Auditing and EthicsQuestion 5497 of 212
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Question 6 (a) You are the auditor of Plus Bank Limited. The bank has made following provisions for the year ended on 31.03.2024: Particulars Amount (` in crores) Provision for Bad Debts 66 Provision for Sub-standard Assets 78 Provision for Expenses 24 Provision for Income Tax 55 You are in the process of verifying the provisions and contingencies of the bank. What audit approach and procedures will you adopt to verify the above? (4 Marks) OR (a) CA Vasu was appointed as the statutory auditor of M/s. Pizza Limited for the financial year 2023-24. While reviewing the internal controls, he observed that the company has entered into many transactions with firms in which the directors are interested. The company's specified procedure was by-passed in such transactions. CA Vasu considered it as a significant deficiency in internal control over related party transactions. He communicated this deficiency to Those Charged With Governance (TCWG) as under, "Controls over significant transactions with related parties are weak." In view of the above, please explain: (i) What is meant by deficiency in internal control? AUDITING AND ETHICS (ii) As per SA 265, whether the significant deficiency communicated by CA Vasu to TCWG is appropriate? Explain. (4 Marks) (b) CA P is a professional accountant in service. In terms of employment and professional relationships with employer he has to be alert to the possibility of inadvertent disclosure of any information outside the employing organization. However, in view of disclosure required by law, CAP had to divulge the information and documents as evidence in course of legal proceedings. Whether CA P has violated any fundamental principle governing professional ethics in this case? Explain. (4 Marks) (c) During the audit of accounts for the year ended 31.03.2024, the auditor of FD Limited wanted confirmation from a Trade Receivable, which was outstanding for more than six months, amounting to ` 4,25,000/-. The auditor sent a Confirmation letter to the party requesting them to respond directly to him, whether or not they agree with the amount outstanding from them. That trade receivable confirmed to the auditor of FD Limited, that they were required to pay an amount of ` 4,20,000 to FD Limited as per their books of accounts. State and explain the type of Confirmation Request sent by the auditor and the course of action that he should take on the confirmation received from the trade receivable. (3 Marks) (d) P Financial Services Ltd. (PFSL) is a leasing & hire purchase company. You, as an auditor of PFSL, are in the process of examining finance lease agreements executed by them for equipment given on lease. Which points shall be noted by you while examining a particular finance lease agreement entered into by PFSL in respect of a leasing transaction? (3 Marks)

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Detailed Solution & Explanation

(a) For audit of provisions and contingencies the auditor should: • ensure that the compliances for various regulatory requirements for provisioning as contained in the various circulars have been fulfilled. • obtain an understanding as to how the bank computes provision on standard assets and non-performing assets. It will primarily include checking the basis of classification of loans and receivables into 28 SUGGESTED ANSWER standard, sub-standard, doubtful, loss and non-performing assets. The auditor may verify the loan classification on a sample basis. • obtain the detailed break up of standard loans, non-performing loans and agree the outstanding balances with the general ledger. • obtain the tax provision computation from the bank’s management and verify the nature of items debited and credited to profit and loss account to ascertain that the same are appropriately considered in the tax provision computation. • examine the other provisions for expenses vis-a-vis the circumstances warranting the provisioning and the adequacy of the same by discussing and obtaining the explanations from the bank’s management. Or (a) (i) Meaning of Deficiency in internal control: This exists when - (1) A control is designed, implemented or operated in such a way that it is unable to prevent, or detect and correct, misstatements in the financial statements on a timely basis or (2) A control necessary to prevent, or detect and correct, misstatements in the financial statements on a timely basis is missing. (ii) As per SA 265, While pointing out significant deficiencies in internal control, auditor has not only to communicate significant deficiencies giving their description but also explain the potential effects and sufficient information to those charged with governance and management to understand context of communication. Therefore, the above communication is not proper. Not only significant deficiency has to be communicated, it should also be explained to management the potential effects of transactions with firm in which the directors are interested. It should explain that such a significant deficiency can lead to misstatement of transactions with related party. Highlighting importance of such a control, it should be stated that responsibility be fixed for concerned persons for adhering to such an important control. AUDITING AND ETHICS (b) Confidentiality principle requires a professional accountant to respect the confidentiality of information acquired as a result of professional or business relationships. Confidentiality serves the public interest because it facilitates the free flow of information from the professional accountant’s client or employing organization to the accountant with the understanding that the information will not be disclosed to a third party. However, such confidential information may be disclosed, for example, when it is required by law, when it is permitted by law and is authorised by the client or employer or there is a professional duty or right to disclose when not prohibited by law. In the given situation, CA P, who is a professional accountant in service, and in terms of employment and professional relationships with the employer he is alert to the possibility of inadvertent disclosures of any information outside the employing organization. However, CA P had to divulge the information and documents as evidence in the course of legal proceedings and same was required by law. Therefore, CA. P will not be held responsible for violation of fundamental principle of “Confidentiality” governing professional ethics. (c) Positive confirmation request: A request that the confirming party respond directly to the auditor indicating whether the confirming party agrees or disagrees with the information in the request or providing the requested information. Exception – A response that indicates a difference between information requested to be confirmed, or contained in the entity’s records, and information provided by the confirming party. The exception needs to be assessed to the entire population after analyzing the reason for difference. In the given situation, the auditor has sent the positive confirmation request for the amount of 4,25,000 to a trade receivable which was outstanding for more than 6 months, however, due to difference between information requested to be confirmed, or contained in the entity’s records (i.e. 4,25,000), and information provided by the confirming party (i.e. 4,20,000) is forming situation of exception confirmation. The auditor’s evaluation, when taken into account with other audit procedures the auditor may have performed, may assist the auditor in concluding whether sufficient appropriate audit evidence has been 30 SUGGESTED ANSWER obtained or whether performing further audit procedures is necessary, as required by SA 330 in case a response is indicating an exception. The company should be asked to investigate and reconcile the discrepancy indicated by the confirming party. (d) The lease agreement should be examined, and the following points may be noted: (i) the description of the lessor, the lessee, the equipment and the location where the equipment is to be installed. (The stipulation that the equipment shall not be removed from the described location except for repairs. For the sake of identification, the lessor may also require plates or markings to be attached to the equipment). (ii) the amount of tenure of lease, dates of payment, late charges, deposits or advances etc. should be noted. (iii) whether the equipment shall be returned to the lessor on termination of the agreement and the cost shall be borne by the lessee. (iv) whether the agreement prohibits the lessee from subletting the equipment and authorises the lessor to do so.

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