11.
(a) SA
505 “External Confirmations” If the management refuses to allow the auditor to
a send a confirmation request, the auditor shall:
(i)
Inquire reasons for the refusal – (ii) Evaluate the implications refusal on the
auditor’s assessment of the relevant risks of material misstatement (fraud, and
on the nature, timing and extent of other audit procedures) – (iii) Perform
alternative audit procedures – (iv) If auditor concludes refusal is
unreasonable then communicate with TCWG
11
(b) As
per SA 501 “Audit Evidence – Additional Considerations for Specific Items”, the
auditor should perform audit procedures, designed to obtain sufficient
appropriate audit evidence during his attendance at physical inventory
counting.
SA
501 is additional guidance to that contained in SA 500, “Audit Evidence”.
If the auditor is unable to be present at the physical inventory count on the
date planned due to unforeseen circumstances, the auditor should take or
observe some physical counts on an alternative date + perform alternative audit
procedures to assess whether the changes in inventory between the date of
physical count and the period end date are correctly recorded.
Verify
the procedure adopted, treatment given for the discrepancies
Ensure
that appropriate cut off procedures were followed by the management.
Get
management’s written representation on (a) the completeness of information
provided regarding the inventory, and (b) assurance with regard to adherence to
laid down procedures for physical inventory count.
11 (c) Factors Influencing the amount of Working Papers: SA
230
(i)
The size and complexity of the entity.
(ii) The nature of the audit procedures to be
performed.
(iii) The identified risks of material misstatement.
(iv) The nature and extent of exceptions identified.
(v) The audit methodology and tools used.
12. (a) The general condition pertaining to the
internal check system -
(i) Every employee’s action should come under the review of another person and
no one should have complete control over any important aspect of business.
(ii) Staff duties should be rotated from time to time.
(iii) Every member of the staff should be encouraged to go on leave at least
once a year.
(iv) Persons having physical custody of assets must not be permitted to have
access to the books of accounts.
(v) Mechanical devices should be used, where ever practicable to prevent loss
or misappropriation of cash.
(vi) Procedures should be laid down for periodical verification and testing of
different sections of accounting records to ensure that they are accurate.
12
(b) Important Points on Drafting Letter of Weakness: As
per SA 265
(i) A description of the deficiencies and potential effects
(ii) Sufficient information to enable those charged
with governance and management to understand the context of the communication.
(iii) Communicate material weaknesses to the
management or the audit committee, if any, on a timely basis.
Important points with regard to such a letter are as
follows-
(1) Lists down area of weaknesses in system and offers suggestions for
improvement.
(2) Indicate that it discusses only weaknesses which have come to attention of auditor.
(3) Serves valuable reference document for management for purpose of revising system
and insisting on its strict implementation.
(4) Serve to minimize legal liability in event of a major defalcation or other
loss resulting from a weakness in internal control.
13
(a) Subsequent to the notification of Ministry of
Corporate Affairs dated October 11, 2018 under Section 467(1) of the Companies
Act, 2013, Trade Payables should be disclosed as follows:-
(A) total outstanding dues of micro enterprises and small enterprises; and
(B) total outstanding dues of creditors other than micro enterprises and small
enterprises.”
13
(c) The auditor’s inability to obtain sufficient
appropriate audit evidence (limitation on the scope of the audit) may arise
from:
(i)
Circumstances beyond the control
of the entity;
(ii)
Circumstances relating to the
nature or timing of the auditor’s work; or
(iii)
Limitations imposed by management.
It is not a limitation on
the scope of the audit if the auditor
is able to obtain sufficient appropriate audit evidence by performing
alternative procedures.
Limitations imposed by
management may have other implications like auditor’s assessment of fraud risks
and consideration of engagement continuance.
Examples of circumstances beyond the control of the entity include
when:
(a)
The entity’s accounting records
have been destroyed.
(b)
The accounting records of a
significant component have been seized indefinitely by governmental
authorities.
Examples of circumstances relating to the nature or timing of the
auditor’s work include when:
(a)
The entity is required to use the
equity method of accounting for an associated entity, and the auditor is unable
to obtain sufficient appropriate audit evidence about the latter’s financial
information to evaluate whether the equity method has been appropriately
applied.
(b)
The timing of the auditor’s
appointment is such that the auditor is unable to observe the counting of the
physical inventories.
