icwa paper-6june_2010_audit (1)

8/7/2019 ICWA paper-6June_2010_audit (1)

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June 2010 Examination

Section I Commercial and Industrial LawQuestion 1: Comment on the following statements based on legal provisions(No marks for wrong reasons / justifications)

a) Gratuity can be attached in execution of a decree or order of any civil,revenue or criminal court.b) During 2001 2002, the number of employees were 50 and subsequently

reduced to 10 during 2009 2010. Employer discontinued deductions asEPF not applicable due to reduction in employees.

c) Mr. Roy sells by auction, to Mr. Paul a cow which Mr. Roy knows to beunsound. Mr. Roy says nothing to Mr. Paul about cow's unsoundness.This is a clear case a fraud by Mr. Roy.

d) Sale and Agreement to sale are same.e) Cheque for Rs. 2,00,000 issued by Mr. Nair was returned unpaid with

remarks 'Account Closed', hence drawee has no remedy.f) Rights to Information Act 2004 provides that Public Information Officer

is required to furnish the information within 15 days from the date ofreceipt of application with a fee Rs. 50/-

g) Mr. Tarafder instructsMr. Kinkar a merchant to buy a ship for him. Mr.Kinkar takes the services of a renowned ship surveyor to choose a seaworthy ship for Mr. Tarafder. The ship turns out to be unsea worthy andis lost. Mr. Kinkar who is agent is responsible.

Answer 1:a) False. This protection is specifically provided in the Payment of

Gratuity Act, 1972 that the gratuity cannot be attached by an orderof the court.

b) EPF Act 1952 provides that once the Act is applied to any

establishment, it shall continue to be applied even whensubsequently the number of employees has reduced. Employeraction is wrong in the eyes of law. EPF scheme shall continue.

c) Mere silence over a fact does not amount to fraud as per theIndian Contract Act. Mr. Paul has all the opportunities to examinethe cow. Mr. Roy is not supposed to bring to light the unsoundnessof cow.

d) No. They are not same. In sale the consideration moves with thesale at the present date while in agreement to sale theconsideration will move at a future date when the sale would take

place.e) The drawee has a remedy under the Negotiable Instrument Act

and can serve a notice to the drawer within 15 days of dishonourof cheque and demand the payament.

f) As per RTI Act 2004, the fee is Rs. 10 and not Rs. 50. The PublicInformation Officer is bound to provide information within 30 dayssubject to certain conditions.


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g) Mr. Kinkar is not responsible as Mr. Tarafder is also supposed tosee the seaworthiness of the ship before buying. Mr. Kinkar isacting as agent and he has all the rights to appoint another personas agent as this is a case of technical expertise. Mr. Kinkar cannotbe charged of negligence as he has appointed a renowned firm for

the survey.Question 2:

a) Mr. A agrees to sell a house to Mr. B for Rs. 100,000, but if Mr.B uses the house as 'Gamble house', then Mr. B shall pay Rs.150,000. Explain the legality.

b) A contract without adequate consideration is not a contract.Offer your views.

c) Discussion the position of agents appointed by Minor.d) An exchange of goods with goods is a sale. Comment with

Rules position.

e) When sale is complete in an Auction ?f) Factories Act, provides certain precautions in case of fire Give

details.g) Under what circumstances compensation is not payable

(Workman's Compensation Act).Answer 2:

a) The Contract is valid if the purpose is lawful and is void if thepurpose is unlawful. First part is a valid contract while the secondpart is void as using the house as 'gambling house' is unlawful.Consideration does not matter is deciding the lawfulness of the

purpose.b) Repeat Question. Please see : Solved scanner : Page 6.9 Chapter2 Consideration Dec 2001.

c) Minor is not supposed to take decisions. He can neither enter intoa contract nor can he appoint agent. Such agents will deemed tobe not appointed at all and their appointment will be null and voidin the eyes of law.

d) Exchange of goods with goods is not sale, but it is called barterexchange. Sale is defined in Sale of Goods Act as transfer ofproperty in goods for a price.

e) Auction sale is complete when the auctioneer announces thecompletion in any formal manner e.g. by falling the hammer.f) The precautions required in case of fire as per Factories Act, are

as follows:(i) All precautions and measures should be taken to

prevent the occurrence of fire inside the factory andoutside the factory.


