TYBBI SEM-6 Auditing-II (November 2024 Question Paper with Solutions)

 Paper/Subject Code: 85503/Auditing - II

TYBBI SEM-6 : 

Auditing-II 

(November 2024 Question Paper with Solutions)

Course: TYBBI

Semester : VI

Subject : Auditing-II

University : University of Mumbai

Exam : November 2024

Introduction

This article provides the TYBBI Semester 6 Auditing-II question paper for the November 2024 examination along with detailed solutions. The solutions are explained step-by-step to help students understand the method used to solve each problem and prepare for their university examination.

Instructions:

(a) All questions are compulsory subject to internal choice.

(b) Figure to the right indicates marks.

Q.1a) Rewrite the sentences by choosing correct option. (Any Eight):        08

i) _________ are not required to furnish LFAR apart from statutory audit report.

(Public sector banks, Private sector banks; Insurance Companies; Foreign Banks)

Ans: Insurance Companies

ii) The portion of profit, which can legally be distributed to the shareholders of the company by way of dividend, is called ________.

(Capital Profit; Revenue Profit, Divisible profit; Regular profit)

Ans: Divisible profit

iii) Bank Loans are to be granted only after verifying _______ of the borrower.

(Credit worthiness; Social Influence, Social Status; Profession)

Ans: Credit worthiness

iv) Surrender value becomes a part of ________ in revenue account.

(Premiums; commissions; Benefits paid; tax paid)

Ans: Benefits paid

v) AS-3 deals with ________

(Revenue Recognition; Inventory Control; Cash Flow Statements; Accounting for Investments)

Ans: Cash Flow Statements

vi) CAAT stands for ________

(Cost Assisted Auditing Techniques; Computer Added Auditing Techniques; Computer Assisted Auditing Techniques, Computer Automatic & Authentic Techniques)

Ans: Computer Assisted Auditing Techniques

vii) White box approach in CIS environment is also known as auditing ________ the computer. (around; without; web based; through)

Ans: through

viii) The auditors should obtain _______  management representations to complement the audit procedures. (oral; written; spoken; verbal)

Ans: written

ix) Books of accounts shall be kept at the _______ of the company.  (registered office, auditor's office; government office; overseas office)

Ans: registered office

x) In case of Marine Insurance business, reserve for unexpired risk is _______ % of the net premium. (25%; 50%; 75%; 100%)

Ans: 100%

Q.1 b) State whether the following statements are True or False (Any seven):            07

i. The remuneration of a bank auditor is fixed according to Section 151 of Companies Act, 2013.

Ans: False

        

ii. Auditor is required to send a copy of his report to each member of the company individually.

Ans: False

iii. A Chartered Accountant can disclose the client's financial information to any person.

Ans: False

iv. Private companies are excluded in calculation of ceiling on number of audits of an auditor.

Ans: True

v. Auditor can give qualified certificate.

Ans: True

vi. In banks, cash should be counted physically at the end of year.

Ans: True

vii. Separate application for registration has to be made for each class of general insurance business.

Ans: True

viii. A Chartered accountant is expected to maintain the dignity and prestige of the profession.

Ans: True

ix. Auditor need to have technical knowledge to perform audit in computerized environment. 

Ans: True

x. Provisions of section 44AAB of Companies Act 2013 are applicable to Human Resource audit.

Ans: False

Q.2a) What do you mean by audit report? Explain its types in brief.

Meaning of Audit Report

An Audit Report is a written statement prepared by an independent auditor after examining the financial statements, books of accounts and other financial records of an organisation.

It expresses the auditor's opinion on whether the financial statements present a true and fair view of the financial position and performance of the organisation.

An audit report helps shareholders, investors, creditors and other stakeholders understand the reliability of financial information.

Types of Audit Report

There are mainly four types of audit reports:

1. Unqualified Report (Clean Report)

An unqualified audit report is issued when the auditor is satisfied that the financial statements present a true and fair view and comply with the applicable accounting standards.

• No material misstatement is identified.

• Financial statements are properly prepared.

• It indicates a favourable audit opinion.

Example: The auditor finds that all financial transactions are properly recorded and financial statements are accurate in all material respects.

2. Qualified Report

A qualified audit report is issued when the auditor finds certain issues or limitations, but they are not so serious or widespread as to make the entire financial statements unreliable.

• There may be some errors or disagreements.

• The issue is material but not pervasive.

• The auditor gives an opinion with certain qualifications.

Example: The company has not properly disclosed a particular expense, but the issue does not affect the entire financial statements.

3. Adverse Report

An adverse audit report is issued when the auditor concludes that the financial statements contain material and pervasive misstatements and do not present a true and fair view.

• Serious accounting errors are identified.

• Financial statements are misleading.

• It indicates an unfavourable audit opinion.

Example: A company deliberately shows incorrect assets and profits in its financial statements.

4. Disclaimer of Opinion

A disclaimer of opinion is issued when the auditor is unable to obtain sufficient and appropriate audit evidence to form an opinion on the financial statements.

• The auditor cannot express an opinion.

• There may be restrictions on audit procedures.

• Important financial records may be unavailable.

• The possible effects may be material and pervasive.

Example: The company does not provide important financial records, making it impossible for the auditor to complete the audit.

Q.2b) What are the rights of company auditor?

Meaning

A company auditor is an independent professional appointed to examine the books of accounts, financial statements and records of a company to ensure accuracy and compliance with applicable laws.

Under the Companies Act, 2013 (Section 143), a company auditor is provided with certain rights and powers to perform audit duties effectively and independently.

Rights of a Company Auditor

1. Right to Access Books of Accounts

Every auditor has the right to access the books of accounts, vouchers and other financial records of the company at all times.

2. Right to Obtain Information and Explanation

An auditor has the right to obtain necessary information and explanations from the company's officers and employees regarding financial transactions and accounts.

3. Right to Visit Branch Offices

The auditor has the right to visit and examine the accounts of branch offices. The auditor can also obtain relevant information from branch auditors.

4. Right to Receive Notice of General Meetings

The auditor has the right to receive notices and other communications relating to general meetings of the company.

5. Right to Attend General Meetings

An auditor has the right to attend general meetings of the company, either personally or through an authorised representative who is qualified to be an auditor.