(c)
The auditor determines that
performing substantive procedures alone is not sufficient, but the entity’s
controls are not effective.
Examples of an inability to obtain sufficient appropriate audit
evidence arising from a limitation on the scope of the audit imposed by
management include when:
(a) Management prevents the auditor from observing the counting of the physical
inventory.
(b) Management prevents
the auditor from requesting external confirmation of specific account balances.
14.
(a)
(1)
Government Guaranteed Advance: If a government
guaranteed advance becomes NPA, then for the purpose of income recognition,
interest on such advance should not be taken to income unless interest is
realized.
However, for purpose of asset classification, credit
facility backed by Central Government Guarantee, though overdue, can be treated
as NPA only when the Central Government repudiates its guarantee, when invoked.
If the advance is guaranteed by State Government
because this exception is not applicable for State Government Guaranteed
advances, where advance is to be considered NPA if it remains overdue for more
than 90 days.
In case the bank has not invoked the Central Government Guarantee though the
amount is overdue for long, the reasoning for the same should be taken and duly
reported in LFAR.
(2)
The Audit Programme to Verify Advances against Life Insurance Policies is as
under-
(i)
The auditor should inspect the
policies and see whether they are assigned to the bank and whether such
assignment has been registered with the insurer.
(ii)
The auditor should also examine
whether premium has been paid on the policies and whether they are in force.
(iii)
Certificate regarding surrender
value obtained from the insurer should be examined.
(iv) The
auditor should particularly see that if such surrender value is subject to
payment of certain premium, the amount of such premium has been deducted from
the surrender value.
(b)
Verification of “Claims Provision” in the Case of a General Insurance Company:
The outstanding liability at the year-end is determined at the
divisions/branches where the liability originates for outstanding claims.
Thereafter, based on the total consolidated figure for all the
divisions/branches, the Head Office considers a further provision in respect of
outstanding claims. The auditor should satisfy himself that the estimated
liability provided for by the management is adequate with reference to the
relevant claim files/dockets, keeping in view the following:
(i) that provision has been made for all unsettled claims as at the year -end
on the basis of claims lodged/communicated by the parties against the company.
The date of loss (and not the date of communication thereof) is important for
recording/ recognizing the claim as attributable to a particular year.
(ii) that provision has been made for only such claims for which the company is
legally liable, considering particularly, (a) that the risk was covered by the
policy, if in force, and the claims arose during the currency of the policy;
and (b) that claim did not arise during the period the company was not supposed
to cover the risk.
(iii) that the provision made is normally not in excess of the amount insured
except in some categories of claims where matters may be sub-judice in legal
proceedings which will determine the quantum of claim, the amount of provision
should also include survey fee and other direct expenses.
(iv) that in determining the amount of provision, events after the balance
sheet date have been considered.
(v) that the claims status reports recommended to be prepared by the Divisional
Manager on large claims outstanding at the year-end have been reviewed with the
contents of relevant files or dockets for determining excess/short provisions.
(vi) that in determining the amount of provision, the ‘average clause’ has been
applied in case of under-insurance by parties.
(vii) that the provision made is net of payments made ‘on account’ to the
parties wherever such payments have been booked to claims.
(viii) that in case of co-insurance arrangements, the company has made
provisions only in respect of its own share of anticipated liability.
(ix) that wherever an unduly long time has elapsed after the filing of the
claim and there has been no further communication and no litigation or
arbitration dispute is involved, the reasons for carrying the provision have
been ascertained.
(x) that wherever legal advice has been sought or the claim is under
litigation, the provisions is made according to the legal advisor’s view and
differences, if any, are explained.
(xi) that in the case of amounts purely in the nature of deposits with courts
or other authorities, adequate provision is made and deposits are stated
separately as assets and provisions are not made net of such deposits.
(xii) that no contingent liability is carried in respect of any claim intimated
in respect of policies issued.
(xiii) that the claims are provided for net of estimated salvage, wherever
applicable.
(xiv) that intimation of loss is received within a reasonable time and reasons
for undue delay in intimation are looked into.
(xv) that provisions have been retained as at the year-end in respect of
guarantees given by company to various Courts for claims under litigation.
