Auditing and Assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

How will you vouch the followings?
a. Repairs to assets.
b. Income from investments.
c. Sale proceeds of Scrap.
d. Payment of taxes
e. Royalties received.

a. Answer
Since the line demarcating repairs from renewals is slender, usually it is not a simple matter to determine the amount of the expenditure, if any, included as charges for repairs, which should be considered as that incurred for renewal of an asset and added to its cost. It may sometimes be possible to determine this on a consideration of the nature of repairs carried out. The proportion of the charges which had the effect of increasing the value of an asset or enhancing its capacity or life, should be treated as capital expenditure. Where, however, it is not possible to form an option accurately on the basis of evidence as regards the nature of repairs, a certificate from the engineer under whose supervision the repairs were carried out, confirming the classification of expenditure should be obtained.

b. Answer
If the investments are many, the client generally would have an Investment Register. In such a case, the dividend income is first vouched reference to the counterfoils of Dividend Warrants and the interest on securities reference to the tax – deduction certificates, issued IRD. Afterwards the amounts collected are traced into the Investment Register; it is scanned to find out whether interest or dividend, relating to any investment, has remained unrealized. If so, the reasons, thereof are ascertained. In order that the gross amount of interest are disclosed in the Profit and Loss Account, the tax deducted out of interest is debited to the Income-tax Account and credited to Interest account. The auditor should verify that this has been done.
c. Answer
 Review the internal control on scrap as regards its generation, storage and disposal and see whether it was properly followed at every stage.
 Ascertain whether the organization is maintaining reasonable records for the sale and disposal of scrap.
 Review the production and cost records for the determination of the extent of scrap that may arise in a given period.
 Compare the income from the sale of scrap with the corresponding figures of the preceding three years.

 Check the rates at which scrap has been sold and compare the same with the rates that prevailed in the preceding year.
 See that scrap sold has been billed and accounted.
 Make an overall assessment of the value of the realization from the sale of scrap as to its reasonableness.

d. Answer
Payment on account of income-tax and other taxes consequent upon a regular assessment should be verified reference to the copy of the assessment order assessment sheet, demand notice and the receipted challan. Payments or advance payment of income-tax should also be verified with the notice of demand and the receipted challan acknowledging the amount paid. The interest allowed on advance payment of income-tax should be included as income and penal interest charges for

e. Answer
The auditor should see the relevant contract and examine the important provisions relating to the conditions of payment of royalty. In particular the rate of royalty, mode of calculation and the due dates should be noted. The periodical statements received from the payer and the calculation of the royalty should be checked. If there is any deduction on account of recoupment of royalty for the past period, the records for earlier royalty receipt should be seen to ensure that the amount of deduction is as per the contract. Royalties due but not yet received should have been properly accounted for.

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