Auditing and EthicsQuestion 5693 of 212
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Question 6 (a) T Ltd. has appointed NFO & Co., Chartered Accountants, as statutory auditors. Since inventory is a material component of the financial statements, CA F plans to attend the physical inventory counting. Provide any five matters that CA F should consider when planning their attendance at the physical inventory counting. (5 Marks) (b) M/S PQ & Co., Chartered Accountants have been appointed as statutory auditors of CBD Multiplex Cinema Ltd. The audit team started the audit and verified the ledger and other books of accounts for the F.Y. 2024-2025. However, one of the team members is of the view that the internal control mechanism of the company should also be verified. Can you guide the audit team about the areas that will be covered in verifying the internal control mechanism? (5 Marks) (c) The auditor shall take into consideration the reporting objectives of the engagement so as to plan timing of different audit procedures and also nature of communications while establishing audit strategy. Give any four instances of reporting objectives. (4 Marks) OR (c) As an auditor of Star Ltd., a company covered under Section 135 of the Companies Act, 2013, what matters should auditor verify to ensure that proper disclosures regarding Corporate Social Responsibility (CSR) activities is made in Additional Information to notes to account. Mention any four such matters. (5 Marks)

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Detailed Solution & Explanation

(a) Matters that CA F should consider when planning attendance at physical inventory counting are: (i) Nature of inventory. (ii) Stages of completion of work in progress. 56 SUGGESTED ANSWER (iii) The risks of material misstatement related to inventory. (iv) The nature of the internal control related to inventory. (v) Whether adequate procedures are expected to be established and proper instructions issued for physical inventory counting. (vi) The timing of physical inventory counting. (vii) Whether the entity maintains a perpetual inventory system. (viii) The locations at which inventory is held, including the materiality of the inventory and the risks of material misstatement at different locations, in deciding at which locations attendance is appropriate (ix) Whether the assistance of an auditor’s expert is needed to obtain sufficient appropriate audit evidence. (b) Areas that will be covered in verifying the internal control mechanism of CBD Multiplex Cinema Ltd. are: (i) that entrance to the cinema-hall during show is only through printed tickets; (ii) that they are serially numbered and bound into books; (iii) that the number of tickets issued for each show and class, are different though the numbers of the same class for the show on the same day, each week, run serially; (iv) that for advance booking a separate series of tickets is issued; and (v) that the inventory of tickets is kept in the custody of a responsible official. (c) The reporting objectives of the engagement to plan the timing of the different audit procedures and also the nature of the communications while establishing audit strategy are: • The entity’s timetable for reporting. • Organisation of meetings to discuss nature, timing and extent of audit work with management. • Discussion with management regarding the expected type and timing of reports to be issued including the auditor’s report. AUDITING AND ETHICS • Discussion with management regarding the expected communications on the status of audit work throughout the engagement. • Expected nature and timing of communications among engagement team members, including the nature and timing of team meetings and timing of the review of work performed. OR (c) As an auditor of Star Ltd., a company covered under Section 135 of the Companies Act, 2013, the auditor should verify the following matters to ensure that proper disclosures regarding Corporate Social Responsibility (CSR) activities is made in “Additional Information” to notes to account are: (i) amount required to be spent by the company during the year. (ii) amount of expenditure incurred. (iii) shortfall at the end of the year. (iv) total of previous years shortfall. (v) reason for shortfall. (vi) nature of CSR activities. (vii) details of related party transactions, e.g., contribution to a trust controlled by the company in relation to CSR expenditure as per relevant Accounting Standard. (viii) where a provision is made with respect to a liability incurred by entering into a contractual obligation, the movements in the provision during the year should be shown separately.

Key Concepts to Understand

Consideration

Something of value exchanged for a promise. 'Quid Pro Quo' (Something for something).

Ledger

The principal book of accounts in which all business transactions are classified and posted under separate account heads. It is also called the 'Book of Final Entry' or the 'King of All Books'.

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