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Assignment Assessment Report

Campus: Mumbai Year/semester 2011-13

Level: PCL-II Assignment Type A

Module Name: Audit Assessors Name Harish Sir

Students Name: Mihir Joshi Reqd Submission Date 28-02-2013

e-mail id & Mob No [email protected] Actual Submission Date 27-01-2012

Stream Finance Submitted to : Harish Sir

Certificate by the Student:

Plagiarism is a serious College offence.

I certify that this is my own work. I have referenced all relevant materials. Mihir Joshi

(Students Name/Signatures)

Expected Outcomes Assessment Criteria Grade

based on

D,M,P,R

system

Feedback

General ParametersClarity Clear understanding of

the concept

Analytical Thinking- Ability to analyze the

problem realistically

Research Done- Research carried out to

solve the problem

Formatting & Presentation- Concise& clear

thinking along with

presentation

Subject Specific Parameters

1.

2.

3.

Assignment Grading Summary (To be filled by the Assessor)

OVERALL ASSESSMENT GRADE:

TUTORS COMMENTS ON

ASSIGNMENT:

SUGGESTED MAKE UP PLAN

(applicable in case the student is asked

to re-do the assignment)

REVISED ASSESSMENT GRADE

TUTORS COMMENT ON REVISED

WORK (IF ANY)

Date: Assessors Name / Signatures:

Grades Grade Descriptors Achieved Yes/No (Y / N)

P A Pass grade is achieved by meeting all the requirements defined.

M Identify & apply strategies/techniques to find appropriate solutions

D Demonstrate convergent, lateral and creative thinking.

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AUDIT

ASSIGNMENT A

1. Case Study-Ratio Analysis

The Balance sheet and Profit & Loss Account of X&X India Private Limited for the financial year 2010-11

are given below. You are hired as independent consultant to review the financial statements of the company

for the financial year 2010-11. With the help of ratios you are advised to evaluate the performance of the

company for various entities i.e., Management of the Company, Shareholders, Debtors, Tax authorities andcreditors.

XYZ India Private Limited

Balance Sheet

Particulars Amount Particulars Amount

Sources Of Funds As At

31st March 2011

Application of Funds As At

31st March 2011

Shareholders Funds

a. Share Capital (50 shares

@ Rs100 each)

b. Reserve and Surplus

50,000

1,785

Fixed Assets

Less: Depreciation

Net Block

28,350

(3,665)

24,685

Loan Funds

a. Secured Loan

b. Unsecured Loan

5,75

7,46

Investments 26,875

Current Liabilities and

Provisions

a. Sundry Creditors

b. Provisions

8,288

5,43

Current Assets and Loans

& Advances

a. Inventories

b. Sundry Debtors

c. Cash and Bank

d. Loans and advances

1,334

6,574

1,244

1,225

Total 61,937 Total 61,937

XYZ India Private Limited

PROFIT AND LOSS ACCOUNT

Profit and Loss Account

Particulars

Amount(Rs) For the year ended

31st March 2011

Income

Sales and Service

Other income

19,000

1,900

Expenditure

Material

Employee cost

Depreciation

Other cost

Interest Expenses

(9,000)

(1,200)

(2,00)

(50)

(20)

Profit before tax 6,030

Less: Provision for tax (2,000)

Profit After Tax 8,430

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2. Case Study on Fraud

List out some examples of fraud that can be done by ledger keeper in Purchase Ledger, Sales Ledger and

Suppliers ledger.

3. Case Study on Share Certificate

You are appointed as Statutory Auditor of P& B Private Limited. During the period under audit you

noted that the company has invested Rs 25 lakhs in share capital of Other Private Limited Company and

funds are transferred from companys bank account to transferee Company Bank account. You are alsoprovided company bank statement to substantiate that funds are remitted in lien of share issued to

Transferor Company. You as Statutory Auditor of the company how would you ensure the authenticity

of the above Investment.

Application Based Questions

1. ABC Ltds15% subscribed capital is held by State Financial Corporation and 10% is held by

General Insurance Co. Please advise ABC Ltd whether the appointment of the statutory

auditor can be done by passing a general resolution at annual general meeting?

