Suggested answer May 2019 - Audit and Assurance

Both Old and New Course Answer

NEW

1

(a) Incorrect - Where the firm is appointed as the auditor, the report is signed in the personal name of the auditor and in the name of the audit firm.

(b) Correct - The existence of a satisfactory control environment can be a positive factor when the auditor assesses the risks of material misstatement. However, although it may help reduce the risk of fraud, a satisfactory control environment is not an absolute deterrent to fraud.

(c) Incorrect - Hold office till the conclusion of the AGM

(d) Incorrect - A joint auditor is not bound by the views of the majority of the joint auditors regarding matters to be covered in the report and should express his opinion in a separate report in case of a disagreement.

(e) Incorrect  - The auditor of a banking company is to be appointed at the annual general meeting of the shareholders, whereas the auditor of a nationalised bank is to be appointed by the bank concerned acting through its Board of Directors.

(f) Correct - The accounts of every LLP shall be audited in accordance with Rule 24 of LLP, Rules 2009. Such rules, inter-alia, provides that any LLP, whose turnover does not exceed, in any financial year, Rs. 40 lakhs , or whose contribution does not exceed Rs. 25 Lakhs, is not required to get its accounts audited.

(g) Incorrect - Positive confirmation request - A request that the confirming party respond directly to the auditor indicating whether the confirming party agrees or disagrees with the information in the request, or providing the requested information.

(h) Incorrect - Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 provides the classes of companies, engaged in the production of goods or providing services, having an overall turnover from all its products and services of Rs. 35 crore or more during the immediately preceding financial year, required to include cost records in their books of account.

2(A)

Sampling Risk. The risk that the auditor’s conclusion based on a sample may be different from the conclusion if the entire population were subjected to the same audit procedure.

Sampling risk can lead to two types of erroneous conclusions:

(i) In the case of a test of controls, that controls are more effective than they actually are, or in the case of a test of details, that a material misstatement does not exist when in fact it does. The auditor is primarily concerned with this type of erroneous conclusion because it aff ects audit eff ectiveness and is more likely to lead to an inappropriate audit opinion.

(ii) In the case of a test of controls, that controls are less effective than they actually are, or in the case of a test of details, that a material misstatement exists when in fact it does not. This type of erroneous conclusion affects audit efficiency as it would usually lead to additional work to establish that initial conclusions were incorrect.

2(B)

Constructing an Audit Programme - For the purpose of programme construction, the following points should be kept in mind:

(1) Stay within the scope and limitation of the assignment.

(2) Determine the evidence reasonably available and identify the best evidence for deriving the necessary satisfaction.

(3) Apply only those steps and procedures which are useful in accomplishing the verification purpose in the specific situation.

(4) Consider all possibilities of error.

(5) Co-ordinate the procedures to be applied to related items.

2(C)

SQC 1 requires the fi rm to obtain information before accepting an engagement. Information such as the following assists the engagement partner in determining whether the decisions regarding the acceptance and continuance of audit engagements are appropriate:

- The integrity of the principal owners, key management and those charged with governance of the entity;

- Whether the engagement team is competent to perform the audit engagement and has the necessary capabilities, including time and resources;

- Whether the fi rm and the engagement team can comply with relevant ethical requirements; and

- Significant matters that have arisen during the current or previous audit engagement, and their implications for continuing the relationship.

2(D)

The process of establishing the overall audit strategy assists the auditor to determine, subject to the completion of the auditor’s risk assessment procedures, such matters as:

1. The resources to deploy for specific audit areas, such as the use of appropriately experienced team members for high risk areas or the involvement of experts on complex matters;

2. The amount of resources to allocate to specific audit areas, such as the number of team members assigned to observe the inventory count at material locations, the extent of review of other auditors’ work in the case of group audits, or the audit budget in hours to allocate to high risk areas;

3. When these resources are to be deployed, such as whether at an interim audit stage or at key cut-off dates; and

4. How such resources are managed, directed and supervised, such as when team briefing and debriefing meetings are expected to be held, how engagement partner and manager reviews are expected to take place (for example, on-site or off -site), and whether to complete engagement quality control reviews.