(xvi) that due provision has been made in respect of claims lodged at any office
of the company other than the one from where the policy was taken, e.g., a
vehicle insured at Mumbai having met with an accident at Chennai necessitating
claim intimation at one of the offices of the company at Chennai.
In cases of material differences in the liability estimated by the management
and that which ought to be provided in the opinion of the auditor, the same
must be brought out in the auditor’s report after obtaining further information
or explanation from the management.
15. (a) Non-maintenance of stock register: The explanation of the entity for
the use of varieties of raw materials for different jobs undertaken may be
valid. But the auditor needs to verify the specified job-orders received and
the different raw materials purchased for each job separately. The use of
different papers (quality, quantity and size) ink, colour etc. may be examined.
If possible, the auditor may also enquire with the other similar printers in
the locality to ensure the prevailing custom. At the same time, he has to
report and certify under clause 35(b) and clause 11(b) of Form 3CD read with
the Rule 6G(2) of the Income-tax Act, 1961, about the details of stock and
account books (including stock register) maintained. He must verify the closing
stock of raw materials, work-in-progress and finished goods of the concern, at
least on the date of its balance sheet. In case the said details are not
properly maintained, he has to specifically mention the same with reasons for
non-maintenance of stock register by the entity.
(b) The auditor should advise the company to file all the GSTR-3B, GSTR-1 and
annual returns before conducting GST audit so that auditor can validate and
verify the returns filed by the company, verification of ITC claimed,
verification of output GST liability discharged by the company and for
collation of return workings and reconciliations. Auditor needs to have a
comprehensive picture of -
(i) Understanding of the back-up of monthly returns as well as annual return
and understanding of reports generated by the GSTN portal as well as internal
records of the company.
(ii) Understanding of the eligibility of Input Tax Credit (ITC) availed i.e.
whether ITC availed by the company is creditable or not and understanding of
reversal of ITC undertaken or applicable (if any).
(iii) Understanding of the taxability of outward supplies and transactions
covered under Reverse Charge Mechanism and other miscellaneous/ specific
transactions and understanding of the positions taken on various transactions
by the company.
16 (a) Issues examined in Comprehensive Audit: Some of the issues examined in
comprehensive audit are-
(i) How does the overall capital cost of the project compare with the approved
planned costs? Were there any substantial increases and, if so, what are these
and whether there is evidence of extravagance or unnecessary expenditure?
(ii) Have the accepted production or operational outputs been achieved? Has
there been under utilisation of installed capacity or shortfall in performance
and, if so, what has caused it?
(iii) Has the planned rate of return been achieved?
(iv) Are the systems of project formulation and execution sound? Are there
inade - quacies? What has been the effect on the gestation period and capital
cost?
(v) Are cost control measures adequate and are there inefficiencies, wastages
in raw materials consumption, etc.?
(vi) Are the purchase policies adequate? Or have they led to piling up of
inventory resulting in redundancy in stores and spares?
(vii) Does the enterprise have research and development programmes? What has
been the performance in adopting new processes, technologies, improving profits
and in reducing costs through technological progress?
(viii) If the enterprise has an adequate system of repairs and maintenance?
(ix) Are procedures effective and economical?
(x) Is there any poor or insufficient or inefficient project planning?
(b) According to the guidelines issued by the C&AG, Performance Audits
usually address the issues of:
(i) Economy - It is minimising the cost of resources used for an activity,
having regard to appropriate quantity, quality and at the best price.
Judging economy implies forming an opinion on the resources (e.g. human,
financial and material) deployed. This requires assessing whether the given
resources have been used economically and acquired in due time, in appropriate
quantity and quality at the best price.
(ii) Efficiency - It is the input-output ratio. In the case of public spending,
efficiency is achieved when the output is maximised at the minimum of inputs,
or input is minimised for any given quantity and quality of output.
Auditing efficiency embraces aspects such as whether:
(a) sound procurement practices are followed;
(b) resources are properly protected and maintained;
(c) human, financial and other resources are efficiently used;
(d) optimum amount of resources (staff, equipment, and facilities) are used in
producing or delivering the appropriate quantity and quality of goods or
services in a timely manner;
(e) public sector programmes, entities and activities are efficiently managed,
regulated, organised and executed;
(f) efficient operating procedures are used; and
(g) the objectives of public sector programmes are met cost -effectively.