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(ii) Fire escape should be provided. This should beadequate for all the employees.

(iii) All necessary equipments and facilities should beprovided to fight and put out the fire.

(iv) All workers must be trained regarding what they should

do in case of fire. All must know where the escape is.(v) The state govt. has powers to give directions in this

regard.(vi) The Chief Inspector has all the powers, if in his opinion,

the measures and precautions taken by factory to dealwith fire, are inadequate, he may direct the factory toprovide more facilities, equipments and arrangementsin the factory. He may also frame a time schedule forthis.

g) Compensation is not payable in the following cases :

(i) The employee was under the influence of drugs /alcohol at the time of accident.

(ii) Disablement was for a period less than 4 days.(iii) Worker was not following safety rule.(iv) Worker was not using the required equipment or

safety measure e.g. helmet, belt etc.(v) The worker has refused for medical examination

even when the employer was paying the cost ofsuch examination.

3 (a) Write Short Notes on any four :

1. (i) Undue Influence : When two parties enter into contract with eachother and one of the parties is in position to dominate the will of theother and uses that position to obtain an unfair advantage over theother party, such contract is said to be induced by ' undue influence.'If a person having a dominant position over another person and heenters into contract with such person then the burden of proof that thecontract was not done under undue influence, is on the personholding the dominant position.

A person is said to be having a dominant position if (i) he makescontract with a person who is not of sound mind because of age,

illness, mental instability or bodily distress etc. (ii) he holds somecontrol over the other person (iii) he holds some monetaryobligation over the other person.

2. Right of Resale : If the seller has not received the payment fromthe buyer, he is called unpaid seller. The unpaid seller has the right toresell those goods provided he gives proper notice to the buyer in thisregard. The buyer should be given reasonable time to pay the balanceamount and if he fails to pay, unpaid seller may resell the goods and he


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also has right to recover the damages occurred to him by breach ofcontract, from the buyer. If such notice has not been given, the unpaidseller has no right to recover the damages from the original buyer nor he(unpaid seller) has any right over the profit arising out of such sale. Thesecond buyer gets the good title after such resale. The seller can retain

any profit on account of such sale.3. Industrial Disputes : Industrial Dispute means : any dispute ordifference between (a) employer and employees (b) employer andemployer (c) employee and employee. The dispute should be connectedwith (a) employment (b) non-employment (c) terms of employment (d)conditions of working ; of any person.4. Working Hours for Children : No child shall be employed orpermitted :(i) to work in any factory for more than four and half hours in any day ;(ii) during the night ; (iii) not more than two shifts and shifts should be 5

hours apart (iv) no child shall be allowed to work in any factory on anyday on which he has already been working in any other factory (v) nofemale child shall be allowed to work in any factory except between 8am to 7 plant & machinery;5. Consumeras per Consumer Protection Act 1986 : This is repeatquestion of Dec 2007 (6a). For answer Please see Chapter 21 page s6.95Question 3 (b) : Give correct answer if the following statements arewrong :

(i) When person becomes or ceases to be, designated member,

notice is delivered to the Registrar within 30 days;(ii) Where there is any change in the name or address of a

member, notice is delivered to the Registrar within 30 days.Answer : In first case, the notice to the Registrar be delivered within 14 daysand in (ii) within 28 days.

Question 4:(a) Mr. Roy gives Mr. Ghosh on hire, a horse for own riding but Mr. Ghosh

drives the horse in his carriage. What action Mr. Roy can take?(b) A saved life of B when B was drowning. Later A sued B for remuneration

/ reward because saving life was the consideration received by B. Statebased on rules whether A would succeed.

(c) Sale and Bailment are same. Do you agree ?(d) Manager of the factory fixed working hours of woman from 6 pm 1 am

during the period from Monday to Friday of first week of May 2010.Whether it is permissible, cite the rule position.

(e) As per the Factory Act, '' first aid boxes'' shall be provided andmaintained not less than one for every 200 workers ordinarily engaged.

(f) When and to whom the gratuity is payable.(g) What is negotiable ?

