of Make My Journey Ltd. The company is in the business of tours and travels. Annual turnover of the company is INR 2000crores and profits are INR 190crores. During the planning meeting of the management and the auditors, it was discussed that the management needs to provide written representation letter to the auditors for the preparation of the financial statements and for the completeness of the information provided to the auditor. At the time of closure of the audit, there has been some confusion about the requirements of the written representation letter. Management argued that representation need not be written, it can also be verbal which has been provided to the audit team during the course of their audit. Auditors have completed their documentation and hence in a way, representation based on verbal discussions with the auditors has also got documented. Auditors explained that this is mandatory to obtain written representation in accordance with the requirements of SA 580. However, still some confusion remains regarding the date and period covered by the written representation. You are required to advise about the date of and period covered by written representation in view of SA 580.
Answer
As per SA 580, “Written Representations”, as written representations are necessary audit evidence, the auditor’s opinion cannot be expressed, and the auditor’s report cannot be dated, before the date of the written representations. Furthermore, because the auditor is concerned with events occurring up to the date of the auditor’s report that may require adjustment to or disclosure in the financial statements, the written representations are dated as near as practicable to, but not after, the date of the auditor’s report on the financial statements.
In some circumstances it may be appropriate for the auditor to obtain a written representation about a specific assertion in the financial statements during the course of the audit. Where this is the case, it may be necessary to request an updated written representation.
The written representations are for all periods referred to in the auditor’s report because management needs to reaffirm that the written representations it previously made with respect to the prior periods remain appropriate. The auditor and management may agree to a form of written representation that updates written representations relating to the prior periods by addressing whether there are any changes to such written representations and, if so, what they are.
Situations may arise where current management were not present during all periods referred to in the auditor’s report. Such persons may assert that they are not in a position to provide some or all of the written representations because they were not in place during the period. This fact, however, does not diminish such persons’ responsibilities for the financial statements as a whole. Accordingly, the requirement for the auditor to request from them written representations that cover the whole of the relevant period(s) still applies.
Question 3
In the course of audit of ABC Ltd. its management refuses to provide written representations. As an auditor what is your duty?
Answer:
Duty of an Auditor if management refuses to provide written representations:
As per SA 580 “Written Representations”, if the management does not provide one or more of the requested written representations, the auditor shall:
1. Discuss the matter with management,
2. Re-evaluate the Integrity of the management and evaluate the effect that this may have on the reliability of representations (oral or written) and audit evidence in general, and
3. Take appropriate actions, including determining the possible effect on the opinion in the auditor’s report The auditor should disclaim an opinion on the financial statements if management does not
provide written representations in accordance with SA 705 “Modifications to the Opinion in the Independent Auditor’s Report”
Question 4
Explain what is meant by “Written Representations” and indicate to what extent an auditor can place reliance on such representations.
Answer
Written Representation:
A written statement by management provided to the auditor to confirm certain matters or to support other audit evidence. Written representations in this context do not include financial statements, the assertions therein, or supporting books and records. Audit evidence is all the information used by the auditor in arriving at the conclusions on which the audit opinion is based. Thus written representations are necessary information that the auditor requires in connection with the audit of the entity’s financial statements.
Accordingly, similar to responses to inquiries, written representations are audit evidence. Although written representations provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal.
Furthermore, the fact that management has provided reliable written representations does not affect the nature or extent of other audit evidence that the auditor obtains about the fulfillment of management’s responsibilities, or about specific assertions. The auditor shall request management to provide a written representation that it has fulfilled its responsibility for the preparation of the financial statements in accordance with the applicable financial reporting framework, including where relevant their fair presentation, as set out in the terms of the audit engagement. Other SAs require the auditor to request written representations.
If, in addition to such required representations, the auditor determines that it is necessary to obtain one or more written representations to support other audit evidence relevant to the financial statements or one or more specific assertions in the financial statements, the auditor shall request such other written representations.
Extent of Reliance:
SA 580, “Written Representations”, states that If the auditor has concerns about the competence, integrity, ethical values or diligence of management, or about its commitment to or enforcement of these, the auditor shall determine the effect that such concerns may have on the reliability of representations (oral or written) and audit evidence in general.
In particular, if written representations are inconsistent with other audit evidence, the auditor shall perform audit procedures to attempt to resolve the matter. If the matter remains unresolved, the auditor shall reconsider the assessment of the competence, integrity, ethical values or diligence of management, or of its commitment to or enforcement of these, and shall determine the effect that this may have on the reliability of representations (oral or written) and audit evidence in general. If the auditor concludes that the written representations are not reliable, the auditor shall take appropriate actions, including determining the possible effect on the opinion in the auditor’s report.
Question 5
State briefly the basic elements of Management Representation Letter.
Answer
Basic Elements of a Management Representation Letter:
As per SA 580 “Written
Representations”, some of the basic elements of a Management Representation letter are-
(1) It is a written statement by management provided to the auditor to confirm certain matters or to support other audit evidence.
(2) It does not include financial statements, the assertions therein, or supporting books and records.
(3) The auditor shall request management to provide a written representation that it has fulfilled its responsibility for the preparation of the financial statements in accordance with the applicable financial reporting framework, including where relevant their fair presentation, as set out in the terms of the audit engagement.
(4) The written representations shall be for all financial statements and period(s) referred to in the auditor’s report.
Question 6
In the course of audit of ABC Ltd. its management refuses to provide written representations. As an auditor what is your duty?
