scope, timing and direction of the audit. Describe how the process of
establishment of overall audit strategy will assist him in managing
deployment of his human resources for various audit areas.
(4 Marks)
(b) JB Limited has invested huge sums of money on establishment of new
Property, Plant and Equipment during the year under audit. They have
incurred an amount of ` 5,70,000/- on dismantling of an old plant, which
had become obsolete, so that a new plant can be set up at the existing
location. The Auditor is in the process of verifying the cost incurred towards
addition to Property, Plant and Equipment. What should be the accounting
treatment of the amount spent on dismantling of old plant in the financial
statements? Which elements of cost should be considered for valuing
Property, Plant and Equipment?
(4 Marks)
(c) CA Ayush has recently qualified and has joined a CA Firm. On going through
various audit reports, he observed that different phrases were used to express
an unmodified opinion on the financial statements. On enquiring with a
senior, he got to know that all those phrases can be regarded as being
equivalent. Which phrases are appropriate and which phrases are
inappropriate while drafting an unmodified opinion?
(3 Marks)
(d) You have been appointed as an auditor of Co-operative society. During the
course of audit, you have noticed some serious irregularities in the working
of the society. Enumerate those special matters for reporting to the Registrar.
(3 Marks)
Answer
(a) Establishing the overall audit strategy- Assistance for the auditor :
Overall audit strategy sets the scope, timing and direction of the audit, and
guides the development of the more detailed audit plan. The auditor shall
establish an overall audit strategy that sets the scope, timing and direction
of the audit, and that guides the development of the audit plan.
The process of establishing the overall audit strategy assists the auditor to
determine, subject to the completion of the auditor’s risk assessment
procedures, such matters as: -
(i) The resources to deploy for specific audit areas, such as the use of
appropriately experienced team members for high-risk areas or the
involvement of experts on complex matters
AUDITING AND ETHICS
(ii) The amount of resources to allocate to specific audit areas, such as the
number of team members assigned to observe the inventory count at
material locations, the extent of review of other auditors’ work in the
case of group audits, or the audit budget in hours to allocate to high
risk areas
(iii) When these resources are to be deployed, such as whether at an
interim audit stage or at key cut-off dates
(iv) How such resources are managed, directed and supervised, such as
when team briefing and debriefing meetings are expected to be held,
how engagement partner and manager reviews are expected to take
place (for example, on-site or off-site), and whether to complete
engagement quality control reviews.
(b) In the given situation, JB Limited has invested huge sums of money on
establishment of new Property, Plant and Equipment and incurred an
amount of ` 5,70,000 on dismantling of old plant which had become
obsolete so that new plant can be set up at the existing location. An item
of property, plant and equipment that qualifies for recognition as an asset
should be measured at its cost. The costs of dismantling, removing the item
and restoring the site on which it is located referred to as decommissioning
will form part of the new Property, Plant and Equipment.
Elements of Cost: The cost of an item of property, plant and equipment
comprises:
(i) its purchase price, including import duties and non-refundable
purchase taxes, after deducting trade discounts and rebates.
(ii) any costs directly attributable to bringing the asset to the location and
condition necessary for it to be capable of operating in the manner
intended by management.
(iii) the initial estimate of the costs of dismantling, removing the item and
restoring the site on which it is located, referred to as
decommissioning, restoration and similar liabilities’, the obligation for
which an enterprise incurs either when the item is acquired or as a
consequence of having used the item during a particular period for
purposes other than to produce inventories during that period.
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SUGGESTED ANSWER
(c) Appropriate and Inappropriate Phrases while drafting an Unmodified
Opinion: When expressing an unmodified opinion on financial statements,
the auditor’s opinion shall, unless otherwise required by law or regulation,
use one of the following phrases, which are regarded as being equivalent:
(i) In our opinion, the accompanying financial statements present fairly,
in all material respects, […] in accordance with [the applicable
financial reporting framework]; or
(ii) In our opinion, the accompanying financial statements give a true and
fair view of […] in accordance with [the applicable financial reporting
framework].
The phrases “present fairly, in all material respects,” and “give a true and fair
view” are regarded as being equivalent.
Inappropriate Phrases: When the auditor expresses an unmodified
opinion, it is not appropriate to use phrases such as “with the foregoing
explanation” or “subject to” in relation to the opinion, as these suggest a
conditional opinion or a weakening or modification of opinion.
(d) Special report to the Registrar: During the course of audit, if the auditor
notices that there are some serious irregularities in the working of the
society he may report these special matters to the Registrar, drawing his
specific attention to the points. The Registrar on receipt of such a special
report may take necessary action against the society. In the following cases,
for instance, a special report may become necessary:
(i) Personal profiteering by members of managing committee in
transactions of the society, which are ultimately detrimental to the
interest of the society.
(ii) Detection of fraud relating to expenses, purchases, property and stores
of the society.
(iii) Specific examples of mis-management. Decisions of management
against co-operative principles.
(iv) In the case of urban co-operative banks, disproportionate advances to
vested interest groups, such as relatives of management, and
deliberate negligence about the recovery thereof. Cases of reckless
advancing, where the management is negligent about taking adequate
AUDITING AND ETHICS
security and proper safeguards for judging the credit worthiness of the
party.