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Solved Solved Solved SolvedScannerScannerScannerScanner Appendix
CS Executive Programme Module - IIDecember - 2013
Paper - 5 : Company Accounts and Auditing Practices
Part - A : Company Accounts
Chapter - 1: Share Capital
2013 - Dec [1] (a)
When shares are issued at a price higher than the face value, they are said to be issued
at premium. Thus, the excess of issue price over the face value is the amount of
premium.
The premium on issue of shares must not be treated as revenue profits on the contrary
it must be regarded as capital receipt. The Act requires that when a company issues
shares at a premium whether for cash or otherwise a sum equal to the aggregate
amount of the premium collected on shares must be credited to a separate account
called “Securities Premium Account”. There are no restrictions in the Companies Act
on the issue of shares at a premium, but there are restrictions on its disposal.
U/S 78 of the Act, the Securities Premium Account may be used wholly or in part for:
(i) Issuing fully paid bonus shares to the members.
(ii) Writing off preliminary expenses of the company.
(iii) Writing off the expenses of or the commission paid or discount allowed on any
issue of shares or debentures of the company.
(iv) Providing for the premium payable on the redemption of any redeemable
preference shares or of any debentures of the company.
In addition, according to Sec. 77A, a company may purchase its own shares or other
specified securities out of the Securities Premium Account.
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2013 - Dec [2] (a)
Journal Entries
Forfeiture
Equity Share capital (1,000 x 7) Dr. 7,000
Security Premium A/c (1,000 x 2) Dr. 2,000
To Share forfeiture (1,000 x 3) 3,000
To Equity Share Allotment (1,000 x 4) 4,000
To Equity Share First call (1,000 x 2) 2,000
(Being 1,000 share forfeited).
Y Re issue
C Bank A/c Dr. (600 x 8.5) 5,100
Share forfeiture A/c Dr. (600 x 1.5) 900
To Equity share competed (600 x 10) 6,000
(Being 600 share re issue as fully paid up for 8.5 per share)
C Share forfeiture A/c Dr 900
To capital Reserves 900
(Being transfer of net gain on Re-issue of 600 forfeited share to capital reserve)
i.e.
2013 - Dec [2A] (i)
Conditions for Bonus issue:
(a) The bonus issue is not made unless the partly-paid shares if any are made fully
paid-up.
(b) The company has not defaulted in payment of interest or principal in respect of
fixed deposits and interest on existing debentures or principal on redemption.
(c) The company has sufficient reason to believe that it has not defaulted in respect
of payment of statutory dues of the employees such as contribution to provident
fund, gratuity, bonus, ets.
(d) A company which announces its bonus issue after the approval of the BOD must
implement the proposal with in a period of six months from the date of such
approval and shall not have the option of changing the decision.
(i) The AOA of the company shall contain a provision for capitalisation of
reserves etc.
(ii) If there is no such provision in the articles the company shall pass a resulation
at its general body meeting making provisions in the AOA for capitalisation.
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2013 - Dec [3] (a)
Statement Showing the Liability of underwriters
Under writers A B C D
Gross Liability 2,00,000 1,50,000 1,00,000 50,000
Less: marked Application 2,20,000 90,000 1,10,000 10,000
Balance (20,000) 60,000 (10,000) 40,000
Less: Unmarked
Application (Note: 1)
8,000 6,000 4,000 2,000
Resultant Liability, or
(surplus)
(28,000) 54,000 (14,000) 38,000
Less: Surplus of A&C
allocated to B&D in the
Ratio of gross liability
28,000 31,500 14,000 10,500
Net Liability Nil 22,500 Nil 27,500
Note 1: Total number of application received 4,50,000 and 2,20,000 + 90,000 +
1,10,000 + 10,000. 4,30,000 share received as marked application so unmarked
application will be 20,000 (4,50,000 - 4,30,000) unmarked application are allocated in
the ratio of gross liability.