2. XYZ private Limited Ltd. has paid up Capital and Reserves of Rs. 60 lacs and secured Loans

of Nationalized Banks having sanctioned limit of Rs. 28 lacs and outstanding balance of

Rs.23 lacs. The turnover of the company is 5.10 crores for the year ended 31.3.2010. A

customer returns goods worth 40 lacs on 2.4.2010, out of sales made during the year ended

31.3.2010. The management of company is of the opinion that CARO, 2003 is not applicable

to the company. Please advice the management of the Company?

3. Mr. Y was appointed as an auditor of PQR Ltd. for the year ended 31.3.2009 at AnnualGeneral Meeting held on 16.08.2008. Mr. Y has been indebted to the company for sum of

Rs. 10,000 as on 1.4.2008, the opening date of accounting year which has been subject to his

audit. However, Mr. Y having come to know that he might be appointed as auditor, he repaidthe amount on 10.8.2008. One of the shareholders complains that the appointment of Mr. Y

as an auditor was invalid because he incurred disqualification of the auditor.Do you agree

with the contention of the Shareholder?

4. As a Statutory Auditor, how would you deal with the following Mr. Rajesh is appointed as

the auditor of NOIDA Travels Ltd. with audit fees of Rs. 35,000. He purchased air ticked

from Delhi to Kolkata and back for Rs. 18,000 from the client for his personal work and the

amount remains unpaid at the end of the year as it is a general practice of the client to give

credit to all. Mr. Rajesh claims that he does not incur any disqualification of an auditor

5. As an auditor, how would you deal with the following :

During the audit for the year ended on 31st March, 2009 of XYZ Ltd you come across certain

personal expenses of employees having been debited to Profit and Loss account.

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6. Mr. X is the auditor of XYZ Ltd. For the year ended 31.12.2002. On the basis of the published

accounts, certain shareholders has called for some information from him through letters regarding

Details of certain travelling expenses,Reasons for variations in expenses as compared to previous year,

Explanation for not qualifying the reports

Should the auditor answer the various questions raised by the individual shareholder?

7. T PvtLtds paid up Capital & Reserves are less than Rs 50 lakhs and it has no outstanding loan

exceeding Rs. 25 lakhs from any bank or financial institution. Its sales are Rs 6 Crores before

deduction Trade discount Rs 10 lakhs and Sales returns Rs 95 lakhs. The services rendered by the

company amounted to Rs 10 lakhs. The company contends that reporting under Companies Auditors

Reports Order (CARO) is not applicable. Discuss.

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Solution

Solution1: Case Study-Ratio Analysis

The information provided in financial statements can be used to provide insightinto the financial strength and weakness of a company. It is important toexamine the relationship between accounts in order to take the financialinformation to the next step.

The nature of the ratio analysis depends on what information the reader is looking for.

The following are the classified entities for which Ratio Analysis is a key tosuccess:Management of the Company, Shareholders, Debtors, Tax authorities andcreditors.

If the reader is the Management of the Company,

Current ratio: Current Assets / Current Liabilities = 10,377 / 8,831 = 1.18

Quick or Liquid ratio:Quick Assets / Current Liabilities = 9,043 / 8,831 = 1.02

Proprietary ratio: Shareholders funds / Total Assets = 50,000 / 61,937 = 0.80

Fixed assets turnover ratio: Cost of Revenue / Net fixed Assets = 19,000 / 24,685 =0.77

Current assets to fixed assets ratio: Current assets / Fixed assets = 10,377 / 24,685 =0.42

Net profit ratio: Net profit after tax / Net Sales = 8,430 / 19,000 = 0.44

Return on total assets: Net profit / Total assets = 8,430 / 61,937 = 0.14

Earnings per share: Income / No. of equity shares = 8,430 / 50 = 168.6

Price -Earnings ratio: Price per share / Earnings per share = 100 / 168.6 = 0.60

If the reader is a Shareholder,

Returns on equity: Net Income / Shareholder's Equity = 8,430 / 50,000 = 0.17

Earnings per share: Net Income / No. of equity shares = 8,430 / 50 = 168.6

Price earnings ratio: Price per share / Earnings per share = 100 / 168.6 = 0.60

If the reader is a Debtor,

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Debtors Turnover Ratio:Debtors / Total sales x365 = 6,574 / 19,000 x365=126.29 days