(iii) Effectiveness - It is the extent to which objectives are achieved and the
relationship between the intended impact and the actual impact of an activity.
In auditing effectiveness, performance audit may, for instance:
(a) assess whether the objectives of and the means provided (legal, financial,
etc.) for a new or ongoing public sector programme are proper, consistent,
suitable or relevant to the policy;
(b) determine the extent to which a program achieves a desired level of program
results;
(c) assess and establish with evidence whether the observed direct or indirect
social and economic impacts of a policy are due to the policy or to other
causes;
(d) identify factors inhibiting satisfactory performance or goal-fulfilment;
(e) assess whether the programme complements, duplicates, overlaps or
counteracts other related programmes;
(f) assess the effectiveness of the program and/or of individual program
components;
(g) determine whether management has considered alternatives for carrying out
the program that might yield desired results more effectively or at a lower
cost;
(h) assess the adequacy of the management control system for measuring,
monitoring and reporting a programme's effectiveness;
(i) assess compliance with laws and regulations applicable to the program; and
(j) identify ways of making programmes work more effectively.
17. (a) Direct Assistance from Internal Auditor: As per SA 610 “Using the Work
of Internal Auditor”, the external auditor shall not use internal auditors to
provide direct assistance to perform procedures that Involve making significant
judgments in the audit.
Since the external auditor has sole responsibility for the audit opinion
expressed, the external auditor needs to make the significant judgments in the
audit engagement. Significant judgments include the following:
- Assessing the risks of material misstatement;
- Evaluating the sufficiency of tests performed;
- Evaluating the appropriateness of management’s use of the going concern
assumption;
- Evaluating significant accounting estimates; and
- Evaluating the adequacy of disclosures in the financial statements, and other
matters affecting the auditor’s report.
In view of above, Mr. Anand cannot ask direct assistance from internal auditors
regarding evaluating significant accounting estimates and assessing the risk of
material misstatements.
(b) Direct Assistance from Internal Auditor in case of External Confirmation
Procedures: SA 610 “Using the Work of Internal Auditor”, provide relevant
guidance in determining the nature and extent of work that may be assigned to
internal auditors.
In determining the nature of work that may be assigned to internal auditors,
the external auditor is careful to limit such work to those areas that would be
appropriate to be assigned.
Further, in accordance with SA 505, “External Confirmation” the external
auditor is required to maintain control over external confirmation requests and
evaluate the results of external confirmation procedures, it would not be
appropriate to assign these responsibilities to internal auditors. However,
internal auditors may assist in assembling information necessary for the
external auditor to resolve exceptions in confirmation responses.
18. Investigation on Behalf of the Bank for Advances: A bank is primarily
interested in knowing the purpose for which a loan is required, the sources
from which it would be repaid and the security that would be available to it,
if the borrower fails to pay back the loan. On these considerations, the
investigating accountant, in the course of his enquiry, should attempt to
collect information on the under mentioned points:
(i) The purpose for which the loan is required and the manner in which the
borrower proposes to invest the amount of the loan.
(ii) The schedule of repayment of loan submitted by the borrower, particularly
the assumptions made therein as regards amounts of profits that will be earned
in cash and the amount of cash that would be available for the repayment of
loan to confirm that they are reasonable and valid in the circumstances of the
case. Institutional lenders now-a-days rely more for payment of loans on the
reliability of annual profits and loss on the values of assets mortgaged to
them.
(iii) The financial standing and reputation for business integrity enjoyed by
directors and officers of the company.
(iv) Whether the company is authorised by the Memorandum or the Articles of
Association to borrow money for the purpose for which the loan will be used.
(v) The history of growth and development of the company and its performance during
the past 5 years.
(vi) How the economic position of the company would be affected by economic,
political and social changes that are likely to take place during the period of
loan.
To investigate the profitability of the business for judging the accuracy of
the schedule of repayment furnished by the borrower, as well as the value of
the security in the form of assets of the business already possessed and those
which will be created out of the loan, the investigating accountant should take
the under -mentioned steps:
(a) Prepare a condensed income statement from the Statement of Profit and Loss
for the previous five years, showing separately therein various items of income
and expenses, the amounts of gross and net profits earned and taxes paid annually
during each of the five years. The amount of maintainable profits determined on
the basis of foregoing statement should be increased by the amount by which
these would increase on the investment of borrowed funds.