3(A)

The auditor shall design and perform audit procedures in order to identify litigation and claims involving the entity which may give rise to a risk of material misstatement, including:

(a) Inquiry of management and, where applicable, others within the entity, including in-house legal counsel;

(b) Reviewing minutes of meetings of those charged with governance and correspondence between the entity and its external legal counsel; and

(c) Reviewing legal expense accounts. If the auditor assesses a risk of material misstatement regarding litigation or claims that have been identified, or when audit procedures performed indicate that other material litigation or claims may exist, the auditor shall, in addition to the procedures required by other SAs, seek direct communication with the entity’s external legal counsel.

3(B)

IT also poses specific risks to an entity’s internal control, including, for example:
- Reliance on systems or programs that are inaccurately processing data, processing inaccurate data, or both.
- Unauthorised access to data that may result in destruction of data or improper changes to data, including the recording of unauthorised or nonexistent transactions, or inaccurate recording of transactions. Particular risks may arise where multiple users access a common database.
- The possibility of IT personnel gaining access privileges beyond those necessary to perform their assigned duties thereby breaking down segregation of duties.
- Unauthorised changes to data in master fi les.
- Unauthorised changes to systems or programs.
- Failure to make necessary changes to systems or programs.

3(C)

There are two interlinked perspectives of independence of auditors, one, independence of mind; and two, independence in appearance. The Code of Ethics for Professional Accountants issued by International Federation of Accountants (IFAC) defines the term ‘Independence’ as follows:

“Independence is: (a) Independence of mind – the state of mind that permits the provision of an opinion without being affected by influences allowing an individual to act with integrity, and exercise objectivity and professional skepticism; and

(b) Independence in appearance – the avoidance of facts and circumstances that are so signifi cant that a third party would reasonably conclude an auditor’s integrity, objectivity or professional skepticism had been compromised.”

3(D)

Completion Memorandum or Audit Documentation Summary
The auditor may consider it helpful to prepare and retain as part of the audit documentation a summary (sometimes known as a completion memorandum) that describes-
- the significant matters identified during the audit and
- how they were addressed.

Such a summary may facilitate effective and efficient review and inspection of the audit documentation, particularly for large and complex audits. Further, the preparation of such a summary may assist auditor’s consideration of the significant matters. It may also help the auditor to consider whether there is any individual relevant SA objective that the auditor cannot achieve that would prevent the auditor from achieving the overall objectives of the auditor.

4(A)



4(B)

Perform analytical procedures to obtain audit evidence as to overall reasonableness of purchase quantity and price which may include:
- Consumption Analysis: Auditor should scrutinize raw material consumed as per manufacturing account and compare the same with previous years with closing stock and ask for the reasons from Management If any significant variations found.
- Stock Composition Analysis:
Auditor to collect the reports from management for composition of stock i.e. raw materials as a percentage of total stock and compare the same with previous year and ask for reasons from management in case of significant variations.
- Ratios: Auditor should compare the creditors turnover ratios and stock turnover ratios of the current year with previous years.
- Auditor should review quantitative reconciliation of closing stocks with opening stock, purchases and consumption

4(C)

Auditor needs to obtain a clear understanding about the organisation and its hiring, appraisal and retirement process in the following manner:
1. An auditor tests the controls the entity has set around employee benefit payment process to determine how strong and reliable they are. If they are strong, the auditor can minimise the amount of transaction testing he must do. Common internal controls over the employee benefit payment cycle includes maintaining of attendance records, employee master, authorisation and approval of monthly payroll processing and disbursement, computation of employee deductions like payroll taxes, accrual of other benefi ts like gratuity, leave encashment, bonus etc.
2. The auditor selects a random sample of transactions and examines the related appointment letters, appraisal letters, attendance records, HR policies, employee master etc.
3. Performing substantive audit procedures is must. Substantive analytical procedure will consist of monthly expense reasonability, comparison with previous accounting period, any analysis auditor may fi nd relevant and most important of all setting an expectation in relation to the expense incurred during the period under audit and compare that with the client’s business operations and overall trend in the industry.

