The Hindu Business Line : Same pattern, similar focus

The CA PE-II paper on auditing is not as tough as it seems. As usual, the students were given a choice of two questions, and were required to answer for 100 marks out of the 132. There is no change in the pattern of questions. In the earlier examinations, the question on government and EDP audits was divided into two parts. This time around, they form part of two different questions. Thus, the two topics account for 18 marks as against the usual 16.

The focus yet again is on company audit. In Question 1, though, the focus has shifted from auditor appointment, removal, and so on, to Sections 227 1A and 4A. A surprise, though not difficult, question is that on statutory report (Question 8). The candidates would have studied this topic for the accounts as well as corporate and other laws papers.

The queries on internal check and analytical procedures in verification of closing stock are quite difficult. The candidates might have also found the questions on vouching/verification of quoted investments and payments to subsidiaries tough. But the queries on discounted bills receivable, dishonoured and purchase returns are simple. The auditing paper is of the normal standard, expected of a professional body of auditors. The following are some of the suggested answers:

Foreign travel

As an auditor, comment on the following: Travelling expenses of Rs 2.25 lakh shown in profit and loss account of X Ltd, including a sum of Rs 1.10 lakh spent by a director on his foreign travel for the company's business accompanied by his mother for her medical treatment.

Under Section 227 (1A), the auditor has to satisfy himself that no personal expenditure of the directors or officers of the company is charged to revenue unless payable by way of a contractual obligation. The director has spent Rs 2.25 lakh on travel, including Rs 1.10 lakh on his foreign trip for the company's business for her medical treatment of his mother.

The wordings of the question seem to suggest that the Rs 1.10 lakh was spent by him for the company's business. If so, Section 227(1A) is not attracted. If the amount was spent for his mother's medical expense, the auditor would have to examine whether the expenditure is payable by the company by way of a contractual obligation and the reasonableness of the same.

CARO requirement

X Ltd, to whom the Companies (Auditor's Report) Order, 2003 is applicable, has issued 9% Debenture of Rs 5 crore, redeemable after five years and used proceeds of the issue for payment of sundry creditors and other current liabilities of Rs 2.80 crore.

CARO requires the auditor to verify if the management has disclosed the end-use of money obtained through the public issue and whether the same has been verified. The company presumably issues debentures by way of a public issue and uses the proceeds to pay off current liabilities of Rs 2.80 crore, which is only a part of the issue size. The auditor has to verify the offer document to ensure whether the offer document stated this to be a purpose of issue of debentures. The management has to disclose by way of a note to the financial statements that it has utilised Rs 2.80 crore of the Rs 5 crore for repaying current liabilities. The auditor has to verify the veracity of the same and state in the report about his findings.

If the offer document states the purpose of issue to be that of, among other things, paying off current liabilities, the auditor has to document the same and state in the report to be furnished under CARO the following:

"During the year the company made a public issue of 9% debentures for Rs 5 crore, for repaying current liabilities and the same has been utilised for the purpose."

If the offer document does not state repaying of current liabilities as one of the purposes, the auditor has to make a comment about the same under CARO.

Accounting standard

The surplus arising from sale of investment was set off against a non-recurring loss and was not disclosed separately.

AS 13 (on investments) read with AS 9 (on revenue recognition) require a company to disclose in the profit and loss account any incomes generated by sale of investments. AS 13 requires that upon any sale of investments, the difference between book value and sale price be charged to the P&L account. In the given question, the company sets off a non-recurring loss against profits arising out of the sale of investments, which is not in accordance with AS 13. Such a practice vitiates the true and fair view of the financial statements. The auditor should advise the company accordingly and require them to show this profit in the P&L account as such.

Upon refusal, the auditor should comment under Section 211(3) and clauses (a), (b) and (c) that the company has not complied with the requirement of AS 13 and that it does not have any impact on the net profit of the company.

Updating the register

The register of members of AP Ltd has not been written up-to-date and, as a result, the balances in the register do not agree with the amount of issued share capital. The auditor has to state in the audit report whether the company has maintained proper books of account in the manner prescribed by law. Unless the statutory books of account, too, also maintained up-to-date, it cannot be said that the company has maintained proper books of account in the manner as prescribed by law. In the given question, the register of members, which is a statutory register, has not been updated. Therefore, there is a difference between the books of account and the underlying records. The auditor has to have an assurance that the balances in issued capital in the financial statements have been properly evidenced.

This situation calls for a subjective qualification (AAS 28) and the auditor has to state in the audit report thus: "The company has not maintained the register of members up-to-date. Subject to this, the company has maintained proper books of account in the manner as prescribed by law insofar as it appears from our examination of such books of account."

(To be concluded)