Auditing and Assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

How would you vouch and verify the following? (5 Marks each December 2011)
a) Personal expenses of directors met the company
b) Redemption of debentures at a premium
c) Impairment of assets
a) Answer
Personal Expenses of Directors:
(i) Check the articles of association, service contract, minutes of general meeting, etc., to check the authorization for such payment.
(ii) Enquire to ensure that personal expenses are not camouflaged in any other revenue items.

(iii) Check the invoices and relevant documents to support the claim made.
(iv) Check documentary evidences to examine the payments reimbursed.

b) Answer
The auditors should verify the provisions for the premium payable on redemption of debentures. Such provisions are made in either of the following two ways:
a. The amount of premium payable on redemption may be debited to an account denominated as „Loss on Issue of Debentures‟ and credited to „Premium payable on redemption of debentures Account‟ or subsequently, the debit balance in the first mentioned account should be carried forward till it is written off, while the later account would be closed on payment of the premium, on redemption of debentures.
b. The fact that the debentures will have to be redeemed at premium may be disclosed a note in the Balance sheet along with the date of redemption and , as and when redemption is made, the amount paid as a premium should be debited to the Premium on Redemption of Debentures accounts.

c) Answer
An asset is impaired when its carrying amount exceeds its recoverable amount.
The difference between the carrying amount of an assets and recoverable amount is termed as impairment loss.
Besides charging annual depreciation on assets the reason of normal wear and tear, effluxion of time and obsolescence to re-instate the correct value of the assets considering the future cash flows that the assets can generate, impairment loss needs to be provided.

The treatment of impairment loss is similar to depreciation except the fact that it can be re- instated in future, if the recoverable amount of the assets exceeds the carrying amount.

The auditor must ensure that provisions of set standards “Impairment of Assets” are followed.

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