The Hindu Business Line : Audit your level of preparedness

(c) A company proposes to produce records of all its branches at the head-office itself and, therefore, suggests that the auditor need not visit the branches. Consequently, the company requests the auditor to reduce the audit fees. (5)

(d) A company in which a private sector company carrying on general insurance business held 29 per cent of the subscribed capital appoints an auditor with 80 per cent of the shareholders voting in favour of the appointment. (4)

Q2: How do you react in the following situations:

(i) A company appoints X as its auditor and his father as its internal auditor. (4)

(ii) The auditor refers a technical matter to the chief engineer of the company and bases his opinion on the report of this expert. (5)

(iii) The auditor observes a fraud perpetuated by a director of the company which is made good. The auditor insists on mentioning this fraud in his audit report. (4)

(iv) The company requires the auditor to route all the letters seeking confirmations from sundry debtors through the company. (5)

Q(3)(a): Discuss the provisions of law regarding appointment of branch auditors. (8)

b) What are the reporting requirements of CARO regarding fixed assets? (4)

c) Discuss the provisions of the law on auditor’s lien. (4)

Q4: How do you vouch/verify the following: (a) work in progress; (b) advertisement; (c) audit fees; and (d) foreign travel. (4x4 =16)

Q(5)(a): Discuss the requirements of AAS (Auditing and Assurance Standards) 28 on audit report. (10) b) What is the scope of audit? How and by whom is it decided? (6)

Q(6)(a): What special points do you consider in the audit of a leasing company? (10)

b) How do you audit issue of shares for consideration other than cash? (6)

Q(7)(a): How is the audit of stores and stocks carried out? (6)

b) What is audit through the computer and what difficulties do you foresee? (5)

c) What are computer aided audit techniques? (5)

Q8: Write short notes on the following: (a) test audit; b) audit trail; c) retail method; d) compliance procedures. (4x4 = 16)

Solution

1(a): A branch auditor should possess all the qualifications and suffers all the disqualifications of a company auditor.

The law provides that a person eligible to audit companies in the foreign country can be appointed for audit of branches in foreign countries.

There is no legal restriction for appointing an Indian chartered accountant as an auditor of foreign branch.

In the given question, the company proposes to appoint a chartered accountant practising in India as auditor of its foreign branch.

Subject to the disqualifications under Section 226, the company can do so.

1(b): The board of directors has to be satisfied that the circumstances of the company warrant interim dividend.

If the directors pay interim dividend and the payment is not justified, they would be liable to make good the entire amount so paid, even if they have to take it from their personal resources.

But if the loss is due to a natural calamity and an event occurring after paying the interim dividend, the clause does not apply.

In the given question, the company reports loss at the end of the year, therefore: a) if the indications of loss were existent as at the time of declaring interim dividend, the board would be liable to make good the entire amount of interim dividend.

b) if the loss is unforeseen and the directors have bona fide belief that the company would not have losses, they are not liable.

1(c): Company law gives unrestricted right to the auditor to visit branches and to have access to accounts and records of the company.

AAS 2 arms the auditor with a right to decide the nature, extent and timing of work to be carried out by the auditor.

The auditor is independent to decide on the nature, extent and timing of audit procedures to be carried out.

There is nothing wrong in the company proposing to produce all the records at the head-office for the auditor.

The auditor may consider the proposal and decide whether or not to accept the proposal in the light of other evidence available with him. If he wishes to visit the branch for the purposes of his audit, the company cannot restrict him. The auditor may also decide to accept the proposal in the light of his past experience.

Audit fee is normally fixed at the time of appointment. The board may be authorised to fix the remuneration at a later date.

By producing the books at the head-office, the auditor may be saving his expenditure, which is anyway reimbursed by the company.

Liability of the auditor is not proportionate to the audit fee.

He continues to be liable for the audit, irrespective of whether or not he visits the branches.

Therefore, the auditor may as well decide upon the reduction of fees.

Thus, the auditor is independent to decide whether or not to accept the proposals. He may accept any, either or none of the proposals.

1(d): A company, in which any other company (irrespective of a public sector or private sector company) carrying on general insurance business holds not less than 25 per cent of the subscribed capital, has to appoint the auditor by passing a special resolution.

In the given case, the company appoints the auditor by an 80 per cent majority.

This is only one of the four conditions to constitute a special resolution, others being: i) mention in the notice of meeting that the resolution shall be passed as a special resolution; ii) a special notice of 14 days; and iii) explanatory note.
Therefore, the appointment will be valid only if all the above conditions are fulfilled. Failure to fulfil any of them would render the appointment invalid and Section 224(3) becomes operative.

(2)(i): An auditor is an independent person. In the course of his audit, he is entitled to rely upon the internal auditor (AAS7). There is no legal restriction of a relative of the internal auditor to be appointed as the statutory auditor.

But the auditor has to consider the impairment of his independence if he accepts the appointment where his relative is involved.

Here, the father of the statutory auditor is appointed as the internal auditor. Such a situation should be carefully evaluated by the auditor before accepting the assignment.

There is no legal restriction, but self-regulatory measures suggest that he should not accept the assignment.

(2)(ii): AAS 9 permits the auditor to refer to an expert in those areas where he does not have knowledge.

The expert should be selected based on experience, integrity, skill and competence. There is no restriction for an employee of the company from being taken as an expert, provided he is properly evaluated by the auditor.

(2)(iii): AAS 1 states confidentiality as one of the basic concepts. An auditor cannot divulge any information of a confidential nature to a third party without specific authority unless he is legally or professionally required so to do.

AAS 4 on frauds and errors requires the auditor to bring it to the notice of a higher authority if he comes across as a fraud. If the loss is made good, he need not report the fraud.

But if the loss is perpetuated by the directors, he is duty bound to bring it to the notice of the shareholders, no matter whether or not the loss is made good.

Since there is a professional requirement to comply with AAS4, the auditor can bring it to the notice of the shareholders.

But audit report, being a public document, the auditor should exercise caution whether to include it in the report. He may as well seek a legal advice about the wording of the report.

2(iv): AAS 30, dealing with external confirmations, leaves it to the judgment of the auditor to decide upon the matters on which he seeks external confirmations and the method of doing it.

Since the company has business dealings with the debtors, it might serve a good cause to route the letters seeking confirmation through the company.

The auditor has to take an independent decision in the light of his past experience and other information available with him. And may decide accordingly.

More Stories on : Auditing | Education

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Audit your level of preparedness

No room for misplaced compassion in labour cases, says apex court

NRI remittances invested in shares

Sensex springs surprises

From marketing to software

Psychometric tests minimise human bias in selection

Just Do IT

Number Crunch

Taking stock of retail

Principled life leads to success

Equity in education

Battle over tax collection