The Hindu Business Line : The big auditing challenge

a) A company forfeits shares for non payment of call amounts. Directors propose dividend, among others, out of the balance to the credit of shares forfeited account. (4 marks)

b) Mr Krishna is the auditor of Dowell Private Ltd, which is a family concern. The same family floats another private limited company, Welldone. Mr Krishna is appointed as a director of Welldone. (5 marks)

c) Mr Sharma practices in his individual capacity. In addition to it, he has three partnerships with three different individuals. He carries out all the 75 audits of these four firms put together and wants to sign all the 75 audit reports. (5 marks)

d) A company appoints three firms as their joint auditors. One of the firms resigns as auditor of the company. Advise the company. (4 marks)

Answers: a) Dividends can be paid put of: i) current years profits, ii) accumulated profits, iii) balance to the credit of free revenue reserves, and iv) out of capital profits subject to the conditions that there is provision to the effect in Articles of Association and that the capital profit is realised in cash.

Shares forfeited account does not amount to capital profits. Hence, dividends cannot be paid out of this account.

b) Section 226(3) prohibits a director from being appointed as the auditor of that company. In this case, though Mr Krishna is a director of Welldone, he is advised to give up the audit of Dowell as a self-regulatory measure.

Though he is not a director of Dowell, he is the director of another company along with the same directors of Dowell. There is an impairment of independence.

c) Any partner of a firm can sign the audit report for and on behalf of the firm. Since Mr Sharma is associated with three firms as a partner, he is within his right to sign all the audit reports of all the firms. The ceiling of the number of audits does not mean that he can not sign more than 20 audit reports.

d) When one of the joint auditors resigns, the board may request the remaining auditors to continue the audit on such revised terms as may be acceptable to the remaining joint auditors.

It is not necessary to appoint another joint auditor immediately.

Situation analysis

Q2: Examine if the following situations involve professional misconduct:

1) A chartered accountant appoints the son of his friend as a software technician of a company of which he is the auditor. After getting the salary, this boy gifts the chartered accountant a laptop, which he accepts. (5 marks)

Code of conduct restricts a member from accepting a share or a percentage of remuneration of others.

Here, the member was offered a gift by the son of his friend by way of a gesture and not as a percentage of the salary. Hence, there is no misconduct.

2) A chartered accountant accepts the position as auditor of a company, of which his brother was the previous auditor and has resigned to join the company as a director. (4 marks)

By a recent amendment, the ICAI has restricted the members from accepting audit assignments of those entities where the relative of the member is in a key position or holds substantial interest. Since his brother is on the board of directors of the company, the member cannot take up the position as auditor of the company and he is liable to professional misconduct.

3) A chartered accountant runs a tax column in a newspaper. At the end of his column, it is stated: “Mr XYZ is a chartered accountant in practice and represents M/s. XYZ Associates, Chartered Accountants. He can be contacted at the email id…” (5 marks)

By giving the name of the firm and the email, the member will be pulled up for professional misconduct, that is, for soliciting business and resorting to means not open to the members.

4) A credit card company writes to the Institute that Mr CA has utilised the card and has not been paying the card dues, which are now over drawn to Rs 5 lakh. (4 marks)

The term “other misconduct” is not defined. It is expected of every member of the ICAI to conduct himself in the manner most befitting the profession. In the given case, the ICAI should look in to the matter and if, after such examinations as the disciplinary committee may deem fit, the committee is of the opinion that the member is in default, he would be liable for other misconduct.

Shareholder interest

Q3(a) Section 227 (1A) requires the auditor to ensure that all the transactions represented by merely book entries are not prejudicial to the interests of the company or the shareholders. How do you proceed? (6 marks)

b) CARO requires the auditor to state whether there are any undisputed taxes remaining unpaid for a period exceeding six months. What points are to be considered? (5 marks)

c) What are the provisions of Section 274 (1)(g) regarding disqualification of directors? (5 marks)

Q4(a) What factors are to be considered to decide if any of the items under Section 43B is to be disallowed while carrying out tax audit? (6 marks)

b) What are the consequences if tax audit report is not obtained? (5 marks)

c) What do you mean by hit or take orders? (5 marks)

Q5(a) Peer review is a handholding exercise — comment. (8 marks).

b) What points do you look into while carrying out financial due diligence audit of a company? (8 marks)

Q6(a) What is the difference between operations audit and internal audit? (6 marks)

b) How is the auditor of State Bank of India appointed? (5 marks)

c) How do you audit claims under reinsurance? (5 marks)

Q7(a) What are the circumstances under which special audit is carried out? Who can be appointed? (6 marks)

b) What are the provisions for cost audit under the Companies Act? (5 marks)

c) What is Computer Aided Audit Techniques? (5 marks)

Q8: Write short notes on any four of the following: a) data warehouse; b) concurrent audit; c) flash report; d) retail method; and e) tolerable error. (4x4 = 16 marks)