Auditing and assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

Distinguish between the following: (5 Marks each December 2007)
a) Joint audit and Branch audit
b) Concealed and Unconcealed Errors
c) Provisions and Contingent Liabilities
ANSWER
Answer
a) Answer
The practice of appointing Chartered Accountants as joint auditors is quite widespread in big companies and corporations. Joint audit basically implies pooling together the resources and expertise of more than one firm of auditors to render an expert job in given time period which may be difficult to accomplish acting individually. It essentially involves sharing of the total work. Whereas branch audit is done either under legal provision or under requirement of the management. In certain cases, branch audit may be compulsory but joint audit is never compulsory.
Where joint auditors are appointed, they should, mutual discussion, divide the audit work among themselves. The division of work would usually be in terms of audit of identifiable units or specified areas. Whereas though branch audit may decrease workload of statutory auditor‟s branch auditors are not concerned with the audit of other units.

For certain works, whether divided between joint auditors or not all the joint auditors are jointly and severally responsible. In respect of audit work divided among the joint auditors, each joint auditor is responsible only for the work allocated to him, whether or not he has prepared a separate report on the work performed him. In case of branch auditor, he is liable and responsible for the matters concerned with the branch only and does not decrease liability of

statutory audit concerning the branch. Branch auditor may work under guidance of statutory auditors whereas joint auditors work jointly.

b) Answer
As a general rule, mistakes are unconcealed but frauds are deliberately concealed. This proposition does not need any elaboration, but exceptions are in both cases. Mistakes become concealed if compensated another or more mistakes in the opposite direction, or it may even be greatly minimized that chance happening. Mistakes may as well be concealed for wrong arithmetical calculations or for a faulty process of verification. Depreciation and stocks are examples which immediately come to one‟s mind. Wrong calculation of depreciation or omission to include certain stocks in the inventory or wrong valuation of stocks is not apparent. Petty cash defalcation is often unconcealed because petty cash is an item which on many occasions is left out of checking. The attitude towards apparently small errors may be dangerous because its true dimensions remain concealed and that may render the statements of account totally unacceptable.

c) Answer
A contingent liability is the certain liability arising out of uncertain event that is not recognized in the accounts. Contingent liabilities are not recognized as liabilities because they are either possible obligations or which is yet to be confirmed whether the enterprise has a present obligation that could lead to an outflow of resources embodying economic benefits or present obligations that do not meet the recognition criteria because either it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or a sufficiently reliable estimate of the amount of the obligation cannot be made.
Examples of contingent liabilities are unexpired contract commitments, compensation amount in respect of a law suit pending court‟s verdict etc.
Unless the possibility of any outflow in settlement is remote, an enterprise should disclose for each class of contingent liability at the balance sheet date a brief description of the nature of the contingent liability with certain details.



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