If the reader is the Tax authority,

Earnings per share: Net Income / No. of equity shares = 8,430 / 50 = 168.6

Price- Earnings ratio: Price per share / Earnings per share = 100 / 168.6 = 0.60

Net profit ratio: Net profit / Net sales x100 = 8,430 / 19,000 = 0.4437

Return on total assets: Net profit / Total assets = 8,430 / 61,937 = 0.14

Fixed assets turnover ratio: Cost of Revenue / Net fixed Assets = 19,000 / 24,685 =0.77

If the reader is a Creditor,

Creditors Turnover Ratio: Creditors / Cost of sales x365 days = 8,288 / 19, 000x365= 159.22 days

Evaluation and Conclusion: When evaluating a good return rate, one has toconsider the level of business risk assumed. (For example, 6.2% earnings maybe acceptable in a bank account but not in a risky business environment).

The Return on Equity is 17%, which is quite good for a shareholder.

The Return on total assets ratio is 14%, which is a positive leverage, whichresults in greater return on equity than the return on assets.

A ratio of 1:1 indicates a more positive in the Net working capital. Here wegot the Current ratio as 1.18.

Overall, the companys performance is satisfactory.

Solution 2: Case Study on Fraud

The following are few examples of fraud that can be done by ledger keeper inPurchase Ledger, Sales Ledger and Suppliers ledger.

(a) Over-casting the payments side of the cash book;(b) Under-casting the receipts side of the cash book;(c)Entering fictitious transactions in the cash column to show that amounts havebeen deposited in the account actually when there is no deposit has been made;(d) Posting an amount of cash sale to the credit of a party and subsequentlywithdrawing the amount;

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(e) Wrong totals or balances being carried forward in the cash book or in theledger;(f)Crediting the account of a supplier on the basis of a fictitious invoice;(g)Crediting an amount due to supplier not in his account but under a fictitiousname and misappropriating the amount paid against the credit balance;(h)Teeming and Lading

(i) Writing off the amount receivable from a customers bad debt account andmisappropriating the amount received in payment in payment of the debt

Solution 3: Case Study on Share Certificate

In order to ensure the authenticity of investment, I would check all thenecessary documents. The documents are:

(a)Documents of all new investments for the year with investment date(b) Copies of remittances of all income from investments and expenses incurredduring investment(c)Include proof of valuation of variable value investments at the balance sheet

date. I will need to know if values of investments have been impaired(d) Copies of all contracts and certificates of registration, revealing rights andobligations affecting investments with signature of directors or authorize

persons(e) Specifically, as regards to this case study verifying the Demat account of thecompany so as to ensure whether the shares are actually purchased is also oneof the ways to ensure the authenticity of the investment.

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Application Based Questions

Solution 1:

ABC Ltds 25% subscribed capital is held by the below mentioned categories.

According to section 224 (1) of the companies Act, 1956, the appointment orreappointment of an auditor or auditors at each Annual General Meeting shall bemade by passing a special resolution in case of a company in which not lessthan 25% of the subscribed share capital is held, whether singly or in anycombination, by

A public financial institution or a government company of central government orany state government, orAny financial or other institution established by any provincial or state act inwhich a state government holds not less than fifty one percent of the subscribedshare capital, orA nationalized bank or an insurance company carrying on general insurancebusiness

In case, the company fails to appoint an auditor at its annual general meeting

by passing a special resolution,the central government is to be informed and itwill exercise its power of appointing the auditors

So, the appointment of auditor shall be made only by passing a specialresolution not by a general resolution.

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Solution 2:

Clause 4(vii) of CARO, 2003 requires the auditor to comment whether thecompany has an internal audit system commensurate with the size and natureof the business.