Answer :


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(a) This is contract of bailment. Mr. Ghosh has not followed theconditions of bailment and he action to use the horse in hiscarriage in not as per the terms of bailment. It is now up to Mr.Roy to continue with or terminate the bailment.

(b) There was no contract or agreement between A and B in this

respect. As there was no contract at the first place, the question ofany consideration does not arise whatsoever. It was a voluntaryact on part of A hence A will not succeed.

(c) No, they are not same. There are many points of differencebetween them as given below :

A sale involves transfer of ownership and physicaltransfer of property.

Bailment involves physicalis not disturbed.

Parties involved are called seller and buyer. Parties involved are called

The property is never taken back after transfer. Property is taken back as

Contract is over when buyer takes the possession of

property after payment.

Contract is not over when

the property is to be return(d) As per the provisions of Factory Act, the working hours for women

are between 6.00 am to 7.00 pm. No woman shall be allowed towork from 7.00 pm to 6.00 am. The state government has powersto alter the above limits but in no case the women will be allowedto work in any factory between 10.00 pm to 6.00 am. Hence themanager's decision is incorrect in the eyes of law.

(e) As per the Factory Act, '' first aid boxes'' shall be provided andmaintained not less than one for every 150 (not 200 as given) workersordinarily engaged.

(f) Gratuity is payable to employees who have rendered continuousservice for minimum 5 years in following circumstances :(i) On the superannuation (ii) on his/her retirement or resignation(iii) on his / her death or disablement. In case of death, gratuity ispaid to the nominees or to his / her legal heirs, if there was nonominee. In case of death, the condition of continuous service of 5years is not applicable.

(g) Negotiable means transferable on delivery. When an instrumenti.e. promissory note, bill of exchange or cheque is transferred to anyperson to make him holder, the instrument is said to be negotiated.Question 5 : Comment on the following statements based on legalprovisions (no marks for wrong reasoning).

(a) US GAAP is not different from India GAAP.(b) Auditor is not liable in case of honorary Audit.(c) Besides statutory audit by a Chartered Accountant, Comptroller

and Auditor General of India conduct audit of Govt. Companies,hence Internal audit is not necessary in Govt. companies.


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(d) Cost audit is submitted to the company within 90 days from theend of company's financial year.

(e) Scope of management audit is limited to review the audit reportsof statutory auditor and internal auditor.

(f) CARO is not applicable to Private company.

(g) To comply with CARO, Auditor is to comment in his report on ''Application of Term Loan''. Comment.

Answer 5:(a) False. There are many differences between them, major ones

being in the cases of depreciation, R&D expenditure, investment inown shares etc. (Suggestive reading :The difference between IndiaGAAP and US GAAP has been given on page S 6.133 Chapter 1:Audit techniques and practices.)

(b) False. The auditor has to conduct and conclude his audit as perthe directives and guidelines given in the Company's Act 1956.

The quantum of fees does not decide the scope, standard orstrength of audit. The auditor's liability exists for the auditconducted by him. It does not matter whether he has conductedthe audit with fees or on honorary basis.

(c) Internal audit is different and distinct from the audits conducted byCA or by CAG. According to CARO, internal audit is mandatory incase of listed companies and other non-listed companies having apaid up capital and reserves exceeding Rs. 50 lacs or thecompanies whose average turnover in last three years exceedsRs. 500 lacs. Hence internal audit is also compulsory for the govt.

companies who fall under the mentioned category.(d) False. Cost audit report is submitted to the Central Govt. with acopy to company within 180 days from the end of financial year towhich the cost audit report relates.

(e) False. The objectives of management audit are (i) to detect andcorrect the human limitations of top management; (ii) to improveupon managements productivity; (iii) to avoid possible lossesarising from inefficient management and (iv) to study the currentstate of all affairs of the management and suggest suitablemeasures for improvement.

(f) : CARO 2003 is applicable to every company except :1. A Banking Company 2. An Insurance Company 3. Acompany licensed to operate as per the provisions ofsection 25 of the Companies Act 1956. 4. A privatelimited company which has a paid up capital andreserves of not more than Rs. 50 lakhs after writingoff the accumulated losses and other fictitious assets.


