SA and Guidance Notes – CA Inter Audit Questions bank

SA and Guidance Notes – CA Inter Audit Questions bank is designed strictly as per the latest syllabus and exam pattern.

SA and Guidance Notes – CA Inter Audit Question Bank

Question 1.
Write short note on the following:
Changes in accounting policies. (May 2016, 4 marks)
Answer:
As per AS – 1, Disclosure of Accounting Policies, All significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. The disclosure of the significant accounting policies as such should form part of the financial statements and the significant accounting policies should normally be disclosed in one place.

Question 2.
XYZ Ltd. which is in the business of trading of automobile components is following Cash Basis of Accounting for sale of spare parts. As Statutory Auditor of XYZ Ltd. explain the reporting requirements, manner of qualification and disclosure, It any, to be made in the auditor’s report in line with AS-1 Disclosure of Accounting Policies. (Jan 2021, 3 marks)

Question 3.
State the informations to be disclosed in the financial statements according to the requirements of AS-10. (Nov 2009, 5 marks)
Answer:
As per AS-10, Property, Plant and Equipment,
The financial statements should disclose, for each dass of poperty, plant and equipment:
(a) the measurement bases (I.e., cost model or revaluation model) used for determining the gross carrying amount;
(b) the depreciation methods used;
(c) the useful lives or the depreciation rates used. In case the useful lives or the depreciation rates used are different from those specified in the statute governing the enterprise, it should make a specific mention of that fact;

(d) the gross carrying amount and the accumulated depredation (aggregated with accumulated impairment losses) at the beginning and end of the period: and
(e) a reconciliation of the carrying amount at the beginning and end of the period showing:

• additions;
• assets retired from active use and held for disposal;
• acquisitions through business combinations;
• increases or decreases resulting from revaluations under paragraphs 34, 42, and 43 and from impairment losses recognized or reversed directly in revaluation surplus in accordance with AS 28:
• impairment losses recognized In the statement of profit and loss in accordance with AS 28;
• impairment losses reversed in the statement of profit and loss in accordance with AS 28;
• depreciation;
• the net exchange differences arising on the translation of the financial statements of a non-integral foreign operation in accordance with AS 11. The Effects of Changes In Foreign Exchange Rates; and
• other changes.

The financial statements should also disclose:
(a) the existence and amounts of restrictions on title, and property, plant and equipment pledged as security for liabilities;
(b) the amount of expenditure recognised in the carrying amount of an item of property, plant and equipment in the course of its construction;
(c) the amount of contractual commitments for the acquisition of property, plant, and equipment;
(d) If It Is not disclosed separately on the face of the statement of profit and loss, the amount of compensation from third parties for items of property, plant and equipment that were Impaired, lost or given up that is included in he statement of profit and loss; and
(e) the amount of assets retired from active use arid held for disposal.

Question 4.
As an Auditor how would you react to the following situations/comments? The Central Government sanctioned ₹ 20 lakhs as Grant to a Hospital for the purchase of certain equipments and paid ₹ 10 lakh as advance. The hospital took ₹ 10 lacks as income in the Profit and Loss account for the year. (Nov 2008, 6 marks)
Answer:
AS-12: Accounting for government grants regards two methods of presentation of grants related to specific fixed assets (PPE) In financial statements as acceptable alternatives:
1. Under first alternative, the grant is shown in the Balance Sheet as a deduction from the gross value of a machinery. The grant is recognised in P&L a/c over the useful life of a depreciable asset by way of a reduced depreciation charges.

2. Under second alternative, it can be treated as deterred Income which should be recognized in P&L A/c over useful life of asset in proportion In which depreciation qn machinery will be charged. The deferred income pending its apportionment to P&L a/c should be disclosed in Balance Sheet with a suitable description e.g. Deferred Government
Grants.

Present Case:
In the given case, Hospital received ₹ 50 lacs as grant towards part cost of specific machinery and paid ₹ 10 lacs as advance. The Hospital has credited the said sum as income in its Profit and Loss account which is in correct. As the treatment is not in accordance with Accounting Standard, so company is advised to rectify as per provision given above.

