(c) PD & Co., Chartered Accountants, were appointed as the statutory auditors
of MR Limited for the financial year 2023-24. MR Limited included the
following clause in the appointment letter to the auditors: "The Auditor shall
be responsible for detecting the frauds that may happen in the company
during the financial year 2023-24.”
The auditor objected to inclusion of such a clause in the appointment letter.
Discuss in the light of scope of audit.
(3 Marks)
(d) M/s. PQ Limited has a turnover of ` 807 crores during the financial year
2023-24. It has outstanding dues towards Goods and Services Tax (GST) of
` 10 lakhs since June 2023. When enquired by the auditor, the company's
management informed him that they have filed an objection letter for the
said demand with the GST Authorities, however, no response is received from
the GST Department. State the reporting responsibility of the auditor under
paragraph 3, clause (vii) of the Companies Auditor's Report Order, 2020
[CARO, 2020].
(3 Marks)
Answer
(a) Facts Which Become Known to the Auditor After the Date of the
Auditor’s Report but Before the Date the Financial Statements are
Issued: As per SA 560, “Subsequent Events”, the auditor has no obligation
to perform any audit procedures regarding the financial statements after
the date of the auditor’s report.
However, when, after the date of the auditor’s report but before the date
the financial statements are issued, a fact becomes known to the auditor
that, had it been known to the auditor at the date of the auditor’s report,
may have caused the auditor to amend the auditor’s report, the auditor
shall
(i) Discuss the matter with management and, where appropriate, those
charged with governance.
(ii) Determine whether the financial statements need amendment and, if
so,
(iii) Inquire how management intends to address the matter in the financial
statements.
If management amends the financial statements, the auditor shall carry out
the audit procedures necessary in the circumstances on the amendment.
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Further, the auditor shall extend the audit procedures and provide a new
auditor’s report on the amended financial statements. However, the new
auditor’s report shall not be dated earlier than the date of approval of the
amended financial statements.
In the instant case, ABC Ltd. received an amount of ` 5 crore on account of
incentives pertaining to year 2023-24 in the month of April 2024 i.e. after
finalisation of financial statements and signing of audit report but before
the issuance of Financial Statements to stakeholders. The Board of Directors
of ABC Ltd. wished to amend the financial statements and requested the
CA. Rashmi (auditor) to consider this event and issue a fresh audit report
on the financial statements for the year ended on 31.03.2024.
After applying the conditions given in SA 560, CA. Rashmi can issue new
audit report subject to date of audit report which should not be earlier than
the date of approval of the amended financial statements.
(b) Sample Selections Methods:
(i) Stratified Sampling method involves dividing the whole population to
be tested in a few separate groups called strata and taking a sample
from each of them. Each stratum is treated as if it was a separate
population and proportionate of items are selected from each of these
stratum. The number of groups into which the whole population has
to be divided is determined on the basis of auditor judgment.
In the given case, Auditor divided the trade receivables in three groups
i.e. balances above ` 20 lakhs, balances between ` 10 lakhs to 20 lakhs
and balances below ` 10 lakhs and he selected different percentages
of items from each group will be considered as Stratified Sampling.
(ii) Block Sampling: This method involves selection of a block(s) of
contiguous items from within the population. Usually, a range of
continuous transaction shall have similar characteristics, therefore,
selection of a group at one time will not give a reasonable basis for
opinion on the overall population as different types of transactions and
unusual transactions may not be covered in the group taken all at once.
In the given case, the auditor uses the sample of 50 consecutive
cheques to test whether the cheques are signed by authorized
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SUGGESTED ANSWER
signatories, rather than picking 50 single cheques throughout the year
is Block Selection Method.
(c) Scope of Audit in detection of Fraud: In conducting audit of financial
statements objectives of auditor, in accordance with SA 200, “Overall
Objectives of the Independent auditor and the conduct of an audit in
accordance with Standards on Auditing” is to obtain reasonable assurance
about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, thereby enabling the auditor
to express an opinion.
An audit is not an official investigation into alleged wrongdoing. The
auditor does not have any specific legal powers of search or recording
statements of witness on oath which may be necessary for carrying out an
official investigation.
Audit is distinct from investigation. Investigation is a critical examination of
the accounts with a special purpose. For example, if fraud is suspected and
it is specifically called upon to check the accounts whether fraud really
exists, it takes character of investigation.
The scope of audit is general and broad whereas scope of investigation is
specific and narrow.
Thus, inclusion of such a clause in the engagement letter is uncalled for and
outside the scope of audit.
(d) Reporting responsibility of the auditor under paragraph 3 of CARO,
2020: The auditor is required to report as per clause (vii) (a) of Paragraph
3 of CARO, 2020 that whether the company is regular in depositing
undisputed statutory dues including Goods and Services Tax, provident
fund, employees' state insurance, income tax, sales-tax, service tax, duty of
customs, duty of excise, value added tax, cess and any other statutory dues
to the appropriate authorities and if not, the extent of the arrears of
outstanding statutory dues as on the last day of the financial year
concerned for a period of more than six months from the date they became
payable, shall be indicated;
Further, the auditor is also required to report as per Clause (vii) (b) of
Paragraph 3 of CARO, 2020, where statutory dues referred to in sub-clause
(a) have not been deposited on account of any dispute, then the amounts
AUDITING AND ETHICS
involved and the forum where dispute is pending shall be mentioned (a
mere representation to the concerned Department shall not be treated as
a dispute).