Auditing and Assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

How would you verify and vouch the following?

a. Remuneration paid to directors.
b. Research and development expenditure.
c. Discounted bills receivable dishonored.
d. Consignment sale.
Answer
a. Answer
 Refer to General Meeting of Board meeting resolution for the appointment and terms of appointment and terms of appointment of the director.
 Examine Article of Association and general meeting resolution to determine the mode of payment monthly, quarterly or way of commission.
 Check agreement with the director.
 Verify director‟s attendance in the board meetings.
 Ensure compliance with the provision of sections 91 of the Companies Act, 2063, where appropriate.
 Check computation of the net profits and the commission payable to directors in accordance with Section 91 of the Companies Act, 2063.
 Verify receipts issued the directors.

b. Answer
 Ascertain the nature of research and development work at the outset.
 Ascertain accounting policy regarding treatment of research and development of expenditure.
 Ascertain whether the concerned research activity is authorized the Board and has relevance to the objectives of the company.
 See that if the research expenses are for developing products or for inventing a new product they are treated as deferred revenue expenditure to be written off over a period of three to five years, if successful. In case it is established that the research effort is not going to succeed the entire expenses incurred should be written off to the profit and loss account.
 Ensure that if any machinery and equipment have been brought specially for the purpose of research activity the cost thereof, less the residuals value is appropriately debited to the Research and Development Account over the years of research.
 See that tax benefit arising on the research and development expenses is taken into account in creating tax provision.

 Ensure that no expense unrelated to the research and development programme is allowed to be debited to Research and Development Account.
c. Answer
 Obtain the schedule of discounted bills receivable dishonored.
 Check the entry in bank statement regarding the amount of bills dishonored and see that the bank has debited the account of client.
 Verify the bills receivable, returned the bank along with banks advice.
 See that the dishonored bills have been noted and protested following the proper procedure and the account of the drawee or the debtor is also debited.
 Check that bank commission, if any changed the bank has been recovered from the party.
d. Answer
 Ascertain that credit has been taken only for the profit on the goods sold through the consignee before the year end. No profit should be taken for the profit on goods remaining in the hands of the consignee.
 Where it is desired to show the result of each consignment, the goods sent to consignee should be debited, through consignment day book, to the Consignment Account. All expenses incurred on this consignment like freight, carriage, insurance, loading etc. including those incurred the consignee should also be debited to this account.
 The auditor should check debits in each of the consignment account reference to the proforma invoice, consignment day book, goods outward book, transport documents, acknowledgement of the goods the consignee and the Account sales etc.
 Credits in the consignment Account should be verified with the help of the account Sales received from the consignee. The gross sale proceeds should be credited to the Consignment Accountant and debited to the Consignee’s account.
 Verify the terms of agreement between the consignor and the consignee to check the commission and other expenses debited to the Consignment Account and Credited to the Consignee’s Account. The Account Sales also must be correspondingly checked.
 Ensure that the stock lying with the consignee at the end should be taken in the balance sheet at cost on a consistent basis and credited to the Consignment Account to arrive at the result of the Consignment transaction.
 Obtain confirmation of the balance in the account of the consignee from the consignee.
 Sometimes the goods are consigned not at cost but at an inflated price. The auditor should see that the necessary adjustments to remove the loading are made at the end of the year.
 It is possible that the goods consigned are treated as ordinary sales. The auditor should see that necessary adjustments are made at the year-end in respect of the unsold goods, commission and the expense incurred consignee. The consignee should not be shown at a debtor for unsold goods and in valuation of stock, these goods should be included in stock at cost worked out on a consistent basis.



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