Analysis of Audit (CA Final) Paper for May 2016 Exams

Paper Analysis / Suggested Answers / Common Mistakes By CA Ravi Taori Highlights of the paper•Generally audit paper from past 4 attempts was of 7 pages but this time it increase to 11 pages (57% increase)•Questions of around 50 marks were from PM rest of 70 marks questions were Levelof QuestionsMarksEasy61Medium22Difficult37Grand Total By CA Ravi Taori 051015202530 By CA Ravi Taori By CA Ravi Taori Management’s authorisation or encouragement to the confirming parties to respond to the auditor. Confirming parties may only be willing to respond to a confirmation request containing management’s The ability of the intended confirming party to confirm or provide the requested information (for example, individual invoice amount versus total balance).When a Response to a Positive Confirmation Request is Necessary to Obtain Sufficient Appropriate Audit Evidence In certain circumstances, the auditor may identify an assessed risk of material misstatement at the assertion level for which a response to a positive confirmation request is necessary to obtain sufficient appropriate The information available to corroborate Specific fraud risk factors, such as the risk of management override of controls, or the risk of collusion which can involve employee(s) and/or By CA Ravi Taori By CA Ravi Taori Positiveconfirmationrequest–Partyhastoindicatewhethertheyagreeordisagreewiththeinformationintherequest,ortheyhavetoprovideinformation.(anyeithercasereplyisrequested)Positiveconfirmationrequestisnecessary,alternativeauditprocedureswillnotprovidesufficientevidence.(Riskofmanagementoverridecontrols(Chequesissued/loantakenfrombank)/Riskofcollusion(PurchaseManager&Storekeeper&Supplier)/Onlyoutsideevidenceisavailable(GoodssenttoConsignee,norecordsatstores)Iftheauditordoesnotobtainsuchconfirmation,theauditorshalldeterminetheimplicationsfortheauditandtheauditor’sopinioninaccordancewithSA705 By CA Ravi Taori By CA Ravi Taori Indicatorsofnoncompliance(FromSA250)Whentheauditorbecomesawareoftheexistenceof,orinformationabout,thefollowingmatters,itmaybeanindicationofnon-compliancewithlawsandregulations:benoncompliance2-PUPATE)Paymentsforgoodsorservicesmadeotherthantotheountryfromwhichthegoodsorservicesoriginated.(NonComplianceofCustomsAct)UnusualPaymentsinash,purchasesintheformofcashiers’chequespayabletobearerortransferstonumberedbankaccounts.(Maybebribe)aymentsforunspecifiedservicesorloanstoconsultants,relatedparties,employeesorgovernmentemployees.(NonComplianceofCompanyAct)nauthorisedtransactionsorimproperlyrecordedtransactions.(SecretspaymentsagainstlawEgNoapprovalaspercompanylawetc)Purchasingatricessignificantlyaboveorbelowmarketprice.(NonComplianceofIncomeTaxAct)Salescommissionsorgent’sfeesthatappearexcessiveinrelationtothoseordinarilypaidbytheentityorinitsindustryortotheservicesactuallyreceived.(NoncomplianceofIRDARegulationsetc By CA Ravi Taori noncompliancemattersInvestigationsbyregulatoryorganisationsandgovernmentdepartmentsorpaymentoffinesorpenalties.Unusualpaymentstowardsandretainershipfees.Existenceofaninformationsystemwhichwhetherbydesignorbyaccident,toprovideadequateaudittrailorsufficientevidence.mediacomment By CA Ravi Taori By CA Ravi Taori a.ProceduretodoAuditofSummary(FromSA810)b.Assoonasauditorgetssummaryfinancialstatementheshouldseewhetheresummaryfinancialstatements“adequatelydisclosetheirsummarisednatureandidentifytheauditedfinancialstatements”c.Whetherthesummaryfinancialstatementsadequately“disclosetheappliedcriteria”d.Evaluatewhetherthesummaryfinancialstatementsare“preparedinaccordancewiththeappliedcriteria”.e.Whensummaryfinancialstatementsarenotaccompaniedbytheauditedfinancialstatements:-FSTshoulddescribefromwhomorwheretheauditedfinancialstatementsareavailableorlegalrestrictionsifany.f.Evaluatewhethertheauditedfinancialstatementsareavailabletotheintendedusersofthesummaryfinancialstatementswithoutunduedifficulty.g.Compare/Agree/Recalculateamounts&disclosuresinsummarywithauditedregularfinancialstatements.h.Whethersummarycontainsnecessaryinformationkeepinginmindpurposeofsummary(EgifsummaryFSTisusedforgoodwillvaluationthenP&Lshouldspecifyabnormalitems/nonrecurring/nonbusinessetc)anditshouldnotbemisleading(Theycannotspecifyfixedassets&investmentsorcurrentassets&fictitiousassetsetc) By