4(D)

Incorrect, The securities premium account may be applied by the Company:

(a) towards the issue of unissued shares of the company to the members of the company as fully paid bonus shares;
(b) in writing off the preliminary expenses of the Company;
(c) in writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company;
(d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company; or
(e) for the purchase of its own shares or other securities under section 68.

5(A)

Removal of Auditor Before Expiry of Term: According to Section 140(1), the auditor appointed under section 139 may be removed from his office before the expiry of his term only by a special resolution of the company, after obtaining the previous approval of the Central Government in that behalf as per Rule 7 of CAAR, 2014-
(1) The application to the Central Government for removal of auditor shall be made in Form ADT-2 and shall be accompanied with fees as provided for this purpose under the Companies (Registration Offices and Fees) Rules, 2014.
(2) The application shall be made to the Central Government within 30 days of the resolution passed by the Board.
(3) The company shall hold the general meeting within 60 days of receipt of approval of the Central Government for passing the special resolution. It is important to note that before taking any action for removal before expiry of terms, the auditor concerned shall be given a reasonable opportunity of being heard.

5(B)

Right to receive notices and to attend general meeting – The auditors of a company are entitled to attend any general meeting of the company (the right is not restricted to those at which the accounts audited by them are to be discussed); also to receive all the notices and other communications relating to the general meetings, which members are entitled to receive and to be heard at any general meeting in any part of the business of the meeting which concerns them as auditors.

5(C)

Under section 128 of the Act, books of account of a company must be kept at the registered office. These provisions ordinarily make it impracticable for the auditor to have possession of the books and documents. The company provides reasonable facility to auditor for inspection of the books of account by directors and others authorised to inspect under the Act. Taking an overall view of the matter, it seems that though legally, auditor may exercise right of lien in cases of companies, it is mostly impracticable for legal and practicable constraints. His working papers being his own property, the question of lien, on them does not arise.

5(D)

Paragraph 3 of the CARO requires the auditor to include a statement in the auditor’s report on the following matters, namely -
(i) (a) whether the company is maintaining proper records showing full particulars, including quantitative details and situation of fixed assets;
(b) whether these fixed assets have been physically verified by the management at reasonable intervals; whether any material discrepancies were noticed on such verification and if so, whether the same have been properly dealt with in the books of account;
(c) whether the title deeds of immovable properties are held in the name of the company. If not, provide the details thereof;

6(A)

The engagement team discussion ordinarily includes a discussion of the following matters:
- Errors that may be more likely to occur;
- Errors which have been identified in prior years;
- Method by which fraud might be perpetrated by bank personnel or others within particular account balances and/or disclosures;
- Audit responses to Engagement Risk, Pervasive Risks, and Specifi c Risks;
- Need to maintain professional skepticism throughout the audit engagement;
- Need to alert for information or other conditions that indicates that a material misstatement may have occurred (e.g., the bank’s application of accounting policies in the given facts and circumstances)

6(B)

Understanding the Risk Management Process: Management develops controls and uses performance indicators to aid in managing key business and fi nancial risks.