In respect of non-listed companies the clause is applicable only if:

(i) The paid-up capital and reserves of the company are more than 50lakhs asat the commencement of the financial year; or

(ii) Average annual turnover exceeds 5crores for a period of 3 consecutivefinancial years immediately preceding the financial year concerned.(iii) And have outstanding loan exceeding 10lakhs or more from any bank orfinancial institutions.

So, the contention of the XYZ (P) Ltd. is not correct.

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Solution 3:

According to sec.226(3), following persons are not qualified for appointment asauditors of a company

A body corporate

An officer or an employer of the company

A person who is a partner or who is in the employment of an officer oremployee of the company

A person who is indebted to the company for more than Rs. 10,000 orwho has given a guarantee or provided any security in connection withthe indebtedness of any their person to the company for more thanRs.10,000

A person holding any security of that company

A person is not eligible for appointment as auditor of any company ,if heis disqualified from acting as auditor of that companys subsidiary orholding company or of any other subsidiary of the same holding company

sec.226(4).

If an auditor is disqualified u/s 226(3),226(4) there is an automaticvacation of office sec.226(5).

Here, Mr. Y has repaid the amount before the annual general meeting. So, at thetime of appointment, Mr. Y is no more indebted to the company. Hence, thecontention of the Shareholder is incorrect.

Solution4:

Here, the contention of the auditor, Mr. Rajesh is incorrect as, he owes Rs.18000 to NOIDA Travels Ltd.

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A person who is indebted to the company for more than Rs. 10,000 or who hasgiven a guarantee or provided any security in connection with the indebtednessof any their person to the company for more than Rs.10,000

- Sec. 226 (3)

Solution 5:

On the basis of companys contractual obligation or in accordance withthe accepted business practice, personal expenses of employees debitedto Profit and Loss account, are considered normal and the auditor need notcomment on this. In case, personal expenses not covered by contractualobligations or by accepted business practice, when charged to profit and lossaccount, it would be the auditors dutyto report thereon in terms of Section227 (IA) of Companies Act, 1956.

The charging of such personal expenses of the employees by the company to

its profit and loss account is justified. If the terms and conditions ofemployment include payment of expenses of the personal nature, then suchexpenses can be incurred by the company. However, the contract ofemployment does not contain any provision for payment of expenses of apersonal nature, and then there is no warrant for incurring or re-imbursement of such expenses by the company. Such expenses areconveyance for personal use, medical re-imbursement, expenses on leavetravel, maternity benefits, etc.

Solution 6:

Auditor is not liable to give answer on any other type of questions which arenot related to his report. Auditor is not liable for

- Details of certain travelling expenses- Reasons for variations in expenses as compared to

previous year

According to Sec.227 of the Companies Act, 1956, an auditor is required toexpress an opinion as to whether the annual accounts give a true and fairview of the companys state of affairs and financial position. To formulate

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such an opinion, the auditor needs to examine the companys internalaccounting system, inspect its assets, test-check of accounting transactions.

However, auditor is liable questions raised on auditors reports as to why arethe reports not qualified. Thus the query raised on not qualifying reports hasto be answered by the auditor.

Solution 7:

CARO 2003 is applicable to a private limited company if any one of thefollowing three conditions is fulfilled at any point of time during the periodcovered by the audit report

its paid up capital and reserves are more than Rs. 50lacs

Its outstanding loan from bank or financial institution is more than Rs.

25Lacs.

Its turnover exceeds Rs. 5Crores.

CARO will be applicable even if one of the conditions is satisfied.In this case, paid up capital and reserves of T Pvt. Ltd. is less than Rs.50Lakhs and has no loan outstanding exceeding rupees 25Lakhs from anybank or financial institution. Turnover is not defined in the CARO. Part II ofSchedule VI defines the term turnover as the aggregate amount for whichsales are affected by the company. Salesaffected would include sale ofgoods as well as services rendered by the company.

CARO is applicable to T. Pvt. Ltd.To ascertain the turnover though trade discount and sales returnsshould be deducted, the inclusion of services rendered would result ina turnover of Rs. 5.05crores (6Crores -10Lakhs 95Lakhs + 10Lakhs).

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