6. Right to Speak at General Meetings

The auditor has the right to be heard at general meetings on matters concerning the audit and financial statements of the company.

7. Right to Sign Audit Report

The auditor has the right to sign the audit report prepared after examining the financial statements of the company.

8. Right to Receive Remuneration

The auditor has the right to receive remuneration for professional services provided. The remuneration is determined according to the provisions of the Companies Act, 2013.

9. Right to Receive Relevant Documents

The auditor has the right to receive relevant documents, records and financial statements necessary for conducting the audit.

10. Right to Report Fraud

If the auditor identifies fraud or suspects fraud during the audit, the auditor has the right and, where required by law, the duty to report it to the appropriate authorities under Section 143(12).

11. Right to Seek Legal and Professional Assistance

An auditor may take professional assistance wherever necessary, subject to applicable laws and professional standards, to perform audit duties effectively.

OR

Q.2c) Explain the concept of related party disclosures.

Meaning of Related Party Disclosures

Related Party Disclosures refer to the disclosure of transactions and relationships between a company and its related parties in its financial statements.

A related party is an individual or organisation that has control, joint control or significant influence over a company, or is part of its key management personnel.

The main objective of related party disclosures is to ensure transparency, accountability and fairness in financial reporting.

Example: If ABC Ltd. purchases raw materials from a company owned by its director, the transaction must be disclosed as a related party transaction, wherever required by applicable accounting standards.

Objectives of Related Party Disclosures

1. To maintain transparency in financial statements.

2. To identify transactions between related parties.

3. To prevent misuse of company resources.

4. To protect the interests of shareholders and investors.

5. To ensure compliance with accounting standards.

6. To identify possible conflicts of interest.

Important Aspects of Related Party Disclosures

1. Identification of Related Parties

The company must identify individuals and organisations that are related to it.

Example: Directors, key managerial personnel, holding companies and subsidiary companies.

2. Disclosure of Relationships

The company must disclose the nature of its relationship with related parties, even when no transactions have taken place, wherever required.

3. Disclosure of Transactions

All applicable transactions between the company and related parties must be disclosed.

Example: Sale or purchase of goods, rendering of services and transfer of assets.

4. Amount of Transactions

The company must disclose the amounts involved in related party transactions to provide clear financial information.

5. Outstanding Balances

The company should disclose outstanding amounts payable or receivable from related parties, including relevant commitments.

6. Terms and Conditions

The company must disclose important terms and conditions of related party transactions, including whether transactions are secured and the nature of consideration.

7. Key Management Personnel

Transactions involving key management personnel, such as directors and senior executives, must be disclosed as required by accounting standards.

8. Loans and Advances

Loans, advances, guarantees and other financial arrangements involving related parties must be disclosed wherever required.

Examples of Related Party Transactions

• Purchase or sale of goods between a holding company and subsidiary.

• Loans provided to directors or related companies.

• Payment of rent to a company owned by a director.

• Payment of salary or remuneration to key management personnel.

• Providing management or consultancy services to related companies.

Q.2d) Explain conditions and procedure of removal of auditors.

Meaning of Removal of Auditor

Removal of an auditor refers to the process of removing an appointed auditor from their position before the completion of their term.

Under the Companies Act, 2013, Section 140(1), a company can remove its auditor before the expiry of the term by following the prescribed legal procedure and obtaining prior approval from the Central Government.

The main purpose of these provisions is to protect the independence of auditors and prevent their unfair removal by company management.

1. Conditions for Removal of Auditor

1. Removal Before Expiry of Term

An auditor can be removed before the completion of their term only by following the procedure prescribed under Section 140(1) of the Companies Act, 2013.

2. Approval of Central Government

The company must obtain prior approval from the Central Government before passing a resolution for removal of the auditor.

3. Reasonable Opportunity of Being Heard

The auditor must be given a reasonable opportunity to present their explanation before removal.

4. Special Resolution

After obtaining approval from the Central Government, the company must pass a special resolution in a general meeting to remove the auditor.

5. Valid Reasons

The company should have proper and genuine reasons for removing the auditor, such as professional misconduct, negligence or other appropriate grounds.

6. Compliance with Legal Provisions

The company must follow the rules and procedures prescribed under the Companies Act, 2013 and applicable rules.

2. Procedure for Removal of Auditor

The following steps are involved in the removal of an auditor before the expiry of their term:

Step 1: Passing of Board Resolution

The company must first hold a Board of Directors meeting and pass a resolution proposing the removal of the auditor before the expiry of their term.

Step 2: Application to Central Government

The company must submit an application in Form ADT-2 to the Central Government for obtaining prior approval.

Step 3: Time Limit for Application

The application must be submitted within 30 days from the date of passing the Board resolution.

Step 4: Opportunity of Being Heard

The auditor concerned must be given a reasonable opportunity to present their explanation before removal.

Step 5: Approval of Central Government

The company must obtain approval from the Central Government before proceeding with the removal.

Step 6: Passing of Special Resolution

After receiving approval, the company must hold a general meeting within 60 days and pass a special resolution for removing the auditor.

Step 7: Filing with Registrar

The company must file the necessary resolution and prescribed documents with the Registrar of Companies (ROC), including Form MGT-14 within the applicable time limit.

These steps are prescribed under Section 140(1) and Rule 7 of the Companies (Audit and Auditors) Rules, 2014

Q.3a) How would the auditor vouch/ verify the following items appearing in the financial Statements of a bank?

i) Non-Performing Assets

Meaning:

Non-Performing Assets (NPA) refer to loans or advances given by a bank on which the borrower has failed to make interest or principal payments for a specified period.

Generally, a loan is classified as an NPA when interest or instalment of principal remains overdue for more than 90 days, subject to applicable RBI guidelines.

Verification of Non-Performing Assets

1. Examine Loan Records: The auditor should examine loan accounts, sanction letters and other relevant documents to verify the outstanding loan amount.

2. Check Repayment Records: The auditor should verify repayment schedules and check whether the borrower has failed to pay interest or principal for more than 90 days.

3. Verify NPA Classification: The auditor should ensure that loans are correctly classified as Substandard Assets, Doubtful Assets or Loss Assets according to RBI guidelines.