Chapter - 2 : Debentures
2013 - Dec [1] (b)
Debenture Suspense A/c Dr. 40,00,000
To Debentures A/c 40,00,000
(Being issue of 0% 40,000, 14% debenture of ` 100 each as collateral security for a
bank loan of ` 25,00,000 as per Board Resolution dated)
(B/s of X Ltd. as at. )
Particulars Note
I. Equity & Liability
Non Current Liabilities
Long term borrowing 1 4,00,000
Current Liabilities
Short term loan 2 25,00,000
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II. Assets
Non Current Asset
Other non Current Asset 3 4,00,000
Note:
1. Long term Borrowings
40,000; 14% Debentures of `̀̀̀ 100 each 4,00,000
(Issued as collateral security as per contra)
2. Short term borrowings
Bank Loan 25,00,000
(Secured by issue of 40,000, 14% debenture of `̀̀̀ 100 each as collateral security)
3. Other not Current Asset
Debenture Suspense A/c 4,00,000
(Issued as collateral security as per cotra)
2013 - Dec [2] (b)
Journal Entries in the book of Zenith limited.
Date Particulars
10.04.12 Bank a/c Dr 12,25,000
Discount on Issue of Debenture Dr 25,000
To 12% convertible Debenture a/c 12,50,000
(Being Debenture Issue)
31.3.2013 12% Convertible, Deb. Dr. 25,000
To Debenture holder 25000
(Being conversion Debenture holder
for 2500 Debenture)
Debenture holder Dr. 25000
To 14% Preference Share 20,000
To security Premium 5,000
(Being 200 preference share Issued
at premium)
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Chapter - 3 : Final Accounts of Companies
2013 - Dec [1] (c)
Remuneration to Director :
1. The remuneration payable to the directors of a company including any managing
or whole time director shall be found out in accordance with and subject to the
provisions of section 198 and this section either by the articles of the company or
by a resolution or if the articles so require by a special resolution passed by the
company in general meeting.
2. A director may be paid fees for attending each meeting of the board or a committee
thereof.
3. A whole time director or a managing director may be paid either by way of a
monthly payment or at a certain percentage not exceeding :
(i) 5% of net profits for one such director, and
(ii) If there is more than one such director, 10% for all of them together.
4. A director who is neither whole time director nor a managing director may be paid
remuneration by way of monthly, quarterly or annual payment with the approval of
Central Government or by way of commission of company special resolution
authorise. Such payment provides such remuneration shall not exceed :
(i) 1% of net profits of the company if the company has whole time director or
managing director or a manager and.
(ii) In any other case 3% of the net profits of the company, It may be increased
with the approval of Central Government.
5. Overall limit to all managerial person shall be 11% of Net Profit u/s 349.
2013 - Dec [2] (c)
Provision and reserves : According to companies Act, 1956, the term “Provision”
means “any amount written off or retained by way of providing for depreciation,
renewals or dimunition in the value of assets, or retained by way of providing for any
known liability of which the amount cannot be determined with substantial accuracy.
Thus, a provision may be created either (i) for a known reduction in the value of an
asset or (ii) for a known liability, the amount of which can not be ascertained a
accurately.
The Companies Act, 1956, gives a negative defination of “reserve”. According to the Act
the term “reserve” shall not include “any amount written off or retained by way of
Providing for depreciation renewals, or diminution in the value of assets or retained by
way of providing for any known liability.
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2013 - Dec [2A] (ii)
Name of the Company Moon Ltd.
Statement of Profit and loss for the year ended 31st March, 2010
(As per New Schedule VI)
(`̀̀̀ in..........)
Particulars Note No.
