Auditing and Assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

A and B are Chartered Accountants. They have a partnership firm named AB & Co. AB & Co is the auditor of X limited of which B is engagement partner. S, a shareholder of the company has filed complaints against AB & Co in the Institute of Chartered Accountants of Nepal for following faults. You are requested to advise the Institute whether the points raised in the complaints are valid. The points raised in the complaints are given below:

a) The company increased sales price of the products from 1stShrawan 2064. To gain profit, the salesman of the company raised invoice on 31stAshadh 2064 for some goods. The goods were adjusted in invoices raised on or after 1stSharwan 2064. The company has neither a policy of physical verification of stock nor certification of ending number of invoices at the year end. The auditors are of the view that it is not a material internal control weakness and did not report the same.
b) A, the partner of the AB & Co purchased goods worth Rs. 5,000 from the company on 1stAshadh 2064 on credit. The company has a policy of normal credit period of 15 days to regular customers. The amount of credit purchase was paid while finalizing the audit report for the year 2063/064 during Aswin 2064. Auditors are of the opinion that the transaction is of personal nature. Therefore, it does not apply to the firm.
c) The company purchased a motor car valued at Rs. 6,00,000 on hire purchase basis on 1stBaishakh 2064. The payment is to be made in 60 Equal Monthly Installments of Rs 15,000. The company debited Vehicle account and created liability to the bank crediting Rs. 9,00,000. The amount of installment is debited to the financing bank account as and when paid. The auditors have not mentioned anything in the report about this.
d) The company does not include selling and distribution cost while valuing inventory. The auditors have certified inventory at value without taking selling and distribution cost as cost of inventory.

Answer

a) Since the company has neither policy of physical verification of stock nor certification of ending number of invoices, there is a serious lapse in internal control in the company. Therefore, the auditors should have planned their work in the light of possibility of fraud involving removal of stocks from the company’s stores without the same being accounted for. Similarly, in absence of certification of ending number of invoices there is a possibility of raising back dated invoices as well. The company increased sales price from the beginning date of next financial year. Therefore, possibility of this type of fraud gains more strength.
Considering possibility of fraud due to weaknesses in the internal control, the auditor should have increased the coverage of his substantive tests regarding dispatches of stocks and correlation of such dispatches with invoices raised. This would have been further supplemented surprise physical verifications and stock reconciliations. It seems these substantial tests were not carried out

and the fraud remained undetected. This suggests serious lapses on the part of auditor in adopting appropriate technique of audit and failure of reporting the fraud. The auditor has committed professional misconduct.

b) Section 112(b) of the Companies Act 2063, provides that a person indebted to the company or does not pay amount payable to the company within the due date is not qualified for appointment as auditor of the company. In a partnership all partners work for each other and there is no separate existence of the partnership from the partners. Therefore, if a partner is indebted to the company, the firm is also not qualified for appointment as auditor. Hence the argument that the transaction is of personal nature and it does not apply to the firm is not tenable. Since the debt was outstanding for the period more than normal credit period, it has crossed the due date and the auditors seized to be qualifying for continuation as auditor of the company.

c) Where a movable asset, such as motor car or machinery has been acquired on hire-purchase basis, it should be adjusted in accounts at its cash value raising a liability for the amount payable to the financing company. The interest payable along with each installment, whether separately or included therein should be debited to the interest account.
In the cited case the cash value of the car is only Rs. 600,000. Therefore, vehicle account should be debited Rs 600,000 only and the financing bank should be credited the same amount. While paying installment the interest portion from the installment should be debited to interest account and balance should only be debited to financing bank account. It is clear from the above that the company has not given proper treatment while acquiring the car and while paying installments. Therefore, auditors have failed to point out the incorrect accounting treatment given.

d) As per Set standards, the cost of inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Costs, other than bringing the inventories to their present location and condition, are not included in the cost of inventories. while giving examples of costs excluded from the cost of inventories and recognized as expenses in the period in which they are incurred specifically excludes selling costs from inclusion in the cost of inventories. Hence, auditors have certified inventory in accordance with the Nepal Accounting Standards and cannot be termed as failed in performing duty.



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