4. Examine Bank Statements: The auditor should check the borrower's repayment history and verify overdue amounts through bank records.

5. Check Interest Income: The auditor should verify whether interest on NPAs has been recognised according to applicable RBI income-recognition norms.

6. Verify Provisioning: The auditor should check whether adequate provisions have been made for NPAs according to RBI guidelines.

7. Examine Security Documents: The auditor should verify the value of securities, guarantees and other assets provided against loans.

8. Check Disclosure: The auditor should ensure that NPAs and related provisions are properly disclosed in the financial statements.

ii) Money at call and Money at short notice

Meaning

1. Money at Call

Money at call refers to short-term funds lent by a bank to other banks or financial institutions that are repayable on demand, usually within 24 hours, without prior notice.

2. Money at Short Notice

Money at short notice refers to short-term funds lent by a bank to other banks or financial institutions that are repayable after giving a short notice, generally between 2 and 14 days, depending on the agreement and applicable banking practices.

Verification and Vouching by the Auditor

The auditor should perform the following procedures to verify Money at Call and Money at Short Notice appearing in the bank's financial statements:

1. Examine confirmations: Obtain balance confirmations from the borrowing banks or financial institutions to verify the amount outstanding at the balance sheet date.

2. Check documentary evidence: Examine call loan receipts, loan agreements, deal tickets and other relevant documents supporting the transactions.

3. Verify bank statements: Check the bank's books, general ledger and subsidiary records to confirm the amounts advanced and outstanding.

4. Verify interest income: Check the interest rate, period of lending and interest earned. Ensure that accrued interest is properly recorded in the books of accounts.

5. Check repayment: Examine subsequent receipts and bank statements to confirm that the loans have been repaid according to the agreed terms.

6. Verify classification: Ensure that money at call and money at short notice are correctly classified and disclosed under the appropriate head in the bank's financial statements.

7. Check authorisation: Verify that the advances were properly authorised by the bank's competent officials and comply with applicable banking regulations.

8. Check year-end transactions: Examine transactions immediately before and after the balance sheet date to ensure correct accounting and prevent window dressing.

Q.3 b) How would you evaluate the internal control system of the bank?

Meaning

An internal control system is a set of policies, procedures and rules established by a bank to safeguard its assets, prevent fraud and errors, ensure accuracy of accounting records and maintain compliance with banking laws and regulations.

Evaluation of the Internal Control System of a Bank

An auditor should evaluate the internal control system of a bank by following these procedures:

1. Examination of Organisation Structure

The auditor should examine the bank's organisational structure, delegation of authority and responsibilities of employees to ensure proper supervision and accountability.

2. Segregation of Duties

The auditor should verify that duties relating to authorisation, recording and custody of assets are divided among different employees to minimise the risk of fraud and errors.

3. Verification of Cash Transactions

The auditor should examine the internal controls over cash receipts and payments, including cash verification, authorisation of payments and daily balancing of cash balances.

4. Internal Check System

The auditor should verify whether an effective internal check system exists for deposits, withdrawals, loans, advances and other banking transactions.

5. Verification of Loans and Advances

The auditor should examine the procedures for loan approval, documentation, disbursement, monitoring and recovery to ensure that loans are granted according to the bank's policies.

6. Examination of Accounting Records

The auditor should verify the accuracy and completeness of books of accounts, ledgers, vouchers, subsidiary records and financial statements.

7. Bank Reconciliation Statements

The auditor should check whether bank reconciliation statements are prepared regularly and whether differences between bank records and other relevant records are properly investigated and resolved.

8. Verification of Computerised Systems

The auditor should examine IT controls, password protection, access restrictions, data backups and security measures to prevent unauthorised access and manipulation of banking records.

9. Internal Audit Department

The auditor should evaluate the effectiveness, independence and scope of the internal audit department and examine whether internal audit observations are properly addressed by management.

10. Compliance with Laws and Regulations

The auditor should verify whether the bank follows applicable RBI guidelines, banking laws, KYC requirements, anti-money-laundering procedures and other relevant regulatory requirements.

11. Physical Verification of Assets

The auditor should examine the controls over cash, securities, documents of title, fixed assets and other valuable items held by the bank.

12. Surprise Checks and Inspection

The auditor should review whether surprise cash counts, periodic inspections and independent checks are conducted regularly to detect errors and irregularities.

OR

Q.3c) How would the auditor vouch/ verify the following items appearing in the financial statements of an insurance company?

i) Claims

Meaning

Claims refer to the amounts payable by an insurance company to policyholders or beneficiaries when an insured event occurs, according to the terms and conditions of the insurance policy.

Verification of Claims by the Auditor

1. Examine Insurance Policies: The auditor should examine the insurance policies to verify the terms, conditions and extent of coverage.

2. Check Claim Intimation: The auditor should verify the claim forms and claim intimation submitted by the policyholders.

3. Verify Supporting Documents: The auditor should examine relevant documents such as medical bills, death certificates, survey reports, FIRs and other evidence, depending on the type of insurance claim.

4. Check Claim Register: The auditor should verify the claims register and ensure that all claims received during the accounting period are properly recorded.

5. Examine Surveyor's Report: In general insurance, the auditor should examine the surveyor's report to verify the amount of loss assessed and the claim payable.

6. Verify Claim Settlement: The auditor should check payment vouchers, bank statements and receipts to confirm that settled claims have actually been paid to the correct beneficiaries.

7. Check Outstanding Claims: The auditor should verify claims reported but not settled by the end of the accounting period and ensure that adequate provisions are made.

8. Verify Rejected Claims: The auditor should examine rejected claims and verify whether the reasons for rejection are properly documented and authorised.

9. Check Reinsurance Claims: The auditor should verify claims recoverable from reinsurers and ensure that the amounts are correctly recorded.

10. Verify Accounting Treatment: The auditor should ensure that claims are properly classified, recorded and disclosed in the financial statements according to applicable accounting and regulatory requirements.

ii) Commission

Meaning

Commission refers to the remuneration paid by an insurance company to insurance agents, brokers or intermediaries for procuring insurance business.