Figures
for the
current
reporting
period
Figures
for the
previous
reporting
period
I. Revenue from operations 1 xxx
II. Other income 2 xxx
III. Total Revenue (I + II) xxx
IV. Expenses :
Cost of materials consumed
Purchases of Stock-in Trade 3 xxx
Changes in inventories of finished
Goods works-in progress and Stock-in-
Trade
4 xxx
Employee benefits expense 5 xxx
Finance costs 6 xxx
Depreciation and amortization expenses 7 xxx
Other expenses 8 xxx
Total expenses xxx
V. Profit before exceptional and extra-
ordinary items and tax (III-IV)
xxx
VI. Exceptional items
VII. Profit before extraordinary items and tax
(V-VI)
VIII. Extraordinary Items
IX. Profit before tax (VII-VIII)
X. Tax expense :
1. Current tax
2. Deferred tax
9 xxx
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XI. Profit (Loss) for the period from
continuing operations (VII-VIII)
xxx
XII. Profit/(loss) from discontinuing operations
XIII. Tax expense of discontinuing operations
XIV. Profit/(loss) from discontinuing
operations (after tax) (XII-XIII)
XV. Profit (loss) for the period (XI + XIV)
XVI. Earnings per equity share:
1. Basic
2. Diluted
Notes :
1. Revenue from Operation :
Sales (Net) xxx
2. Other Income
Dividend xxx
3. Purchase of Stock-in-Trade
Purchases xxx
Less: Cost of goods/articles distributed among xxx xxx
customers free of cost
4. Changes in inventories :
Opening Stock xxx
(-) Closing Stock xxx
xxxx
5. Employee Benefit Expenses :
Salaries and wages xxx
Less: Director’s remuneration xxx
xxx
Less: Wages for installation of electrical fitting xxx xxx
Directors’ remuneration xxx
xxxx
6. Finance Costs:
Discount on issue of debentures xxx
Preliminary expenses written-off xxx
Interest on Bank overdraft xxx
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Interest on debentures xxx
Add: Outstanding xxx xxx
Interim Dividend xxx
xxx
(Note : Discount on issue of debentures and Preliminary expenses are written-off as per
requirements of New Schedule VI)
7. Depreciation & Amortisation :
Furniture xxx
Technical know-how (written off) xxx xxx
8. Other Expenses:
Selling Expenses xxx
Preliminary Expenses xxx
Bad debts xxx
Audit fees xxx
Advertisement xxx xxx
9. Current Tax:
Provision for tax xxx
Chapter - 4 : Corporate Restructuring
2013 - Dec [1] (e)
The following are the distinguishing features pooling of interest method and purchase
method of accounting for amalgamations:
Pooling of Interest Method Purchase Method
(i) This method is applicable for
amalgamations which are in the
nature of merger.
This method is applicable for
amalgamations which are in the nature of
purchase.
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(ii) Assets, liabilities, reserves and
profit and loss account of the
transferor company are all
incorporated through journal in the
financial statements of transferee
company. Hence, there is a
wholesome and total aggregation
of financial figures.
There is only a partial aggregation, as
only assets and liabilities are combined
with that of assets and liabilities of the
transferee company. Reserves and profit
and loss account are not incorporated.
Hence, there is partial aggregation of
financial figures.
(iii) No goodwill or capital reserve
account is to come about as a
result of difference between the
consideration paid and the net
assets taken over by the
transferee company. The
difference is to be adjusted in
general reserve or other reserves.
The difference of consideration paid and
the net assets taken over by the
transferee company is either goodwill or
capital reserve.
(iv) No account called amalgamation
adjustment account is to be
brought into books, as all the
reserves are taken into the books
of the transferee company.
The transferee company has to carry
forward any statutory reserve for legal
compliance by debiting amalgamation
adjustment account and crediting
statutory reserve account. The
amalgamation adjustment account will be
shown on the assets side of balance
sheet of the transferee company under
the head Miscellaneous Expenditure.
2013 - Dec [2] (d)
Restructuring may be of the following type
(i) Financial restructuring which deals with the restructuring of capital base and
raising finance for new projects.
(ii) Technological restructuring which involves, inter alia, alliances with other
companies to exploit technological expertise.
(iii) Market restructuring which involves decisions with respect to the product market
segments, wher the company plans to operate based on its core competencies.
(iv) Organizational restructuring which involves establishing internal structures and
procedures for improving the capability of the personnel in the organization to
respond to changes.