Answer
Duty of an Auditor if management refuses to provide written representations:
As per SA 580 “Written Representations”, if the management does not provide one or more of the requested written representations, the auditor shall:
1. Discuss the matter with management,
2. Re-evaluate the Integrity of the management and evaluate the effect that this may have on the reliability of representations (oral or written) and audit evidence in general, and
3. Take appropriate actions, including determining the possible effect on the opinion in the auditor’s report.
The auditor should disclaim an opinion on the financial statements if management does not provide written representations in accordance with SA 705 “Modifications to the Opinion in the Independent Auditor’s Report”.
Question 7
B is the Principal Auditor of ABC Co. Ltd., with 8 branches audited by 8 Branch Auditors. B wanted to ensure that the works of Branch Auditors were adequate for the purpose of his audit. Hence he insisted on Branch Auditors to get familiar with a check list he prepared for branches and, besides, required them to share the working papers compiled by them for his review and return. Is Principal Auditor within his right in asking for such sharing of working papers?
Answer
Using the Work of another Auditor:
When the accounts of the branch are audited by a person other than the company’s auditor, there is need for a clear understanding of the role of such auditor and the company’s auditor in relation to the audit of the accounts of the branch and the audit of the company as a whole; also, there is great necessity for a proper rapport between these two auditors for the purpose of an effective audit. In recognition of these needs, the Council of the Institute of Chartered Accountants of India has dealt with these issues in SA 600, “Using the Work of another Auditor”. It makes clear that in certain situations, the statute governing the entity may confer a right on the principal auditor to visit a component and examine the books of account and other records of the said component, if he thinks it necessary to do so. Where another auditor has been appointed for the component, the principal auditor would normally be entitled to rely upon the work of such auditor unless there are special circumstances to make it essential for him to visit the component and/or to examine the books of account and other records of the said component.
Further, it requires that the principal auditor should perform procedures to obtain sufficient appropriate audit evidence, that the work of the other auditor is adequate for the principal auditor’s purposes, in the context of the specific assignment. When using the work of another auditor, the principal auditor should ordinarily perform the following procedures:
(1) Advise the other auditor of the use that is to be made of the other auditor’s work and report and make sufficient arrangements for co-ordination of their efforts at the planning stage of the audit. The principal auditor would inform the other auditor of matters such as areas requiring special consideration, procedures for the identification of inter-component transactions that may require disclosure and the time-table for completion of audit; and
(2) Advise the other auditor of the significant accounting, auditing and reporting requirements and obtain representation as to compliance with them. The principal auditor might discuss with the other auditor the audit procedures applied or review a written summary of the other auditor’s procedures and findings which may be in the form of a completed questionnaire or check-list. The principal auditor may also wish to visit the other auditor.
The nature, timing and extent of procedures will depend on the circumstances of the engagement and the principal auditor’s knowledge of the professional competence of the other auditor. This knowledge may have been enhanced from the review of the previous audit work of the other auditor.
Further, SA 230 issued by ICAI on Audit Documentation, and “Standard on Quality Control (SQC) 1, “Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements”, issued by the Institute, provides that, unless otherwise specified by law or regulation, audit documentation is the property of the auditor. He may at his discretion, make portions of, or extracts from, audit documentation available to clients, provided such disclosure does not undermine the validity of the work performed, or, in the case of assurance engagements, the independence of the auditor or of his personnel.” In the light of aforesaid, principal auditor was not within his right for asking for such sharing of working papers. It depends upon the discretion of auditor.
Question 8
“There should be sufficient liaison between a principal auditor and other auditors.” Discuss the above statement and state in this context the reporting considerations, when the auditor uses the work performed by other auditor.
Answer:
SA 600 on “Using the Work of Another Auditor” lays down the procedure to be applied in situations where a principal auditor reporting on the financial statement of the entity uses the work of another independent auditor.
SA 600 contemplates coordination between auditors and requires that there should be sufficient liaison between the principal auditor and the other auditor. For this purpose, the principal auditor may find it necessary to issue written communication(s) to the other auditor. The other auditor, knowing the context in which his work is to be used by the principal auditor, should coordinate with the principal auditor. For example, by bringing to the principal auditor’s immediate attention any significant findings requiring to be dealt with at entity level, adhering to the timetable for audit of the component, etc. He should ensure compliance with the relevant statutory requirements. Similarly, the principal auditor should advise the other auditor of any matters that come to his attention that he thinks may have an important bearing on the other auditor’s work.
When considered necessary by him, the principal auditor may require the other auditor to answer a detailed questionnaire regarding matters on which the principal auditor requires information for discharging his duties. The other auditor should respond to such questionnaire on a timely basis.
When the principal auditor concludes, based on his procedures, that the work of the other auditor cannot be used and the principal auditor has not been able to perform sufficient additional procedures regarding the financial information of the component audited by the other auditor, the principal auditor should express a qualified opinion or disclaimer of opinion because there is a limitation on the scope of audit.
In all circumstances, if the other auditor issues, or intends to issue, a modified auditor’s report, the principal auditor should consider whether the subject of the modification is of such nature and significance, in relation to the financial information of the entity on which the principal auditor is reporting that it requires a modification of the principal auditor’s report.
Question 9
Moon Ltd. of which you are the Statutory Auditor, have an internal audit being conducted by an outside agency. State the factors that weigh considerations in opting to make use of direct assistance of the internal auditors for the purpose of statutory audit.
Answer
Determining the Nature and Extent of Work that Can Be Assigned to Internal Auditors Providing Direct Assistance: SA 610 ‘Using the work of Internal Auditor’ Deals about the concept of direct assistance of internal auditor. In determining the nature and extent of work that may be assigned to internal auditors and the nature, timing and extent of direction, supervision and review that is appropriate in the circumstances, the external auditor shall consider:
(1) The amount of judgment involved in:
- Planning and performing relevant audit procedures; and
- Evaluating the audit evidence gathered;
- The assessed risk of material misstatement; and
- The external auditor’s evaluation of the existence and significance of threats to the objectivity and level of competence of the internal auditors who will be providing such assistance.