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5. Private Ltd. company whose turnover does notexceed Rs. 5 crores.

(g) : This is point 16 of CARO 2003. Application of Term Loan :Whether loans taken, were used in the same purpose for whichthese were taken.

Question 6 :(a) Find out the difference between US GAAP and India GAAP in

respect of R & D.(b) What are the basic items / areas you will consider for review of

Fixed Capital / Assets ?(c) State the matters that should be considered to determine the

effects of Computerised Information System environment on theaudit.

(d) Internal Check is said to have some fundamental aims. If so givedetails.

(e) Articles of Association of ABC Ltd. provide that Fixed DepositsReceipts should not be shown to statutory auditor. Accordingly,Manager (accounts) refused to show. State the legality.

Answer 6 :(a) Indian GAAP allows the R and D expenditure to be capitalised

under certain conditions like technical feasibility, resourceavailability etc. In the US GAAP R and D costs are treated asexpenses. If the Plant & machinery has future use, it can becapitalised.

(b) The basic items which can be considered are many; some of them

are the following :(i) Assets register, whether it is maintained properly, updatedregularly. Who maintains it and who verifies and signs it.(ii) Policy of depreciation: Whether consistently followed. AS 6i.e. Depreciation accounting is followed. Any change in policy ofdepreciation has been properly disclosed and its impact has beenassessed and incorporated.

(iii) Policy of acquisition of fixed assets. How the assets arepurchased? Who authorizes the payment ? Whether purchasecommittee is formed for this purpose ? Whether price paid for

its acquisition is okay ?(iv) Insurance policy : Whether all assets are ensured adequatelyagainst possible contingencies ?

(v) Verification of assets : How and by whom, the assets areverified physically ? What is the interval between twosuccessive verification ? Has any discrepency


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(vi) Policy of writing off or disposal : How the assets are disposed ?Who certifies the disposal ? Entries are recorded in the assetsregister or not?

(vii) Utilisation of Fixed assets : Optimum utilisation being ensuredby the management, what is the Fixed assets turnover ratio and

how it stands against the industrial standard.(viii) CARO 2003 requires in its first point regarding Fixed assets :

a. Company is maintaining proper records of fixed assets ;b. Fixed assets are frequently verified by the management;c. Material discrepancy found during verification are accounted

properlyd. Any disposal of fixed assets has affected the going concern

concept or not.(c) Although the overall objective and scope does not change in EDP

or CIS (computerized information system) environment, however, the

use of computers changes the processing, transfer and storage ofinformation in a very significant manner. Accordingly the proceduresfollowed by the auditor in his study and evaluation of accounting systemand related internal control may be considerably affected by the Cisenvironment. This calls for adequate knowledge of Cis, understanding ofcomputer hardware, software and processing system on the part ofauditor.The use of computers and computer assisted audit techniques leads todrastic improvements in the effectiveness and efficiency of auditingprocedures and performance. For example some transactions may be

tested more effectively than manual system. The CIS does not causeany change in central objective of auditing but it does change the auditprocess itself as below:

1. Skill and Competence : It is imperative to know how the cisenvironment affects the study and evaluation of internal controlsystem of the entity. The auditor should have understanding ofcomputer hardware, software and application of varioustechniques in relation to accounting and auditing. He should havesufficient knowledge of cis to implement the auditing proceduresand approaches.

2. Planning : CIS of the auditee has direct relation with the planningof audit. The auditor should collect the information relating to cise.g.

a) The computer hardware, software and its extent of application inthe entity.

b) Any revision in the existing system, introduction of new applicationsystem;

c) Planning of audit of various application processes ;


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d) Determine the degree of reliance on internal control of cis.e) Planning auditing procedures using computer-assisted audit

techniques.3. Accounting system and Internal control : Internal control objectives

apply to all areas, whether manual or automated. Therefore,

conceptually, control objectives in an IS environment remain unchangedfrom those of a manual environment. However, control features may bedifferent. If the auditor plans to rely on internal control in conducting hisaudit, he should ensure adherence to manual and controls as prescribedin the charter.

