Auditing and Assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

Express your views as an auditor in the following cases: (5×4 = 20 Marks, June 2005)
a. Mr. Ram Singh Kathayat, FCA has been doing audit of ABC Co. Ltd for the past few years. His experience as auditor of the company for the past few years shows that accounts of the company are

always in order. The managing director of ABC Co. Ltd. requested him to issue an unqualified audit report without conducting the audit for the year since the audit for the year since the audit report is positively required the next day if the company is to secure a very good contract.

Answer.
Mr. Ram Singh Kathayat, FCA should conduct the audit of ABC Co. Ltd. in accordance with Nepalese Standards on Auditing having regard to the requirements of NSA, relevant professional bodies, legislation, regulations and where appropriate, the terms of the audit engagement and reporting requirement. For this he needs to obtain sufficient evidence and information to verify the transaction of ABC Co. Ltd for the year. The auditor should not only rely on the past tract records of the company and agree to the request of his client to issue unqualified audit report.

b. As at the beginning of the year, M/s ABC Ltd. has a capital of Rs. 250 Lakhs, free reserves of Rs.50 Lakhs and Revaluation Reserves of Rs.450 Lakhs. In the relevant year under the audit, ABC Ltd. has incurred a loss of Rs.400 lakhs. The company proposes to adjust the loss with the revaluation Reserve.
Answer.
An increase in net value of assets is normally credited to owner‟s interest and under the heading Revaluation Reserve except that, to the extent that such increase is related to and not greater than a decrease arising on revaluation previously recorded as a charge to the profit and loss statement, it may be credited to the profit and loss statement. A decrease in net book value arising on revaluation of fixed asset should be charged directly to the profit and loss statement except that the extend such a decrease is related to an increase which was previously records as, credit to revaluation reserve and which has not been subsequently reversed or utilized, it may be charged directly to that account the treatment of reserve created on Revaluation of Fixed Assets states that where the value of fixed assets is written up in the books of account of a company, the corresponding credit appearing as revaluation reserve does not represent a realized gain and is therefore, not available for distributions as dividend. Similarly, accumulated losses and the depreciation on the acquisition cost (including arrears of depreciation) should not be adjusted against revaluation reserve since this would amount to setting off actual losses against unrealized gains.

The auditor should explain to the management that accumulated losses cannot be adjusted against the revaluation reserve created on revaluation of the fixed assets. In case the company in question does so, the balance sheet of the company will not reflect a true and fair view of the state of affairs of the company keeping in view the magnitude of the amounts involved, i.e. accumulated amounted to Rs.400 Lakhs and share capital and free reserves amounted to Rs.300 Lakhs(excluding revaluation reserve). If the management does not agree with the opinion of the auditor, the auditor may even issue an adverse report.

c. XYZ Company Ltd. did not manage their closing stock of finished product and raw material properly, as a result of which physical verification of such items could not be carried out properly the

management. However, management certified the list of stock as true and correct balance of the stock as on the Asadh end 2061.

Answer:

The physical verification of stock is the primary responsibility of the management. The auditor however, is required to examine the verification programme adopted the management. As per NSA 501, the auditor must satisfy himself about the existence, ownership and valuation of such stock. In the given case, the auditor could not able to obtain sufficient information relating to closing stock of the XYZ Company Ltd. to form an overall opinion contained in the financial statements. The certification made the management cannot be a substitute for other audit evidence that the auditor could reasonably expect to be available. If the auditor is unable to obtain sufficient appropriate audit evidence that he believes would be available regarding a matter, which has or may have material effect on the financial information, this will constitute a limitation on the scope of his examination even if he has obtained a certificate from the management on the matter. Therefore, in the given case, auditor should take further audit evidence to satisfy as mentioned above, otherwise, the auditor may issue a disclaimer of opinion stating his/her unable to express an opinion for the reason that he has not been able to obtain sufficient audit evidence to form an opinion.

d. Alex Co. Ltd. wants to provide for non-moving stock during the financial year ending 2060/61 based on technical evaluation:
Total Value of Stock Rs.2 Crore.
Provision required based on one-year issue Rs.4 Lakhs. Provision required on the basis of technical evaluation Rs.3 Lakhs.

Give your view as an auditor of Alex Co. Ltd.
i. Does this amount to change in Accounting Policy?
ii. Can the company change the method of provision?

Answer:

The decision of making provision for non-moving stocks on technical evaluation basis does not amount to change in accounting policy. Accounting policy of a company may require that provision for non- moving stocks should be made. The method of estimating the amount of provision may be changed in case a more prudent estimate is required to be made.

In the given case, considering the total value of stock, the change in the amount of required provision of non-moving stock form 4 lakhs to 3 lakhs is also not material. The disclosure can be made for such change in the following lines way of notes to accounts in the annual accounts of Alex Co. Ltd. for the year 20600/61

“The company has also provided for non-moving stock on the basis of technical evaluation unlike the preceding years. Had the same method been followed as in the previous year, the profit and the corresponding effect on the year-end net assets would have been higher Rs.1 lakh.”



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