CA Ravi Taori By CA Ravi Taori ConsiderationsforPlanningandPerformingAuditincaseofSpecialPurposeFramework:AsperSA800“SpecialConsiderations-AuditsofFinancialStatementsPreparedinaccordancewithSpecialPurposeFrameworks”,financialstatementspreparedinaccordancewithaspecialpurposeframeworkmaybetheonlyfinancialstatementsanentityprepares.Insuchcircumstances,thosefinancialstatementsmaybeusedbyusersotherthanthoseforwhomthefinancialreportingframeworkisdesigned.Whileplanningandperformingauditofsuchspecialpurposeframeworkbasedcompany,theauditorshouldconsiderbelowmentionedfactors:(i)Toobtainanunderstandingoftheentity’sselectionandapplicationofaccountingpolicies.Inthecaseoffinancialstatementspreparedinaccordancewiththeprovisionsofacontract,theauditorshallobtainanunderstandingofanysignificantinterpretationsofthecontractthatmanagementmadeinthepreparationofthosefinancialstatements.(ii)ComplianceofallSAsrelevanttoaudit,theauditormayjudgeitnecessarytodepartfromarelevantrequirementinanSAbyperformingalternativeauditprocedurestoachievetheaimofthatrequirement.(iii)ApplicationofsomeoftherequirementsoftheSAsinanauditofspecialpurposefinancialstatementsmayrequirespecialconsiderationbytheauditor.Forexample,inSA320,judgmentsaboutmattersthatarematerialtousersofthefinancialstatementsarebasedonaconsiderationofthecommonfinancialinformationneedsofusersasagroup.Inthecaseofanauditofspecialpurposefinancialstatements,however,thosejudgmentsarebasedonaconsiderationofthefinancialinformationneedsoftheintendedusers By CA Ravi Taori (iv)Inthecaseofspecialpurposefinancialstatements,suchasthosepreparedinaccordancewiththerequirementsofacontract,managementmayagreewiththeintendedusersonathresholdbelowwhichmisstatementsidentifiedduringtheauditwillnotbecorrectedorotherwiseadjusted.TheexistenceofsuchathresholddoesnotrelievetheauditorfromtherequirementtodeterminematerialityinaccordancewithSA320forpurposesofplanningandperformingtheauditofthespecialpurposefinancialstatements.(v)CommunicationwiththosechargedwithgovernanceinaccordancewithSAsisbasedontherelationshipbetweenthosechargedwithgovernanceandthefinancialstatementssubjecttoaudit,inparticular,whetherthosechargedwithgovernanceareresponsibleforoverseeingthepreparationofthosefinancialstatements.Inthecaseofspecialpurposefinancialstatements,thosechargedwithgovernancemaynothavesucharesponsibility By CA Ravi Taori By CA Ravi Taori theworkofamanagement’sexpert(FROMSA500)Wheninformationtobeusedasauditevidencehasbeenpreparedtheworkofaexpert,theauditorshall,totheextentnecessary,havingregardtothesignificanceofthatexpert’sworkfortheauditor’spurposes,:(a)Evaluatethecapabilitiesandobjectivityofthatexpert;(b)Obtainanoftheworkofthatexpert;and(c)Evaluatetheofthatexpert’sworkasauditevidencefortherelevantassertion.toremembertheworkofamanagement’sexpertBeforerelyingonworkdonebymanagementsexpert,checkfollowingthings(SimilartoSA620)CompetenceCapableObjectivityObtainrequiredunderstandingofthefield&expertsworkAppropriatenessofexpertswork(Dataused/Methodsused/Assumptions/ProfessionalStandards/Legalrequirements/whetherexperthasareaofspecialtyrelevantfor By CA Ravi Taori Total Limit 2 x 20 = 40Out of 7 only one will be counted, Private Company Having paid up capital more than 100 crores By CA Ravi Taori