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2013 - Dec [3] (c)
Calculation of Purchase consideration as per Net Assets Method
Particulars Amount (`)
Assets
Fixed Assets (above 10%) 60,50,000
Investment 25,00,000
Current Assets 27,00,000
Total (A) 1,12,50,000
Liabilities
13% Debenture (at 10% Premium ) 27,50,000
Current Liabilities 15,00,000
Total (B) 42,50,000
Purchase consideration (A-B) 70,00,000
Chapter - 5 : Consolidation of Accounts
2013 - Dec [4] (b)
Consolidate Balance Sheet as on
31st December 2012
Shareholder’s Fund Notes to Amount (`)
Equity Share Capital
6,000 shares @ 10 each 60,000
Reserve & Surplus
General Reserve 12,000
Profit & Loss Account 3 40,000
Capital Reserve 1 12,400
Non Controlling Interest 2 17,600
Non Current Liabilities Nil
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Current Liabilities
Trade Payable [10,000 + 8,000] 18,000
Total 1,60,000
Non Current Assets
Fixed Assets [44,000 + 60,000] 1,04,000
Investment [52,000 - 5,20,000] Nil
Current Assets [20,000 + 36,000] 56,000
Total 1,60,000
Note: 1 Note: 2
Cost of Control 4,000 shares 80% Non Controlling Interest 20%
Investment 52,000 Equity Share 10,000
Equity Share (40,000) Post Profit of Suby 7,600
Pre Profit of Suby (20,400)
ROD (4,000)
Capital Reserve 12,400 Total 17,600
Note: 3
Consolidated Profit & Loss Account
Opening 4,000
+ Profit for the Year 30,000
+ Post Profit of Suby 10,000
- ROD (4,000)
40,000
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Working Note: 1
Analysis of Profit
Pre Post Total
G/R 10,000 – 10,000
P/L 8,000 20,000
18,000 20,000
Div. Paid – 5,000
18,000 25,000
T/A25,000 x
12,500 (12,500)
30,500 12500
Div. Paid (5,000) –
25,500 12,500
H.80 20,400 10,000
M.20 5,100 2,500
Chapter - 6 : Valuation of Shares and Intangible Assets
2013 - Dec [2A] (iii)
Super Profit Method: In this case the future maintainable profits of the firm are
compared with the normal profit for the firm. Normal earnings of a business can be
judged only in the light of normal rate of earning and capital employed in the business.
However, this method of valuing goodwill would require the following information:
(i) A normal rate of return for representative firms in the industry.
(ii) The fair value of capital employed.
(iii) Estimated future maintainable profit.
2013 - Dec [3] (b)
Normal profit of Real Ltd. ` 5,000
Less: Dividend of preference
Share (10,000 x 5%) = 500
Profit available to Equity share capital 4,500
Normal Rate of Return of Equity Share capital 8%
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Normal value of Equity Share of 20,000 Share = 4,500
8%
= 56,250
Calculation of 5,000 Equity Share Capital = 56,250 x 5,000
20,000
= ` 14062.5
Chapter - 7 : Liquidation of Company
2013 - Dec [4] (a)
Z Limited (in Liquidation)
Liquidator’s final statement of A/c
Receipt Amount Payment Amount
Cash & Bank
Balance
3,00,000 Liquidation
expenses
1,09,000
Liquidator
Commission
(49,00,000 x 3%)
1,47,000
Amount Realize
Trade Receivable 8,00,000
Stock 6,00,000
Furniture & Fixture 3,00,000 Debentures holder:
Plant & Machinery 20,00,000 Principal 10,00,000
Land & Building 12,00,000 Interest (Note: 1) 2,25,000
Creditors (Note: 2) 12,75,000
Contributors
Call on equity
shareholder
30,000 x 2.65
(W. Note 3)
79.500 By Preference
Share
20,00,000
Arrears of dividend 4,00,000
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Equity Shareholder
@ 12.35 on 10,000
shares (Note - 3)
1,23,500
52,79,500 52,79,500
Working Note: 1
Note: 1
Interest
C Out standing 1,50,000
C from 31.12.12 to 30.06.13 75,000
2,25,000
Note: 2
Amounts payable to Equity shareholder
C Equity share capital
(7,50,000 + 18,00,000) 25,50,000
C Less: Surplus available to Equity shareholding 44,000
C Loss: to be to born by Equity Share holders 25,06,000
C Loss: per Equity Share (2,50,600 ÷ 40,000) 62.65
Each Equity share of ` 75 paid up (75 - 62.65) 12.35
Calls from Equity share of ` 60 paid up (62.65 - 60) 2.65
Working Note: 2
Preferential 1,52,000
unsecured 11,23,000
12,75,000
Working Note: 3
Amount payable/Receivable from equity shareholders
Total equity capital (Paid up capital)
(7,50,000 + 18,00,000) 25,50,000
Less: Balance available after payment to crs, expenses
& preference share (52,00,000 - 51,56,000) (44,000)
Loss to be borne by 40,000 equity share 25,06,000
Loss per share (25,06,000 ÷ 40,000) = 62.65
Hence, amount of call on ` 60 paid share (62.65 - 60) = 2.65
Refund on ` 75 paid share (75.00 - 62.65) = 12.35
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Chapter - 8 : Corporate Financial Reporting
2013 - Dec [1] (d)
Concept of Economic Value Added EVA : EVA is the surplus generated by an
organisation after meeting an equitable charge towards the providers of capital. It is
basically a benchmark to measure an organisation’s earning efficiency.