An eff ective risk management system in a bank generally requires the following:
(a) Oversight and involvement in the control process by those charged with governance: Those charged with governance (BOD/Chief Executive Offi cer) should approve written risk management policies. The policies should be consistent with the bank’s business objectives and strategies, capital strength, management expertise, regulatory requirements and the types and amounts of risk it regards as acceptable.
(b) Identifi cation, measurement and monitoring of risks: Risks that could signifi cantly impact the achievement of bank’s goals should be identifi ed, measured and monitored against pre-approved limits and criteria.
(c) Control activities: A bank should have appropriate controls to manage its risks, including eff ective segregation of duties (particularly, between front and back offi ces), accurate measurement and reporting of positions, verifi cation and approval of transactions, reconciliation of positions and results, setting of limits, reporting and approval of exceptions, physical security and contingency planning.
(d) Monitoring activities: Risk management models, methodologies and assumptions used to measure and manage risk should be regularly assessed and updated. This function may be conducted by the independent risk management unit.
(e) Reliable information systems: Banks require reliable information systems that provide adequate fi nancial, operational and compliance information on a timely and consistent basis. Those charged with governance and management require risk management information that is easily understood and that enables them to assess the changing nature of the bank’s risk profi le.

6(C)

Power of Central Government to direct special audit in certain cases - Under section 77 of the Multi-State Co-operative Societies Act, 2002, where the Central Government is of the opinion:
(a) that the aff airs of any Multi-State co-operative society are not being managed in accordance with self-help and mutual deed and co-operative principles or prudent commercial practices or with sound business principles; or
(b) that any Multi-State co-operative society is being managed in a manner likely to cause serious injury or damage to the interests of the trade industry or business to which it pertains; or
(c) that the fi nancial position of any Multi-State co-operative society is such as to endanger its solvency.

6(D)

The C&AG Act gives the following powers to the C&AG in connection with the performance of his duties-
(a) To inspect any offi ce of accounts under the control of the Union or a State Government including offi ce responsible for the creation of the initial or subsidiary accounts.
(b) To require that any accounts, books, papers and other documents which deal with or are otherwise relevant to the trans actions under audit, be sent to specifi ed places.
(c) To put such questions or make such observations as he may consider necessary to the person in charge of the offi ce and to call for such information as he may require for the prepara tion of any account or report which is his duty to prepare. In carrying out the audit, the C&AG has the power to dispense with any part of detailed audit of any accounts or class of transactions and to apply such limited checks in relation to such accounts or transactions as he may determine.

OLD

1(a) Incorrect - The terms of engagement cannot, however, restrict the scope of an audit in relation to matters which are prescribed by legislation or by the pronouncements of the Institute.

1(b) Correct - It is also the function of audit to establish that payments have been made validly to persons who are shown to be recipients. For example, it must be verified that salaries to partners were paid according to a provision contained in the partnership deed and the directors fees were paid according to the provisions in that regard in the Articles of Association or the resolution passed by members of the company at a general meeting.

1(c) Correct - Stratified Sampling method involves dividing the whole population to be tested in a few separate groups called strata and taking a sample from each of them.

1(d) Incorrect - Internal audit is a review of the operations and records, sometimes continuously undertaken, within a business, by specially assigned staff. But internal audit must not be confused with internal check. Internal check consists of a set of rules or procedures that are part of the accounting system, introduced so as to ensure that accounts of a business shall be correctly maintained and the possibility of occurrence of frauds and errors eliminated.

1(e) Incorrect - The purpose of such letters is to place on record representation of management on significant matters affecting the account such as the ownership and basis of stating the amount of assets, liabilities, and contingent liabilities. In addition, they act as a reminder to management of their responsibilities. Such letters, however, do not relieve the auditors of any of their responsibilities.

1(f) Incorrect - Right to receive notices and to attend general meeting – The auditors of a company are entitled to attend any general meeting of the company (the right is not restricted to those at which the accounts audited by them are to be discussed).

1(g) Correct - But after passing BR in BM.

1(h) Incorrect - The inclusion of an Emphasis of Matter paragraph in the auditor’s report does not affect the auditor’s opinion. An Emphasis of Matter paragraph is not a substitute for either:
(a) The auditor expressing a qualified opinion or an adverse opinion, or disclaiming an opinion, when required by the circumstances of a specific audit engagement (see SA 7052); or
(b) Disclosures in the financial statements that the applicable financial reporting framework requires management to make.