If using internal auditors to provide direct assistance is not prohibited by law or regulation, and the external auditor plans to use internal auditors to provide direct assistance on the audit, the external auditor shall evaluate the existence and significance of threats to objectivity and the level of competence of the internal auditors who will be providing such assistance.
The external auditor’s evaluation of the existence and significance of threats to the internal auditors’ objectivity shall include inquiry of the internal auditors regarding interests and relationships that may create a threat to their objectivity.
Question 10
CA. Amboj, a practicing chartered accountant has been appointed as an internal auditor of Textile Ltd. He conducted the physical verification of the inventory at the year-end and handed over the report of such verification to CA. Kishore, the statutory auditor of the Company, for his view and reporting. Can CA. Kishore rely on such report?
Answer
Using the Work of Internal Auditor:
As per SA 610 “Using the Work of Internal Auditors”, while determining whether the work of the internal auditors can be used for the purpose of the audit, the external auditor shall evaluate-
(a) The extent to which the internal audit function’s organizational status and relevant policies and procedures support the objectivity of the internal auditors;
(b) The level of competence of the internal audit function; and
(c) Whether the internal audit function applies a systematic and disciplined approach, including quality control.
Further, the external auditor shall not use the work of the internal audit function if the external auditor determines that:
(a) The function’s organizational status and relevant policies and procedures do not adequately support the objectivity of internal auditors;
(b) The function lacks sufficient competence; or
(c) The function does not apply a systematic and disciplined approach, including quality control.
In the instant case, CA. Kishore should ascertain the internal auditor’s scope of verification, area of coverage and method of verification. He should review the report on physical verification taking into consideration these factors. If possible he should also test check few items and he can also observe the procedures performed by the internal auditors. If the statutory auditor is satisfied about the appropriateness of the verification, he can rely on the report but if he finds that the verification is not in order, he has to decide otherwise. The final responsibility to express opinion on the financial statement remains with the statutory auditor.
Question 11
State what may be the evaluative or review procedures that the Statutory Auditor may do before concluding as to relevance and reasonableness of Auditor’s Expert work for using it for his audit purposes?
Answer
Evaluating the Adequacy of the Auditor’s Expert’s Work:
As per SA 620 Using the work of an Auditor’s Expert, the auditor shall evaluate the adequacy of the auditor’s expert’s work for the auditor’s purposes, including the relevance and reasonableness of that experts findings or conclusions, and their consistency with other audit evidence, etc. Specific procedure to evaluate the adequacy of the auditor’s expert’s work are —
1. Enquiries of the auditor’s expert.
2. Reviewing the auditor’s expert’s working papers and reports
3. Corroborative procedure such as-
- Observing the auditor’s expert’s work
- Examining the published data, such as statistical reports from reputed source
- Confirming the relevant matters with third parties
- Performing detailed analytical procedure to see whether principles of materiality aspects Considered
- Re performing calculations
1. Discussions with another expert with relevant expertise when, for example, the findings or the conclusion of the auditor’s expert are not consistent with other audit evidence.
2. Discussing the expert’s report with the management.
Question 12
While doing audit, Ram, the Auditor requires reports from experts for the purpose of Audit evidence. What types of reports/opinions he can obtain and to what extent he can rely upon the same?
Answer
Using the Work of an Auditor’s Expert:
As per SA 620, “Using the Work of an Auditor’s Expert”, during the audit, the auditor may seek to obtain, in conjunction with the client or independently, audit evidence in the form of reports, opinions, valuations and statements of an expert. While doing audit, Ram, the auditor can obtain the following types of reports, or options or statements of an expert for the purpose of audit evidence:
1. The valuation of complex financial instruments, land and buildings, plant and machinery, jewellery works of art, antiques, intangible assets, assets acquired and liabilities assumed in business combinations and assets that may have been impaired.
2. The actuarial calculation of liabilities associated with insurance contracts or employee benefit plans.
3. The estimation of oil and gas reserves.
4. The valuation of environmental liabilities, and site clean-up costs.
5. The interpretation of contracts, laws and regulations.
6. The analysis of complex or unusual tax compliance issues.
When the auditor intends to use the work of an expert, he shall evaluate the adequacy of the auditor’s expert’s work, including the relevance and reasonableness of that expert’s findings or conclusions, and their consistency with other audit evidence; if that expert’s work involves use of significant assumptions and methods, the relevance and reasonableness of those assumptions and methods in the circumstances; and if that expert’s work involves the use of source data that is significant to his work, the relevance, completeness, and accuracy of that source data.
If the auditor determines that the work of the auditor’s expert is not adequate for the auditor’s purposes, he shall agree with that expert on the nature and extent of further work to be performed by that expert; or perform further audit procedures appropriate to the circumstances.
Question 13
X Ltd had a net worth of INR 1300 crores because of which IND AS became applicable to them. The company had various derivative contracts – options, forward contracts, interest rate swaps etc. which were required to be fair valued for which company got the fair valuation done through an external third party. The statutory auditors of the company involved an auditor’s expert to audit valuation of derivatives. Auditor and auditor’s expert were new to each other i.e. they were working for the first time together but developed a good bonding during the course of the audit. The auditor did not enter into any formal agreement with the auditor’s expert. Please advise
Answer
As per SA 620 “Using the work of an Auditor’s Expert”, the auditor shall agree, in writing when appropriate, on the following matters with the auditor’s expert:
1. The nature, scope and objectives of that expert’s work;
2. The respective roles and responsibilities of the auditor and that expert;
3. The nature, timing and extent of communication between the auditor and that expert, including the form of any report to be provided by that expert; and
4. The need for the auditor’s expert to observe confidentiality requirements.
In the instant case X Ltd. had various derivative contracts – options, forward contracts, interest rate swaps etc. which were required to be fair valued for which company got the fair valuation done through an external third party. The statutory auditors of the company involved an auditor’s expert to audit valuation of derivatives. Considering the complexity involved in the valuation and volume of derivatives and also due to the fact that the auditor and auditor’s expert were new to each other, auditor should have signed a formal agreement/ engagement letter with the auditor’s expert in respect of the work assigned to him in accordance with SA 220.