Question 5.
State with reasons (In short) whether the following statement Is True or False:
When Government grants are received ¡n the form of assets such as Land, plant and equipments etc., free of cost, then, such assets should be entered in the books of accounts at nominal value. (May 2009,2 marks)
Answer:
True:
As per AS 12 “Accounting for Government Grants” when Government grants in the form of non-monetary assets such as land, plant and equipments etc. are received free of costs then such assets should be entered in the books of account at nominal value.

Question 6.
Comment as a auditor on the following situations:
M.N.P. Company Ltd. purchased a machinery for ₹ 1,00 crore. The State Government granted the company a subsidy of ₹ 40 lakhs to meet partial cost of machinery. The company credited the subsidy received from the State Government to its Profit and Loss Account for the year ended March 31, 2010. (Nov 2010, 5 marks)
Answer:
Accounting Treatment for Government Grants
As per AS – 12 “Accounting for Government Grants”, accounting treatment of any grants or subsidy depends on nature of grants or receipts. Grants related to specific PPE are government grants whose primary condition is that an enterprise qualifying for them should purchase, construct or otherwise acquire such assets. Following are two methods of presentation of grants related to specific fixed assets (PPE) in financial statements as acceptable alternatives.

(i) Under the first alternative the grant ¡s shown in the balance sheet as a deduction from the gross value of the machinery. The grant is recognized In profit and loss accounts over the useful life of the depreciation life of asset by way of a reduced depreciation charge.

(ii) Under second alternative, it is treated as a deferred income which should be recognized in profit and loss account over useful life of asset in proportion in which depreciation will be changed on machinery.

Deferred income pending Its apportionment to profit and loss A/c should be disclosed in the balance sheet with a suitable description i.e. Deferred Government Grant.

Conclusion:
In the Instant case, MNP Company Ltd. received a subsidy from government worth ₹ 40 lakhs towards meeting partial cost of machinery. The company credited the same to its profit and loss account.

Accounting treatment of grant received towards partial cost of machinery is not correct. The auditor should advise company to correct the above accounting treatments of grant, otherwise, it is duty of the auditor to qualify his report bringing out the qualification Impact clearly.

Question 7.
Discuss with reference to SAs:
The auditor is responsible for maintaining an attitude of professional skepticism throughout the audit. Do you agree with the statement? (May 2014, 6 marks)
Answer:
Agree:
As per SA 200, ‘Overall Objectives of the Independent Auditor and the Conduct of an Audit In Accordance with Standards on Auditing’ Professional skepticism is an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud and a critical assessment of audit evidence.

Professional Skepticism Is necessary to the Critical Assessment of audit evidence as although auditor is not having any legal duty to detect frauds & errors still he has moral duty towards it. This includes questioning contradictory audit evidences and relying on documents and responses to other information obtained from management and those charged with governance (TCWG). It also includes consideration of the sufficiency and appropriateness of audit evidence obtained.

Question 8.
State with reasons (in short) whether the following statement is correct or incorrect:
It is necessary for the auditor to maintain professional skepticism through out the audit. (Nov 2016, 2 marks)
Answer:
Correct:
Professional skepticism through Out facilitates the exercise of professional judgernent and enhances the quality of audit and effectiveness of audit procedure. As per SA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing”. Professional skepticism is an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.

Question 9.
Examine with reasons (in short) whether the following statements are correct or incorrect:
(a) Judgmental matters are transactions that are unusual due to either its size or nature and that therefore occur infrequently. (Nov 2018, 2 marks)
(f) Management of the organization is solely responsible for the compliance of auditing standards while preparing financial statements. (Nov 2018, 2 marks)
Answer:
(a) Incorrect:
Non-routine transactions are transactions that are unusual, due to either size or nature and that therefore occur infrequently Judgmental matters may include the development of accounting estimates for which there is significant measurement uncertainty.

(f) Incorrect :
Management of the organization is responsible for the compliance of accounting standards while preparing financial statements.

Question 10.
Discuss the following:
“Professional judgment is essential to the proper conduct of an audit. Discuss. (Nov 2018,5 marks)
Answer:
Professional judgment is essential to the proper conduct of an audit. This is because interpretation of relevant ethical requirements arid the SAs and the informed decisions required throughout the audit cannot be made without the application of relevant knowledge and experience to the facts and circumstances.