2(A)

Development of an Overall Plan:
- The terms of his engagement and statutory responsibilities.
- Nature and timing of reports
- Applicable legal or statutory requirements.
- Accounting policies adopted by the client
- Effect of new accounting or auditing pronouncements on the audit.
- Identification of significant audit areas.
- Setting of materiality levels for audit purposes.
- The degree of reliance on accounting system and internal control
- Possible rotation of emphasis on specific audit areas.
- The nature and extent of audit evidence to be obtained.
- The work of internal auditors and the extent of their involvement
- The involvement of other auditors
- The involvement of experts.
- The allocation of work between joint auditors
- Establishing and coordinating staffing requirements.

2(B)

Formation of Opinion on Accounts: The principal aspect to be covered in an audit to form an opinion, an auditor has to look into following matters-
(i) An examination of the system of accounting and internal control to ascertain whether it is appropriate for the business and helps in properly recording all transactions. This is followed by such tests and enquiries as are considered necessary to ascertain whether the system is in actual operation. These steps are necessary to form an opinion as to whether reliance can be placed on the records as a basis for the preparation of final statements of account.
(ii) Reviewing the system and procedures to find out whether they are adequate and comprehensive and incidentally whether material inadequacies and weaknesses exist to allow frauds and errors going unnoticed.
(iii) Checking of the arithmetical accuracy of the books of account by the verification of postings, balances, etc.
(iv) Verification of the authenticity and validity of transaction entered into by making an examination
of the entries in the books of accounts with the relevant supporting documents.
(v) Ascertaining that a proper distinction has been made between items of capital and of revenue nature and that the amounts of various items of income and expenditure adjusted in the accounts corresponding to the accounting period.
(vi) Comparison of the Balance Sheet and profit and loss account or other statements with the underlying record in order to see that they are in accordance therewith.
(vii) Verification of the title, existence and value of the assets appearing in the Balance Sheet.
(viii) Verification of the liabilities stated in the Balance Sheet.
(ix) Checking the result shown by the profit and loss and to see whether the results shown are true and fair.
(x) Where audit is of a corporate body, confirming that the statutory requirements have been complied with.
(xi) Reporting to the appropriate person/body whether the statements of account examined do reveal a true and fair view of the state of affairs and of the profit and loss of the organisation.

2(C)

The division of internal control into the following five components, for purposes of the SAs, provides a useful framework for auditors to consider how different aspects of an entity’s internal control may affect the audit:
(a) The control environment;
(b) The entity’s risk assessment process;
(c) The information system, including the related business processes, relevant to financial reporting, and communication;
(d) Control activities; and
(e) Monitoring of controls.

2(D)

Significant difficulties encountered during the audit may include such matters as:
(i) Significant delays by management, the unavailability of entity personnel, or an unwillingness by management to provide information necessary for the auditor to perform the auditor’s procedures.
(ii) An unreasonably brief time within which to complete the audit.
(iii) Extensive unexpected effort required to obtain sufficient appropriate audit evidence.
(iv) The unavailability of expected information.
(v) Restrictions imposed on the auditor by management.
(vi) Management’s unwillingness to make or extend its assessment of the entity’s ability to continue as a going concern when requested.

3(A)

Analytical Procedures in case of trade receivables:

Following are the analytical review procedures which may often be helpful as a means of obtaining audit evidence regarding the various assertions relating to trade receivables-

(i) comparison of closing balances of trade receivables with the corresponding figures for the previous year;
(ii) comparison of the relationship between current year trade receivable balances and the current year sales with the corresponding budgeted figures, if available;
(iii) comparison of actual closing balances of trade receivables with the corresponding budgeted figures, if available;
(iv) comparison of current year’s ageing schedule with the corresponding figures for the previous year;
(v) comparison of significant ratios relating to trade receivables with similar ratios for other firms in the same industry, if available;
(vi) comparison of significant ratios relating to trade receivables with the industry norms, if available.
(vii) Check whether there is any change in credit policy of the organization.
(viii) Check the percentage of bad debts of previous years and current year.
(ix) Find the reasons of major variations in the estimated values and actual values.

