M. V. Kali Prasad suggests answers to the November 2004 CA (PE II) paper on auditing

M. V. Kali Prasad

PATENTS should be disclosed in the balance-sheet at original cost less amount amortised to date.

If patents are developed by the entity, they should be amortised over a period of 14 years in equal instalments, unless the board of directors finds a better method suitable.

If patents are acquired from another entity, the cost of purchase should be amortised over the remaining useful life of the patent.

The auditor should verify the certificate by which patent rights are registered.

He should see that they are registered in the name of the client and are the property of the client. If not, verify the assignment deed.

Where such rights are purchased, the cost or the value can be ascertained with the help of invoice or other documents. It should be seen that the cost recognition is done according to AS 26.

The auditor should see that the renewal fees are paid in time and that none is elapsed.

He should also see the patent register when such registers are maintained.

How will you vouch and/or verify the following: a) personal expenses of directors met by the company; b) preliminary expenses; and c) advances given to suppliers.

a) Personal expenses of directors met by the company acquire a lot of significance since Section 227 (1A) as well as CARO require the auditor to comment whether any expenses of a personal nature are charged to revenue unless they are payable by way of a contractual obligation.

The auditor should study the resolution of appointment as to the nature of personal expenses payable by way of a contractual operation.

The expenses paid should be checked with the supporting documents and other corroborative evidence.

The director should acknowledge the expenses as personal expenses.

The expenses should be within the limits as per the resolution passed.

The overall expenses should be studied so that the provisions of managerial remuneration are not violated.

It should be seen that proper accounting treatment has been followed and that proper account is maintained for all the expenditure paid and the due amount collected.

In addition to these, the auditor would do well to obtain an individual representation in the form of management representation, wherein the director states the total and nature of personal expenses met by the company.

b) Preliminary expenses are those incurred in connection with incorporation of a company. They consist of stamp duties, registration fees, legal costs, consultant's fees, expenses of printing of memorandum and articles, and so on.

In this context, the following should be checked:

Minutes of the first board meeting where the preliminary expenses are taken on record and the period over which they are to be written off.

The statement of preliminary expenses as presented by the promoter together with supporting documents

Vouch entries in the cashbook with bills, supporting documents and vouchers, contracts, agreements, and so on, to support the promoters' claim.

Receipt for the registration fee paid for registration of the company.

Rates of stamp required to the affixed on the memorandum of articles (MoA) and articles of association (AoA).

The preliminary expenses whether written off within 3-5 years or as decided by the board of directors.

No expenses other than those that constitute preliminary expenses are booked under this head.

c) Advances given to suppliers: It is a common business practice to pay advances to suppliers of both capital goods as well as revenue items. The auditor should, therefore, examine the following:

Terms of the purchase order.

Check the order released, its value and calculation of the amount of advance.

Vouch the payment with the receipt issued by the suppliers for the payments of advance, indicating specifically the items against which the advances are paid.

If the advance remains unadjusted as on the date of balance-sheet, obtain a confirmatory letter from the supplier for the advances lying with him.

In such a situation, it should be shown under the head current assets, loans and advances, separately from sundry debtors.

Audit subsequent transactions to see if the advance has been set off against subsequent purchases.

If there is a delay in supplies, ensure interests on such advances are claimed and allowed by the supplier.

Local bodies

DESCRIBE the key features of financial administration of local bodies.

The salient features are: a) budgetary procedures; and b) expenditure control.

Budgetary procedure: This serves a dual purpose, of financial accountability and control of expenditure. It ensures that collection and expenditure of various departments is in accordance with the limits, rules and as authorised by the legislature.

The budget exercise determines changes in levels of taxation and allocation of expenditure to various departments. There is no specific budget format and the head of accounts, which vary from one municipality, cantonment board or corporation to the other.

These budgets do not differentiate between revenue and capital items. Most of the capital transactions are covered by the head "extraordinary items". Separate funds are established for different activities such as irrigation, roads, and so on. Separate budgets are made for specific functions of the municipality, such as education, water supply, health and sanitation, and so on.

Expenditure control: In any Government there is a clear demarcation between legislature and executive. The local bodies do not provide for an independent finance officer. Legislative and executive powers are integrated in the local body, thereby making the entire system complicated. There is no provision for management information systems.

Thus, financial administration in local bodies is complicated, confusing and incomprehensive.

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(This article was published in the Business Line print edition dated March 28, 2005)
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