• Professional judgment is necessary In particular regarding decisions about:
• Materiality and audit risk.
• The nature, timing, and extent of audit procedures used to meet the requirements of the SAs and gather audit evidence.
• Evaluating whether sufficient appropriate audit evidence has been obtained and whether more needs to be done to achieve the objectives of the SAs and thereby, the overall objectives of the auditor.
• The evaluation of management’s judgments in applying the entity’s applicable financial reporting framework.
• The drawing of conclusions based on the audit evidence obtained, for example, assessing the reasonableness of the estimates made by management in preparing the financial statements.

Question 11.
Discuss the following:
Mention any tour information which assists the auditor in accepting and continuing of relationship with the client as per SA 220. (May 2015, 5 marks)
Answer:
Information which assist the Auditor in accepting and continuing of relationship with Client:
As per SA 220, “Quality Control or an Audit of Financial Statements” the auditor should obtain information considered necessary in the circumstances before accepting an engagement with a new client when deciding whether to continue an existing engagement, and when considering acceptance of a new engagement with an existing client.

The following information would assist the auditor In accepting and continuing of relationship with the client:
1. The integrity of the principal owners, key management and those charged with governance of the entity;
2. Whether the engagement team Is competent to perform the audit engagement and has the necessary capabilities, including time and resources;
3. Whether the firm and the engagement team can comply with relevant ethical requirements; and
4. Significant matters that have arisen during the current or previous audit engagement, and their implications for continuing the relationship.

Question 12.
The engagement partner shall take the responsibility for the overall quality for each audit engagement to which that partner is assigned. Discuss with reference to SA 220 “Quality Control for an audit of financial statement”. (Nov 2019, 3 marks)
Answer:
As per SA 220, “Quality Control for an Audit of Financial Statement”, the engagement partner shall take the responsibility for the overall quality on each audit engagement to which that partner is assigned to emphasise:
(a) The importance to audit quality of:

• Performing work that complies with professional standards and regulatory and legal requirements;
• Complying with the firm’s quality control policies and procedures as applicable;
• Issuing auditor’s reports that are appropriate in the circumstances; and
• The engagement team’s ability to raise concerns without fear of reprisals; and

(b) The fact that quality is essential in performing audit engagements.

Question 13.
Comment on the following in relation to SAs:
(C) ‘Management is responsible for compliance with laws and regulations. (May 2011, 5 marks)
Answer:
Management’s responsibility for compliance with laws and regulations:
According to SA 250 on “Consideration of Laws and Regulations in an Audit of Financial Statements”, it is management’s responsibility, to ensure that the entity’s operations are conducted in accordance with the provisions of laws and regulations.

Laws and regulators may affect an entity’s financial statements in different ways for example, most directly; they may affect specific disclosures required of the entity In the financial statements.

The following are the procedures an entity may implement to assist in the prevention and detection of non-compliance with Laws and regulations:-

1. Monitoring legal requirements and ensuring that operating procedures are designed to meet these requirements.
2. Maintaining a register of significant laws and regulations with which the entity has to comply within its particular industry and a record of complaints
3. Instituting and operating appropriate systems of Internal control.
4. Monitoring compliance with the code of conduct and acting appropriately to discipline employees who fail to comply with it.
5. Engaging legal advisors to assist in monitoring legal requirements.
6. Developing, publicizing, and following a code of conduct.
7. Ensuring employees are properly trained and understand the code of conduct.

Question 14.
Principal aspects to be considered by an auditor while conducting an audit of final statements of accounts. (May 2018,5 marks)
Answer:
The principal aspects to be covered In an audit concerning final statements of accounts are the following:
(i) An examination of the system of accounting and internal control to as creation whether it is appropriate for the business and helps in properly recording all transactions.

(ii) Reviewing the system and procedures to find out whether they are adequate and comprehensive and incidentally whether material inadequacies and weaknesses exist to allow frauds and errors going unnoticed.

(iii) Checking of the arithmetical accuracy of the books of account by the verification of postings, balances, etc.

(iv) Verification of the authenticity and validity of transactions entered into by making an examination of the entries in the books of accounts with the relevant supporting documents.

