State with reasons your views on the following:
a. Mr. X, a partner of X & Co., Chartered Accountant died of a heart attack on 30.3.2003 after completing the entire routine audit work of T Ltd. Mr. Y one of the partners of the firm, therefore signed the accounts of T Ltd. Without reviewing the finalization work done the assistants.
(5 Marks June 2003)
b. A senior assistant of X & Co. Chartered Accountants drew up his audit programme without evaluating internal controls of T Ltd. When the partner asked for the reason, he stated that the controls were developed the General Manager (Finance) of T Ltd. Who is a Chartered Accountant and had written few books on “Internal Control” and therefore there was no need to review the said area. (5 Marks June 2003)
c. An assistant of X & Co. Chartered Accountants detected an error of Rs. 5 per interest payment which recurred number of times. The General Manager (Finance) of T Ltd. advised him not to request for passing any adjustment entry as individually the errors were of small amounts. The company had 2,000 Deposit Accounts and interest was paid quarterly. (5 Marks June 2003)
d. An assistant of X & Co., Chartered Accountants wanted to verify the cash in hand and investment of T Ltd. The General Manager (Finance) of T Ltd. suggested to the assistant of X & Co. that it was not necessary as his staff had done the same only few days back and no discrepancies were noted.
When the auditor delegates work to assistants or uses work performed other auditors and experts, he will continue to be responsible for forming and expressing his opinion on the financial information. However, he will be entitled to rely on work performed others, provided he exercises adequate skill and care and is not aware of any reason to believe that he should not how so relied. Further, the auditor should carefully direct, supervise and review work delegated to assistants. Thus, the auditor is responsible for forming and expressing his opinion on the financial statements. He is however, entitled to rely on work performed others, provided he exercises adequate skill and care. In any case the work performed each assistant needs to be reviewed to consider whether.
i. The work has been performed in accordance with the audit programme
ii. The work performed and the results obtained have been adequately documented; iii.All significant audit matters have been resolved or are reflected in audit conclusions;
iv. The objectives of the audit procedures have been achieved; and
v. The conclusions expressed are consistent with the results of the work performed and support the audit opinion.
In the instant case, it is not clear whether Mr. X did review the work performed assistants or not. Now, it is the duty of Mr. Y to ensure irrespective of the fact of paucity of time, to review the work performed the assistants before he expresses an opinion on financial statements. In fact, Mr. Y should have reviewed working papers carefully, carry test checks and scrutinize audit file thoroughly.
Accordingly, Mr. Y had failed to exercise adequate skill and care since he did not review the finalization work performed the assistants.
A proper understanding of the internal control system enables the auditor to decide upon the nature, extent and timing of the appropriate substantive audit procedures to the performed for the different areas to be covered under the audit programme. The management is responsible for maintaining an adequate accounting system in cooperating various internal controls to the extent appropriate to the size and nature of the business. The mere fact that the controls have been developed a chartered accountant is not important. In any case, the auditor should independently gain an understanding of the accounting system and related internal controls and should study and evaluate the operation of those internal controls upon which he wishes to rely in determining their nature and timing. In cases where internal control is weak, the auditor might choose an auditing procedure or test that otherwise might not be required, he might extend certain tests to cover a large number of transactions or other items than he otherwise would examine at times and perform additional tests for his satisfaction. Also, NSA 610 “Using the work of internal auditors” specifically requires the statutory auditor to read and consider the internal audit report to determine the NTE of his audit procedures.
Accordingly, just because the internal control was developed a chartered accountant who had also authored a of book on internal control is of no consequence. The auditor must understand and evaluate internal control to develop a proper audit programme.
The auditor is primarily concerned with items which either individually or as a group are material in relation to the affairs of an enterprise. Therefore, the auditor while carrying out his attest function needs to consider the possibility of misstatements of relatively small amounts that cumulatively could have a material effect on the financial statements.
In the instant case, an error of Rs. 5 in the interest computation, even if small individually, will have a material effect due to the number of transactions. NSA 320 “Audit Materiality” along with NSA 450 on, “Evaluation of Misstatements Identified during the Audit” states that the auditor needs to consider the possibility of misstatements of relatively small amounts that, cumulatively, could have a material effect on the financial information. For example, an error in a month-end (or other periodic) procedure could be an indication of a potential material misstatement if that error is repeated each month or each period as the case may be.
The auditor should therefore, determine the cumulative error and then take a decision as to whether an adjustment is required or not. Accordingly, they need not pay any attention to the advice made the General Manager (Finance) of T Ltd.
It is the responsibility of the auditor to ensure that an audit is organized to cover adequately all aspects of the enterprise as far as they are relevant of the financial statements being audited. The auditor assesses the reliability and sufficiency/adequacy of the information contained in the accounting records and other source date by:
i. Evaluating the accounting and internal control system and testing the control to determine the nature, extent and timing of other audit procedures and,
ii. Carrying out such audit steps, enquires and vouching and verification procedures of accounting transactions and account balances respectively as he considers appropriate in the particular circumstances.
Generally, both cash and investments constitute a significant proportion of the total assets of an entity. Physical verification of both these items to verify their existence constitutes an important auditing procedure. Since, it is normally not possible to verify the existence of these items on the date of the balance sheet, the Institute has recommended that surprise checks must be conducted during the year. If necessary, in case of investments in the custody of third party‟s confirmation shall have to be obtained.
Therefore, the auditor has to verify the cash in hand and investments even though the sum has been verified personnel of the Finance Department of T Ltd. for obtaining confirmation as the case may be.