Shareholders must earn sufficient returns for the risk they have taken in investing their
money company’s capital. The return generated by the company for shareholders has
to be more than the cost of capital to justify risk taken by the shareholders. The excess
of returns over cost of capital is simply termed as Economic Value Added (EVA). EVA
measures whether the operating profit is sufficient enough to cover cost of capital. If a
company’s EVA is negative, the firm is destroying shareholders wealth even though it
may be reporting positive and growing EPS or Return on Capital employed. (ROCE)
Thus, EVA is just a way of measuring an operation’s real profitability. EVA holds a
company accountable for the cost of capital it uses to expand and operate its business
and shows whether a company is creating a real value for its shareholders or not.
Calculation of EVA
EVA is the measure of financial performance. It is the operating profit after tax less a
charge for the capital, equity as well as debt, which is used in business.
EVA can be calculated as follows :
EVA = NOPAT ! (TCE × WACC)
NOPAT = Net operating profit after tax
TCE = Total Capital Employed
WACC = Weighted average cost of capital
While calculation of NOPAT, the non-operating items like dividend, interest on securities
invested outside the business, non-operating expenses etc. are not considered. The
total capital employed is the sum of shareholders funds as well as loan funds and this
does not include investments outside the business.
In calculating WACC, cost of debt is taken as after tax cost of equity is measured on the
basis of Capital Asset Pricing Method (CAPM). CAPM is traditionally used by the
founders of EVA. Under CAPM. Cost of Equity (Ke) is given by the following :
Ke = Rf + b (Rm - Rf)
where f = Risk free return
Rm = Expected market rate of return
b = Risk coefficient of particular investment
It should be noted that EVA is expressed in terms of rupee figure and not as a
percentage i.e. EVA measures the absolute rupee value of wealth created.
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Chapter - 9 : Accounting Standards
2013 - Dec [2] (e)
Objectives of the Accounting Standards Board:
(i) To conceive and suggest areas in which AS need to be developed.
(ii) To formulate AS with a view to assisting the council of the ICAI in evolving and
establishing As in india.
(iii) To examine how for the relevant International AS/IFRS can be adapted while
formulating the As and to adapt the same.
(iv) To review, at regular intervals the AS from the point of view of acceptance or
changed conditions and if necessary revise the same.
(v) To provide from time to time interpretations and guidance on AS.
(vi) To carry out such other functions relating to AS.
Part - B : Auditing Practices
Chapter - 10 : Auditing Concept
2013 - Dec [5] (a)
The auditor assesses the reliability and sufficiency of the information contained in the
underlying accounting records and other source data by:
(A) Making a study and evaluation of accounting systems and internal controls on
which he wishes to rely and testing those internal controls to determine the nature
extent and timing of other auditing procedures,
(B) Carrying out such other tests, enquiries and other verification procedures to
accounting transactions and account balances as he considers appropriate in the
particular circumstances.
The auditor determines whether the relevant information is property disclosed in
the financial statements:
(a) Comparing the financial statements with the underlying accounting records
and other source data to see whether they properly summarize the
transactions and events recorded therein,
(b) Considering the judgement that management has made in preparing the
financial statements accordingly the auditor assessees the selection and
consistent application of accounting policies, the manner in which the
information has been classified and the adequacy of disclosure.
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2013 - Dec [6] (a)
Distinction between audit and Investigation is as follows:
1. Legal Binding: Audit of annual financial statement of a company is compulsory
under the companies Act, 1956. However, Investigation is not compulsory under
the companies Act 1956, but voluntary depending upon necessity.
