UPSC 10 Years Answers - Commerce 2009-2018

UPSC 10 Year Answers

Auditing Related - Modified as per 2019 Prevailing Law and Guidance

2009

Question: Explain the audit procedure for conducting the audit of a NGO. 20 Marks

Answer:

Audit Procedure for Conducting the Audit of Non-Governmental Organisation : NGO’s can be defined as non-profit making organisations which raise funds from members, donors or contributors apart from receiving donation of time, energy and skills for achieving their social objectives. Non-Governmental Organisations are generally incorporated as societies under the Societies Registration, Act, 1860 or as a trust under the India Trust Act, 1882, or under any other law corresponding to these Acts enforced in any part of India. NGO's can also be incorporated as a company under section 25 of the Companies Act, 1956. While planning the audit of a Non-Governmental Organisation (NGO), the auditor may concentrate on the following; 

(i) Knowledge of the NGO’s work, its mission and vision, areas of operations and environment in which it operate. 

(ii) Reviewing the legal form of the organisation and its Memorandum of Association, Articles of Association, rules and Regulations. 

(iii) Reviewing the NGO’s Organisation chart, Financial and Administrative Manuals, Project and Programme Guidelines, Funding Agencies Requirements and Formats, budgetary policies, if any. 

(iv) Examination of minutes of the Board/Managing Committee/Governing Body/Management and Committees thereof to ascertain the impact of any decisions on the financial records. 

(v) Study the accounting system, procedures, internal controls and internal checks existing for the NGO and verify their applicability. 

The audit programme should include in a sequential order all assets, liabilities, income and expenditure ensuring that no material is omitted:

(i) Corpus fund: The contributions/grants received towards corpus are vouched with reference to the letters from the donor(s). The interest income is checked with investment Register and physical investments in hand. 

(ii) Reserves: Vouch transfers from projects/programmes with donor’s letters and board resolutions of NGO. Also check transfers and adjustments made during the year. 

(iii) Ear-marked Funds: Check requirements of donors’ institutions, board resolution of NGO, rules and regulations of the schemes of the ear-marked funds. 

(iv) Project/Agency Balances: Vouch disbursements and expenditures as per agreements with donors for each of the balances. 

(v) Loans: Vouch loans with loan agreements receipt counter –foil issued. 

(vi) Fixed Assets: Vouch all acquisitions/sale or disposal of assets including depreciation and the authorisations for the same. Also check donor’s letters/agreements for the grants. For immovable property, check title, etc. 

(vii) Investments: Check Investment Register and the investments physically ensuring that investments are in the name of the NGO. Verify further investments and dis-investments for approval by the appropriate authority and reference in the bank accounts for the principal amount and interest.

(viii) Cash in Hand: Physically verify the cash in hand and imprest balance, at the close of the year and whether it tallies with the books of accounts. 

(ix) Bank Balance: Check the bank reconciliation statements and ascertain details for old outstanding and unadjusted amounts. 

(x) Stock in Hand: Verify stock in hand and obtain certificate from the management for the quantities and valuation of the same. 

(xi) Programme and Project Expenses : Verify agreement with donor/contributor (s) supporting the particular programme or project to ascertain the conditions with respect to undertaking the programme/project and accordingly, in the case of programmes/projects involving contracts, ensure that income tax is deducted, deposited and returns filed and verify the terms of the contract. 

(xii) Establishment Expenses: Verify that provident fund, life insurance and their administrative charges are deducted, contributed and deposited within the prescribed time. Also check other office and administrative expenses such as postage, stationery, travelling, etc. 

The receipt of income of NGO may be checked on the following lines: 

(i) Contribution and Grants for projects and programmes: Check agreements with donors and grants letters to ensure that funds received have been accounted for. Check that all foreign contribution receipts are deposited in the foreign contribution bank account as notified under the Foreign Contribution (Regulation) Act, 1976. 

(ii) Receipts from Fund arising programmes: Verify in detail the internal control system and ascertain who are the persons responsible for collection of funds and mode of receipt. Ensure that collections are counted and deposited in the bank daily. 

(iii) Membership Fees: Check fees received with membership register; ensure proper classification is made between entrance and annual fees and life membership fees. Reconcile fees received with fees to be received during the year. 

(iv) Subscription: Check with subscription register and receipts issued. Reconcile subscription received with printing and dispatch of corresponding magazine/circulars/periodicals. Check the receipts with subscription rate schedule. 

(v) Interest and Dividends: Check the interest and dividends received and receivable with investments held during the year.

