Auditing and Assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

As an auditor, express your comments/views on the following situations:
a) Trade and Trust Limited Company has a policy of writing back unclaimed balances (creditors/sundry payables etc.) as income if it remained for more than 3 years. During the year 2066-67, it has written back Rs.14,050 out of Rs.55,000 balance in dividend payable as the Rs.14,050 was more than 5 years old.

b) You are auditor of Exim Limited which exports Pashmina Goods to M/s. ImexInc, of USA for the financial Year 2066-67. The Company‟s around 75% sale constitutes export to Imex Inc. and there is outstanding balance of Rs. 17 Crore in Sundry Debtors which covers around 85% of the total debtors as at 32 Ashad, 2067. Due to global recession, the Imex Inc. has filed bankruptcy in USA on 15 Ashwin, 2067 which came to your notice during the audit.

a) Answer

Write back of unclaimed balances unilaterally without consent of the party involved is not in line with Nepal Accounting Standards. Therefore, the policy adopted the Company is not consistent with Accounting Standards. In case of Dividends, Section 182 of company Act 2063 requires that the amount

of dividend not claimed/received any Shareholder even after the expiry of a period of five years after the date of resolution adopted the company in its general meeting to distribute dividend shall be credited to the investors protection fund to be established under Section 183 of the same Act. Before crediting the amount to the fund, it shall publish a notice in a national daily newspaper inviting the concerned to receive the dividend, within the time limit of at least one month.
Therefore, the writing back of dividend Trade and Trust Company is violation of provisions of Company Act and shall be liable.

b) The filing of bankruptcy of the company during the course of audit but after the balance sheet date is subsequent event or events occurring after balance sheet date. It is seen that the debtor covers the major portion of debtors, the debtors shown in the balance sheet may no longer be appropriate and hence adequate provision should be made. Since, the party is major customer and covers major portion of the debtor, the going concern assumption of the company may no longer be appropriate. In such circumstances, the auditor should ask the management for necessary adjustment/provisioning in the financial statement regarding the debtor balances and necessary disclosure thereof.

Further, the auditor should also:
 Review management’s plans for future actions based on its going concern assessment;

 gather sufficient appropriate audit evidence to confirm or dispel whether or not a material uncertainty exists through carrying out procedures considered necessary, including considering the effect of any plans of management and other mitigating factors; and

 Seek written representations from management regarding its plans for future action.

Based upon further assessment and actions of management, the auditor shall issue his opinion.

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