2. Object in View: Audit is conducted to ascertain whether the financial statements
show a true and fair view. Investigation is conducted with a particular object in
view, viz to know financial position, earning capacity, prove fraud, invest capital,
etc.
3. Period Covered: Audit is conducted on annual basis. Investigation may be
conducted for several years, at a time say for three years.
4. Parties for whom conducted: Audit is conducted on behalf of shareholders (or
proprietor, or partners). Investigation is usually conducted on behalf of outsiders
like prospective buyers, investors, unders etc.
5. Documents: Audit is not carried out of audited financial statements. Investigation
may be conducted even though the accounts have been audited.
6. Extent of work: Audit is normally conducted on test verification basis. Investigation
is a thorough examination of Books of Accounts.
7. Report: Audit report of a company is addressed to shareholders (or propreitors or
partners). Investigation report is addressed to the party on whose instruction
investigation was conducted.
Chapter - 11 : Types of Company Audit
2013 - Dec [5] (b)
The provisions regarding qualification and disqualification of the statutory auditor of a
company are contained in section 226 of the companies Act, 1956.
Qualification of Statutory Auditor:
As per sec 226 of the company Act 1956, A practicing Chartered Accountant within the
meaning of the Chartered Accountant Act 1949 or a firm of practicing Chartered
Accountant where all the partners are practicing Chartered Accountant may be
appointed as the “Statutory Auditor” of the company.
Disqualification of statutory Auditor:
following persons shall not be qualified for appointment as auditor of a company:
(a) A body corporate;
(b) An officer or employee of the company;
(c) A person who is a partner, or who is in the employment, or an officer or employee
of the company;
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(d) A person who is indebted to the company for an amount exceeding one thousand
rupees, or who has given any guarantee or provided any security in connection
with the indebtness of any third person to the company for an amount exceeding
one thousand rupees;
(e) A person holding any security of that company after a period of one year from the
date of commencement of the companies (Amendment) Act, 2000.
2013 - Dec [5] (c)
There are some difference between statutory Auditor and Internal Auditor. The details
are as given below:
1. Appointment: Internal Auditor is appointed by the management of the organisation
while the statutory Auditor is appointed by owners i.e shareholder for a company.
First statutory Auditors of a company are appointed by Board of Directors.
2. Qualification: Qualification of a statutory Auditor are prescribed in the companies
Act, 1956. In case of a company, a practicing Chartered Accountants or a firm of
practicing Chartered Accountants can only be appointed as a statutory auditor.
There are no fixed qualifications for the position of an internal auditor.
3. Objects: The main object of the Statutory audit is to form an opinion on the
financial statement of the organisation. Auditor has to state that whether the
financial statement are showing the true and fair view of the affairs of the
organisation or not. The main object of the internal audit is to detect and prevent
the errors and frauds.
4. Scope: The scope of the statutory audit is fixed by the companies Act, 1956. It
cannot be changed by mutual consent between the auditor and the management
of the audited business unit. The scope of the internal audit is fixed by the mutual
consent of the auditor and the management of the unit under audit.
5. Report: The statutory auditor submits his report to the shareholder of the company
in its general meeting. The internal auditor submits his report to the management
of the company who is also his appointing authority.
6. Removal: The procedure for the removal of the statutory auditor is very complex.
Only the company in the general meeting can remove the auditor. It also has to
take permission of the Central Government. The management of the entity can
easily remove internal auditor. No permission of Central Government is required.
2013 - Dec [6] (b)
Section 233 A of the Companies Act, 1956 deals with the matter relating to special
Audit. Special Audit can be ordered by Central Government if it is of the opinion:
(a) That the affairs of any company are not being managed in accordance with sound
business principles or prudent commercial practices; or
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(b) That any company is being managed in a manner likely to cause serious injury or
damage to the interests of the trade industry or business to which it pertains’ or
(c) That the financial position of any company is such as to endanger its solvency; the
Central Government may at any time by order direct that a special audit of a
company’s accounts for such period or periods as may be specified in the order,
shall be conducted and may by the same or a different order appoint either a
Chartered Accountant as defened in clause (b) of sub section (1) of section 2 of
Chartered Accountants Act, 1949, or the company’s auditor himself to conduct
such special audit.
Chapter - 13 : Internal Control
2013 - Dec [6] (c)
There are two types of techniques used in internal control system. Preventive internal
control technique and Detective Control techniques.