2010

Question

In DJA Company Limited, two public financial institutions - Life insurance corporation of India and Industrial development Bank of India Hold 20% and 40% of the paid up share capital respoectively. The company at its annual genereal meeting passed an ordinary resolution appointing X as an auditor. Representatives of industrial development bank of India remained absent in the meeting. A group of members of the company objects to the appointment of X as an auditor of the company on the grounds of violation of provision of Companies act.

Examine the validity of X as an auditor of the company and state whether contention of the members shall be tenable. 20 Marks

Answer

2011

What is a Qualified Audit Report? Prepare a qualified audit report highlighting atleast three qualification. 25 Marks

Answer:

A qualified report is one in which the auditor concludes that most matters have been dealt with adequately, except for a few issues. An auditor’s report is qualified when there is either a limitation of scope in the auditor’s work, or when there is a disagreement with management regarding application, acceptability or adequacy of accounting policies. For auditors an issue must be material or financially worth consideration to qualify a report. The issue should not be pervasive, that is, the issue should not misrepresent the factual financial position. If issues are material and pervasive, the auditor issues a disclaimer or adverse opinion. A qualified audit report does not mean that your business is suffering, and it doesn't mean that your financial statement isn't transparent. It merely reflects the auditor’s inability to give a clean report.

Qualified audit report

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF ABC COMPANY LIMITED 

Report on the Standalone Financial Statements

We have audited the accompanying (Standalone) financial statements of ABC COMPANY LIMITED (“the Company”) which comprise the Balance Sheet as at March 31, 2017, the Statement of Profit and Loss, Cash Flow Statement for the year then ended, and a summary of significant accounting policies and other explanatory information. 

Management’s Responsibility for the (Standalone) Financial Statements 

The Company’s Board of Directors is responsible for the matters stated in Section 134(5) of the Companies Act, 2013 (“the Act”) with respect to the preparation of these (Standalone) financial statements that give a true and fair view of the financial position, financial performance and cash flows of the Company in accordance with the accounting principles generally accepted in India, including the Accounting Standards specified under Section 133 of the Act, read with Rule 7 of the Companies (Accounts) Rules, 2014. This responsibility also includes maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding the assets of the Company and for preventing and detecting frauds and other irregularities; selection and application of appropriate accounting policies; making judgments and estimates that are reasonable and prudent; and design, implementation and maintenance of adequate internal financial controls, that were operating effectively for ensuring the accuracy and completeness of the accounting records, relevant to the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error. 

Auditor’s Responsibility 

Our responsibility is to express an opinion on these (Standalone) financial statements based on our audit. We have taken into account the provisions of the Act, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of the Act and the Rules made thereunder. We conducted our audit in accordance with the Standards on Auditing specified under Section 143(10) of the Act. 

Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. 

An audit involves performing procedures to obtain audit evidence about the amounts and the disclosures in the financial statements. 

The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial

- Where the Company does not have any requirement to prepare consolidated financial statements under the Companies Act 2013, in the auditor’s report, the term “Standalone financial statements”, wherever appearing, would be replaced by the term “financial statements”. 

In making those risk assessments, the auditor considers internal financial control relevant to the Company’s preparation of the financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on whether the Company has in place an adequate internal financial controls system over financial reporting and the operating effectiveness of such controls. 

An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of the accounting estimates made by the Company’s Directors, as well as evaluating the overall presentation of the financial statements. 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion on the standalone financial statements. 

Basis for Qualified Opinion 

1. The Company’s inventories are carried in the Balance Sheet at Rs. XXX (As at 31st March 2017: Rs. YYY). The Management has not stated the inventories at the lower of cost and net realisable value but has stated them solely at cost, which constitutes a departure from the Accounting Standard 2 “Valuation of Inventories”. The Company’s records indicate that had the Management stated the inventories at the lower of cost and net realisable value, an amount of Rs. XXX (As at 31st March 2017: Rs. YYY) would have been required to write the inventories down to their net realisable value. Accordingly, cost of sales would have been increased by Rs. XXX , and income tax, profit for the year and shareholders’ funds would have been reduced by Rs. X, Rs. XX and Rs. XXX, respectively. 

2. Included in debtors shown on the balance sheet is an amount of XXXX due from a debtor which has ceased trading. The Company has no security for this debt. On the basis that no security has been obtained and no cash has been received on the debt, in our opinion the Company should make a full provision for impairment of XXXXX, reducing profit before taxation for the year and net assets at Year End by that amount.

