| 1. | (a) | As an Auditor of X Ltd., a public company, furnish your views on the following, with brief reasons: | | |
| | | (i) | The company valued at the year end its stock of goods ready for export at realizable value yielding a margin of 10% on cost. | 3 | (0) |
| | | (ii) | The company requiring to maintain cost accounts and records contends that the statutory auditor need not report on the non–maintenance of cost records because the provisions of cost audit even not made applicable to it. | 3 | (0) |
| | | (iii) | Capitalization of machine erection staff’s salary during the erection period and nontechnical staff’s salary during the construction period | 3 | (0) |
| | | (iv) | The company was registered with the Registrar of Companies on 1st October, 2003. The Board of Directors appointed Mr. G as the first Auditor on 4th December, 2003. A new Board of Directors which assumed charge on 30th January, 2004 removed him and appoints you as the statutory auditor. | 3 | (0) |
| | (b) | Briefly state the statutory violations of fallacies if any, in respect of the following: | | |
| | | (i) | The Audit report of X Ltd., is signed by H, a partner of a partnership firm properly appointed as auditors. H is practicing in Sri Lanka. | 4 | (0) |
| | | (ii) | Foreign branch of a company can be audited only by a foreign auditor | 4 | (0) |
| 2. | (1) | Distinguish between: | | |
| | | (a) | Audit and Investigation. | 4 | (0) |
| | | (b) | Internal and External evidence. | 4 | (0) |
| | (2) | What are the special points you would consider while auditing the accounts of a Hotel? | 8 | (0) |
| 3. | Write short notes on: | 4x4=16 | |
| | (a) | Sampling Risk; | | (0) |
| | (b) | Letter of Representation; | | (0) |
| | (c) | Improving the auditor–auditee relationship; | | (0) |
| | (d) | Measurement standards in the context of field work—vis—a—vis collection of Internal audit evidence. | | (0) |
| 4. | (a) | “The report of an auditor should not be regarded as a guarantee nor as a certificate of insurance covering the quality of the accounting information which has been audited.” — Discuss. | 6 | (0) |
| | (b) | What are the types of Internal controls likely to be found in a computer based system? | 5 | (0) |
| | (c) | State the powers and duties of the Company auditor as regards disclosure qualification made by Branch Auditor in his report. | 5 | (0) |
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| 5. | (a) | State the need as also the main sources of generally accepted Accounting Principle in India. | 9 | (0) |
| | (b) | Comment on the following situation: | | |
| | | (i) | Compensation for an amount of Rs. 75,000 (which is considered material) received from a customer for breach of contract of sale is included in the current year's turnover of sales. | 4 | (0) |
| | | (ii) | Claim against the company for breach of contract which are the subject of a law suit and await the Court judgment has been shown and included in the current liabilities. | 3 | (0) |
| 6. | (a) | State briefly the scope and limitations of propriety audit. | 8 | (0) |
| | (b) | In company audit, it is customary for an auditor to obtain from his client a certificate in respect of stock. Briefly state — | | |
| | | (i) | What are the objects of obtaining such a certificate. | 4 | (0) |
| | | (ii) | Whether it will absolve the auditor from his liability for inclusion of wrong figure of stock in Final Accounts. | 4 | (0) |
| 7. | State the importance of and the various aspects to be noted in the context of follow–up of Audit Report. | 16 | (0) |
| 8. | (a) | Briefly furnish your views in connection with the following: | | |
| | | (i) | You have not been paid the fees for audit of a company. You are asked by the Managing Director of the company to send him the papers relating to the tax computations of his own proprietorship business, the taxation work of which is looked after by you. The auditor wants to exercise his lien. | 4 | (0) |
| | | (ii) | After completion of checking the draft accounts approved by the Board of Directors of the company and placed before you, you observe that the Sundry Debtors and Loans and Advances have been classified in the Balance Sheet as “Fully Secured” on the basis of their being backed unconditionally by Bank Guarantees. | 4 | (0) |
| | (b) | Classify the following audit procedures into compliance/substantive: | 1x5=5 | |
| | | (1) | Preparation of a flow chart showing the detailed procedure of purchases. | | (0) |
| | | (2) | Examining Sales Invoices. | | (0) |
| | | (3) | Circulating an Internal Control questionnaire relating to wages paid to contract labour. | | (0) |
| | | (4) | Scanning a Debtor account. | | (0) |
| | | (5) | Reviewing controls in the EDP section. | | (0) |
| | (c) | What would be your response as an auditor where the company does not have a regular procedure for the determination of damaged stores, raw materials and finished goods. However, the company has made an adhoc provision for possible losses on the basis of its past experience. | 3 | (0) |