Preventive control techniques are designed to discourage errors or irregulatorie from
occurring. They are proactive in nature that helps to insure departmental objectives are
being met. Examples of preventive control techniques are
(1) Segregation of Duties: Duties are segregated among different people to reduce
the risk of error or inappropriate action. Normally, responsibilities for authorizing
transactions (approval), recording transactions (accounting) and handling the
related assets (custody) are divided.
(2) Approvals, Authorisation And Verifications: Management authorizes
employees to perform certain activities and to execute certain transactions within
limited parameters. In addition, management specifies those activities or
transactions that need supervisory approval before they are performed or executed
by employees. A supervisory approval implies that he or she has verified and
validated that the activity or transaction conforms to established policies and
procedures.
(3) Security of Assets (Preventive and Detective): Access to equipment,
inventories, securities, cash and other assets is restricted; assets are periodically
counted and compared to amounts shown on control records.
2013 - Dec [6A] (iii)
Internal control is broadly defined as a process, effected by an entity’s board of
directors, management and other personnel, designed to provide reasonable assurance
regarding the achievement of objectives in the following categories:
1. Effectiveness and efficiency of operations
2. Reliability of financial reporting
3. Compliance with applicable Lows and Regulations
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Internal control is different from internal audit as follows:
Internal Audit Internal Control
(1) Internal Auditing is on independent,
objective assurance and consulting
activity designed to add value and
improve an organisat ion’s
operations. It helps the organisation
accomplish its objectives by
bringing a systematic, disciplined
approach to evaluate and improve
the e f fec t iveness o f r i sk
management , contro l and
governance process.
(1) Internal control is the system of
control established by the
management in order to carry on
business in an orderly and efficient
manner, ensure adherence to
management policies, safeguard
assets and completeness of
records.
(2) Internal audit system is
comparatively a narrow concept.
(2) Internal control system is a broad
concept.
(3) Internal audit system is to be
implemented as per the suitability of
the organisation.
(3) Internal control system is necessary
for every organisation.
(4) Internal Audit is primarily a
backward looking activity.
(4) The primary objective of internal
control system is to prevent the
occurance of proud.
Chapter - 15 : Audit Engagement and Documentation
2013 - Dec [6A] (i)
Verification is made on the basis of vouching so verification is a part of vouching. Even
though they have some differences which are as follows:-
(1) Meaning:
Verification is the act of checking title, possession and valuation of assets but
vouching is the act of checking the records with the help of evidential documents.
(2) Nature:
Verification is specially related to the assets and liabilities but vouching is related
to all the accounting documents.
(3) Person:
Generally, assistant staff or auditor performs the work of vouching but auditor
himself perform the work of verification.
(4) Time:
Vouching is made at the Begining of auditing but verification is made at the end of
auditing or at the time of checking Balance Sheet.
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2013 - Dec [6A] (ii)
General guidelines for the perparation of working papers are:
(1) Clarity and Understanding:
As a preparer of audit documentation, slip back and read your work of objectively.
Would it be clear to another auditor? Working papers should be clear and
understandable without supplementary oral explanations with the information the
working papers reveal, a reviewer should be able to readily determine their
purpose, the nature and scope of the work done and the preparer’s conclusion.
(2) Completeness and Accuracy:
As a reviewer of documentation, if you have to ask the audit staff basic questions
about the audit, the documentation probably does not really serve the purpose.
Work papers should be complete, accurate and support observations, listing,
conclusions, and recommendations. They should also show the nature and scope
of work performed.
(3) Pertinence:
Limit the information in working papers to matters that are important and necessary
to support the objectives and scope established for the assignment.
(4) Logical Arrangement:
File the working papers in a logical order.
(5) Legibility and Neatness:
Be neat in your work. Working papers should be legible and as neat as practical.
Sloppy work papers may loss their worth as evidence.
Crowding and writing between lines should be avoided by anticipating space needs
and arranging the work papers before writing.
(6) Safety:
Keep your work papers safe and retrievable.
(7) Initial and Date:
Put your initials and date on every working paper.
(8) Summary of Conclusions:
Summarize the results of work performed and identify the overall significance of
any weakness or exceptions found.
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