Verification of Commission by the Auditor

1. Examine Agency Agreements: The auditor should examine agreements with insurance agents and brokers to verify the applicable commission rates and terms.

2. Check Commission Register: The auditor should verify the commission register and ensure that all commission transactions are properly recorded.

3. Verify Premium Receipts: The auditor should check premium receipts and policy records to ensure that commission is calculated on actual eligible insurance business.

4. Check Commission Rates: The auditor should verify whether commission has been calculated at the agreed rates and in accordance with applicable insurance regulations.

5. Verify Commission Calculations: The auditor should independently recalculate commission on selected transactions to check mathematical accuracy.

6. Examine Payment Vouchers: The auditor should examine payment vouchers, bank statements and receipts to confirm that commission has been paid to the correct agents or brokers.

7. Check Authorisation: The auditor should verify that commission payments have been properly approved by authorised officials of the insurance company.

8. Verify Outstanding Commission: The auditor should check commission payable at the end of the accounting period and ensure that appropriate liabilities are recorded.

9. Check Cancellation of Policies: The auditor should examine cancelled policies and refunded premiums to determine whether commission adjustments or recoveries are required.

10. Verify Accounting Treatment: The auditor should ensure that commission expenses are correctly recorded in the books of accounts and appropriately disclosed in the financial statements.

Q.3d) Write a note on AS-9

1. Meaning of AS-9

AS-9 stands for Accounting Standard 9 – Revenue Recognition. It deals with the accounting treatment of revenue arising from the sale of goods, rendering of services and the use of an enterprise's resources by others that generate interest, royalties and dividends.

The main objective of AS-9 is to determine when and how revenue should be recognised in the books of accounts.

2. Objectives of AS-9

The main objectives of AS-9 are:

1. To prescribe the accounting principles for revenue recognition.
2. To ensure that revenue is recorded in the correct accounting period.
3. To maintain consistency in the preparation of financial statements.
4. To ensure accurate measurement of revenue.
5. To improve the reliability and comparability of financial statements.

3. Revenue Covered Under AS-9

AS-9 covers revenue arising from the following activities:

A. Sale of Goods

Revenue is recognised when the seller transfers ownership or significant risks and rewards of ownership to the buyer, retains no effective control over the goods, and there is no significant uncertainty regarding the consideration.

B. Rendering of Services

Revenue from services is recognised according to the method appropriate to the nature of the service:

• Proportionate Completion Method: Revenue is recognised according to the stage of completion of the service.
• Completed Service Contract Method: Revenue is recognised when the service is substantially completed or the relevant act is completed.

C. Interest, Royalties and Dividends

• Interest: Recognised on a time-proportion basis, taking into account the amount outstanding and the applicable rate.
• Royalties: Recognised on an accrual basis in accordance with the terms of the relevant agreement.
• Dividends: Recognised when the owner's right to receive payment is established.

4. Effect of Uncertainties on Revenue Recognition

Revenue should be recognised only when it can be measured reliably and there is reasonable certainty of ultimate collection.

If there is significant uncertainty regarding the amount receivable or its collection, recognition of revenue should be postponed to the extent of that uncertainty. If uncertainty arises after revenue has already been recognised, a separate provision may be made for the doubtful amount.

5. Items Not Covered Under AS-9

AS-9 does not deal with the following:

1. Revenue arising from construction contracts.
2. Revenue from hire-purchase and lease agreements.
3. Revenue from government grants and similar subsidies.
4. Revenue of insurance companies arising from insurance contracts.

It also excludes certain gains, such as gains from the disposal of fixed assets and unrealised holding gains.

Q.4 a) What do by mean by Cost Audit? Explain in detail.

1. Meaning of Cost Audit

Cost Audit refers to the systematic examination and verification of cost accounting records, cost statements and related documents of an organisation to ensure their accuracy and compliance with applicable cost accounting principles, standards and legal requirements.

It helps determine whether the cost of production, processing or services has been correctly calculated and recorded.

In simple words, cost audit is an audit of cost records to verify the accuracy of costs incurred in producing goods or providing services.

2. Objectives of Cost Audit

The main objectives of cost audit are as follows:

1. Verification of Cost Records

To verify the correctness and accuracy of cost accounting records maintained by the organisation.

2. Detection of Errors and Fraud

To identify errors, irregularities, wastage and possible fraud in cost records.

3. Cost Control

To help management control material costs, labour costs, overheads and other production expenses.

4. Reduction of Cost

To identify unnecessary expenditure and suggest measures for reducing production and operating costs.

5. Verification of Cost Statements

To ensure that cost sheets, cost statements and other cost reports are prepared accurately.

6. Compliance with Legal Requirements

To ensure compliance with applicable provisions of the Companies Act, 2013, and relevant cost auditing rules.

7. Improvement in Efficiency

To identify inefficiencies in production, use of materials, labour and machinery.

8. Assistance to Management

To provide reliable cost information for planning, decision-making, budgeting and pricing.

3. Types of Cost Audit

1. Statutory Cost Audit

Statutory cost audit is an audit required by law. Under Section 148 of the Companies Act, 2013, certain prescribed classes of companies are required to maintain cost records and undergo a cost audit, subject to applicable rules and exemptions.

2. Internal Cost Audit

Internal cost audit is conducted by the organisation's internal audit department or appointed professionals to review cost records, identify inefficiencies and improve cost control.

3. Cost Compliance Audit

This audit examines whether cost accounting records and cost statements comply with applicable cost accounting standards, rules and requirements.

4. Cost Audit on Management Request

Management may request a cost audit to investigate rising costs, production inefficiencies, wastage or other cost-related issues.

4. Advantages of Cost Audit

1. Effective Cost Control: It helps management monitor and control production and operating costs.

2. Reduction in Wastage: It identifies wastage of raw materials, labour hours, power and other resources.

3. Improvement in Profitability: By reducing unnecessary costs, cost audit can help improve the profitability of the organisation.

4. Accurate Pricing: It provides reliable cost information for fixing selling prices.

5. Better Decision-Making: Management can use cost audit reports for budgeting, planning and business decisions.

6. Detection of Inefficiencies: It identifies inefficient processes, underutilisation of machinery and excessive expenditure.