(v) Ascertaining that a proper distinction has been made between items of capital and of revenue nature and that the amounts of various items of income and expenditure adjusted In the accounts corresponding to the accounting period.

(vi) Comparison of the balance sheet and profit and loss account or other statements with the underlying record In order to see that they are in accordance therewith.

(vii) Verification of the title, existence, and value of the assets appearing in the balance sheet.

Assertions about account balances at the period end:
(a) Existence –
Assets, liabilities d equity interests exist;

(b) Rights and Obligations –
The entity holds or controls the rights to assets, and liabilities are the obligations of the entity.

(c) Completeness –
All assets, liabilities, and equity interests that should have been recorded have been recorded.

(d) Valuation and Allocation –
Assets, liabilities, and equity Interests are included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded.

(viii) Verification of the liabilities stated in the balance sheet.

(ix) Checking the result shown by the profit and loss and to eo whether the results shown are true and fair.

(x) where audit is of a corporate body, confirming that the statutory requirements have been complied with.

(xi) Reporting to the appropriate person/ body whether the statements of account examined do reveal a true and fair view of the state of affairs and of the profit and loss of the organization.

Question 15.
Discuss the following:
With reference to SA 320 indicate the factors which may affect the identification of an appropriate benchmark in determining materiality for the financial statement as a whole. (Nov 2015, 5 marks)
Answer.
SA 320 “Materiality In planning and performing an audit” establishes standards on the concept of materiality and the relationship with audit risk while conducting an audit. The concept of materiality states that the significant and material item should be disclosed at one place ¡n the financial statements. For this purpose materiality means those items which may affect the judgement of the users of the financial statements of the client so that such items should be disclosed at one place.

Following are the factors which may affect the identification of appropriate benchmarks in determining materiality for the financial statements as a whole:
1. Item of materiality may be determined individually or in aggregate.
2. The materiality depends on the regulatory or legal considerations.
3. Materiality is not often reckoned with respect to quantitative details above. It has qualitative dimensions as well.
4. Even significant items in terms of quality may be material in special circumstances.
5. Sometimes the materiality of an item ¡n terms of quality is described in itself, for e.g. Schedule (VI) requires disclosure of items of expenditures which are in excess of one percent of ₹ 500, whichever is less.
6. An item whose impact is insignificant at present, but in future, it may be significant, maybe material item.

Question 16.
With Ret. to SA 320 Iateriahty in planning and performing an audit” Indicate the factors wljich may effect the Identification of an appropriate benchmark while determining materiality for the financial statements as a whole. (Nov 2020, 4 marks)

Question 16.
Write short note on the following:
Reliability of external confirmations. (Nov 2010, 4 marks)
Answer:
Reliability of External Confirmation:
As per SA 505 ‘External Confirmation”, the reliability of external confirmations depends among other factors, upon the application of appropriate procedures by the auditor in designing the external confirmation request, performing the external confirmation procedures, and evaluating the results of the external confirmation procedures.

The Factors that affect the reliability of confirmations include:

• The character of respondents,
• Any restrictions included in the response or imposed by the management, and
• The control which the auditor exercises over confirmation requests and responses.

Question 17.
Explain the process of external confirmation. Give some examples where external confirmation can be used as audit evidence. (Nov 2011, 8 marks)
OR
Discuss external confirmation procedure as per SA-505. (Nov 2016, 4 marks)
Answer:
External Confirmation:
As per SA 505 (Revised), on external confirmation, it is the process of obtaining and evaluating through a direct communication from a 3rd party in response to a request for information about a particular item affecting assertion made by the management in the financial statements.

External Confirmation Procedures:
The auditor shall maintain control over external confirmation request including the following:

• To determine the information to be confirmed.
• To select the appropriate 3 party who shall confirm the Information.
• To design the confirming request
• To determine that requests are property addressed and contain return information for responses to be sent directly to the auditor.
• To send the requests including follow-up requests when applicable to the confirming party.
• To select the items for which confirmations are needed.