(b) Compute the under-mentioned ratios separately and then include them in the
statement to show the trend as well as changes that have taken place in the
financial position of the company:
(i) Sales to Average Inventories held.
(ii) Sales to Fixed Assets.
(iii) Equity to Fixed Assets.
(iv) Current Assets to Current Liabilities.
(v) Quick Assets (the current assets that are readily realisable) to Quick
Liabilities.
(vi) Equity to Long Term Loans.
(vii) Sales to Book Debts.
(viii) Return on Capital Employed.
(c) Enter in a separate part of the statement the break-up of annual sales
productwise to show their trend.
Steps involved in the verification of assets and liabilities included in the
Balance Sheet of the borrower company which has been furnished to the Bank-
The investigating accountant should prepare schedules of assets and liabilities
of the borrower and include in the particulars stated below:
(1) Fixed assets - A full description of each item, its gross value, the rate
at which depreciation has been charged and the total depreciation written off.
In case the rate at which depreciation has been adjusted is inadequate, the
fact should be stated. In case any asset is encumbered, the amount of the
charge and its nature should be disclosed. In case an asset has been revalued
recently, the amount by which the value of the asset has been decreased or
increased on revaluation should be stated along with the date of revaluation.
If considered necessary, he may also comment on the revaluation and its basis.
(2) Inventory - The value of different types of inventories held (raw
materials, workin- progress and finished goods) and the basis on which these
have been valued.
Details as regards the nature and composition of finished goods should be
disclosed. Slow-moving or obsolete items should be separately stated along with
the amounts of allowances, if any, made in their valuation. For assessing
redundancy, the changes that have occurred in important items of inventory
subsequent to the date of the Balance Sheet, either due to conversion into
finished goods or sale, should be considered.
If any inventory has been pledged as a security for a loan the amount of loan
should be disclosed.
(3) Trade Receivables, including bills receivable - Their composition should be
disclosed to indicate the nature of different types of debts that are
outstanding
for recovery; also whether the debts were being collected within the period of
credit as well as the fact whether any debts are considered bad or doubtful and
the provision if any, that has been made against them.
Further, the total amount outstanding at the close of the period should be
segregated as follows:
(i) debts due in respect of which the period of credit has not expired;
(ii) debts due within six months; and
(iii) debts due but not recovered for over six months.
If any debts are due from directors or other officers or employees of the
company, the particulars thereof should be stated. Amounts due from subsidiary
and affiliated concerns, as well as those considered abnormal should be
disclosed. The recoveries out of various debts subsequent to the date of the
Balance sheet should be stated.
(4) Investments - The schedule of investments should be prepared. It should
disclose the date of purchase, cost and the nominal and market value of each
investment. If any investment is pledged as security for a loan, full
particulars of
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134 FINAL (OLD) EXAMINATION: MAY, 2020
the loan should be given.
(5) Secured Loans - Debentures and other loans should be included together in a
separate schedule. Against the debentures and each secured loan, the amounts
outstanding for payments along with due dates of payment should be shown. In
case any debentures have been issued as a collateral security, the fact should
be stated. Particulars of assets pledged or those on which a charge has been
created for re-payment of a liability should be disclosed.
(6) Provision of Taxation - The previous years up to which taxes have been
assessed should be ascertained. If provision for taxes not assessed appears in
be inadequate, the fact should be stated along with the extent of the
shortfall.
(7) Other Liabilities - It should be stated whether all the liabilities, actual
and
contingent, are correctly disclosed. Also, an analysis according to ages of
trade
payables should be given to show that the company has been meeting its
obligations in time and has not been depending on trade credit for its working
capital requirements.
(8) Insurance - A schedule of insurance policies giving details of risks
covered, the
date of payment of last premiums and their value should be attached as an
annexure to the statements of assets, together with a report as to whether or
not the insurance-cover appears to be adequate, having regard to the value of
assets.
(9) Contingent Liabilities - By making direct enquiries from the borrower
company,
from members of its staff, perusal of the files of parties to whom any loan has
been advanced those of machinery suppliers and the legal adviser, for example,
the investigating accountant should ascertain particulars of any contingent
liabilities which have not been disclosed. In case, there are any, these should
be included in a schedule and attached to the report.