7. Protection of Investors and Stakeholders: Reliable cost information improves accountability and transparency.

8. Assistance to Government: Cost audit information can assist regulatory authorities in examining cost structures in prescribed industries.

5. Procedure of Cost Audit

The cost auditor generally follows these steps:

1. Appointment of Cost Auditor: The cost auditor is appointed in accordance with the applicable legal provisions.

2. Examination of Cost Records: The auditor examines cost books, cost ledgers, vouchers and supporting documents.

3. Verification of Material Costs: The auditor checks purchases, material consumption, stock records and wastage.

4. Verification of Labour Costs: The auditor examines wage records, attendance registers, labour hours and payroll expenses.

5. Verification of Overheads: The auditor checks factory, administration, selling and distribution overheads.

6. Examination of Production Records: The auditor verifies production quantities, capacity utilisation and output records.

7. Verification of Cost Statements: The auditor checks the accuracy of cost sheets and cost calculations.

8. Preparation of Audit Report: The auditor prepares a report highlighting discrepancies, non-compliance and relevant observations.

 

Q.4 b) What are the special aspects of CIS audit environment?

1. Meaning of CIS Audit

CIS stands for Computer Information System. A CIS audit refers to the examination and evaluation of an organisation's computerised information systems, data processing procedures and related controls to ensure the accuracy, security and reliability of information.

In a CIS audit, the auditor examines how transactions are processed, stored and protected through computer systems.

2. Special Aspects of CIS Audit Environment

The important special aspects of a CIS audit environment are as follows:

1. Absence of Physical Documents

In a computerised environment, transactions are recorded electronically. Physical documents and manual records may not be available. Therefore, the auditor must verify electronic records and supporting data.

2. High Speed of Processing

Computers process a large number of transactions within a short period. The auditor must examine whether the system processes transactions accurately and without errors.

3. Automatic Processing

Many accounting activities are performed automatically by computer software. The auditor should verify whether automated calculations and processing procedures are functioning correctly.

4. Concentration of Data

A large amount of financial and business information is stored in computer systems and databases. Any unauthorised access or system failure may affect a large volume of information.

5. Risk of Unauthorised Access

There is a possibility of unauthorised persons accessing, modifying or deleting confidential information. The auditor should examine passwords, access controls and user permissions.

6. Need for Specialised Knowledge

CIS auditing requires knowledge of computers, software, databases, networks and information technology. The auditor may require assistance from IT experts.

7. Lack of Visible Audit Trail

In some computerised systems, the traditional audit trail may not be visible because transactions are processed electronically. The auditor should check whether proper electronic logs and records are maintained.

8. System Security and Backup

The auditor should examine security arrangements, antivirus protection, firewalls, data backup and recovery procedures to ensure the safety of information.

9. Changes in Computer Programs

Changes in accounting software or computer programs may affect transaction processing. The auditor should verify whether changes are properly authorised, tested and documented.

10. Dependence on Computer Systems

Organisations depend heavily on computer systems for daily operations. System failure, technical errors or cyberattacks may interrupt business activities and affect accounting records.

11. Risk of Data Loss

Due to hardware failure, software problems, viruses or accidental deletion, important information may be lost. The auditor should verify whether proper backup and disaster recovery arrangements exist.

12. Continuous Monitoring

The auditor should evaluate whether the organisation has effective monitoring systems to identify errors, irregularities and security threats on a regular basis.

OR

Q.4c) Write a note on Tax Audit.

1. Meaning of Tax Audit

Tax Audit refers to the examination of the books of accounts and financial records of a taxpayer by a qualified Chartered Accountant to verify whether the income, expenses, deductions and other particulars are correctly reported under the Income Tax Act.

In India, tax audit is governed by Section 44AB of the Income Tax Act, 1961.

The main purpose of tax audit is to ensure proper maintenance of accounts and compliance with income tax provisions.

2. Objectives of Tax Audit

The main objectives of tax audit are as follows:

1. Verification of Accounts: To verify the accuracy and correctness of books of accounts maintained by the taxpayer.

2. Prevention of Tax Evasion: To prevent tax evasion and discourage incorrect reporting of income.

3. Compliance with Tax Laws: To ensure that the taxpayer follows the provisions of the Income Tax Act.

4. Verification of Deductions: To check whether deductions, exemptions and allowances claimed by the taxpayer are genuine and permissible.

5. Reporting of Errors: To identify mistakes, omissions and discrepancies in accounting records.

6. Proper Calculation of Income: To ensure that taxable income is correctly calculated and reported.

7. Assistance to Tax Authorities: To provide reliable information to the Income Tax Department for assessment purposes.

3. Applicability of Tax Audit

As per Section 44AB of the Income Tax Act, tax audit is applicable to specified taxpayers crossing the prescribed limits.

Particulars	Tax Audit Limit
Business	Turnover exceeding ₹1 crore
Business (cash receipts and payments not exceeding 5%)	Turnover exceeding ₹10 crore
Profession	Gross receipts exceeding ₹50 lakh

4. Procedure of Tax Audit

The auditor generally follows these steps:

1. Examination of Books of Accounts

The auditor examines cash books, ledgers, journals, purchase books, sales books and other accounting records.

2. Verification of Income

The auditor verifies whether all sources of income are properly recorded and reported.

3. Verification of Expenses

The auditor checks business and professional expenses to ensure that they are genuine and allowable under the Income Tax Act.

4. Verification of Deductions

The auditor examines deductions and exemptions claimed by the taxpayer and checks their eligibility.

5. Verification of Tax Payments

The auditor verifies advance tax, self-assessment tax, TDS and other tax payments.

6. Examination of Statutory Compliance

The auditor checks compliance with relevant provisions of the Income Tax Act.

7. Preparation of Audit Report

After completing the audit, the auditor prepares and submits the prescribed tax audit report.

5. Forms Used in Tax Audit

The following forms are prescribed for tax audit in India:

• Form 3CA: Used when the accounts of the taxpayer are already audited under another law.

• Form 3CB: Used when the accounts are not required to be audited under any other law.

• Form 3CD: Contains the detailed particulars and information required to be reported by the tax auditor.

