ICWA

Career Institute of Commerce & Accounts 2

Solution
AUDIT
Answer: 1
Indian GAAP allows the R and D expenditure to be capitalised under certain conditions like technical feasibility, resource
availability etc. In the US GAAP R and D costs are treated as expenses. If the Plant & Machinery has future use, it can be
capitalised.
Answer : 2
(i) The Accounting Standards are mandatory in nature and according to section 227, the auditor is required to report
whether the company has followed the accounting standards or not.
However, if the company has not followed some accounting standards, such fact should be disclosed along with the
financial statements along with statement showing (i) deviation from the accounting standards (ii) the reasons for
such deviaton. Any financial effect arising out of such deviation shall also be quantified and highlighted.
(ii) IFRS are applicable to companies having turnover of `1,000 croses and more from April 1,2011. IFRS are applicable
to individual companies and consolidated financial statements. These apply to profit oriented entities only.
Answer : 3
(a) Some examples of contingent liability are:
(i) Disputed claims by workers for compensation
(ii) Bills discounted
(iii) Guarantees given in favour of others;
(iv) Amount of incomplete contract;
(v) Calls unpaid on partly paid shares;
(vi) Payment of gratuity under Industrial Dispute Act;
(vii) Arrears of preference shares
Verification of Contingent Liability
For the verification of contingent liability, the auditor should
(i) Obtain certificate from some responsible officer of the company regarding the contingent liability disclosed in the
financial statements.
(ii) Examination relevant documents and records to ascertain the existence of contingent liability.
(iii) Assess on his own the likelihood of contingent liability to turn to actual liability.
(iv) Verify the court cases pending in the court, when the verdict is likely to come, he can also consult the company
advocates in the regard.
(v) Examine the claims by the workers pending decision of court, tribunal etc.
(vi) Maturity dates of bills discounted by the company. Verify whether there are any discounted bills against which
payment has been received, then see that such bills are not included in the contingent liability.
Verify the contract register, check calculations of estimates for completion of incomplete contract.
Answer: 4
The verification of loan against security of stock and shares, can be conducted on following lines:
(i) Demand a statement of stocks and shares given as security against loan.
(ii) Ensure that all the shares are fully paid up.
(iii) Loan amount to be compared with the market value of share at that time
(iv) Proper documentation with requisite stamps is available in respect of loan and mortgage.
(v) What is the margin available against fluctuation in share prices? Is there any policy in this regard?
(i) AS-6 deals with Depreciation accounting, auditor should see that provisions contained in AS-6 are followed and if not
he should seek explanation for the same. Section 205 also deals with depreciation and its compliance should be
ensured by the auditor. He should also see that the rates prescribed under schedule XIV to the Companies Act 1956
are followed. Determination of useful life of assets may require assistance of some other experts. The methods
followed for computation of depreciation should be consistently followed. If there has been change in method of
Date : 13.05.2012
ICWA
Career Institute of Commerce & Accounts 3
depreciation, it should have retrospective effect and resultant profit or loss should be taken to profit and loss a/c for
the current accounting year. In short he can follow the following steps auditing depreciation:
(i) Examine the policy for charging depreciation;
(ii) Examine whether the method and rates of depreciation are reasonable and sound considering the nature of
assets, their operation and estimated life.
(iii) If some accounts manual is operative for depreciation, he should ensure that it is followed properly.
(iv) While preparing depreciation schedule, whether all assets have been included.
(v) Adequate depreciation has been provided before declaring dividend as required in the section 205 of the Act.
(ii) True: The management audit is very useful for society at large. It is intended to review all managerial aspects of the
company so as to enhasnce efficiency and efficacy of the entire system which has a social advantage as well. It
serves the interest of different segments of society like customers, creditors, stakeholders, government and people
at large.
(iii) The branch audit should be conducted in the same manner as other statutory audits. The branch auditor has same
powers, responsibility and liability as statutory auditor. His basic objective is to record and report his opinion on the
state of affairs of the company as to whether the financial statements present the true and fair view of the state of
affairs of the company. he will check the books of accounts, call for explanation of the concerned officials as required,
collect internal and external evidence and frame his opinion and report.
Answer : 5
The basic items which can be considered are many; some of them are the following:
(i) Assets register, whether it is maintained properly, updated regularly. Who maintains it and who verifies and signs it.
(ii) Policy of depreciation; Whether consistently followed. AS-6 i.e. Depreciation accounting is followed. Any change in
policy of depreciation has been properly disclosed and its impact has been assessed and incorporated.
(iii) Policy of acquisition of fixed assets. How the assets are purchased? Who authorizes the payment? Whether purchase
committee is formed for this purpose? Whether price paid for its acquisition is okay?
(iv) Insurance policy: Whether all assets are ensured adequately against possible contingencies?
(v) Verification of assets: How and by whom, the assets are verified physically? What is the interval between two
successive verification ? Has any discrepancy
(vi) utilization of Fixed assets: Optimum utilization being ensured by the management, what is the Fixed assets turnover
ratio and how it stands against the industrial standard.
(viii) CARO 2003 requires in its first point regarding
Fixed assets:
(a) Company is maintaining proper records of fixed assets;
(b) Fixed assets are frequently verified by the management;
(c) Material discrepancy found during verification are accounted properly;
(d) Any disposal of fixed assets has affected the going concern concept or not.