Section141(3)eilingLimita)IfCAisinfulltimeemploymenthislimitwillbeZERO.b)Ifheisinparttimepractice,thenalsolimitisZEROc)Limitoffirmwillbe20multipliedbynumberofpartnersd)IfCAispartnerinmultiplefirmsthen,totalauditsinhisnameshouldnotexceedlimitof20.e)LimitofoneCAcannotbeusedbyanotherCA,numberofsignaturesofeachCAcannotexceed20.f)ExemptionswhilecountingOPC/DormantCo/SmallCo/PvtCopaidupcapitalbelow100crores.FurtherthereareICAIGuidelines2008,whichsaysceilinglimitshouldbe30includingalltypesofcompanies.Soifwetakecombinedinterpretation,thenCAcando20auditsexcluding4typesofcompaniesspecifiedaboveand30companiesincluding4typescompaniesspecified.Butthispointcanbegivenattheendasadditionalknowledge.Solveproblemsasperlimitof20only,unlessspecificallymentionedaboutguidelines By CA Ravi Taori GeneralStepsintheConductofRBA–RBAconsistsoffourmainphasesstartingwiththeidentificationandprioritizationofrisks,tothedeterminationofresidualrisk,reductionofresidualrisktoacceptablelevelandthereportingtoauditeeofauditresults.Theseareachievedthroughthefollowing:--Understandauditeeoperationstoidentifyandprioritizerisks--Assessauditeemanagementstrategiesandcontrolstodetermineresidualauditrisk--Manageresidualrisktoreduceittoacceptablelevel--InformauditeeofauditresultsthroughappropriatereportUnderstandingauditeeoperationsinvolvesprocessesforreviewingandunderstandingtheauditedorganization’sriskmanagementprocessesforitsstrategies,frameworkofoperations,operationalperformanceandinformationprocessframework,inordertoidentifyandprioritizetheerrorandfraudrisksthatimpacttheauditoffinancialstatements.Theenvironmentinwhichtheauditeeoperates,theinformationrequiredtomonitorchangesintheenvironment,andtheprocessoractivitiesintegraltotheauditedentity’ssuccessinmeetingitsobjectivesarethekeyfactorstoanunderstandingofagencyrisks.Likewise,aperformancereviewoftheauditedentity’sdeliveryofservicebycomparingexpectationsagainstactualresultsmayalsoaidinunderstandingagencyoperations By CA Ravi Taori Assessmentofmanagementriskstrategiesandcontrolsisthedeterminationastohowcontrolswithintheauditeearedesigned.Theroleofinternalauditinpromotingasoundaccountingsystemandinternalcontrolisrecognized,thustheSAIshouldevaluatetheeffectivenessofinternalaudittodeterminetheextenttowhichreliancecanbeplaceduponitintheconductofsubstantivetests.Managementofresidualriskrequiresthedesignandexecutionofariskreductionapproachthatisefficientandeffectivetobringdownresidualauditrisktoanacceptablelevel.Thisincludesthedesignandexecutionofnecessaryauditproceduresandsubstantivetestingtoobtainevidenceinsupportoftransactionsandbalances.Moreresourcesshouldbeallocatedtoareasofhighauditrisks,whichwereearlierknownthroughtheanalyticalproceduresundertaken.Theresultsofauditshallbecommunicatedbytheauditortotheauditedentity.Theauditormustimmediatelycommunicatetotheauditeereportableconditionsthathavebeenobservedevenbeforecompletionoftheaudit,suchasweaknessesintheinternalcontrolsystem,deficienciesinthedesignandoperationofinternalcontrolsthataffecttheorganization’sabilitytorecord,process,summarizeandreportfinancialdata By CA Ravi Taori PublicCompanyAccountingOversightBoard(PCAOB)Establishedinanindependentprivateboard,toregulatetheaccountingprofession,tobedominatedbyexecutivesandexpertsfromoutsidetheaccountingprofession(aself-regulatorybodysofar).ThePCAOBrequiresthePublicAccountingFirmstoregisterwiththeBoardandtofollowcertainregulationsforauditofPublicCompanies.AuditingStandardsofthePublicCompanyAccountingOversightBoard(PCAOB)hasthefollowingkeyrequirements:♦Thedesignofcontrols-relevantassertionsrelatedtoallsignificantaccountsanddisclosuresinthefinancialstatements;♦Informationabouthowsignificanttransactionsareinitiated,authorized,supported,processed,andreported;♦Enoughinformationabouttheflowoftransactionstoidentifywherematerialmisstatementsduetoerrororfraudcouldoccur;♦Controlsdesignedtopreventordetectfraud,includingwhoperformsthecontrolsandtheregulatedsegregationofduties;♦Controlsovertheperiod-endfinancialreportingprocess;♦Controlsoversafeguardingofassets;♦Theresultsofmanagement'stestingandevaluation By CA Ravi