Question 14
KRP Ltd., at its annual general meeting, appointed Mr. X, Mr. Y and Mr. Z as joint auditors to conduct auditing for the financial year 2015-16. For the valuation of gratuity scheme of the company, Mr. X, Mr. Y and Mr. Z wanted to refer their own known Actuaries. Due to difference of opinion, all the joint auditors consulted their respective Actuaries. Subsequently, major difference was found in the actuary reports. However, Mr. X agreed to Mr. Y actuary report, though, Mr. Z did not. Mr. X contends that Mr. Y actuary report shall be considered in audit report due to majority of votes. Now, Mr. Z is in dilemma. Explain the responsibility of auditors, in case, report made by Mr. Y actuary, later on, found faulty.
Answer
Using the work of an Auditor’s Expert:
As per SA 620 “Using the Work of an Auditor’s Expert”, the expertise of an expert may be required in the actuarial calculation of liabilities associated with insurance contracts or employee benefit plans etc., however, the auditor has sole responsibility for the audit opinion expressed, and that responsibility is not reduced by the auditor’s use of the work of an auditor’s expert .The auditor shall evaluate the adequacy of the auditor’s expert’s work for the auditor’s purposes, including the relevance and reasonableness of that expert’s findings or conclusions, and their consistency with other audit evidence as per SA 500.
Further, in view of SA 620, if the expert’s work involves use of significant assumptions and methods, then the relevance and reasonableness of those assumptions and methods must be ensured by the auditor and if the expert’s work involves the use of source data that is significant to that expert’s work, the relevance, completeness, and accuracy of that source data in the circumstances must be verified by the auditor.
In the instant case, Mr. X, M Y and Mr. Z, jointly appointed as an auditor of KRP Ltd., referred their own known Actuaries for valuation of gratuity scheme. Actuaries are an auditor’s expert as per SA 620. Mr. Y’s referred actuary has provided the gratuity valuation report, which later on found faulty. Further, Mr. Z is not agreed with this report therefore he submitted a separate audit report specifically for such gratuity valuation.
In such situation, it was duty of Mr. X, Mr. Y and Mr. Z, before using the gratuity valuation report of Actuary, to ensure the relevance and reasonableness of assumptions and methods used. They were also required to examine the relevance, completeness and accuracy of source data used for such report before expressing their opinion .Mr. X and Mr. Y will be held responsible for grossly negligence and using such faulty report without examining the adequacy of expert actuary’s work whereas Mr. Z will not be held liable for the same due to separate opinion expressed by him.
Question 15
Enumerate the ‘Basic Elements of Audit Report’ as enshrined in SA 700.
Answer
Basic Elements of Auditor’s Report:
As per SA 700, “Forming an Opinion and Reporting on Financial Statements”, the auditor’s report includes the following basic elements:
1. Title: The auditor’s report shall have a title that clearly indicates that it is the report of an independent auditor.
2. Addressee: The auditor’s report shall be addressed as required by the circumstances of the3.
Auditor’s Opinion: The first section of the auditor’s report shall include the auditor’s opinion, and shall have the heading “Opinion.” The Opinion section of the auditor’s report shall also:
(a) Identify the entity whose financial statements have been audited;
(b) State that the financial statements have been audited;
(c) Identify the title of each statement comprising the financial statements;
(d) Refer to the notes, including the summary of significant accounting policies; and
(e) Specify the date of, or period covered by, each financial statement comprising the financial
statements.
4. Basis for Opinion: The auditor’s report shall include a section, directly following the Opinion section, with the heading “Basis for Opinion”, that:
(a) States that the audit was conducted in accordance with Standards on Auditing;
(b) Refers to the section of the auditor’s report that describes the auditor’s responsibilities under the SAs;
(c) Includes a statement that the auditor is independent of the entity in accordance with the relevant ethical requirements relating to the audit, and has fulfilled the auditor’s other ethical responsibilities in accordance with these requirements.
(d) States whether the auditor believes that the audit evidence the auditor has obtained is sufficient and appropriate to provide a basis for the auditor’s opinion.
5. Going Concern: Where applicable, the auditor shall report in accordance with SA 570 (Revised)
6. Key Audit Matters: For audits of complete sets of general purpose financial statements of listed entities, the auditor shall communicate key audit matters in the auditor’s report in accordance with SA 701. When the auditor is otherwise required by law or regulation or decides to communicate key audit matters in the auditor’s report, the auditor shall do so in accordance with SA 701.
7. Responsibilities for the Financial Statements: The auditor’s report shall include section with a heading “Responsibilities of Management for the Financial Statements.” The auditor’s report shall use the term that is appropriate in the context of the legal framework applicable to the entity and need not refer specifically to “management”. In some entities, the appropriate reference may be to those charged with governance.
8. Auditor’s Responsibilities for the Audit of the Financial Statements.
9. Location of the description of the auditor’s responsibilities for the audit of the financial statements.
10. Other Reporting Responsibilities.
11. Signature of the Auditor.
Question 16
Write a short note on Corresponding figures
Answer
Corresponding Figures:
As per SA 710 “Comparative Information—Corresponding Figures and Comparative Financial Statements”, “corresponding figures” is a comparative information where amounts and other disclosures for the preceding period are included as part of the current period financial statements, and are intended to be read in relation to the amounts and other disclosures relating to the current period. These corresponding figures are not presented as complete financial statements capable of standing alone, but are an integral part of the current period financial statements intended to be read only in relationship to the current period figures.
