Code of conduct and company audit, as usual, is covered in the first two questions for 18 marks each.

The other questions have a broad spectrum, covering energy audit, tax audit, management audit, EDP audit, cost audit, and so on.

Miscellaneous topics, such as audit of share brokers, due diligence audit and audit of mutual funds, have got their share of coverage as well.

Conspicuous by its absence is a question on audit of co-operative societies.

The paper is, however, of expected standard (candidates might have a different opinion though).

A good approach would have been to attempt Questions 1, 2 and 8 which are fairly easy.

The candidates should have found the latter half of the paper a little difficult. The question on audit of banks and insurance companies would have been a good one to attempt.

Now let us take a closer look at the questions:

Q1: On company audit, much of this question is devoted to CARO (two sub-parts out of the four). These questions are of PE II or PCE standard.

The other two parts, on divisible profits and on Section 227(1A), are no threat at all.

On an overall assessment, Question 1 could have been answered by even a PE II candidate.

Q2: These questions have been were carefully composed and are likely to make the candidates think.

Q2(a): About web sites, this question needs careful thought whether communicating by emails would amount to misconduct.

Q2(b): This is a fairly simple question about a CA in practice appointed as managing director.

Q2(c): The easiest of the lot, where a CA authorises someone else to sign an audit report.

Q2(d): About fee for other services being more than audit fees, this question should have posed some problem for the candidates.

1) As an auditor how would you deal with the following?

a) L Pvt Ltd, which has an outstanding loan of Rs 50 lakh from financial institution, defaulted in repayment thereof to the extent of 50 per cent. The company holds that being a private limited company, the company’s auditors’ report order is not applicable.

Loan outstanding is more than Rs 10 lakh. CARO is applicable.

Contention of the private limited company is not justified.

The auditor has to make a comment if there are any over-dues to financial institutions.

Therefore, the auditor has to offer a comment to the effect that loans are overdue to the extent of 50 per cent.

b) In the audit of ABC Private Ltd, the auditor came across cases of payments to directors whereby expenses of a personal nature were reimbursed.

Section 227(1A) requires the auditor, among other things, to state if any expenses of the directors of a personal nature, other than those payable by way of a contractual obligation, were charged to revenue. These provisions are also applicable to a private limited company.

In the instant case, the company has reimbursed expenses of a personal nature to the directors.

Therefore, by operation of Section 227(1A), the auditor should look in to the matter if they are payable by way of a contractual obligation.

If they are payable by way of a contractual obligation, the auditor has merely to document the same and can issue an unqualified report. But if they are not payable, the auditor should suitably qualify the report.

c) The management of a limited company states that the proposed dividend does not represent a liability and, hence, no provision needs to be made. Comment.

Dividends are proposed by the board of directors. The right to declare dividends rests with the general body. Dividends once proposed by the board of directors do not become a liability until the same has been declared by the members at the annual general meeting.

Once the dividends are declared, the liability dates back to the date of the balance-sheet.

When the board proposes dividends, these dividends are out of the profits of the company for the relevant year. Declaring dividends is an adjusting event occurring after the date of the balance sheet and requiring an adjustment.

Therefore, the proposed dividends have to be provided for in the financial statements.

Proposed dividend is merely a provision. That is why the format of a balance-sheet specifically provides for proposed dividends under the head current liabilities and provisions (item 9 under provisions).

The Institute of Chartered Accountants of India (ICIA) also endorsed the same view. The company has to necessarily provide for dividends, even if the liability arises as on the date of AGM.

d) ABC Ltd to whom CARO is applicable made a public issue of 7 per cent debentures of Rs 3 crore, redeemable after five years and used the proceeds of issue for payment of sundry creditors and other current liabilities to the tune of Rs 3 crore.

Under CARO, the auditor has to report if any short-term funds were used for long-term purposes and vice-versa. If yes, he has to state the nature and amount of such utilisation.

In the given question, the company has raised long-term funds for five years by issue of debentures.

These funds were used issue for payment of sundry creditors and other current liabilities, thereby using long-term funds for short-term purposes.

Such an act by the company warrants a comment by the auditor under CARO. He should also state the nature of such utilisation as well as the amount.

The above situation calls for a comment: “During the year, the company raised long-term funds of Rs 5 crore by issue of debentures for 5 years and has utilised the same for payment of short-term purposes to the tune of Rs 3 crore to pay sundry creditors and other current liabilities.”

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