Taori By CA Ravi Taori &DisclosureofProspectiveFinancialInformation(FROMSAE3400)C-DRAMATassumptionsareadequatelydisclosedinthenotestotheprospectivefinancialinformation.Itneeds clearwhetherassumptionsrepresentmanagement’sbest-estimatesorarehypotheticaland, aremadeinthatarematerialandaresubjecttoahighdegreeofuncertainty,thisuncertaintyandthesensitivityofresultsneedstobeadequatelydisclosed;(EgFuelpriceshasmaterialimpactonaviation industry,furthertheremaybehighdegreeofuncertaintyregardingthesamesoitshould described) (a)“Tdateasofwhichtheprospectivefinancialinformationwasprepared”isdisclosed.Managementneedstoconfirmthattheassumptionsareappropriateasofthisdate,eventhoughtheunderlyinghavebeenaccumulatedoveraperiodoftime;(EgDateisveryimportantaschangingeventsandinformationcanhavebigimpactonPFIandusercanunderstandeventstillwhichdatearetakenintoconsideration) (b)Theccountingpoliciesareclearlydisclosedinthenotestotheprospectivefinancialinformation;(Egiseasytounderstandcalculations) (c)isanychangeintheaccountingpolicyoftheentityfromthatdisclosedinthemostrecenthistoricalstatementsandwhetherreasonforthechangeandtheeffectofsuchchangeoninformationhasbeenadequatelydisclosed.(EgUsersshouldbeawareaboutchangesimpactonresults) (d)Theofestablishingpointsinarangeisclearlyindicatedandtherangeisnotselectedinamisleadingmannerwhenresultsshownintheprospectivefinancialinformationareexpressedintermsofarange;and(EgMaximum/MinimumofpastareusedorDeviationof5-10%adhocistakenetc. By CA Ravi Taori Appointment is not valid.It is government company and right to By CA Ravi Taori By CA Ravi Taori By CA Ravi Taori InternalAuditProgrammeforP&M/Tools/DiesCheckwhetherinternalcontrolcoversfollowingthings(FlowofanswerRegister-Purchase-Sale-OtherPoints)SeparateRegisterforHiredAssets,OwnedAssets,JointlyOwnedAssets/Procedureforpurchasingnewassets(WrittenAuthority,WorkOrder,VouchersEtc)/IndependentCheckingofPurchasesbyauthorisedperson/Recordingofmovementsofassetsonvarioussitesafterpurchase/Authorisationbeforedeclaringassetobsolete/scrapping&selling/Afterproceduresproperrecordingofalladditions&disposals/PeriodicInspection/Reconcilingregisterwithphysicalinspection&nominalledger(generalledger)Regularreviewofsecurityarrangements&insurancecover(Register)ReviewofAssetRegister(Date/Cost/Location/Depreciationetc)CodeRegister(DistinctCodeforeachassetoridentification&maintenance)(Purchase)CostRegister&JournalRegister(toverifypurchases)MovementRegister(Properrecodingformovableassetstoensurephysicalverification& By CA Ravi Taori (Sale)AssetDisposalRegister(AfterproperAdvice/Authorisation/SaleRecords)(Others)ReviewofMaintenanceActivity(PerformanceofMaintenanceDepartment)SparePartRegister(AvailabilityofSpareParts)ReviewofObsolescenceReviewofR&D(Relevanceforoperations/maintenance/preventionofearlyobsolescence) By CA Ravi Taori By CA Ravi Taori Section 123 & Clause 80 of Table FDividendonce declared becomes debt, as it is not yet declared in By CA Ravi Taori By CA Ravi Taori ExplainSection34:-ifprospectusincludesanystatementuntrue(fakesales)ormisleading(otherincomeaddedtosales)theneverypersonwhoauthorises(auditorisoneofthem)issueofprospectusisliableU/s447Protectionifprovedthatitisimmaterialorauthoriserhadreasonablegroundtobelievethatinformationistrue¬misleading.ExplainSec147:-NoCompliancebyCompany(139-146)Min25,000toMax5,00,000NoCompliancebyofficer(139-146)Min10,000toMax1lakhsNoCompliancebyAuditor(139,143,144,145)Min25,000toMax5,00,000|IffraudMin1,00,000Max25,00,000+Imprisonmentof1yearorboth|Mayhavetorefundfees|Partytopaydamages|ResponsibilityJoint&Severalonallpartners|GovtcansetupauthorityforrecoveryExplainSec447:-ImprisonmentMin6months(ifpublicinterestisinvolvedthenminimum3years)Max10years|Fineupto3timesamountExplainSec448:-Ifanyreturn,report,certificate,financialstatement,prospectus,etcundercompanyact2013byanyperson(includesauditor)makestatementwhichisfalseoromissionwhichismaterialwillbeliableu/s