The Hindu Business Line : A shift back to Standards

In the June 2009 CA (Final) paper on advanced auditing, Accounting Standards accounted for five marks and Audit and Assurance Standards, 46 marks. The paper contains eight questions and requires the candidate to answer only six of them. The paper is for a total of 140 marks, of which, questions carrying 36 marks are compulsory.

Candidates have the option to choose from the balance of 104 marks, and attempt questions for 64 marks. Question 8 contains six parts and requires only four to be answered for 16 marks.

The spread of marks is: AS and AAS (51 marks), professional ethics (22), company audit (18), banks and insurance companies (18), tax audit (8) and miscellaneous topics (23) — cost audit (6), propriety audit (5), stock brokers (4), mutual funds (4) and operational audit (4).

Conspicuous by their absence were questions on due diligence, peer review, audit of co-operatives and corporate governance. There were also no questions on topics such as energy audit, management audit, social audit, etc.

The paper is not difficult, as some of the questions are elementary (such as the first question, where a charitable organisation says AS is not applicable to it; the question where the incoming auditor communicates to the outgoing auditor under certificate of posting; and payment of share to the widow of a deceased partner).

Certain questions are straight from the rule book, such as Questions 5 on AAS 21 and the one on tax audit. There are some tricky ones too, such as Q7(b) for four marks on operational audit, and Q4(a) on internal controls in the area of loans and advances of banks (12 marks).

Candidates might have wanted to leave out Q(4) in the choice. The division of questions, such as splitting banks and insurance companies and combining them with other questions, is a clever move.

With normal preparation, a candidate can aspire for around 60 marks, if not more.

Accounting standards

Q1(a): In the audit of an organisation whose objects are charitable or religious, it is held that accounting standards are not applicable, as only a very small portion of its activities is in the nature of business: The preamble of Accounting Standards states that every entity whose financial statements are to be attested by a chartered accountant should comply with all the applicable Accounting Standards. There is no discrimination between one kind of the entity and the other.

The fact that it is a charitable organisation cannot be reason for not complying with the Accounting Standards.

The contention of the charitable organisation is, therefore, not valid.

Q1(b): During the audit for the year ended March 31, 2009, certain personal expenses of employees have been debited to profit and loss (P&L) account: Section 227 (1A) requires the auditor to qualify the report if there is non-compliance. Clause ‘e’ requires the auditor to examine whether personal expenditure has been charged to revenue.

The auditor should examine the personal expenditure so charged to revenue with the terms of employment, and check whether such expenditure is payable by way of a contractual obligation.

If the terms of contract so provide, he has to merely document the same and issue an unqualified report.

On the contrary, if the terms of the contract do not provide for such expenditure, the auditor should seek a clarification from the management and consider whether the report is to be qualified.

Going-concern status

Q1(c): While conducting the audit of ABC Ltd for the year ended March 31, 2009, you find that the company has disposed of substantial part of the fixed assets, but the management of the company represents to you that they will continue in business: CARO requires the auditor to state whether the going-concern status of the entity is affected if a substantial part of the fixed assets is disposed of or lost.

AAS 11 requires the auditor to examine representations made by the management in the light of other information available in support of the representation. AS 25, on discontinuing operations, requires disclosures to be made if there are any discontinued operations.

The auditor should subject the management representation to such further examination as he deems fit and use his judgment to decide if the management representation is to be believed or not. If he is satisfied with the management representation, he has to document the same and need not qualify the report.

He may state under CARO as follows: “The company has disposed of certain fixed assets during the year. But there is no endangerment to the going-concern status of the entity insofar as it appears from our examination of the records of the company and as represented to us by the company.”

If he is not satisfied, he may refer the matter to an expert and decide if the situation warrants a comment in the audit report in the terms of AAS 16 on going concern.

He should also consider if the situation results in any discontinued operations and insist upon suitable disclosures if the situation so warrants.

Dividend provision

Q1(d): A Ltd has not made provision for proposed dividends in its accounts but proposes to charge dividends to P&L account as and when paid: Section 209 of the Companies Act requires every company to follow accrual basis of accounting. Declaring dividends at the AGM is an event occurring after the date of the balance-sheet and constitutes an “adjusting event” as per AS 4.

Dividends declared at the AGM cannot exceed the dividends proposed by the board of directors. As the board proposes the dividend, it is incumbent upon them to provide for the same. As dividends are to be paid out of the profits made by the company for the year, it is necessary for the company to provide for the same. Not providing for dividends amounts to non-compliance with the accrual basis of accounting.

The auditor should discuss the same with the management and see that the provision is made. If they do not accept, he should put in a suitable qualification in the audit report.