4. Audit evidence : A Cis environment may altogether alter the sceneof audit evidence. Computer assisted audit techniques may be requiredto enhance the effectiveness as well as efficiency of the audit.Generalised audit software may also be called for assistance in audit incis environment.

(d) The internal check system should have some fundamentals like thefollowing :

(i) The basic objective is to prevent fraud and error andmisappropriation of resources. This should always be kept in mind.

(ii) Some check points should be designed and these should beentrusted to specific persons.

(iii) Segregation of duties is essential component of any internalcheck system.

(iv) The flow of work from start to finish should be smooth enough.No breakers or bottlenecks should come in the way.

(v) It should be designed in such a way where work of one personshould be automatically checked by another person.(e) Restriction of the rights of statutory auditor:To enable the statutory auditor to perform the duties, certain rights arevested in him vide section 227 of the Company's Act 1956, viz. (i) Rightto access the books and records at all times, (ii) right to acquireinformation and explanation from officers, and (iii) right to attend AGM.All these rights are vested in him by the Act itself and the companycannot restrict any of these rights. Any resolution taken at a generalmeeting of shareholders or any provision in the Articles of Association of

the company restricting the rights of auditor is invalid. The companycannot override the provisions of the Act. The manager accounts shouldshow the required documents to the auditor and if he does not do so, theauditor should qualify his report accordingly.Question 7:

a) A sum of Rs. 400,000 which was spent on trial productionwas included in production cost. Give correct answer if thiswas wrong.


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b) What are the disclosure requirement if the assets of thecompany are revalued?

c) Statutory auditor is to give a certificate regarding complianceof corporate governance which is annexed with the Director'sreport. What are the documents and records to be checked

by you before signing the certificate ?d) What are the control measures which the auditor is

concerned with in a computer information system ?e) State, what are the terms to be verified for conducting ''

stores accounting''?f) How will you verify the interest received ?

Answer 7 :a) Trial production is part of the cost of the asset because it is

required to bring the asset in operating condition. All expensesbefore the machine is ready for commercial production should be

capitalised as part of machine. The expense of Rs. 4.0 lakhsshould therefore be capitalised and should not be treated asproduction overheads. According to AS-10 (accounting of fixedassets), the cost of fixed assets includes any directly attributablecost of bringing the asset to the working condition for its intendeduse. AS-10 makes it clear that expenditure incurred on start upand commission of the project including the expenditure on testruns less income from sale of products, forms cost of the assetand is therefore capitalised. Rs. 4.0 lakhs should be capitalised asdeferred revenue expenditure to be written off over a period of say

3 to 5 years.In the light of above, the inclusion of trial run cost in productionoverheads is wrong.

b) This relates to AS 10. AS 10.13 requires the compliance of Part Iof Schedule VI of the Company's Act 1956 which states that thefollowing details of fixed assets to be disclosed in balance sheet :

Original cost, Additions to / Deductions from the fixed assetsduring the year,

Total depreciation up to the end of the year and sum writtenoff or added due to revaluation;

Each balance sheet for the first five years, subsequent to thedate of reduction or addition on account of revaluation orreduction of capital should disclose such reduction or addition.

c) The Corporate Governance Report requires following points to bechecked by auditor during the audit : (i) Minutes of BODsmeetings (ii) Minute book of general body meeting (iii) Minute bookof Audit committee (iv) Corporate Governance Report (v)Mandatory annual intimations filed by each director about


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directorship in other companies (vi) Consistency of segment wiseinformation with the segment information disclosed in financialstatements in according with AS 17.and (vii) Adequacy ofInternal control system consistency with the opinion expressed byhim under CARO 2003.

d) Under computer information system, some of the controls withwhich the auditor is concerned are as follows : (i) Password (ii)Edit Test (iii) Batch cancellation stamp (iv) Fire walls (v) financecontrol total (vi) Audit trails (vii) General controls and applicationcontrols. This is sufficient for 2 marks, if the question is for moremarks, pointwise details should be given.

e) For conducting the audit of 'store accounting' the auditor shouldconsider the following : (i) internal check system regarding thereceipt and issue of materials from stores (ii) adequacy, efficiencyand efficacy of internal control system regarding stores (iii) is there

any manual, directives and guidelines set up by the managementin this regard (iv) what is the frequency of physical checking ofstore items (v) how the discrepancy between physical stock andstock as per books, is treated in books of accounts (vi) whatactions have been taken by the management for the discrepancy ;

f) The interest is received by the organization from many sources viz.fixed deposits with banks, securities like bonds and debentures,investments in other financial institutions, loans given to outsiders,securities deposits with authorities etc. The interest received oneach of these should be verified with the documents. It should also

be seen such interests have been properly entered in the cashbook and duly deposited in bank. Interest accrued managementand not paid should find place in balance sheet.