Areas/Examples where external confirmation can be used as audit evidence are:
Bank balances. and other information relevant to banking relationships:

• Accounts receivable balances and terms.
• Accounts payable balances and terms.
• Inventories held by third parties at bonded warehouses for processing or on consignment.
• Property Iftie deeds held by lawyers or financiers for sate custody or as security.
• Investment held for safeguard by third party or purchased from stock brokers but not delivered at B/S date.
• Amounts due to lenders, including relevant terms of repayment and restrictive covenants.

Question 18.
What are the factors that are to be considered while designing a confirmation request? (Nov 2012, 8 marks)
Answer:
As per SA . 505 ‘External Confirmations’, the design of a confirmation request may directly affect the confirmation response rate and the reliability and the nature of the audit evidence obtained from responses.

The following factors should be considered while designing a confirmation request:

1. The assertions being addressed.
2. Specific identified risks of material misstatement, including fraud risks.
3. The layout and presentation of the confirmation request.
4. Prior experience on the audit or similar engagements.
5. The method of communication
6. Management’s authorisation, to the confirming parties to respond to the auditor. Confirming parties may only be willing to respond to a confirmation request containing management’s authorisation.
7. The ability of the continuing party to provide the requested information.

Question 19.
Examine with reason (in short) whether the following statement is correct or incorrect;
Audit evidence obtained from external confirmation fa always reliable. (Nov 2018, 2 marks)
Answer:
Incorrect:
Audit evidence obtained from external confirmation could affect its reliability. For e.g., information obtained from independent external sources may not be reliable if the source s not knowledgeable, or a management expert may lack objectivity.

Question 20.
Examine with reasons whether the following statements are correct or incorrect. External confirmation procedures are restricted to the Items of addressing assertions associated with account balances & their elements only. (Nov 2020, 2 marks)

Question 21.
Write short note on the following:
Initial Engagements (May 2012, 4 marks)
OR
Discuss the following:
Discuss with reference to SA 510, initial Audit Engagements – Opening Balances, the procedures the auditor should undertake in respect of opening balances for a new audit engagement. (May 2017, 5 marks)
Answer:
Initial Engagements
Initial Engagement refers to the appointment of an auditor for the first time by the client. However, his books may have been audited for the previous year by another (retiring) auditor or they may be unaudited.

As per SA – 510 ‘InitiaI Audit Engagement. Opening Balances’, Opening balances means those account balances which exist at the beginning of the period. Opening balances are the closing balances of the preceding period brought forward to the current period and reflect the effect of:
1. Transactions and other events of preceding periods.
2. Accounting policies applied In the preceding period.

3. For initial audit engagements. the auditor should obtain sufficient appropriate audit evidence that
(a) Ciosirig balances of preceding period have been correctly brought forward to the current period.
(b) Opening balances do not contain misstatements that materially affect the financial statement for the current period.

(c) Appropriate accounting policies are consistently applied. When the financial statements for the preceding period were audited by the another auditor, the current auditor may be able to obtain sufficient appropriate audit evidence regarding opening balances by perusing the copies of the audited financial statements. Ordinarily, the current auditor can place reliance on the closing balances contained in the financial statements for the preceding period, except when during the performance of audit procedures for the current period the possibility of misstatements in opening balances is indicated.

General principles governing verification of assets require that the auditor should confirm that assets have been correctly valued as on the balance sheet date. The contention of the management that the inventory has not undergone any change cannot be accepted, it forms part of normal duties of auditor to ensure that the figures on which he is expressing opinion are correct and properly valued. Moreover, it is also quite likely that the inventory lying as it is might have deteriorated and the same need to be examined. The auditor is advised not to exclude the audit of closing inventory from his audit programme.

Question 22.
Examine with reason (in short) whether the following statement is correct or incorrect:
An auditor is not concerned with consistency of accounting policies relating to opening balances. (Nov 2018, 2 marks)
Answer:
Incorrect:
The auditor shall obtain sufficient appropriate audit evidence about whether the accounting policies reflected in the opening balances have been consistently applied in the current period’s financial statements, and whether changes in the accounting policies have been properly accounted for and adequately presented and disclosed in accordance with the applicable financial reporting framework.

Question 23.
Discuss the following:
With reference to SA – 550, identification of significant related party transaction outside the entity’s normal course of business”. (May 2018,5 marks)
Answer:
As per SA 550, the auditor shall require to take m account some important areas which are as follows for required identification of significant Related Party transactions outside the entity’s normal course of business. The auditor shall require to inspect the underlying contracts or agreements, it any, and evaluate whether.

