CWA/ICWA Inter :: Auditing: June 2005

INTERMEDIATE EXAMINATION
June 2005	*I-II(ADT)* *Revised Syllabus*
Auditing
Time Allowed : 3 Hours	Full Marks : 100
The figures in the margin on the right side indicate full marks Answer Question No. 1 which is compulsory and any five from the rest.
Marks

(a)

L & Co., a firm of chartered accounts, consists of ten partners as under:
4 partners in whole time practice not having individual practice, 2 partners in whole time practice having individual practice. 3 partners who are in part time employment and one partner who is in full time employment elsewhere but attending to firm's affairs also. Can this firm act as the statutory auditor of the following companies:

(i)	20 private companies having authorised capital of more than Rupees 20 crores.
(ii)	195 public companies, of which 125 companies have an authorised capital of more than Rs. 30 lakhs, 25 among these 125 companies having a paid up capital of Rs. 25 lakhs. The rest of the 70 companies have a paid up capital of more than Rs. 1 crore. For how many companies above can L & Co., act as statutory auditors?

(b)

Discuss with brief reasons, whether the following statements are true or false:

(i)	Capitalisation of Borrowing Costs would continue during extended periods in which active development is interrupted.	3
(ii)	A chartered accountant who has taken a loan of Rs. 10,000 from a Mumbai Branch of Natianalised Bank can audit the accounts of Chennai Branch of the same Bank.	2
(iii)	In the case of amalgamation by take over, the statutory reserves of the transferor company need not be shown in the financial statements of transferee company.	2
(iv)	Where an auditor fails to obtain sufficient information to warrant an expression of opinion, he gives an adverse opinion.	1
(v)	Materials in the inventory are to be valued always at cost.	2

(c)

Match each of the item in Column A with the appropriate item in Column B:

1x5=5

Column I		Column II
(i)	Auditing in Depth	(i)	By the shareholders in general meeting.
(ii)	Remuneration of Statutory Auditor appointed by Comptroller and Auditor General is fixed.	(ii)	By the Audit Clerk of the Auditor
(iii)	Appointment of auditor of a Government Company is made	(iii)	Technique in vouching to be applied to a comparetively small sample of transactions without reducing the effectiveness of the examination.
(iv)	Audit Note Book is a Book maintained.	(iv)	By the company sharing the process of audit work done.
(v)	Annual Accounts and Balance Sheet to be placed in general meeting.	(v)	By the Board in consultation with the C.A.G.
		(vi)	By the Central Government on the advise of the C.A.G.
		(vii)	Technique of going through all the transactions thoroughly and deeply.
		(viii)	Section 210 of the Companies' Act, 1956 covers this area.

Please turn over

( 2 )

I-II(ADT)
Revised syllabus

Marks

(a)

Indicate with brief reasons, statutory variations or voilations in the following:

(i)	Shareholders of Hide Ltd. pass a special resolution that the Branch Auditor of the company need not verify the stock and cash balances at the branches	2
(ii)	A newly formed company wants to maintain its Books of Accounts on mixed system of Accounting Cash Basis for Receipts and Mercantile Basis for expenses.	3
(iii)	A company wants to declare dividend at 16% by transfering 6% of the current profits to Reserves.	3

(b)

Briefly furnish your views in connection with the following:

(i)	Y Ltd. has a branch in a rural village, whose turnover for the year of audit is Rs. 3 lacs. The branch was not audited. The company wants the statutory auditor not to refer to this branch, pointing out that in the earlier year's report, there was no reference to the branch.	3
(ii)	Bijoy Irons Ltd. has entered into a contract with Bharat Irons Ltd., for supply in December, 2005 of cooling tower price at Rs. 80 lacs against cash payment. The company has not provided for the same but has merely shown it in Notes to the Balance Sheet as on 31.03.2005.	2
(iii)	Board of Directors refuse to allow access to the Director's Minutes Book to the Statutory auditor when he wants to refer to them.	3

Write short-notes on:

(a)

(i)	Cut off arrangements,
(ii)	Use of flow charts by an auditor in understanding Internal Controls.

5
6

(b)

Distinguish between Financial Audit and Operational Audit (any five areas).

(a)

ABC Ltd. has been charging depreciation on its assets by adopting Straight Line Method since inception. During the year 2004-2005 (financial year), it decided to change over to written down method of depreciation. During the years 2000-2004, the company declared dividends when depreciation was charged on straight line basis. However, due to revision of charging depreciation on written down basis, losses resulted for the year 2000-2004. Substantial profit is still available for the year 2004-2005.
In this context state:

(i)	Whether there is any legal bar is changing the method of depreciation from SLM to WDV Basis?	3
(ii)	Whether the distribution of dividends for 2000-2004 will be viwed as void in view of losses arising from revised calculation of depreciation under WDV basis.	3
(iii)	What a adjustments the company should make in the accounts for the year ended 31.3.2005?	4

Please turn over

( 3 )

I-II(ADT)
Revised syllabus

Marks

(b)

Mention briefly the behavioural problems involved in conducting Management Audit.

(a)

Discuss the relationship between Internal Audit and Statutory Audit.

(b)

State the peculiarities that are normally associated with EDP Accounting System.

How would you as an Auditor vouch/verify the following:

(a)	Research and Development Cost;
(b)	Work-in-progress;
(c)	Share Issue Expenses;
(d)	Trade Marks and Copyright.

4x4=16

(a)

You are the Auditor of X Ltd. with 30th June, '04 as year ending. The following events occur after completion of year end audit and before finalising the audit report dated 28th September, '04. How would you deal with these:

(i)	On 20th August, a batch of goods which were shown in the stock records at cost of Rs. 10,000 on 30th June, was sold for Rs. 25,000 and another batch costing Rs. 30,000 was sold for Rs. 15,000.	4
(ii)	A customer who had purchased a large consignment of goods during the accounting year claimed damage of Rs. 40,000 because the goods were faulty and unfit for use. The company has denied any liability.	4

(b)

Y Ltd. had borrowed Rs. 100 lakhs from a Bank and could not-repay on the due date. The accrued unpaid interest on the same is Rs. 25 lakhs. The agreement stipulates that in case of default in re-payment, then would be a penal interest payable, which would amount to Rs. 10 lakhs. The company had applied to the Bank for re-scheduling the re-payment and waiving part of the accrued interest and the penal interest. As on the date of audit, the said application is still pending. What would you do as an auditor, inj the above situation?

(c)

Mention any four transactions not suitable for test checking.

(a)

State the extent to which the statutory auditor of a company can rely on work performed by others.

(b)

State the Directions of comptroller and Auditor General of India under section 619(3)(a) of the companies' Act. 1956 in regard to:

(i) Systems of Accounts.

(ii) System of Financial Control.

6
2

__________