3. Rs. XXXXX of the Company's recorded turnover comprises cash sales, over which there was no system of internal control on which we could rely for the purpose of our audit. There were no other satisfactory audit procedures that we could adopt to satisfy ourselves that the recorded turnover was free from material misstatements.

Qualified Opinion 

In our opinion and to the best of our information and according to the explanations given to us, except for the effects of the matter described in the Basis for Qualified Opinion paragraph above, the aforesaid standalone financial statements give the information required by the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India, of the state of affairs of the Company as at 31st March, 20XX, and its profit/loss and its cash flows for the year ended on that date. Other Matter

We did not audit the financial statements/information of ________(number) branches included in the standalone financial statements of the Company whose financial statements / financial information reflect total assets of Rs.______ as at 31st March, 20XX and total revenues of Rs._______ for the year ended on that date, as considered in the standalone financial statements. 

The financial statements/information of these branches have been audited by the branch auditors whose reports have been furnished to us, and our opinion in so far as it relates to the amounts and disclosures included in respect of these branches, is based solely on the report of such branch auditors. Our opinion is not qualified in respect of this matter. 

For and on behalf of XYZ & Co Chartered Accountants 

Firm’s registration number: XXXXXX

CA XYZ 

Partner Membership number: XXXXX

2012

Question:

"To Arrive at a comprehensive opinion, the auditor reviews evidence that may be classified into three major groups." What are these groups and how do you relate the components of the groups to the purposes of the audit ? 20 Marks

Answer:

2013

Question:

Audit procedures to detect cash defalcations. 10 Marks

Answer:




Question:

"An Auditor expresses an opionion on company's financial statements taken as a whole, no on individual items on the statements." Explain the above statement with examples. 10 Marks

Answer:





Question:

How should an auditor evaluate cost of gathering evidences for purpose of audit?

Answer:




2014

Question:

What are the main provisions of companies act, 2013 with respect to the audit related to dividends? 10 Marks

Answer:






2015

Question:

What are the objectives and functions of auditing and assurance standards board (AASB)? Explain.

Answer:






Question:

What is the need and imporance of sampling in audit? Briefly outline the analytical procedures to be adopted while conducting audit. 15 Marks


2016

Question

"Audit of dividible profits enables the stakeholders to judge the philosophy of majority shareholders." Comment. 10 Marks

Answer
Question

An NGO operating in Delhi had collected large scale donations for flood victims. The donation so collected were sent to different NGOs operating in Bihar for relief operations. The NGO operating in Delhi has appointed you to audit its accounts for the year in which it collected and remitted donations for flood victims. 

Draft a programme for audit of receipts of donations and remittance of the collected amount to different NGOs. 

Mention five points each, peculiar to the situation, which you would like to incorporate in your audit programme for audit of said receipts and remittances of donations.


Question

Enumerate the steps to be taken by an auditor before declaring an account as Non performing asset in a bank audit.

2017

Question

Verification of advances is an important function of an auditor of a Bank. Explian

Answer:

Lending constitutes a major activity of a bank besides the investment function. The core business of banks is accepting deposits for onward lending. Advances, generally, constitute the largest item on the assets side of the balance sheet of a bank and are major source of its income.

Audit of advances is one of the most important areas covered by auditors. It is necessary that auditors should have adequate knowledge of the banking industry and the regulations governing the banks. Auditors must be aware of the various functional areas of the bank/branches, its processes,
procedures, systems and prevailing internal controls.

Advances generally comprise of:

a) Money lent by the bank to its customers including interest accrued and due;
b) Debit balances in the account of the depositors;
c) Inter-Bank Participation Certificates.

Every bank has its credit policy approved by its board of directors. The credit policy is generally in line with the applicable RBI guidelines, relevant acts and regulations. The auditors must acquaint themselves with the credit policy of the bank and composition of its advances portfolio. Generally, this policy is regularly updated by the bank. The auditor should obtain the latest policy of the bank.

The bank’s corporate office periodically send the guidance/circular to their branches, the auditor should be aware about those circular/guidance during the course of their branch audit.

Question

A bank has received an application from a customer for a loan. You have to investigate on behalf of the bank the accounts of the customer. Highlight those points you would like to concentrate upon.

Answer:

The most fundamental characteristics most prospective banks will concentrate on include:
1. Credit history
2. Cash flow history and projections for the business
3. Collateral available to secure the loan
4. Character
5. Loan documentation that includes business and personal financial statements, income tax returns, a business plan and that essentially sums up and provides evidence for the first four items listed

- The first three of these criteria are largely objective data (although interpretation of the numbers can be subjective). 