(a) The business rationale (or lack thereof) of the transactions suggests that they may have been entered into to engage in tractions financial reporting or to conceal misappropriation of assets,
(b) The terms of the transactions are consistent with management’s explanations and
(c) The transaction have been appropriately accounted for and disclosed in accordance with the applicable Financial Reporting Framework and. The auditor shall require to obtain audit evidence that the transactions have been appropriately authorized and approved.

Question 24.
Examine with reasons whether the following statements are correct or incorrect.
(c) All entities that are under common control by a state (i.e., national, regional or local government) are considered related parties. (Nov 2019, 2 marks)
Answer:
Incorrect.
All entities that are under common control by a state (that is, a national, regional or local government) are not considered as related parties unless they engage in significant transactions or share resources to a significant extent with one another.

3. The subsequent events, according to AS 4 (Revised) and as reproduced in SA 560 are of two types.
(a) those which provide further evidence of conditions that existed at the balance sheet date and
(b) those which are indicative of conditions that arose subsequent to the balance sheet date.

4. DependIng upon the type of subsequent events, the auditor should decide on adjustment of accounts based on evidential value gathered for conditions that existed as on the date of balance sheet date or disclosure of the conditions that arose subsequent to the date of balance sheet.

5. The auditor should perform audit procedures to identify the subsequent events that are relevant for adjustment/disclosure. These procedures would include reading minutes of Board subsequent to accounting period, contacting lawyers for knowing progress of pending Cases, inquiring with the company management, scrutinizing subsequent interim accounts etc.

6. The auditor should perform these procedures as near as practicable to the date of his audit report.

7. If the management does not account for the subsequent events in the financial statements where they are to be accounted for, the auditor should appropriately comment in his audit report by a qualification or disclaimer.

Question 25.
Explain the meaning of term “Subsequent Events as used in the SA 560. Should all types of subsequent events be considered by the auditor in his attest functions? (May 2012, 8 marks)
Answer:
Subsequent Events
According to SA – 560 “Subsequent Events’ subsequent event are those significant events that occur between the Balance Sheet date and the date of auditor’s report. For auditing a part such as branch or division of an organization. subsequent events may also be defined as those significant events which occurred up to the date of auditor report of that past. Therefore, subsequent events can be called as those events, which occur after the balance sheet date till the auditor signs the audit report.

Question 26.
Discuss the following:
Enquiry from Management is helpful for Auditor to evaluate subsequent events. Discuss specific enquiries in reference of SA 560, which might have effect on the financial statements. (Nov 2014, 5 marks)
Answer:
The auditor has no obligation to perform any audit procedures regarding the financial statements after the date of auditor’s report. However, when, after the date of the Auditor’s Report but before the date the financial statements are issued, a fact becomes known that had It been known at the date of the Auditor’s Report, may have caused the auditor to amend the report, he shall:

1. Discuss the matter with management and those charged with governance.
2. Determine whether the financial statements need amendment.
3. Inquire how management intends to address the matter in the financial statements.

Question 27.
State with reasons (in short) whether the following statement is true or false. A Company which has been unable to negotiate borrowings from its bankers claims that it will be able to continue as a going concern. (Nov 2009, 2 marks)
Answer:
False:
In the case of the company which has not been able to negotiate its borrowings with its bankers, there will be a substantial doubt in its ability to continue as a going concern without such financial support.

Alternative Answer – True: It the company is not able to negotiate borrowings from its bankers for reasons like delay failure in the submission of adequate ðents/ information or for other reasons other than the company’s financial status then the statement is true.

Question 28.
Write short note on the following:
Procedures to be performed by the auditor in expressing opinion on ‘going concern’ assumption. (Nov 2010, 4 marks)
Answer:
Procedures to be performed by the auditor In expressing opinion on ‘going concerned’ assumption:

According to SA 570, “Going Concerned”, the auditor should follow the following procedure while expressing an opinion on going concern assumption:

• Analyse and discuss cash flow, profit, and other relevant forecasts with management.
• Analyse and discuss the entity’s latest available interim financial statements.
• Review events after the balance sheet date for items affecting the entity’s ability to continue as a going concern.
• Review the terms of debentures and loan agreements and determine whether any have been breached.
• Review the status of matters under litigation and claims.
• Consider the entity’s position concerning unfilled customer orders.
• Read minutes of the meetings of shareholders, the board of directors and important committees for reference to financing difficulties.