Question 17
What are the professional obligations of the auditor who has withdrawn from the audit before completion of his term due to non-cooperation of the Management in completing certain audit procedures?
Answer
Resignation due to Management Imposing Limitation on the Scope of Audit:
SA 705 “Modifications to the Opinion in the Independent Auditor’s Report” provides the consequence of an inability to obtain sufficient appropriate audit evidence due to a management – imposed limitation after the auditor has accepted the engagement. The practicability of withdrawn from the audit may depend upon the stage of completion of the engagement at the time that management imposes the scope limitation. When the auditor concludes that withdrawn from the audit is necessary because of a scope limitation, there may be a professional, regulatory or legal requirement for the auditor to communicate matters relating to the resignation from the engagement to regulators or the entity’s owners.
In the case of resignation from the company, provisions of the Companies Act, 2013 applies. Section 140(2) of the Companies Act, 2013, requires the auditor, who has resigned from the company, to file within a period of 30 days from the date of resignation, a statement with the company and the registrar, and in case of government companies, the auditor shall file such statement with the Comptroller and Auditor-General of India, indicating the reasons and other facts as may be relevant with regard to his resignation. In case of failure the auditor will be liable for penal provisions
Question 18
There are certain circumstances in which Emphasis of Matter in Auditor’s Report is mandated to be included. Explain this statement in the light of mandatory requirements of matters that are to be emphasised in Auditor’s Report when the Audit Report is on Financial Statements prepared in accordance with Special Purpose Framework.
Answer
Circumstances in which Emphasis of Matter Paragraph in Auditor’s Report is mandated in case of Financial Statements prepared in accordance with a Special Purpose Framework:
As per SA 706, “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report” and/or SA 800, “Special Considerations—
Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks”, the auditor’s report on special purpose financial statements shall include an Emphasis of Matter paragraph alerting user of the auditor’s report that the financial statements are prepared in accordance with a special purpose frame work and that, as a result, the financial statements may not be suitable for another purpose. The auditor shall include this paragraph under an appropriate heading.
The special purpose financial statements may be used for purposes other than those for which they were intended. For example, a regulator may require certain entities to place the special purpose financial statements on public record. To avoid misunderstandings, the auditor alerts users of the auditor’s report that the financial statements are prepared in accordance with a special purpose frame work and, therefore, may not be suitable for another purpose.
Restriction on Distribution or Use: In addition to the alert required above, the auditor may consider it appropriate to indicate that he auditor’s report is intended solely for the specific users. Depending on the law or regulation of the particular jurisdiction, this may be achieved by restricting the distribution or use of the auditor’s report. In these circumstances, the emphasis of matter paragraph given above maybe expanded to include these other matters, and the heading may be modified accordingly.
Question 19
Write short notes on the following: Auditor’s responsibilities regarding comparatives.
Answer
Auditor’s responsibilities regarding comparatives:
SA 710, “Comparative Information Corresponding Figures and Comparative Financial Statements”, establishes standards on the auditor’s responsibilities regarding comparatives.
The auditor shall determine whether the financial statements include the comparative information required by the applicable financial reporting framework and whether such information is appropriately classified. For this purpose, the auditor shall evaluate whether:
1. The comparative information agrees with the amounts and other disclosures presented in the prior period; and
2. The accounting policies reflected in the comparative information are consistent with those applied in the current period or, if there have been changes in accounting policies, whether those changes have been properly accounted for and adequately presented and disclosed.
If the auditor becomes aware of a possible material misstatement in the comparative information while performing the current period audit, the auditor shall perform such additional audit procedures as are necessary in the circumstances to obtain sufficient appropriate audit evidence to determine whether a material misstatement exists. If the auditor had audited the prior period’s financial statements, the auditor shall also follow the relevant requirements of SA 560 (Revised).
As required by SA 580 (Revised), the auditor shall request written representations for all periods referred to in the auditor’s opinion. The auditor shall also obtain a specific written representation regarding any prior period item that is separately disclosed in the current year’s statement of profit and loss.
Question 20
The audit report of P Ltd. For the year 2014-15 contained a qualification regarding no provision of doubtful debts. As the statutory auditor of the company for the year 2015-16, how would you report, if:
1. The company does not make provision for doubtful debts in 2015-16?
2. The company makes adequate provision for doubtful debts in 2015-16?
Answer
Auditor’s responsibility in cases where audit report for an earlier year is qualified is given in SA 710 “Comparative Information – Corresponding Figures and Comparative Financial Statements”.
As per SA 710, When the auditor’s report on the prior period, as previously issued, included a qualified opinion, a disclaimer of opinion, or an adverse opinion and the matter which gave rise to the modified opinion is resolved and properly accounted for or disclosed in the financial statements in accordance with the applicable financial reporting framework, the auditor’s opinion on the current period need not refer to the previous modification.
SA 710 further states that if the auditor’s report on the prior period, as previously issued, included a qualified opinion and the matter which gave rise to the modification is unresolved, the auditor shall modify the auditor’s opinion on the current period’s financial statements. In the Basis for Modification paragraph in the auditor’s report, the auditor shall either:
1. Refer to both the current period’s figures and the corresponding figures in the description of the matter giving rise to the modification when the effects or possible effects of the matter on the current period’s figures are material; or
2. In other cases, explain that the audit opinion has been modified because of the effects or possible effects of the unresolved matter on the comparability of the current period’s figures and the corresponding figures.
