New Paper analysis
1(a) SA 501
1(b) SA 560
1(c) SA 720
2(a) SA 550
2(b) NFRA Rules, 2018
2(c) 2.I.2 and 2.I.7
3(a) Classification of advances and provisioning
3(b) SA 265 3
(c) 2.II.1
4(a) SA 250
4(b) Auditor's procedure to verify completeness of information CFS
4(c) Para 3 Clause (xiii)
5(a) Solution to Behavioral problem
5(b) Regulation 19 LODR
5(c) 1.I.6 PE Or Audit in IT environment/SA 315
6(a) Audit of NBFC
6(b) SA 240
6(c) Data mining technique - Forensic audit
New Course answers
Where a perpetual inventory system is maintained, management may perform physical counts or other tests to ascertain the reliability of inventory quantity information included in the entity’s perpetual inventory records. In some cases, management or the auditor may identify differences between the perpetual inventory records and actual physical inventory quantities on hand; this may indicate that the controls over changes in inventory are not operating effectively.
Relevant matters for consideration when designing audit procedures to obtain audit evidence about whether changes in inventory amounts between the count date, or dates, and the final inventory records are properly recorded include:
• Whether the perpetual inventory records are properly adjusted.
• Reliability of the entity’s perpetual inventory records.
• Reasons for significant differences between the information obtained during the physical count and the perpetual inventory records.
2 (a)
Understanding the nature of significant transactions outside the normal course of business (Ref: Para. 16(a))
Inquiring into the nature of the significant transactions outside the entity’s normal course of business involves obtaining an understanding of the business rationale of the transactions, and the terms and conditions under which these have been entered into. Inquiring into whether related parties could be involved
A related party could be involved in a significant transaction outside the entity’s normal course of business not only by directly influencing the transaction through being a party to the transaction, but also by indirectly influencing it through an intermediary. Such influence may indicate the presence of a fraud risk factor.
Relevant related party information that may be shared among the engagement team members includes, for example:
• The identity of the entity’s related parties.
• The nature of the related party relationships and transactions.
• Significant or complex related party relationships or transactions that may require special audit consideration, in particular transactions in which management or those charged with governance are financially involved.
2 (c)
Clause (7) of Part I of Second
Schedule to the Chartered Accountants Act, 1949 states that a Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he does not exercise due diligence, or is grossly negligent in the conduct of his professional duties . As it appears from the facts of the case, the auditor has been grossly negligent in performing his duties which constitutes professional misconduct. Thus, such instances require reference to Disciplinary Committee of the Council of the Institute. If a member is found guilty by the Council of any of the acts or omissions stated in the Schedule, its finding with recommendations are to be referred to the High Court for decision.
3(a)
• Examine whether the classification made by the branch is appropriate. Particularly, examine the classification of advances where there are threats to recovery.
• Examine whether the secured and the unsecured portions of advances have been segregated correctly and provisions have been calculated properly.
As per the Reserve Bank guidelines, if an account has been regularised before the balance sheet date by payment of overdue amount through genuine sources, the account need not be treated as NPA. Where, subsequent to repayment by the borrower (which makes the account regular), the branch has provided further funds to the borrower (including by way of subscription to its debentures or in other accounts of the borrower), the auditor should carefully assess whether the repayment was out of genuine sources or not. Where the account indicates inherent weakness based on the data available, the account should be deemed as a NPA. In other genuine cases, the banks must furnish satisfactory evidence to the Statutory Auditors about the manner of regularisation of the account to eliminate doubts on their performing status. It is to be ensured that the classification is made as per the position as on date and hence classification of all standard accounts be reviewed as on balance sheet date. The date of NPA is significant to determine the classification and hence specific care be taken in this regard. NPA should be recognized only based on concept of Past Due/ Overdue concept, and not based on the Balance Sheet date.
3 (b)
Examples of matters that the auditor may consider in determining whether a deficiency or combination of deficiencies in internal control constitutes a significant deficiency include:
● The likelihood of the deficiencies leading to material misstatements in the financial statements in the future.
● The susceptibility to loss or fraud of the related asset or liability.
● The subjectivity and complexity of determining estimated amounts, such as fair value accounting estimates.
● The financial statement amounts exposed to the deficiencies.
● The volume of activity that has occurred or could occur in the account balance or class of transactions exposed to the deficiency or deficiencies.
3 (c)
UDIN is applicable for both manual as well as digitally signed certificates, for online certificate, UDIN has to be generated and kept for records if asked by third party or authority.
5 (a)
Solution to behavioural problems: The following steps may be taken to overcome the aforesaid problems-
(i) To demonstrate that audit is part of an overall programme of review for protective and constructive benefit.
(ii) To demonstrate the objective of review is to provide maximum service in all feasible managerial dimensions.
(iii) To demonstrate the review will be with minimum interference with regular operation.
(iv) The responsible officers will be involved in the process of review of the findings and recommendations before the audit report is formally released.