3(B)

Requirements as stated in Schedule III to the Companies Act, 2013, related to disclosure of expenses in case of Companies are:

(i) A Company shall disclose aggregate of the following expenses separately on the face of the Statement of Profit and Loss-Item IV. Expenses:

(a) Cost of Materials Consumed
(b) Purchases of Stock-in-trade
(c) Changes in Inventories of Finished Goods, Work-in-progress and Stock-in-trade
(d) Employee Benefits Expense
(e) Finance Costs
(f) Depreciation and amortization expense
(g) Other Expenses

(ii) A Company shall disclose separately by way of notes on the face of the Statement of Profit and Loss additional information regarding aggregate expenses as under:-

(a) Consumption of stores and spare parts;
(b) Power and fuel;
(c) Rent;
(d) Repairs to buildings;
(e) Repairs to machinery;
(f) Insurance;
(g) Rates and taxes, excluding, taxes on income;
(h) Miscellaneous expenses.

3(C)

Refund of General Insurance Premium Paid: The refund of insurance premium may be because of earlier provisional payment of premium or may be a policy might have been cancelled at a later date. The auditor should take following steps while vouching such refunds-
(i) Ascertain the reasons for refund of insurance premium.
(ii) Examine insurance policy or cover note to find out the amount of premium.
(iii) Verify advice of refund received from the insurance company. When refund is admitted, the insurance company sends the advice. This will be evidence as a covering letter to the cheque for the refund. Sometimes, a cheque is issued after a receipt is sent in advance to the insurance company.
(iv) Scrutinise correspondence between the insurance company and the client.
(v) Check entries in the bank book or the bank statement. If necessary, the counterfoil of the pay-in-slips can also be verified.

3(D)

Type of documents to be verified to ensure that the company holds a legally enforceable security:

(i) Shares and Debentures- The scrip and the endorsement thereon of the name of the transferee, in the case of transfer.

(ii) Life insurance policy - Assignment of policy in favour of the lender duly registered with the insurer

(iii) Hypothecation of goods. - Deed of Hypothecation or other document creating the charge, together with a statement of inventories held at the Balance Sheet date.

4(A)

Removal of Auditor Before Expiry of Term: According to Section 140(1), the auditor appointed under section 139 may be removed from his office before the expiry of his term only by a special resolution of the company, after obtaining the previous approval of the Central Government in that behalf as per Rule 7 of CAAR, 2014-
(1) The application to the Central Government for removal of auditor shall be made in Form ADT-2 and shall be accompanied with fees as provided for this purpose under the Companies (Registration Offices and Fees) Rules, 2014.
(2) The application shall be made to the Central Government within 30 days of the resolution passed by the Board.
(3) The company shall hold the general meeting within 60 days of receipt of approval of the Central Government for passing the special resolution. It is important to note that before taking any action for removal before expiry of terms, the auditor concerned shall be given a reasonable opportunity of being heard.

4(B)

Buy back of own shares companies act - Prohibition for buy back in certain circumstances: As per provisions of Section 70 of the Companies Act 2013-
(1) No company shall directly or indirectly purchase its own shares or other specified securities—
(a) through any subsidiary company including its own subsidiary companies; or
(b) through any investment company or group of investment companies; or
(c) if a default, by the company, in repayment of deposit or interest payable thereon, redemption of debentures or preference shares or payment of dividend to any shareholder or repayment of any term loan or interest payable thereon to any financial institutions or bank, is subsisting. Provided that the buy – back is not prohibited if the default is remedied and a period of three years has elapsed since the cessation of the default.
(2) No company shall directly or indirectly purchase its own shares or other specified securities in
case such company has not complied with provisions of Sections 92, 123, 127 and 129. Section 92 relates to the filing of Annual Return, Section 123 and 127 to declaration and payment of dividend and Section 129 to the financial statement of the company.

4(C)

Preparation of statement of Profit and loss and other statements expect Balance sheet in case no revenue from operations.