3. In the instant Case, if P Ltd. Does not make provision for doubtful debts the auditor will have to modify his report for both current and previous year’s figures as mentioned above. If however, the provision is made, the auditor need not refer to the earlier year’s modification.
Question 21
Difference between Intangible Asset and Intangible Item.
Answer
Intangible Asset vs. Intangible Item:
As per Accounting Standard 26 on “Intangible Assets”, enterprises frequently expend resources, or incur liabilities, on the acquisition, development, maintenance or enhancement of intangible resources such as scientific or technical knowledge, design and implementation of new processes or systems, licences intellectual property, market knowledge and trademarks (including brand names and publishing titles.
Common examples of items encompassed by these broad headings are computer software, patents, copyrights, motion picture films, customer lists, mortgage servicing rights, fishing licences, import quotas, franchises, customer or supplier relationships, customer loyalty, market share and marketing rights. Goodwill is another example of an item of intangible nature which either arises on acquisition or is internally generated.
If above discussed items fulfils the conditions given in the definition of an intangible asset, that is, identifiability, control over a resource and expectation of future economic benefits flowing
to the enterprise, will be considered as intangible asset. But if any of such discussed items does not satisfied these 3 conditions then it will not constitute intangible asset, like expenditure to acquire it or generate it internally is recognized as an expense when it is incurred. However, if the item is acquired in an amalgamation in the nature of purchase, it forms part of the goodwill recognized at the date of the amalgamation.
Further, Intangible assets are shown in Balance Sheet whereas intangible items which are not intangible assets are provided as expenditure in Statement of Profit and Loss.
Question 22
Z Ltd changed its employee remuneration policy from 1st of April 2017 to S provide for 12% contribution to provident fund on leave encashment also. As per the leave encashment policy the employees can either utilize or an cash it. As at 31st March 18 the company obtained an actuarial valuation for leave encashment liability. However, it did not provide for 12% PF contribution on it. The auditor of the company wants it to be provided but the management replied that as and when the employees availed leave encashment, the provident fund contribution was made. The company further contends that this is the correct treatment as it is not sure whether the employees will avail leave encashment or utilize it. Comment.
Answer
As per Para 11 of AS-15 on “Employee Benefits”, issued by the Institute of Chartered Accountants of India, an enterprise should recognize the expected cost of short-term employee benefits in the form of compensated absences in the case of accumulating compensated absences, when the employees render service that increases their entitlement to future compensated absences.
Since the company obtained actuarial valuation for leave encashment, it is obvious that the compensated absences are accumulating in nature. An enterprise should measure the expected cost of accumulating compensated absences as the additional amount that the enterprise expects to pay as a result of the unused entitlement that has accumulated at the balance sheet date.
Here, Z Ltd will accumulate the amount of leave encashment benefits as it is the liability of the company to provide 12% PF on amount of leave encashment. Hence the contention of the auditor is correct that full provision should be provided by the company.
Question 23
A firm of a father and a son is receiving Rs.2 lakhs towards job work done for XYZ Ltd. during the year ended on 31.03.16. The total job work charges paid by XYZ Ltd. during the year are over Rs.50 lakhs. The father is Managing Director of XYZ Ltd. having substantial holding. The Managing Director told the auditor that since he is not involved in the activities of the firm and since the amount paid to it is insignificant; there is no need to disclose the transaction. He further contended that such a payment made in the last year was not disclosed. Advise whether Managing Director is right in his approach.
Answer
Related Party Disclosures:
As per definition given in the AS 18 “Related Party Disclosures” parties are considered to be related if at any time during the reporting period one party has the ability to control the other party or exercise significant influence over the other party in making financial and/or operating decisions. Related party transaction means a transfer of resources or obligations between related parties, regardless of whether or not a price is charged.
In the instant case, the managing director of XYZ Ltd. is a partner in the firm with his son which has been paid Rs.2 lakhs as job work charges. The managing director is having a substantial holding in XYZ Ltd. The case is squarely covered by AS 18. According to AS-18, in the case of related party transactions, the reporting enterprise should disclose the following:
(i) the name of the transacting related party;
(ii) a description of the relationship between the parties;
(iii) a description of the nature of transactions;
(iv) volume of the transactions either as an amount or as an appropriate proportion;
(v) any other elements of the related party transactions necessary for an understanding of the financial statements;
(vi) the amounts or appropriate proportions of outstanding items pertaining to related parties at the balance sheet date and provisions for doubtful debts due from such parties at that date; and
(vii) Amounts written off or written back in the period in respect of debts due from or to related parties.”
Further, SA 550 on “Related Parties”, also prescribes the auditor’s responsibilities and audit procedures regarding related party transactions.
The approach of the managing director is not tenable under the law and accordingly all disclosure requirements have to be complied with in accordance with the AS 18. Auditor should insist to make proper disclosure as per the AS and if management refuses, the auditor shall have to modify his report. Also it has to be seen whether section 184 of the Companies Act, 2013 regarding disclosure of interest by director has been complied with. If it is not complied with, the auditor needs to modify the report appropriately.
Question 24
The Property, Plant and Equipment of ABC Ltd. included Rs.25.75crores of earth removing machines of outdated technology which had been retired from active use and had been kept for disposal after knock down. These assets appeared at residual value and had been last inspected ten years back. As an Auditor, what may be your reporting concern as regards matters specified above?
