(a) Inquiries of Management and Others Within the Entity: After
assimilating the internal control system, the auditor needs to examine
whether and how far the same is actually in operation. Test of controls are
performed to obtain audit evidence about the effectiveness of the: -
(i) Design of the accounting and internal control system
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SUGGESTED ANSWER
(ii) Operation of the internal control throughout the period
In the given case, CA B was performing Re-performance. It involves the
auditor’s independent execution of procedures or controls that were
originally performed as part of the entity’s internal control, for example,
reconciliation of bank accounts, to ensure they were correctly performed
by the entity.
Other procedures that can be applied while undertaking test of controls
are:
•
Inspection of documents supporting transactions and other events to
gain audit evidence that internal controls have operated properly, for
example, verifying that a transaction has been authorised.
•
Inquiries about, and observation of, internal controls which leave no
audit trail, for example, determining who actually performs each
function and not merely who is supposed to perform it.
•
Testing of internal control operating on specific computerised
applications or over the overall information technology function, for
example, access or program change controls.
(b) Vouching /Verification of borrowings from Bank: The auditor is required
to roll out and obtain independent balance confirmations in respect of all
the borrowings from the lender (banks/ financial institutions etc.) and
perform the following:
•
Ascertain that the confirmation asks for all information likely to be
relevant to the tests of debt and related interest balances (e.g.,
applicable interest rates, due dates, collateral and security interests).
•
Send reminders for non-replies.
•
Compare the balances as per the confirmations obtained to the books
of the accounts. Ask for reconciliations, if there are any differences and
test the supporting documents for the reconciling items on a test check
basis.
•
Reconcile the balances in the overdrafts or loan accounts with that
shown in the pass book(s) and confirm the last-mentioned balance by
obtaining a certificate from the bank showing the balance in the
accounts as at the end of the year.
AUDITING AND ETHICS
•
Obtain independent balance confirmation from the bank showing
balances, particulars of securities deposited with the bank as security
for the loans or of the charge created on an asset and confirm that the
same has been correctly disclosed and duly registered with Registrar
of Companies and recorded in the Register of charges.
•
Verify the authority under which the loan or draft has been raised. In
the case of a company, only the Board of Directors is authorised to
raise a loan or borrow from a bank.
•
Confirm, in the case of a company, that the restraint contained in
Section 180 of the Companies Act, 2013 as regards the maximum
amount of loan that the company can raise has not been contravened.
•
Ascertain the purpose for which loan has been raised and the manner
in which it has been utilised and that this has not prejudicially affected
the entity.
(c) Disclosure of Ratios as a part of Additional Regulatory Information as per
Schedule III of the Companies Act 2013 and its Rules relating to disclosure
are:
(1) Current Ratio,
(2) Debt-Equity Ratio,
(3) Debt Service Coverage Ratio,
(4) Return on Equity Ratio,
(5) Inventory turnover ratio,
(6) Trade Receivables turnover ratio,
(7) Trade payables turnover ratio,
(8) Net capital turnover ratio,
(9) Net profit ratio,
(10) Return on Capital employed,
(11) Return on investment.
Rules relating to disclosures of Ratios: The company shall explain the
items included in the numerator and denominator for computing the above
ratios.
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SUGGESTED ANSWER
Further explanation shall be provided for any change in the ratio by more
than 25% as compared to the preceding year.
(d) Relationship between audit strategy and audit plan
•
Audit strategy sets the broad overall approach to the audit whereas
audit plan addresses the various matters identified in the overall audit
strategy.
•
Audit strategy determines scope, timing and direction of audit. Audit
plan describes how strategy is going to be implemented.
•
The audit plan is more detailed than the overall audit strategy that
includes the nature, timing and extent of audit procedures to be
performed by engagement team members. Planning for these audit
procedures takes place over the course of the audit as the audit plan
for the engagement develops.
•
Once the overall audit strategy has been established, an audit plan can
be developed to address the various matters identified in the overall
audit strategy, taking into account the need to achieve the audit
objectives through the efficient use of the auditor’s resources.
•
The establishment of the overall audit strategy and the detailed audit
plan are not necessarily discrete or sequential processes but are closely
inter-related since changes in one may result in consequential changes
to the other.