- The fourth item—character—allows the lender to make a more subjective assessment of your business's market appeal and the business savvy of you and any of your fellow operators. 

- In assessing whether to finance a small business, lenders are often willing to consider individual factors that represent strengths or weaknesses for a loan.- The Last point is the point which auditor generally checks while visiting the client place. For an existing business, generally it is auditor check the past and projected records of the client's

a) Income statements and business balance sheets for the past three years
b) Projected balance sheets and income statements for two years
c) Projected cash flow statements for at least the next 12 months
d) Personal and business tax returns for the last three years

Depending upon the specific type of loan which client is seeking, auditor should also address certain issues germane to that loan type.

For instance, if money is requested for working capital, the documentation should include:
- The amount that will be used for accounts payable, along with an accounts receivable aging report to disclose the current amounts overdue 30 to 60 days or older
- The amounts that will be used for inventory and any increase in the number of days that inventory on hand will be held
- The amount your cash balances will be increased

If money is needed for machinery or equipment, include information that addresses:
- Whether the assets will be immediately available or if a delay is anticipated
- The price of the assets and how installation will be performed
- Whether installation will interfere with current production and the cost of any interruptions

For this purpose the points to concentrate more are the presence of collatoral, inventory, condition of such inventories, recoverable amount, cash flow, sales figures, payment records for loans taken from other banks, defaults in past about repaying the principal/interest. Status of Statutory compliances.

2018

Question:

State the points to be considered while determining divisible profits in case of a company. What are the auditor's duties in regard to payment of dividends by a company ? 15 Marks

Answer:

Declaration of Dividend [Section 123] 

(i) Sources of Dividend
(a) out of the profits of the company for that year or
(b) out of the profits of the company for any previous financial year
(c) out of both (a) and (b); or
(d) out of money provided by the Government in pursuance of a guarantee given by that Government.

(ii) Transfer to reserves: A company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the company.

(iii) Declaration of dividend out of accumulated profits: Where a company, owing to inadequacy or absence of profits in any financial year, proposes to declare dividend out of the accumulated profits earned by it in previous years and transferred by the company to the reserves, such declaration of dividend shall be made only in accordance with prescribed rules.

(iv) Declaration of dividend from free reserves: Dividend shall be declared or paid by a company only from its free reserves. No other reserve can be utilized for the purposes of declaration of such dividend.

(v) Declaration of dividend by set off of previous losses and depreciation against the profit of the company for the current year: No company shall declare dividend unless carried over previous losses and depreciation not provided in previous year or years are set off against profit of the company for the current year.

(vi) Payment of dividend:
(a) Dividends are payable in cash. Dividends that are payable to the shareholder in cash may be paid by cheque or warrant or in any electronic mode.
(b) Dividend shall be payable only to the registered shareholder of the share or to his order or to his banker.

(vii) Prohibition on declaration of dividend: The Act by virtue of Section 123 (6) specifically provides that a company which fails to comply with the provisions of section 73 (Prohibition on acceptance of deposits from public) and section 74 (Repayment of deposits, etc., accepted before the commencement of this Act) shall not, so long as such failure continues, declare any dividend on its equity shares.

(viii) Prohibition on section 8 companies : According to section 8(1), the companies having licence under Section 8 (Formation of companies with Charitable Objects, etc.] of the Act are prohibited from paying any dividend to its members. Their profits are intended to be applied only in promoting the objects of the company.

Auditor's duties

Profit is the central theme for almost all business activities. Decision about the future of the business, i.e., whether to close down, expand or modify largely depend on the trend of profits or losses; investors’ interest in a business is also dependent upon the yield that they get. For all these, determination of correct profit is obviously important and, no wonder, it is a matter to which accountants attach great importance.

The auditor must necessarily have regard to generally accepted accounting practices, legal provisions and judicial pronouncements in carrying out his duties. Should more profit be distributed than is permissible, because of a wrong process of computation, it may be treated as paying a dividend out of capital which is legally not permissible unless the company is being wound up. Apart from legal consequences, the management of the business would be depleting capital of the company which may have dangerous results.