4(D)

Director's disqualification for non filing of Annual return - Yes reporting requirement in

5(A)

Areas to be verified in relation to receipt from sale of Ticket.
(i) See that cash collections are insured and the policy is in force.
(ii) Do surprise checking of cash balances.
(iii) The internal control for collections from sale of tickets should be checked.
(iv) See that the tickets are serially numbered and effective custody of un-issued tickets
are in existence.
(v) Check the rough cash book and reconcile from the inventory of ticket books issued,
the cash to be collected each day.
(vi) Check that the cash balance and ticket sales from inventory is daily checked by the
manager.
(vii) Check that the collections are banked daily, the very next day.
(viii) See rates for each class and the ticket rates are as per current prices.
(ix) The Taxes collection and its subsequent payment to the government agencies.
(x) Check the relation between the amounts of tax collected and sales.
(xi) The collections from the advertising and publicity materials should be checked with
reference to the terms of agreement.
(xii) Income from canteen, stalls, parking facilities should also be checked and see that
the income are fairly booked without any seepage.
(xiii) The cash collections should not be used for meeting petty cash expenses. There
should be separate impressed system.

5(B)

Audit of government expenditure is one of the major components of government audit conducted by the office of C& AG. The basic standards set for audit of expenditure are to ensure that there is provision of funds authorised by competent authority fixing the limits within which expenditure can be incurred. Briefly, these standards are explained below:
(i) Audit against Rules & Orders : The auditor has to see that the expenditure incurred conforms to the relevant provisions of the statutory enactment and is in accordance with the financial rules and regulations framed by the competent authority.
(ii) Audit of Sanctions : The auditor has to ensure that each item of expenditure is covered by a sanction, either general or special, accorded by the competent authority, authorising such expenditure.
(iii) Audit against Provision of Funds : It contemplates that there is a provision of funds out of which expenditure can be incurred and the amount of such expenditure does not exceed the appropriations made.
(iv) Propriety Audit : It is required to be seen that the expenditure is incurred with due regard to broad and general principles of financial propriety. The auditor aims to bring out cases of improper, avoidable, or in fructuous expenditure even though the expenditure has been incurred in conformity with the existing rules and regulations. Audit aims to secure a reasonably high standard of public financial morality by looking into the wisdom, faithfulness and economy of transactions.
(v) Performance Audit : This involves that the various programmes, schemes and projects where large financial expenditure has been incurred are being run economically and are yielding results expected of them. Efficiency-cumperformance audit, wherever used, is an objective examination of the financial and operational performance of an organisation, programme, authority or function and is oriented towards identifying opportunities for greater economy, and effectiveness.

5(C)

Objectives of Audit of Local Bodies: The external control of municipal expenditure is exercised by the state governments through the appointment of auditors to examine municipal accounts. The municipal corporations of Delhi, Mumbai and a few others have powers to appoint their own auditors for regular external audit. The important objectives of audit are-
(i) reporting on the fairness of the content and presentation of financial statements;
(ii) reporting upon the strengths and weaknesses of systems of financial control;
(iii) reporting on the adherence to legal and/or administrative requirements;
(iv) reporting upon whether value is being fully received on money spent; and
(v) detection and prevention of error, fraud and misuse of resources.

5(D)

On the dissolution of the firm, assets are to be applied in the following order:
(a) in paying the firm’s liabilities to third parties;
(b) in repaying partner’s advances and loans;
(c) in repaying partner’s capital; and
(d) the residue if any, is to be divided amongst the partners in the proportion in which they share profits.

6(A)

Test of controls are performed to obtain audit evidence about the eff ectiveness of the:

(a) Design of the accounting and internal control systems, i.e. whether they are suitably designed to prevent or detect and correct material misstatements and

(b) Operation of the internal controls throughout the period

Test of controls include tests of elements of the control environment where strengths in the control environment are used by auditors to reduce control risk.

