(a) (i) In this case, CA. Amit is trying to understand that whether controls in
the LMN Ltd. are operating as intended and they are modified as
appropriate for change in conditions: He is gaining the understanding
of the Monitoring of controls component of internal control.
Monitoring of controls is a process to assess the effectiveness of
internal control performance over time. It helps in assessing the
effectiveness of controls on a timely basis and taking necessary
remedial actions. It includes considering whether controls are
operating as intended and that they are modified as appropriate for
change in conditions.
(ii) In the given situation, CA Amit is trying to understand that whether
there exists a proper system of segregation of duties in the company
and the person responsible for recording a transaction is different from
the person authorising it. He is gaining an understanding of internal
18
SUGGESTED ANSWER
control of the company. In particular, he is understanding “control
activities”. When a person recording a transaction is different from one
authorizing it, he gains confidence that there exists a system for
preventing misstatements. It helps him in gaining insight into the
internal control system of the company.
(b) In the given case, the audit assistant has kept a large chunk of draft
inventory sheets and the final inventory sheet in the audit file which is not
correct as the auditor is not required to document draft inventory sheets.
Auditor should ensure that only final inventory sheets will form part of the
audit documentation. Thus, approach of the audit assistant of filing draft
and final inventory sheet is not correct.
As per SA 230, “Audit documentation”, audit documentation may be
recorded on paper or on electronic or other media.
The auditor need not include in audit documentation:
•
superseded drafts of working papers and financial statements,
•
notes that reflect incomplete or preliminary thinking,
•
previous copies of documents corrected for typographical or other
errors, and
•
duplicates of documents.
(c) An account should be treated as ‘out of order’ if: -
•
the outstanding balance remains continuously in excess of the
sanctioned limit/drawing power or
•
In cases where the outstanding balance in the principal operating
account is less than the sanctioned limit/drawing power, but there are
no credits continuously for 90 days as on the date of Balance Sheet; or
•
credits are there but are not enough to cover the interest debited
during the same period, these accounts should be treated as ‘out of
order’.
In the given case, K Ltd. is availing cash credit limit of ` 25 crores from LMN
Bank Ltd and the drawing power of the company range between ` 22 crores
and ` 25 crores during the year 2023-24. The limit availed by K Ltd.
remained less than ` 20 crores during all the days of the financial year 2023-
AUDITING AND ETHICS
24 and the company has not deposited any amount in the cash credit
account and there are no other credits to this account during the last two
quarters.
Thus, account should be treated as out of order in the books of LMN Bank
Ltd. as the outstanding balance in the principal operating account (` 20
crore) is less than the sanctioned limit/drawing power (` 22 cores and ` 25
crores), but there are no credits continuously for 90 days as on the date of
Balance Sheet.
(d) Statistical sampling: Statistical sampling is an approach to sampling that
has the random selection of the sample units and the use of probability
theory to evaluate sample results, including measurement of sampling risk
characteristics.
Statistical Sampling is more scientific and appropriate as:
•
Audit testing done through this approach is more scientific than testing
based entirely on the auditor’s own judgment because it involves use
of mathematical laws of probability in determining the appropriate
sample size in varying circumstances.
•
Statistical sampling has reasonably wide application where a
population to be tested consists of a large number of similar items and
more in the case of transactions involving compliance testing, trade
receivables’ confirmation, payroll checking, vouching of invoices and
petty cash vouchers.
•
There is no personal bias of the auditor in case of statistical sampling.
Since it is scientific, the results of samples can be evaluated and
projected on the whole population in a more reliable manner.
In larger organisations, with huge transactions, statistical sampling is
always recommended as it is unbiased, and the samples selected are not
prejudged.