The Auditor should obtain appropriate audit evidence as regard to audit of payment of dividends. The procedure includes the following:
(i) Check that all the rules and regulations concerning the declaration or payment of dividends have been complied with.
(ii) Examine that the accounting and disclosure procedure has been complied with related to the declaration and payment of dividend like depreciation has been provided before declaration, disclosure has been made by way of notes to the accounts etc.
(iii) Scrutinize that the dividends have been declared or paid only out of distributable profit i.e. profits for the current year for which dividend is declared, or accumulated profits of the previous years, or money provided by the Central or State Government as per Section 123(1) of the Act.
(iv) Inspect that the dividend has been paid only out of “free reserves” i.e. the reserves which, as per the latest audited balance sheet of a company, are available for distribution as dividend except- any amount representing unrealized gains, notional gains or revaluation of assets, whether shown as a reserve or otherwise, or any change in carrying amount of an asset or of a liability recognized in equity, including surplus in statement of profit and loss on measurement of the asset or the liability at fair value, as laid down under third proviso to Section 123(1) read with Section 2(43) of the Act. (v) If dividend has been paid out of accumulated profits, earned by it in previous years and transferred to the reserves, in case of inadequacy or absence of profits in any financial years, verify that the rules related to such distribution has been complied i.e. the maximum amount allowable to be distributed as a dividend in case of inadequate or no profit as required by second proviso to Section 123(1) of the Act.
(vi) Verify that the dividend recommended by the Board has been approved by the members at the annual general meeting.
(vii) Verify that the dividend has been transferred to the separate scheduled bank account within 5 days from the declaration of such dividend as required by Section 123(4) of the Act.
(viii) Verify that the dividend has been paid within 30 days from the declaration. If in case the dividend has not been claimed or paid within 30 days from the declaration, verify that the unpaid or unclaimed dividend amount has been transferred to a special account called unpaid dividend account as per Section 124(1) of the Act.
(ix) Verify that the company has prepared a statement within a period of 90 days of making any transfer of an amount to the Unpaid Dividend Account containing the names, their last known addresses and the unpaid dividend to be paid to each person, and have placed it on the website of the company, if any, and also on any other website approved by the Central Government for this purpose as required under Section 124(2) of the Act.
(x) Check the procedures that have been followed for the payment of unclaimed dividend out of unpaid dividend account.
(xi) Verify that, if any money transferred to Unpaid Dividend Account has remained unpaid or unclaimed for a period of 7 years from the date of such transfer then, whether it has been transferred by the company along with interest accrued, if any, thereon to the Investor Education and Protection Fund established under section 125(1) of the Act and a statement regarding such transfer has also been sent to the authority which administers such fund.
(xii) In case the company has outsourced the activity to the Service Organisation, check that all the compliances with laws, regulations, accounting and disclosure related to the dividends have been made appropriately

Question

"The audit of banks is the audit of balance sheet and advances." Explain. Distinguish between performing and non performing assets. 20 Marks

Answer:
Commercial banks are the most wide spread banking institutions in India, that provide a number of products and services to general public and other segments of economy. Two of its main functions are (1) accepting deposits and (2) granting advances.

Every banking company is required to prepare a Balance Sheet and a Profit and Loss Account in the forms set out in the Third Schedule to the Act or as near thereto as the circumstances admit. Form A of the Third Schedule to the Banking Regulation Act, 1949, contains the form of Balance Sheet and Form B contains the form of Profi t and Loss Account.

In the case of a nationalised bank, the auditor is required to make a report to the
Central Government in which he has to state the following:
(a) whether, in his opinion, the balance sheet is a full and fair balance sheet containing all the necessary particulars and is properly drawn up so as to exhibit a true and fair view of the aff airs of the bank, and in case he had called for any explanation or information, whether it has been given and whether it is satisfactory;

(b) whether or not the transactions of the bank, which have come to his notice, have been within the powers of that bank;

(c) whether or not the returns received from the offices and branches of the bank have been found adequate for the purpose of his audit;

(d) whether the profit and loss account shows a true balance of profit or loss for the
period covered by such account; and

(e) any other matter which he considers should be brought to the notice of the Central Government. The report of auditors of State Bank of India is also to be made to the Central Government and is almost identical to the auditor’s report in the case of a nationalised bank.

Performing assets

A performing asset is a debt/loan on which the borrower has historically made payments on time. For example, if a homeowner takes out a mortgage and pays his home loan faithfully each month, his mortgage is considered a performing loan. In some cases, loans in which payments are less than 90 days late may be considered performing.

Non Performing assets

A non-performing asset (NPA) is a loan or an advance where -:
- Interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan,
- The account remains ‘out of order’ in respect of an Overdraft/Cash Credit (OD/CC),
- The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,