By CA Ravi Taori By CA Ravi Taori CARO16Clause7(SameclauseasperCARO15)1stCommentRegularityindepositingundisputedstatutoryduesincluding(PF/ESIC/DirectTaxes/IndirectTaxesetc2ndCommentArrearsofoutstandingstatutoryduesoutstandingmorethan6monthsasonbalancesheetdate3rdCommentDetailsoftaxesnotbeendepositedonaccountofanydispute,specifyamount& By CA Ravi Taori By CA Ravi Taori Factors to be considered while planning the Performance Audit: While planning a performance audit of Sugar Industry, the auditors should take care of certain factors which are listed below:(x) to prepare a written audit plan.(ix) to provide sufficient staff and other resources to do the audit.(vi) to identify significant findings and recommendations from previous audits that could affect the current audit objectives. Auditors should determine if management has corrected the conditions causing those findings and implemented thoserecommendations. (Powers Cuts & Breakdowns)(i) to consider significance and the needs of potential users of the audit report. (Capacity Utilization / Cost of Production)(ii) to obtain an understanding of the program to be audited. (MANREGA / Disinvestment of companies)(iii) to consider legal and regulatory requirements. (Central / State rules for production)(iv) to consider management controls. (Internal Control System)(v) to identify criteria needed to evaluate matters subject to audit. (Other States)(vii) to identify potential sources of data that could be used as audit evidence and consider the validity and reliability of these data, including data collected by the audited entity, data generated by the auditors, or data provided by third parties.(Collector Offices / Industry Association)(viii) to consider whether the work of other auditors and experts may be used to satisfy some of the auditors' objectives. (Excise By CA Ravi Taori It is a fixed asset.It should be treated as intangible asset.AS 26 is applicable.Maximum useful life can be 10 years, if there is persuasive evidence it can be more also. But it should be finite.Motilal Oswal writes- By CA Ravi Taori By CA Ravi Taori First Schedule, Part I, Clause 2 is applicable.Sharing can be done only with persons prescribed in clause.Article is not covered in the list, hence it is not allowed. By CA Ravi Taori By CA Ravi Taori First Schedule, Part I, Clause 2 & Clause 3 are applicable.Sharing can be done only with persons prescribed in clause.Advocate is covered in the list, hence it is allowed. By CA Ravi Taori By CA Ravi Taori First Schedule, Part I, Clause 11 is applicable.Private Tutorship is covered in general permission, so prior approval is not required.So it is not a professional misconduct, but if number of hours exceed 25 hours then CA will be considered to be in By CA Ravi Taori By CA Ravi Taori Second Schedule, Part II, Clause 3If false information is sent to ICAI / Committees / QRB etcthen guilty of professional misconduct. By CA Ravi Taori AS 15 is applicable for accounting of employee benefits. PF on leave encashment is also a employee benefit. It is long term employee benefit. Provision for leave encashment means expected cash outflow in leave encashment in future, they will have to pay PF contribution also (even this is expected). By CA Ravi Taori As per Sec 64 VB of Insurance Act 1938, date of policy can start only after receiving premium through cash or cheque. Policy can never start from back dated time. So in this case policy should start from 5thApril and not 25thMarch so accident of 31stMarch will not be covered by policy. Many companies take deposit from big clients to resolve this By CA Ravi Taori It should be reported under Clause 28 of Form CD. By CA Ravi Taori Form 3CD Clause 4 requires that registration number under indirect taxes to be disclosed. So we will have to By CA Ravi Taori By CA Ravi Taori