Question 8:a) How will you verify petty cash ?b) How will you verify provisions for taxation ?c) What is expected under CARO regarding (a) internal audit and

(b) fraud?d) Under what circumstances, the auditor has to qualify his report

?

e) Name 4 such circumstances under which the ManagementAudit is useful.Answer 8:

a) The most rudimentary point in vouching the cash balance is thatthe date and time of checking should be known to nobody otherthan auditor himself. Cash should be preferably checked inremote branches. Surprise checks of cash balance, are alsoadvisable. If possible, the cash balance at the balance sheet


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date should be checked, however, if it has not been done, thecash balance may be checked on surprise basis at a later dateand reconciliation to cash balance at the balance sheet datemay be made.

Cash balance consists of many components viz. cash, petty cash,

postage and revenue stamps, cash at branches, cash with agents.Unduly large balances during any part of the year, of cash, call forexplanation from senior official of the entity. Similar principles andprocedures may be employed for verification of petty cash.

b) Verification for provision for taxation :(i) Guidance notes issued by ICAI should be consulted toascertain the basis for provision for taxation.(ii) According to AS 4, deferred tax liability requires aprovision and a suitable disclosure.(iii) Get a statement of income. See that provision for taxation

has been adequately made in the current year taking intoaccount the profit made.(iv) Check the vouchers of advance payments of tax.

(v) Actual tax liability and advance payment of tax becompared. See suitable adjustments have been madefor additional demand / refund of tax.

(vi) Examine whether assessment is completed andrectified in the same year.

c) Internal Audit System in certain companies :a) Whether the company has an internal audit system commensurate

with the size and nature of its business.b) The above is applicable if : (i) Paid up capital and reservesexceeding Rs. 50 lakhs as at commencement of the financial yearOR (ii) annual turnover exceeding Rs. 500 lakhs for threeconsecutive financial years immediately preceding the FYconcerned.

Fraud : Whether any fraud on or by the company, has been noticedor reported during the year, if yes, nature and amount involved is to beindicated.

d) Where the auditor gives an opinion subject to certain objections,conditions and/or reservations, s/he is said to have given a qualifiedopinion. In the following circumstances, the auditor has to qualify hisreport :(i) She cannot conduct audit satisfactorily due to non-availability ofcertain books of accounts or records or information or explanationnecessary for conduct of his audit work.


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(ii) She finds that the Balance sheet and Profit and loss a/c have notbeen prepared in accordance with accepted accounting principles.(iii) She finds that inadequate / excessive provisions have been made inrespect of bad and doubtful debts, depreciation etc.(iv) She detects that the company has created certain secret reserves.

(v) In her opinion, the provision for taxation is not proper / adequate.(vi) AS 2, has not been followed in inventory valuation.

(e) The objectives of management audit are (i) to detect andcorrect the human limitations of top management; (ii) to improve uponmanagements productivity; (iii) to avoid possible losses arising frominefficient management and (iv) to study the current state of all affairs ofthe management and suggest suitable measures for improvement. (v)The following are some of the circumstances in which the managementaudit may be useful :

(a) While advancing loans, the lending institutions may requirethe management audit to be conducted;

(b) Foreign investors / collaborators usually demandmanagement audit report before releasing funds for growthand expansion;

(c) Company may itself feel the necessity of managementaudit for evaluating its performance, efficiency and efficacy;

(d) When one company wants to acquire another company, itmay insist on conduct of management audit beforeacquisition;

(e) Social image may be bettered by conduct of managementaudit as it is not mandatory in nature.

icwa paper-6june_2010_audit (1)

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