(10) The impact on economic position of the company by economic, political and
social changes those are likely to take place during the period of loan.
Finally, the investigating accountant should ascertain whether any application
for loan to another bank or any other party has been made. If so, the result
thereof should be examined.
19. (a) Responding to Tenders: Clause (6) of Part I of the First Schedule to
the Chartered
Accountants Act, 1949 lays down guidelines for responding to tenders, etc. It
states
that a member may respond to tenders or enquiries issued by various users of
professional services or organizations from time to time and secure
professional work
as a consequence.
However, a member of the Institute in practice shall not respond to any tender
issued
by an organization or user of professional services in areas of services which
are
exclusively reserved for Chartered Accountants, such as audit and attestation
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PAPER – 3 : ADVANCED AUDITING AND PROFESSIONAL ETHICS 135
services. Though, such restriction shall not be applicable where minimum fee of
the
assignment is prescribed in the tender document itself or where the areas are
open
to other professionals along with the Chartered Accountants.
In the instant case, OPAQ & Associates responded to a tender of tax audit
which is
exclusively reserved for Chartered Accountants even though no minimum fee was
prescribed in the tender document.
Therefore, OPAQ & Associates shall be held guilty of professional conduct
for
responding to such tender in view of above-mentioned guideline.
(b) Charging of Fees based on Percentage: Clause (10) of Part I to First
Schedule to
the Chartered Accountants Act, 1949 prohibits a Chartered Accountant in practice
to
charge, to offer, to accept or accept fees which are based on a percentage of
profits
or which are contingent upon the findings or results of such work done by him.
However, this restriction is not applicable where such payment is permitted by
the
Chartered Accountants Act, 1949. The Council of the Institute has framed
Regulation
192 which exempts debt recovery services where fees may be based on a
percentage
of the debt recovered.
In the given case, CA. Prem has insisted for fees to be based on percentage of
the
debt recovered (which is exempted under Regulation 192). Hence, CA. Prem will
not
be held guilty for professional misconduct.
(c) Posting of Particulars on Website: The Council of the Institute had
approved
posting of particulars on website by Chartered Accountants in practice under
Clause
(6) of Part I of First Schedule to the Chartered Accountants Act, 1949 subject
to the
prescribed guidelines. The relevant guidelines in the context of the website
hosted by
ABZ & Co. are:
¨ No restriction on the
colours used in the website;
¨ The websites are run on a
“pull” technology and not a “push” technology
¨ Names of clients and fees
charged not to be given.
However, disclosure of names of clients and/or fees charged, on the website is
permissible only where it is required by a regulator, whether or not
constituted
under a statute, in India or outside India, provided that such disclosure is
only
to the extent of requirement of the regulator. Where such disclosure of names
of clients and/or fees charged is made on the website, the member/ firm shall
ensure that it is mentioned on the website [in italics], below such disclosure
itself, that “This disclosure is in terms of the requirement of [name of the
regulator] having jurisdiction in [name of the country/area where such
regulator
has jurisdiction] vide [Rule/ Directive etc. under which the disclosure is
required
by the Regulator].
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136 FINAL (OLD) EXAMINATION: MAY, 2020
In view of the above, ABZ & Co. would have no restriction on the colours
used in the
website but failed to satisfy the other two guidelines. Thus, the firm would be
liable
for professional misconduct since it would amount to soliciting work by
advertisement.
(d) Submitting Wrong Information to the Institute: As per Clause (3) of Part II
of the
Second Schedule to the Chartered Accountants Act, 1949, a member of the
Institute,
whether in practice or not, shall be deemed to be guilty of professional
misconduct if
he includes in any information, statement, return or form to be submitted to
the
Institute, Council or any of its committees, Director (Discipline), Board of
Discipline,
Disciplinary Committee, Quality Review Board or the Appellate Authority any
particulars knowing them to be false.
In the instant case, Mr. P and Mr. Q, partners of PQ & Co., included the
name of Mr.
R, another Chartered Accountant, as partner in their firm, without his
knowledge, in
their application for empanelment as auditor of branches of Public Sector Banks
submitted to the Institute. However, such a member was not a partner of the
said firm
as on the date of application submitted. Here, Mr. P and Mr. Q have submitted
wrong
information to the Institute.
