CA FINAL AUDIT (OLD) NOV 2020 SOLVED PAPER

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

The matter pertaining to responding to tenders issued by various users of professional services or organization in areas exclusively reserved for the members of the Institute was recently considered by the Council of the Institute. The Council on a consideration of the matter has decided that – 

a) In the exclusive areas of practice of Chartered Accountants, like audit and attestation services i.e. those areas where the assignments can be performed only by Chartered Accountants or where only Chartered Accountants have been invited for audit assignments, members should not respond to such tenders. In such cases, entities may avail the multipurpose empanelment data available with ICAI. However, wherever minimum fee of the assignment is prescribed in the tender document itself, members may participate in such tendering process.

b) In those areas, where along with Chartered Accountants, other professionals can also apply for the tender, there is no restriction for the Chartered Accountants to respond to the tenders floated by authorities from time to time.

The Council has further decided that its aforesaid decision be suitably issued as a guidelines of the Council under clause (1) of Part II of the Second Schedule to the Chartered Accountants Act, 1949 and any member who contravenes any of the provisions of the above guidelines shall be liable for disciplinary action under Section 21 of the Chartered Accountants Act, 1949.

While the guidelines of the Council on the above matter is being issued separately under clause (1) of Part II of the Second Schedule to the Chartered Accountants Act, 1949, this Announcement is being issued for advance information of the members at large.

3(c) 

The auditor may decide not to send a new audit engagement letter or other written agreement each

period. However, the following factors may make it appropriate to revise the terms of the audit engagement or to remind the entity of existing terms:

● Any indication that the entity misunderstands the objective and scope of the audit.

● Any revised or special terms of the audit engagement.

● A recent change of senior management.

● A significant change in ownership.

● A significant change in nature or size of the entity’s business.

● A change in legal or regulatory requirements.

● A change in the financial reporting framework adopted in the preparation of the financial statements.

● A change in other reporting requirements.

 

4(a) Going concern 

4(b)

Schedule II to the Act, provides that useful life of an asset shall not ordinarily be different from the useful life specified in Part ‘C’ to the said Schedule 

The Schedule II to the Companies Act, 2013 needs disclosure in the financial statements about the

depreciation method used and the useful lives of the assets for computing depreciation, if they are

different from the life specified in the Schedule II.

Companies are allowed to follow different useful life/residual value if an appropriate justification is given supported by technical advice. 

4(c)

Limitation of scope 

5(a)

Evaluation of Cost of Products: Clause (4) of Part I of the Second Schedule to Chartered Accountants Act, 1949, states that expressing an opinion on financial statements of any business or enterprise in which he, his firm or a partner in his firm has a substantial interest would constitute misconduct. Also, the Council of the Institute of Chartered Accountants of India has stated that in cases where a member of the Institute is a director of a company, or the firm in which the said member is a partner, should not express any opinion on its financial statements. As per facts of the case, the firm has been retained to evaluate the cost of products manufactured by it for its information system. It is a part of management consultancy service of the firm and moreover its partner was on the Board. Hence, the firm can perform this assignment and it will not constitute misconduct. However, the firm while accepting the position as auditor in future would have to consider whether it would be possible to act in independent manner and express opinion on financial statements. 

5(b)

5(c) 

6(a) Auditor shall not provide access to working paper Clause 1 part 1 second scheudle, SA 200, 230, SQC 1 

6(b) Peer review selection process 

6(c)

In particular, this Ind AS requires: (a) assets that meet the criteria to be classified as held for sale to be measured at the lower of carrying amount and fair value less costs to sell, and depreciation on such assets to cease; and (b) assets that meet the criteria to be classified as held for sale to be presented separately in the balance sheet and the results of discontinued operations to be presented separately in the statement of profit and loss. 

Hints to MCQ  

- Co-Operative Societies Act, 1912, Contribution to charitable purpose

Any registered society may, with the sanction of the Registrar, after one-fourth of the net profits in any year has been carried to a reserve fund, contribute an amount not exceeding ten per cent. of the remaining net profits to any charitable purpose, as defined in section 2 of the Charitable Endowments Act, 1890

- In some cases, even an unsophisticated predictive model may be effective as an analytical procedure. 

- Under comprehensive audit, the C&AG do not really cover again the field which has already been covered. He conducts an appraisal or an efficiency-cum-performance audit.

Prepared by Ajmer Din