Confirm the existence, legality arid enforceability of arrangements to provide or maintain financial support with related and third parties and assess the financial ability of such parties to provide additional funds.

Question 29.
Explain Going Concerned” assumption with reference to SA. State some financial events or conditions that may cast doubt about going concern assumption. (May 2012, 8 marks)
Answer:
Going Concern- SA 570 (Revised)
As per the going concern assumption, an organisation is viewed as continuing in business for the foreseeable future. General purpose financial statements are prepared on a going concern basis, unless management either intends to liquidate the entity or to cease operations or has no realistic alternative but to do so. Special-purpose financial statements may or may not be prepared in accordance with a financial reporting framework for which the going concern basis is relevant.

When the use of the going concern assumption is appropriate, assets and liabilities are recorded on the basis that the entity will be able to realise its assets and discharge its liabilities in the normal course of business.

Appropriateness of Going Concern Assumptions According to Going Concern, when the financial statements are prepared, the auditor must consider the appropriateness of the going concerns.

Report of an auditor is not a guarantee to the future viability of the entity, It establishes or forms only the credibility of financial statement. A business entity continuing as a going concern for the near future, generally around one year after the B/S date Is considered or used for the preparation of the financial statement in the absence of any other information related to it.

Question 30.
Discuss with reference to SAs:
Operating Conditions” that may cast doubt about going concern assumption. (May 2014, 5 marks)
Answer:
As per SA -570 “Going concern” in some enterprises for e.g., those where the funding arrangements are guaranteed by the central government going concern risks may arise, but aren’t limited to, situations where such type of entries operate on a for-profit basis, where government support may be reduced or withdrawn, or in the case of privations, events or condition that may cast significant doubt on an entity’s ability to continue as a going concern may include situations where such type of entity Lacks funding for continued existence or when policy decision are made that affect services provided by such an entity. However, the auditor should consider the risk that the going concern assumption may no longer be appropriate.

Operating:
Management intentions to liquidate the entity or to cease operations.

• Loss of key management without replacement.
• Loss of major market, key customer, franchise, license or principal supplier.
• Labour difficulties.
• Shortages of important supplies.
• Emergence of a highly successful competitor.

Question 31.
Management’s assessment of the entity’s ability to continue as a going concern involves making a judgment about inherently uncertain future outcomes of events or conditions. What are relevant factors to that judgment? (Jan 2021, 4 marks)

Question 32.
Discuss with reference to SAs:
What do you mean by Written Representations? As an auditor, how you will deal if management does not provide requested written representations? (May 2014,5 marks)
Answer:
As per SA-580, “Written Representation” management representation is the last way of getting audit evidence when no other internal or external evidences are available in the circumstances. But if an auditor blindly relies upon management representation without caring to know whether Internal or external evidences are available or not then auditor will be held guilty of negligence of his professional duties. We can also say that management representation can’t be treated as substitute of any other audit evidences.

Moreover, physical verification of the assets and putting the values inside the financial statement is absolute responsibility of management and auditor’s responsibility is to satisfy himself about existence, ownership, and valuation of such assets by applying additional auditor procedures. If Management will not provide written representation then auditor may qualify his audit report.

Requested Written Representations not provided by Management:
If management does not provide one or more of the requested written representations.

1. the auditor shall discuss the matter with management;
2. re-evaluate the integrity of management and evaluate the effect that this may have on the reliability of representations (oral or written) and audit evidence in general; and
3. take appropriate actions, including determining the possible effect on the opinion in the auditor’s report. The auditor shall disclaim an opinion on the financial statements If management does not provide the written representations.