Answer
Disclosure in Audit Report:
The auditor is required to specifically include certain matters as per CARO, 2016 under section 143 of the Companies Act, 2013. According to clause (i) (a) of CARO, 2016 the auditor has to comment whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets; and as per clause (i) (b) whether these fixed assets have been physically verified by the management at reasonable intervals; whether any material discrepancies were noticed on such verification and if so, whether the same have been properly dealt with in the books of account;
In the given case, ABC Ltd. has intention to sale its earth removing machines of outdated technology which had been retired from active use and had been kept for disposal after knock down and these assets are appearing at residual value. Further, inspection of such machines (though it is a retired machine, however value is € 25.75 crores which is material amount) was done 10 years back, is not in compliance with CARO, 2016. Hence, this fact needs to be disclosed in the Audit Report as per clause (i) (a) and (b) of Paragraph 3 of CARO 2016.
Question 25
You are the Auditor of Power Supply Corporation Limited, a Government Company for the year ended on 31st March 2018. The turnover of the Company for the period was Rs.12000 crores from sale of power. During your audit, you found that the Company had procured Spares for Transmitters for 850crores from abroad through a Corporation by name Procurement and Supply India Limited which is also owned and controlled by Government of India. The Financial Statements of the Power Supply Corporation Limited, prepared in compliance with IND AS for the year ended on 31/03/2018 did not contain any additional disclosure regarding the procurement of spares as referred to above. To your query as to whether any disclosure regarding Related Party Transaction would be required, the Management of the Corporation replied that no such disclosure would be necessary for transactions between State Controlled Enterprises. Analyse this issue in finalizing the Audit Report.
Answer
Related Party Disclosures:
As per IND AS 24, “Related Party Disclosures”, a reporting entity is exempt from the disclosure requirements in relation to related party transactions and outstanding balances, including commitments, with (i) a government that has control or joint control of, or significant influence over, the reporting entity, and (ii) another entity that is a related party because the same government has control or joint control of, or significant influence over, both the reporting entity and the other entity.
If a reporting entity applies the above exemption, it shall disclose the following about the transactions and related outstanding balances referred to:
(1) the name of the government and the nature of its relationship with the reporting entity (i.e. control, joint control or significant influence);
(2) the following information in sufficient detail to enable users of the entity’s financial statements to understand the effect of related party transactions on its financial statements:
(i) the nature and amount of each individually significant transaction; and
(ii) for other transactions that are collectively, but not individually, significant, a qualitative or quantitative indication of their extent.
Further, as per SA 550 Related Parties, in forming an opinion on the financial statements in accordance with SA 700, the auditor shall evaluate whether the identified related party relationships and transactions have been appropriately accounted for and disclosed in accordance with the applicable financial reporting framework.
In the instant case, Power Supply Corporation Limited, a Government Company has procured spares for transmitters for rupees 850crore from abroad through a corporation namely
Procurement and Supply India Limited which is also owned and controlled by Government of India. Even after applying the exemption of IND AS 24, Power Supply Corporation Limited has to disclose the matters specified above (i.e.name of Government, natures of its relationship with reporting entity, the nature and amount of transaction etc.) Contention of Management of Corporation regarding no requirement of disclosure for transactions between State Controlled Enterprise in not tenable.
Question 26
As an Auditor give your comments for the following disclosures made by a Company which adopted IND A8 for compilation of Financial Statements:
(i) In the Balance Sheet, the sub-head inventories contained an item “goods In transit” in which a consolidated amount aggregating the cost of raw materials in transit and loose tools billed on company but delivery not made to company had been specified.
(ii) Provision for doubtful debts of trade debtors was grouped in, “Provisions” under current liabilities.
(iii) In Statement of Profit and Loss, prior period income was shown under “Other Income”.
(iv) Sale proceeds of scrap incidental to manufacture were included in “Other Income”.
(v) Payment towards a one-time voluntary retirement scheme introduced during the year was included In “Employee Benefit Expense”.
Answer
(i) Goods in Transits: As per Division II of Schedule III of the Companies Act, 2013, cost of raw material in transit shall be disclosed as sub-head of raw material and loose tools billed on the company would be shown as separate sub-head of Loose tools under heading of Inventories i.e. part of Current Asset. Thus, disclosure of consolidated amount aggregating the cost of raw material in transit and loose tools is not correct.
(ii) Provision for Doubtful Debts of Trade Debtors was grouped in “Provisions” under current liabilities: The term “doubtful debts’ is an adjustment to the carrying amounts of assets, hence no provision is created separately for it as per Ind-AS 37 “Provisions, Contingent Liabilities and Contingent Assets”. Thus, provision should be shown net in trade receivable.
(iii) In Statement of Profit and Loss, Prior Period Income was shown under Other Income: As per Ind-AS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”, Prior Period Income should not be shown in statement of profit and loss. The entity shall adjust the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied.
(iv) Sale Proceeds of Scrap incidental to manufacture were included in “Other Income”: As per Ind-AS 2 “Inventories”, sale proceeds of scrap incidental to manufacture should be deducted from the cost of the main product. Thus, disclosure of sale proceeds of scrap as other income is not correct.
(v) Payment towards a onetime VRS during the year included in Employee Benefit Expenses: As per Ind-AS 19 “Employee Benefits”, if the termination benefits are expected to be settled wholly before twelve months after the end of the annual reporting period in which the termination benefit is recognized, the entity shall apply the requirements for short-term employee benefits, in case it is not expected to be settled before twelve months the entity shall apply the requirements for long term employee benefits. In the instant case, it should be shown as short term employee benefits in place of Employee Benefit Expenses. Thus, treatment of such payment as employee benefit expenses is not correct.
Question 27
Zed Ltd. has flexi deposit linked current account with various banks. Cheques are issued from the current account and as per the requirements of funds, the flexi deposits are en cashed and transferred to current accounts. As of 31st March, 2018 certain cheques issued to vendors are not presented for payment resulting in the credit balance in the books of the company. The management wants to present the book overdraft under current liabilities and flexi deposits under cash & bank balances. Comment.