6. Advantages of Tax Audit

1. Helps prevent tax evasion.

2. Ensures proper maintenance of books of accounts.

3. Improves accuracy of financial records.

4. Ensures compliance with income tax provisions.

5. Helps identify errors and discrepancies.

6. Provides reliable information to tax authorities.

7. Reduces the possibility of incorrect tax reporting.

8. Promotes transparency and accountability.

Q.4 d) Explain the internal control system in computerized system.

1. Meaning of Internal Control System in a Computerised Environment

An internal control system in a computerised environment refers to the policies, procedures and security measures adopted by an organisation to ensure the accuracy, reliability and safety of computerised accounting records and information.

It helps prevent unauthorised access, errors, fraud, data loss and misuse of computer systems.

The main objective is to ensure that computerised transactions are properly authorised, processed, recorded and stored.

2. Types of Internal Controls in a Computerised System

Internal controls in a computerised system are mainly divided into two categories:

A. General Controls

General controls are policies and procedures that apply to the overall computerised information system of an organisation.

1. Organisation and Management Controls

The organisation should establish proper responsibilities and duties for employees handling computer systems. Duties should be clearly divided to avoid misuse of authority.

2. Access Controls

Access to computer systems should be restricted through passwords, user IDs and authentication procedures. Only authorised employees should be allowed to access confidential information.

3. Physical Security Controls

Computer hardware, servers and other equipment should be protected against theft, fire, damage and unauthorised physical access.

4. Data Backup and Recovery Controls

Regular backups of important information should be maintained. Proper recovery procedures should be established to restore data in case of system failure.

5. Software and Program Controls

The organisation should ensure that authorised and properly tested software is used. Changes in computer programs should be approved and documented.

6. Network Security Controls

Firewalls, antivirus software and other security measures should be used to protect computer networks from cyberattacks and unauthorised access.

B. Application Controls

Application controls are designed to ensure the accuracy, completeness and validity of data processed through specific computer applications.

1. Input Controls

Input controls ensure that only correct, complete and authorised data is entered into the computer system.

Example: Checking invoice numbers, dates, amounts and customer details before entering transactions.

2. Processing Controls

Processing controls ensure that data is processed accurately and according to the established instructions.

Example: Automatic calculation of totals, taxes, interest and discounts.

3. Output Controls

Output controls ensure that reports and information generated by the computer system are accurate and distributed only to authorised persons.

Example: Verification of computer-generated financial statements and reports.

4. Master File Controls

These controls ensure that important permanent information, such as customer details, employee records and supplier information, is properly maintained and updated.

5. Validation Controls

These controls check whether the information entered into the computer system is valid and within the prescribed limits.

Example: The system should reject an incorrect account number or invalid date.

6. Error Reporting Controls

The system should identify, record and report errors during data processing so that corrective action can be taken.

3. Advantages of Internal Control in a Computerised System

1. Accuracy: It improves the accuracy of accounting records and financial information.

2. Data Security: It protects confidential information from unauthorised access.

3. Prevention of Fraud: It reduces the possibility of fraud and manipulation.

4. Reliability: It improves the reliability of computerised accounting systems.

5. Time Saving: It ensures faster and more efficient processing of transactions.

6. Data Recovery: Backup facilities help recover information in case of system failure.

7. Better Monitoring: It helps management monitor computerised operations effectively.

Q.5a) What do you mean by "professional misconduct"? Enumerate any five instances of Part I of second schedule in Chartered Accountants Act, 1949.                08

1. Meaning of Professional Misconduct

Professional misconduct refers to improper, unethical or unacceptable behaviour by a professional while performing professional duties. It includes acts or omissions that violate professional ethics, rules and regulations.

Under Section 22 of the Chartered Accountants Act, 1949, professional or other misconduct includes acts or omissions specified in the First and Second Schedules of the Act.

2. Five Instances of Professional Misconduct under Part I of Second Schedule

1. Disclosure of Confidential Information

If a Chartered Accountant discloses information obtained during professional engagement to any person other than the client without the client's permission, except where disclosure is required by law, it amounts to professional misconduct.

Example: A CA shares confidential financial information of a client with another company without permission.

2. Submission of Audit Report Without Proper Examination

A Chartered Accountant is guilty of professional misconduct if he certifies or submits an audit report in his name or his firm's name without personally examining the financial statements and related records, or ensuring that the examination was conducted by an authorised person mentioned in the Act.

Example: A CA signs an audit report without checking the company's financial records.

3. Certifying Estimated Earnings

A Chartered Accountant should not allow his name or his firm's name to be used with an estimate of future earnings in a manner that creates the impression that he guarantees the accuracy of the forecast.

Example: A CA certifies a company's estimated future profits without an appropriate basis.

4. Expressing Opinion Where There Is Substantial Interest

A Chartered Accountant should not express an opinion on the financial statements of a business or enterprise in which he, his firm or a partner in his firm has a substantial interest.

Example: A CA audits and expresses an opinion on the financial statements of a company in which he has a substantial financial interest.

5. Failure to Disclose Material Facts

A Chartered Accountant is guilty of professional misconduct if he fails to disclose a material fact known to him that is not disclosed in the financial statements, where such disclosure is necessary and he is concerned with those statements in a professional capacity.

Example: A CA knowingly hides important financial liabilities of a company in the audit report.

Q.5b) Explain the procedure for enquiry into charges of Misconduct of Chartered Accountants. 07

1. Meaning

Professional misconduct refers to improper, unethical or negligent behaviour by a Chartered Accountant while performing professional duties.

The Chartered Accountants Act, 1949 provides a legal procedure for investigating complaints and taking disciplinary action against Chartered Accountants who are found guilty of professional or other misconduct.

2. Procedure for Enquiry into Charges of Misconduct

The procedure involves the following steps:

1. Filing of Complaint

A complaint regarding professional misconduct may be filed against a Chartered Accountant before the Institute of Chartered Accountants of India (ICAI) in the prescribed manner.

2. Preliminary Examination

The complaint is examined by the Director (Discipline) to determine whether it discloses a prima facie case of professional or other misconduct.

3. Classification of Misconduct

The Director (Discipline) determines whether the alleged misconduct falls under:

• First Schedule of the Chartered Accountants Act, 1949.

• Second Schedule of the Chartered Accountants Act, 1949.