Question 33.
Discuss with reference to SAs:
‘The degree of reliance that a Statutory Auditor can place or. the work of the Internal Auditor is a matter of individual judgment. (Nov 2014, 8 marks)
Answer:
As per SA – 610, Using the Work of Internal Auditors, the following points, explain the inter-relationship between the statutory and internal auditor.
1. RevIew by Internal Auditor: The areas covered by an Internal auditor are:

• review of accounting system and Internal control,
• examination of financial and operating information for the benefit of management,
• examination of the economy, efficiency, and effectiveness of operations,
• reviews of controls Including non-financial controls of tangible assets of the company.

2. Scope of Internal Audit: The scope of internal audit is determined by the management. Its primary objectives differ from that of the external auditor who is appointed to report independently on Financial information.

But, the means of achieving their respective objectives are similar, and thus much of the work of the internal auditor may be useful to the external auditor in determining the nature, timing, and extent of the procedures.

3. Review of Internal Audit by Statutory Auditor The function of an internal auditor is an integral part of the system of internal control. It is statutory requirement too as per Sec 138 of the Companies Act, 2013 where the Audit Committee of the company or the Board shall, in consultation with the Internal Auditor, formulate the scope, functioning, periodicity, and methodology for conducting the internal audit.

However, it is obligatory for a statutory auditor to examine the scope and effectiveness of the work carried out by the internal auditor. For this, he should examine the Internal Audit Department of the organization, the strength of the internal audit staff, their qualification and their powers. Afterwards, the procedures should be studied; also the scope of the audit examination carried Out should be ascertained on referring to audit programmes, reports submitted, points raised in audit and how these had been dealt with subsequently.

The extent of independence exhibited by the internal auditor in the discharge of his duties and his Status in the organization are important factors for determining the effectiveness of his audit. In a large business, it has been increasingly recognized that, if their functions and those of statutory auditors could be integrated, it might not be necessary for the statutory auditors to go over the same facts and figures as have been previously examined by a competent and trustworthy internal audit staff. But so far, the practice of audit being conducted jointly by the internal auditors is of great assistance to statutory auditors.

If the st1tutory auditor is satisfied on an examination of the work of the internal auditor, that the internal audit has been efficient and effective, he often decides to curtail his audit progamme by dispensing with some of the detailed checkings already carried out by the internal Audit Department after or without testing the work already done. He, at times, also decides to entrust certain items of work to the internal auditor.

Given below are items of audit work in regard to which the statutory auditor accepts the checking that has already been carried out by the internal auditor;

• Verification of the system of internal control;
• Verification of assets, e.g., inventory in trade, fixed assets (PPE), book debts, etc; and
• Verification of amounts provided for expenses as well as amounts adjusted as prepaid expenses.

It must however be mentioned that the area of co-operation between the statutory and the internal auditor is limited by the fact that the statutory auditor and the internal auditor owe their allegiance to separate authorities, the shareholders in one case and the management in the other.

Therefore, the former is not protected against the liability for negligence which may arise in such a case.

Responsibility of External Auditor:

1. In spite of the existence of internal audit function, the statutory auditor’s responsibility is absolute.
2. Any reliance he places upon the work performed by the internal auditors is part of his audit approach. It does not reduce his duty to exercise sufficient professional care and skill before the announces an audit opinion.
3. Therefore, an auditor cannot ignore checking of the areas already checked by the internal auditors.

Question 34.
Write short note on the following:
Compilation engagement (Nov 2016, 4 marks)
Answer:
Compilation Engagements:
The purpose of SRS 4410, engagement to compile Financial Statements, is to establish standards on professional responsibilities of an accountant when an engagement to compile financial statements or other financial information is undertaken and the form and content of the report to be issued in connection with such a compilation so that the association of the name of the accountant with such financial statements or financial information is not misconstrued by a user of those statements or information as having been audited by him.

The objective of a compilation engagement is for an accountant to use accounting expertise, as opposed to auditing expertise, to collect, classify and summarise financial information. This ordinarily entails reducing detailed data to a manageable and understandable form without the requirement to test the assertions underlying that information.

General Principles of a Compilation Engagement:
The accountant should comply with the Code of Ethics issued by the Institute of Chartered Accountants of India. The ethical principles governing the accountant’s professional responsibilities for this type of engagement are as follows:

• Integrity;
• Objectivity;
• Professional competence and due care;
• Confidentiality;
• Professional conduct and
• Technical standards.