Therefore, Mr. P and Mr. Q, both, would be held guilty of professional
misconduct
under Clause (3) of Part II of the Second Schedule to the Chartered Accountants
Act,
1949.
20. (a) Scope of Peer Review: The Statement on Peer Review lays down the scope
of
review to be conducted as under:
The Peer Review process shall apply to all the assurance services provided by a
Practice Unit.
1. Once a Practice Unit is selected for Review, its assurance engagement
records
pertaining to the Peer Review Period shall be subjected to Review.
2. The Review shall cover:
(i) Compliance with Technical, Professional and Ethical Standards:
(ii) Quality of reporting.
(iii) Systems and procedures for carrying out assurance services.
(iv) Training programmes for staff (including articled and audit assistants)
concerned with assurance functions, including availability of appropriate
infrastructure.
(v) Compliance with directions and/or guidelines issued by the Council to the
Members, including Fees to be charged, Number of audits undertaken,
register for Assurance Engagements conducted during the year and such
other related records.
(vi) Compliance with directions and/or guidelines issued by the Council in
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PAPER – 3 : ADVANCED AUDITING AND PROFESSIONAL ETHICS 137
relation to article assistants and/or audit assistants, including attendance
register, work diaries, stipend payments, and such other related records.
(b) Mandatory Review Areas of the Audit Committee: The Audit Committee shall
mandatorily review the following information as per LODR Regulations-
(i) Management discussion and analysis of financial condition and results of
operations;
(ii) Statement of significant related party transactions (as defined by the
Audit
Committee), submitted by management;
(iii) Management letters / letters of internal control weaknesses issued by the
statutory auditors;
(iv) Internal audit reports relating to internal control weaknesses; and
(v) The appointment, removal and terms of remuneration of the Chief internal
auditor shall be subject to review by the Audit Committee.
(vi) Statement of deviations: (a) quarterly statement of deviations including
report of
monitoring agency if applicable and (b) annual statement of funds utilized for
purposes other than those stated in the offer document/ prospectus/ notice.
(c) Differences between Division II (Ind- AS- Other than NBFCs) and Division
III
(Ind- AS- NBFCs) of Schedule III –The presentation requirements under Division
III
for NBFCs are similar to Division II (Non NBFC) to a large extent except for
the
following:
(i) NBFCs have been allowed to present the items of the balance sheet in order
of
their liquidity which is not allowed to companies required to follow Division
II.
Additionally, NBFCs are required to classify items of the balance sheet into
financial and non-financial whereas other companies are required to classify
the
items into current and non-current.
(ii) An NBFC is required to separately disclose by way of a note any item of
‘other
income’ or ‘other expenditure’ which exceeds 1 per cent of the total income.
Division II, on the other hand, requires disclosure for any item of income or
expenditure which exceeds 1 per cent of the revenue from operations or `10
lakhs, whichever is higher.
(iii) NBFCs are required to separately disclose under ‘receivables’, the debts
due
from any Limited Liability Partnership (LLP) in which its director is a partner
or
member.
NBFCs are also required to disclose items comprising ‘revenue from operations’
and
‘other comprehensive income’ on the face of the Statement of profit and loss
instead
of as part of the notes.
© The Institute of Chartered Accountants of India
138 FINAL (OLD) EXAMINATION: MAY, 2020
(d) Special Report to the Registrar: The auditors are required to report on
number of
matters as prescribed in various states. In addition to the main report, the
auditors
are also required to submit by way of schedules/audit memorandum information on
the working of the company as well. During the course of audit, if the auditor
notices
that there are some serious irregularities in the working of the society he may
report
these special matters to the Registrar, drawing his specific attention to the
points.
The Registrar on receipt of such a special report may take necessary action
against the society. In the following cases, for instance a special report may
become necessary:
(i) Personal profiteering by members of managing committee in transactions of
the society, which are ultimately detrimental to the interest of the society.
(ii) Detection of fraud relating to expenses, purchases, property and stores of
the society.
(iii) Specific examples of mis-management. Decisions of management against
cooperative principles.
(iv) In the case of urban co-operative banks, disproportionate advances to
vested interest groups, such as relatives of management, and deliberate
negligence about the recovery thereof. Cases of reckless advancing, where the
management is negligent about taking adequate security and proper safeguards
for judging the credit worthiness of the party.
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