• Both the First and Second Schedules.

4. Investigation and Enquiry

The Director (Discipline) investigates the complaint, examines relevant documents and obtains explanations from the Chartered Accountant concerned.

5. Submission of Findings

After investigation, the Director (Discipline) records the findings and places the matter before the appropriate disciplinary authority as prescribed under the Act.

6. Enquiry by the Appropriate Authority

• For First Schedule cases: The Board of Discipline conducts a summary enquiry.

• For Second Schedule or combined cases: The Disciplinary Committee conducts the enquiry.

The Chartered Accountant is given an opportunity to present his explanation and defend himself.

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7. Hearing of the Case

The appropriate authority examines the evidence, documents and statements of both parties. It may also call witnesses and require the production of relevant documents.

8. Final Decision

After considering all the facts and evidence, the Board of Discipline or Disciplinary Committee decides whether the Chartered Accountant is guilty or not guilty of misconduct.

OR

Q.5 c) Write short notes on. (any three)

(i) Divisible profits.

1. Meaning of Divisible Profits

Divisible profits refer to the portion of profits earned by a company that is legally available for distribution among its shareholders in the form of dividends.

In simple words, divisible profits are the profits that a company can distribute to its shareholders as dividends after making necessary adjustments and provisions.

The dividend should be declared and paid in accordance with the provisions of the Companies Act, 2013.

2. Sources of Divisible Profits

The following are the main sources from which dividends can be declared:

1. Current Year's Profits

A company can declare dividends out of the profits earned during the current financial year after providing for depreciation.

2. Previous Year's Accumulated Profits

A company may declare dividends out of accumulated profits of previous years, subject to applicable legal provisions.

3. Profits from Free Reserves

Dividends may be declared out of free reserves in accordance with the prescribed rules under the Companies Act, 2013.

4. Government Guarantee

In certain cases, dividends may be paid out of government funds where the payment is guaranteed by the Central or State Government.

3. Factors to be Considered While Determining Divisible Profits

1. Depreciation: Proper depreciation must be charged on fixed assets before determining profits available for dividend.

2. Previous Losses: Previous years' losses must be adjusted as required under the Companies Act.

3. Tax Provision: Provision for income tax and other applicable taxes should be made.

4. Legal Requirements: The company must follow the provisions of the Companies Act, 2013, relating to declaration and payment of dividends.

5. Transfer to Reserves: The company may transfer an appropriate amount of profits to reserves.

6. Outstanding Liabilities: All known expenses and liabilities should be properly provided for before calculating divisible profits.

7. Capital Profits: Capital profits should not be treated as revenue profits available for distribution unless legally permitted.

4. Auditor's Duties Regarding Divisible Profits

1. The auditor should verify the accuracy of the profit and loss account.

2. The auditor should ensure that depreciation has been properly charged.

3. The auditor should check whether previous losses have been adjusted.

4. The auditor should verify the provisions made for taxes and liabilities.

5. The auditor should ensure that dividends are declared only out of legally permitted sources.

6. The auditor should verify compliance with the Companies Act, 2013.

7. The auditor should examine the board resolution regarding the declaration of dividends.

(ii) Remuneration of auditor of banks.

1. Meaning

Remuneration of an auditor refers to the fees or payment made to the auditor for conducting an audit of a bank's financial statements and records.

The remuneration of bank auditors is determined according to the applicable provisions of banking laws, the Companies Act, 2013 and RBI guidelines.

2. Remuneration of Auditors in Different Types of Banks

1. Banking Companies

• The remuneration of auditors of banking companies is fixed according to Section 142 of the Companies Act, 2013.

• It is generally determined by the company in its general meeting or in the manner decided by the general meeting.

• The remuneration of the first auditor may be fixed by the Board of Directors.

2. Nationalised Banks

• The remuneration of auditors of nationalised banks is fixed according to applicable statutory provisions and RBI instructions.

• RBI guidelines determine the applicable audit fee structure for statutory central auditors and statutory branch auditors.

3. State Bank of India (SBI)

- The remuneration of SBI auditors is determined according to the provisions of the State Bank of India Act, 1955 and applicable rules.

4. Subsidiaries of SBI

- The remuneration of auditors of SBI subsidiaries is fixed by SBI in accordance with applicable provisions.

5. Regional Rural Banks (RRBs)

- The remuneration of auditors is determined by the concerned bank with the approval of the Central Government.

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3. Factors Considered While Fixing Remuneration

The following factors are considered while determining the remuneration of bank auditors:

1. Size of the Bank: The total assets and financial position of the bank are considered.

2. Number of Branches: The number of branches to be audited affects the audit fee.

3. Nature of Work: The scope and complexity of audit work are considered.

4. Volume of Transactions: The number and value of banking transactions influence the audit effort.

5. Time Required: The time required to complete the audit is considered.

6. Experience of Auditor: The professional experience and expertise of the auditor may be considered.

7. Audit Expenses: Necessary expenses incurred in connection with the audit are also considered.

(iii) Forecast Audit

1. Meaning of Forecast Audit

Forecast Audit refers to the examination and verification of financial forecasts and projections prepared by an organisation to assess their reasonableness, assumptions, accuracy and reliability.

A forecast is an estimate of future financial results based on expected business conditions, past performance and available information.

In simple words, forecast audit means checking whether the estimated future financial information is prepared on a reasonable basis and whether the assumptions used are appropriate.

2. Objectives of Forecast Audit

The main objectives of forecast audit are:

1. Verification of Assumptions: To examine whether the assumptions used for preparing forecasts are reasonable.

2. Accuracy of Information: To verify the accuracy of financial and non-financial information used in preparing forecasts.

3. Reliability: To ensure that forecasts are prepared using reliable data and appropriate methods.

4. Identification of Errors: To identify errors, inconsistencies and unrealistic estimates.

5. Management Planning: To help management prepare realistic budgets and future business plans.

6. Decision-Making: To provide useful information to investors, lenders and management for decision-making.

3. Procedure of Forecast Audit

1. Examination of Past Records

The auditor should examine previous years' financial statements and performance records to understand the organisation's financial position.

2. Verification of Assumptions

The auditor should check the assumptions relating to sales, production, expenses, market conditions and future growth.