It is essential to create an atmosphere of trust and friendliness so that audit reports will be understood in their proper perspective. Finally, it needs hardly any emphasis that there should be right management culture, enlightened auditees and auditors of the right calibre. May be to expect a combination at all times of all the three is asking for the impossible. But, a concerted effort by the management, auditors and auditees to achieve a more acceptable climate would go a long way to achieve the goal
Old Course answers
1 (b) General Steps in the Conduct of RBA - RBA consists of four main phases starting with the identification and prioritization of risks, to the determination of residual risk, reduction of residual risk to acceptable level and the reporting to auditee of audit results. These are achieved through the following:
Step 1 Understand auditee operations to identify and prioritize risks: Understanding auditee operations involves processes for reviewing and understanding the audited organization’s risk management processes for its strategies, framework of operations, operational performance and information process framework, in order to identify and prioritize the error and fraud risks that impact the audit of financial statements. The environment in which the auditee operates, the information required to monitor changes in the environment, and the process or activities integral to the audited entity’s success in meeting its objectives are the key factors to an understanding of agency risks. Likewise, a performance review of the audited entity’s delivery of service by comparing expectations against actual results may also aid in understanding agency operations.
Step 2 Assess auditee management strategies and controls to determine residual audit risk: Assessment of management risk strategies and controls is the determination as to how controls within the auditee are designed. The role of internal audit in promoting a sound accounting system and internal control is recognized, thus the SAI should evaluate the effectiveness of internal audit to determine the extent to which reliance can be placed upon it in the conduct of substantive tests.
Step 3 Manage residual risk to reduce it to acceptable level: Management of residual risk requires the design and execution of a risk reduction approach that is efficient and effective to bring down residual audit risk to an acceptable level. This includes the design and execution of necessary audit procedures and substantive testing to obtain evidence in support of transactions and balances. More resources should be allocated to areas of high audit risks, which were earlier known through the analytical procedures undertaken.
Step 4 Inform auditee of audit results through appropriate report: The results of audit shall be communicated by the auditor to the audited entity. The auditor must immediately communicate to the auditee reportable conditions that have been observed even before completion of the audit, such as weaknesses in the internal control system, deficiencies in the design and operation of internal controls that affect the organization’s ability to record, process, summarize and report financial data.
1(c) Personal Expenses Debited to Profit & Loss Account [Clause 21(a)] - Where payment is made to employees under a contractual obligation then it need not to be disclosed even if it is of personal nature.
2(a) Determining materiality involves the exercise of professional judgment. A percentage is often applied to a chosen benchmark as a starting point in determining materiality for the financial statements as a whole. Factors that may affect the identification of an appropriate benchmark include the following:
• The elements of the financial statements (for example, assets, liabilities, equity, revenue, expenses);
• Whether there are items on which the attention of the users of the particular entity’s financial statements tends to be focused (for example, for the purpose of evaluating financial performance users may tend to focus on profit, revenue or net assets);
• The nature of the entity, where the entity is at in its life cycle, and the industry and economic environment in which the entity operates;
• The entity’s ownership structure and the way it is financed (for example, if an entity is financed solely by debt rather than equity, users may put more emphasis on assets, and claims on them, than on the entity’s earnings); and
• The relative volatility of the benchmark.
2 (b) Sarbanes Oxley Act of 2002, commonly known as SOX, is a requirement in America. Section 404 of this act requires public listed companies to implement, assess and ensure effectiveness of internal controls over financial reporting and auditors independent opinion on the design and operating effectiveness of internal controls over financial reporting (ICFR) – which is similar to the requirements of IFC-FR for Indian companies. Similar legal and statutory requirements over internal controls exist in several other countries including Japan, China, European Countries, etc.
2 (c) General Locial question
3 (a) Risks can arise or change due to circumstances such as the following:
(a) Changes in operating environment. Changes in the regulatory or operating environment can result in changes in competitive pressures and significantly different risks.
(b) New personnel. New personnel may have a different focus on or understanding of internal control.
(c) New or revamped information systems. Significant and rapid changes in information systems can change the risk relating to internal control.
(d) Rapid growth. Significant and rapid expansion of operations can strain controls and increase the risk of a breakdown in controls.
(e) New technology. Incorporating new technologies into production processes or information systems may change the risk associated with internal control.
(f) New business models, products, or activities. Entering into business areas or transactions with which an entity has little experience may introduce new risks associated with internal control.
(g) Corporate restructurings. Restructurings may be accompanied by staff reductions and changes in supervision and segregation of duties that may change the risk associated with internal control.
(h) Expanded foreign operations. The expansion or acquisition of foreign operations carries new and often unique risks that may affect internal control, for example, additional or changed risks from foreign currency transactions.
(i) New accounting pronouncements. Adoption of new accounting principles or changing accounting principles may affect risks in preparing financial statements.
3 (b) Council Affairs 4th April, 2016 ANNOUNCEMENT - RESPONDING TO TENDERS
Comments
Post a Comment