Answer
Presentation of Book Overdraft as per Schedule III to the Companies Act, 2013:
The instructions in accordance with which current assets being “cash and cash equivalents” should be made out to Part I of Schedule III to the Companies Act, 2013 states as follows:
(i) Cash and cash equivalents shall be classified as:
- Balances with banks;
- Cheques, drafts on hand;
- Cash on hand;
- Others (specify nature).
(ii) Earmarked balances with banks (for example, for unpaid dividend) shall be separately stated.
(iii) Balances with banks to the extent held as margin money or security against the borrowings, guarantees, other commitments shall be disclosed separately.
(iv) Repatriation restrictions, if any, in respect of cash and bank balances shall be separately stated.
(v) Bank deposits with more than 12 months maturity shall be disclosed separately.
From the facts of the case it is evident that in substance the position is that the composite bank balance including the balance in flexi deposit accounts are positive, even though physical setoff has not been made as on the balance sheet date. Further the bank has got the right to set off of flexi deposits against the cheques issued and hence it would be more informative and useful to the readers of the financial statements to disclose the book credit balance as a set-off from the flexi deposit accounts. The disclosure of the said book credit balance as book overdraft under the head current liabilities as proposed by the management is not correct.
Question 28
As an auditor of ABC Limited, in view of given circumstances, you are required to draft qualified opinion and basis for qualified opinion due to the departure from the applicable Financial Reporting Framework:
- Audit of a complete set of financial statements of an company other than a listed company (registered under the Companies Act, 2013) using a fair presentation framework.
- The financial statements are prepared by management of the entity in accordance with the
- Accounting Standards prescribed under section 133 of the Companies Act, 2013 (a general purpose framework).
- The terms of the audit engagement reflect the description of management’s responsibility for the financial statements in SA 210.
- A departure from the applicable financial reporting framework resulted in a qualified opinion.
- The relevant ethical requirements that apply to the audit are the ICAI’s Code of Ethics and the provisions of the Companies Act, 2013.
- Based on the audit evidence obtained, the auditor has concluded that a material uncertainty does not exist related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern in accordance with SA 570 (Revised).
- Between the date of the financial statements and the date of the auditor’s report, there was a fire in the entity’s production facilities, which was disclosed by the entity as a subsequent event. In the auditor’s judgment, the matter is of such importance that it is fundamental to users’ understanding of the financial statements. The matter did not require significant auditor attention in the audit of the financial statements in the current period.
- The auditor is not required, and has otherwise not decided, to communicate key audit matters in accordance with SA 701.
- Those responsible for oversight of the financial statements differ from those responsible for the preparation of the financial statements.
- In addition to the audit of the financial statements, the auditor has other reporting responsibilities required under the Companies Act, 2013.
Answer
Qualified Opinion We have audited the standalone financial statements of ABC Limited (“the Company”), which comprise the balance sheet as at March 31, 20X1, and the statement of Profit and Loss, (statement of changes in equity) and the statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies and other explanatory information (in which are included the Returns for the year ended on that date audited by the branch auditors of the Company’s branches located at (location of branches))
In our opinion and to the best of our information and according to the explanations given to us, except for the effects of the matter described in the Basis for Qualified Opinion section of our report, the aforesaid financial statements present fairly, in all material respects, or give a true and fair view in conformity with the accounting principles generally accepted in India of the state of affairs of the Company as at March 31st, 2XXX and profit/loss, (changes in equity) and its cash flows for the year ended on that date.
Basis for Qualified Opinion
The Company’s short-term marketable securities are carried in the statement of financial position at xxx. Management has not marked these securities to market but has instead stated them at cost, which constitutes a departure from the Accounting Standards prescribed in section 133 of the Companies Act, 2013. The Company’s records indicate that had management marked the marketable securities to market, the Company would have recognized an unrealized loss of Rs xxx in the statement of comprehensive income for the year. The carrying amount of the securities in the statement of financial position would have been reduced by the same amount at March 31, 20X1, and income tax, net income and shareholders’ equity would have been reduced by Rs xxx, Rs .xxx and Rs. xxx, respectively.
We conducted our audit in accordance with Standards on Auditing (SAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements under the provisions of the Companies Act, 2013, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the ICAI’s Code of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion.
Question 29
A Review Report of an Auditor is negative in form in expression of conclusion- Explain.
Answer
Negative Review Report in expression of conclusion:
According to Standards on Review Engagement (SREs) review report is a limited assurance engagement. The practitioner provides a written report containing a conclusion that conveys the assurance obtained about the subject matter information. SAs, SREs and SAEs establish basic elements for assurance reports. In addition, the practitioner considers other reporting responsibilities, including communicating with those charged with.
In a reasonable assurance engagement, the practitioner expresses the conclusion in the positive form, this form of expression conveys “reasonable assurance”. However, in a limited assurance engagement, the practitioner expresses the conclusion in the negative form, for example, “based on our work described in this report, nothing has come to our attention that causes us to believe that internal control is not effective, in all material respects, based on XYZ criteria”.
This form of expression conveys a level of “limited assurance” that is proportional to the level of the practitioner’s evidence-gathering procedures given the characteristics of the subject matter and other engagement circumstances described in the assurance report.
The format of Review report in SRE in conclusion caption of the report provides as follows- “nothing has come to our attention that causes to believe that these financial statements do not give a true and fair view of (Or presents fairly in all material respects) the financial position of the company and of its financial performance and cash flows for the period then ended in accordance with the Accounting standards referred to in Companies Act 2013 and other accounting principles generally accepted in India” .
Thus, in view of above it is clear that in a review report instead of positive form, the negative form of expression is being used. Also it is to be noted that the Review report contains caption – conclusion and not opinion.