3. Examination of Sales Forecast

The auditor should verify whether estimated sales are based on past sales trends, market demand and expected business conditions.

4. Verification of Expenses

The auditor should examine estimated expenses such as salaries, rent, production costs, administrative expenses and other operating costs.

5. Examination of Cash Flow Forecast

The auditor should verify estimated cash receipts and payments to assess the expected liquidity position of the organisation.

6. Verification of Financial Projections

The auditor should examine projected profit and loss accounts, balance sheets and other financial statements.

7. Review of Forecasting Methods

The auditor should examine whether appropriate methods and techniques have been used for preparing forecasts.

8. Preparation of Audit Report

After completing the examination, the auditor reports significant findings, limitations and observations regarding the forecasts.

4. Advantages of Forecast Audit

1. Helps in preparing realistic future business plans.

2. Improves the reliability of financial forecasts.

3. Helps identify unrealistic assumptions.

4. Assists management in decision-making.

5. Helps investors and lenders evaluate future financial expectations.

6. Improves financial planning and budgeting.

7. Helps identify potential financial risks.

5. Limitations of Forecast Audit

1. Future events cannot be predicted with complete accuracy.

2. Forecasts depend on assumptions that may change.

3. Unexpected market conditions may affect actual results.

4. Availability of reliable information may be limited.

5. Forecast audit cannot guarantee that projected results will be achieved.

(iv) Joint audit

1. Meaning of Joint Audit

Joint Audit refers to an audit conducted by two or more auditors jointly for the same organisation or company.

In a joint audit, all auditors work together, share responsibilities and examine the financial statements of the organisation to express an audit opinion.

In simple words, when two or more auditors are appointed to conduct the audit of one company, it is known as Joint Audit.

2. Objectives of Joint Audit

The main objectives of joint audit are:

1. To divide the audit work among different auditors.

2. To complete the audit within a specified time.

3. To improve the quality of audit work.

4. To bring different professional skills and experience together.

5. To ensure proper examination of financial records.

6. To reduce the workload of individual auditors.

7. To improve the reliability of financial statements.

3. Advantages of Joint Audit

1. Division of Work

The audit work can be divided among two or more auditors according to their expertise and convenience.

2. Time Saving

Since the work is divided among auditors, the audit can be completed within a shorter period.

3. Better Quality of Audit

Different auditors bring their knowledge, experience and professional skills, which may improve audit quality.

4. Wider Coverage

A large organisation may have several branches and departments. Joint audit helps cover a wider area of audit work.

5. Independent Opinion

Each auditor can independently examine the assigned area and contribute to the overall audit opinion.

6. Sharing of Responsibility

The workload and responsibilities are distributed among the joint auditors according to their agreed allocation of work.

7. Specialisation

Auditors with different areas of expertise can handle specialised audit activities.

4. Disadvantages of Joint Audit

1. Lack of Coordination

Differences in working methods and opinions may create coordination problems among auditors.

2. Duplication of Work

If duties are not properly divided, the same work may be performed by different auditors.

3. Difference of Opinion

Joint auditors may have different views regarding accounting treatments and audit findings.

4. Delay in Audit

Lack of proper communication and coordination may delay the completion of the audit.

5. Unclear Responsibility

If the division of work is not clearly defined, it may create confusion regarding individual responsibilities.

6. Increased Cost

Appointing more than one auditor may increase the overall cost of audit.

5. Responsibilities of Joint Auditors

1. Joint auditors should properly divide the audit work among themselves.

2. They should coordinate and communicate with each other regularly.

3. Each auditor should examine the work assigned to them carefully.

4. They should exchange important information and audit findings.

5. They should prepare a joint audit report.

6. They should take responsibility for their allocated work.

7. They should discuss and resolve differences of opinion wherever possible.

6. Joint Audit Report

• Joint auditors generally issue a common audit report.

• If all auditors agree, they express a common opinion.

• If they disagree on any matter, the dissenting auditor or auditors must express their separate opinion with reasons.

• Each joint auditor is responsible for the work allocated to them and for matters not properly examined due to their own negligence.

(v) Elements of audit report

1. Meaning of Audit Report

An audit report is a written statement prepared by an auditor after examining the books of accounts, financial statements and other relevant records of an organisation.

It expresses the auditor's opinion on whether the financial statements present a true and fair view of the financial position and performance of the organisation.

2. Elements of an Audit Report

The main elements of an audit report are as follows:

1. Title

The audit report should have an appropriate title, such as "Independent Auditor's Report", to indicate that it is prepared by an independent auditor.

2. Addressee

The report should clearly mention the person or authority to whom it is addressed, generally the shareholders or members of the company.

3. Opinion

The auditor should express an opinion on whether the financial statements give a true and fair view of the financial position and financial performance of the organisation.

4. Basis for Opinion

This section explains the basis on which the auditor has formed the opinion. It also confirms that the audit was conducted in accordance with applicable auditing standards.

5. Management's Responsibility

The report explains that management is responsible for preparing financial statements, maintaining proper accounting records and establishing appropriate internal controls.

6. Auditor's Responsibility

The auditor is responsible for examining the financial statements and obtaining reasonable assurance that they are free from material misstatement due to fraud or error.

7. Key Audit Matters

In applicable audits, the auditor communicates key audit matters, which are the matters of most significance in the audit of the financial statements.

8. Other Information

The auditor explains the responsibilities relating to other information included in the company's annual report, where applicable.

9. Report on Legal and Regulatory Requirements

The auditor reports on compliance with relevant legal and regulatory requirements, including applicable provisions of the Companies Act, 2013.

10. Auditor's Signature

The audit report must be signed by the auditor or the authorised signing partner, mentioning the firm's name where applicable.

11. Place of Signature

The report should mention the place where the audit report is signed.

12. Date of Audit Report

The report should mention the date on which the auditor signs the report after obtaining sufficient appropriate audit evidence.

3. Importance of Audit Report

1. It provides reliable information to shareholders.

2. It increases the credibility of financial statements.

3. It helps investors make financial decisions.

4. It identifies material misstatements in financial statements.

5. It improves transparency and accountability.

6. It helps assess the financial position of an organisation.