Test of controls may include:

- Inspection of documents supporting transactions and other events to gain audit evidence that internal controls have operated properly, for example, verifying that a transaction has been authorised.

- Inquiries about, and observation of, internal controls which leave no audit trail, for example, determining who actually performs each function and not merely who is supposed to perform it.

- Re-performance involves the auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s internal control, for example, reconciliation of bank accounts, to ensure they were correctly performed by the entity.

- Testing of internal control operating on specifi c computerised applications or over the overall information technology function, for example, access or program change controls.

OR

The review of internal controls will enable the auditor to know:

(i) whether errors and frauds are likely to be located in the ordinary course of operations of the business;

(ii) whether an adequate internal control system is in use and operating as planned by the management;

(iii) whether an eff ective internal auditing department is operating;

(iv) whether any administrative control has a bearing on his work (for example, if the control over worker recruitment and enrolment is weak, there is a likelihood of dummy names being included in the wages sheet and this is relevant for the auditor);

(v) whether the controls adequately safeguard the assets;

(vi) how far and how adequately the management is discharging its function in so far as correct recording of transactions is concerned;

(vii) how reliable the reports, records and the certifi cates to the management can be;

(viii) the extent and the depth of the examination that he needs to carry out in the different areas of accounting;

(ix) what would be appropriate audit technique and the audit procedure in the given circumstances;

(x) what are the areas where control is weak and where it is excessive; and

(xi) whether some worthwhile suggestions can be given to improve the control system.

6(B) 

The reliability of audit evidence depends on its source ‑ internal or external, and on its nature ‑ visual, documentary or oral. While the reliability of audit evidence is dependent on the circumstances under which it is obtained, the following generalisations may be useful in assessing the reliability of audit evidence:

- External evidence (e.g. confirmation received from a third party) is usually more reliable than internal evidence.

- Internal evidence is more reliable when related internal control is satisfactory.

- Evidence in the form of documents and written representations is usually more reliable than oral representations.

- Evidence obtained by the auditor himself is more reliable than that obtained through the entity.

6(C)

The advantages of statistical sampling may be summarized as follows -

(1) The amount of testing (sample size) does not increase in proportion to the increase in the size of the area (universe) tested.

(2) The sample selection is more objective and thereby more defensible.

(3) The method provides a means of estimating the minimum sample size associated with a specifi ed risk and precision.

(4) It provides a means for deriving a “calculated risk” and corresponding precision (sampling error) i.e. the probable diff erence in result due to the use of a sample in lieu of examining all the records in the group (universe), using the same audit procedures.

(5) It may provide a better description of a large mass of data than a complete examination of all the data, since non-sampling errors such as processing and clerical mistakes are not as large.

6(D)

Computer Aided Audit Techniques (CAATs): The use of computers may result in the design of systems that provide less visible evidence than those using manual procedures. CAATs are such techniques applied through the computer which are used in the verifying the data being processed by it.

System characteristics resulting from the nature of Computerised Information System (CIS) environment that demand the use of Computer Aided Audit Techniques (CAAT) are:

(i) Absence of input documents: Data may be entered directly into the computer systems without supporting documents. In on-line transaction systems, written evidence of individual data entry authorization, e.g., credit limit approval may not be available.
(ii) Lack of visible transaction trail: Certain data may be maintained on computer files only. In a manual system, it is normally possible to follow a transaction through the system by examining source documents, books of account, records, files and reports. In CIS environment, however, the transaction trail may be partly in machine-readable form, and it may exist only for a limited period of time.
(iii) Lack of visible output: In a manual system, it is normally possible to examine visually the results of processing. In CIS environment, the results of processing may not be printed or only a summary data may be printed. Thus, the lack of visible output may result in the need to access data retained on machine readable files.
(iv) Ease of Access to data and computer programmes: Data and computer programmes may be altered at the computer or through the use of computer equipment at remote locations. Therefore, in the absence of appropriate controls, there is an increased potential for unauthorized access to, and allocation of, data and programmes by persons inside or outside the entity.