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DATE:23-3-19 CODE:NI-6034 BATCH:INTER REV GR II MARKS:100CA INTERMEDIATE

AUDITING AND ASSURANCESyllabus : FULL AUDIT

Q.1. MCQ1. Statement (1): Accounts are prepared by auditor prior to get them audited.Statement (2):

Statutory audit can be conducted only by a chartered accountant.(a) Only Statement (1) is true (c) Statements (1)and (2)both are true(b) Only Statement (2) is true (d) Both the statements are false

2. Statement (1): Doubt about competence and integrity of management increases the risk ofmisstatement in the financial statements Statement (2): Unusual pressure and unusualtransactions increase the risk of mis-statements in the financial statements.(a) Only Statement (1) is true (b) Only Statement (2) is true(c) Only Statement (2) is true (d) None of the statements is

3. Statement (1): Inspection consists of witnessing a process being performed by others.Statement(2): Inquiry consists of seeking appropriate information from knowledgeable persons insideor outside the entity.(a) Only Statement (1) is true (c) Both the statements are true(b) Only Statement (2) is true (d) None of the statements is true

4. Analytical procedures as per SA-520 are performed on following stages:(a) Obtaining evidences when using substantive analytical procedures(b) Near end of the audit(c) Substantive analytical procedures and near end of audit both(d) SA-520 does not relate to analytical procedures5. SA-210 deals with the auditors responsibilities-(a) Regarding frauds in the financial statements(b) Regarding law and regulations while auditing the financial statements(c) Communicating the matters to those charged with governance(d) Agreeing the terms of audit engagements6. After assembly of audit file, the auditor -(a) May delete auditdocumentation if it is of no use(b) May delete audit documentation if it is occupying much of its space(c) Shall not delete audit documentation before its retention time period(d) May delete auditdocumentation before its retention period if it is required by any law.7. Stratification should be adopted in case of(a) Homogenous population(b) Heterogeneous population(c) All kinds of population(d) It is not a good approach while adopting samplling8. Internal check is a check on transactionswherebyworkcarriedoutbyoneperson ischecked

by .(a) Unusual; auditor (c) Day-to-day;auditor(b) Unusual; another (d) Day-to-day; another

9. In accordance with SA-330, even if there is no significant change in internal controls after

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he had obtained evidences regarding them during previous audits, the auditor -(a) Should not test the controls at all(b) Shall test the controls every year(c) Shall test the controls at least once in every third(d) Shall test the controls at least once in every 5 audits10. Section 188 shall not apply to the transactions entered into by the company -(a) In the ordinary course of business(b) Other than transactions which are not on an arm’s lengh basis(c) Both option (a) and (b)(d) Either option (a) or option (b)11. Amount of siting fees shall not exceed perboardmeetingorcommitteemeetings-

(a) Rs.20,000 (b) Rs.50,000(c) Rs.1 lakh (d) Rs. 5lakh

12. Verification relates to appearing in the financial statements-(a) Assets and liabilities(b) Transactions(c) Assets and liabilities and transactions both(d) Assets and liabilities and transactions and disclosures13. A meansa distinctive signorbrandname so that can easily identify the product-(a) Trademark,customer (b) Copyright,customer(c) Patent, Government (d) All of these14. _ Increases the revenue earning capacity of the business -(a) Capital expenditure(b) Revenue expenditure(c) Both (a) and (b)(d) Both (a) and (b) and deferred revenue expenditures15. AS 10 does not apply to -(a) Biologicassets relatingtoagriculturalactivity(b) Wasting assets(c) Both option (a) and option (b)(d) Either Option (a) or Option (b)16. Statement (1): If CAGfailsto appoint first auditorthen Boardshallappoint the first auditor

within next60days.Statement(2):IfBoardfailstoappointfirstauditorincaseofgovernmentcompany,theBo ardshall inform the members of thecompany who shall appoint the first auditor within 60 daysat Annual General Meeting.(a) Statement (1)is true (b) Statement (2) is true(c) Both the statements are true (d) None of the statements is true

17. Under saction 140 , the following sequence of events is correct(a) Board meeting - Application to CG -Approval by CG - General meeting for passing SR(b) Application to CG -Approval by CG - Board meeting - General meeting for passing SR(c) SR- Board meeting-Application to CG for approval -Approval byCG(d) Approval by CG - General meeting for passing SR -SR is passed - Board meeting18. The audit committee shall consist of-

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(a) Minimum 2 directors (c) Minimum 3 directors(b) Maximum 2 directors (d) Maximum 3 directors

19. Alloranyof thebooksof account andotherrelevantpapersmaybekeptatsuchotherplace inindi aasthe Board of directors may decide In such a case, the company shall within _ days of thedecisio n of the Board,file with the a notice in writting-(a) 10 Registrar (b) 10NCLT (c) 7Registrar (d) 7, NCLT

20. The company shall create debentures redemption reserve equivalent to_______of the value ofdebentures(a) 25% (b) 40% (c) 50% (d) 60%

21. Key audit matters shall be from -(a) Thegoing concernmatters (b) The matters communicated to experts(c) The matters discussed with branch auditor’s (d) The matterscommunicated with TCWG

22. Statement1. Under clause 10thof CARO2016, theauditoris required to reportabout thenatureand amount of any fraud by the company or on the company if such amount is 1 crores ormoreStatement-2. As per clause 11th of the CARO 2016the auditor is required to report whetherall transactions with related parties are incompliance with section 177and 188 and the detailshave been disclosed in the financial statements as required by applicable accounting standards

(a) Only statement (1) is true(b) Only statement (2) is true(c) Both the statements are true(d) None of the statement is23. In audit of hotel,audit should examine whether room addition expenses or construction of new

health club etc have been -(a) Shownas revenue expenditure (b) Properly capitalized(c) Shownas deferredrevenueexpenditure (d) Any of these

24. In the case of Governmentcompanies. audit of accounts of Government Company. _shalldirect theauditor about _to conduct(a) ROC, manner (c) ROC, report(b) CAG; manner (d) CAG; staff to be taken along

25. Statement (1): Performance audit seeks to check cost and benefits of Government expenditure.Statement (2): Audit of Government enterprises is conducted by Central Government.(a) Only Statement (1) is true (b) Only Statement (2) is true(c) Both the Statements are true (d) None of the Statements is true

26. The person carrying out investigation -Statement (1): Is required to adopt doubtful approach.Statement (2): Is required to obtain persuasive evidences.Statement (3): Is required to conduct detailed and critical examination.(a) Only Statements (1) and (2) am true. (b) Only Statements (2) and (3) are true(c) Only Statements (1) and (3)are true (d) None of the Statements is true

27. Statement (1): A joint auditor is generally bound by the views of majority of the jointauditors.Statement(2):Incaseseparateaudit reports areissuedby thejointauditors,such referenceshallbe made under the heading ‘Emphasis of matter paragraphs’.(a) Only Statement (1) is true (b) Only Statement (2) is true(c) Both theStatements are (d) None of the Statements is true

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28. Statement (1): As per SA-550, auditor should examine whether related party transactionshave been appropriately accounted for and disclosed in the financial statements as perfinancial reporting framework; though he need not check authorization of such transactionsby management.Statement (2): Auditor should consider whether management has appropriately accounted anddisclosed the related party transactions in their financial statements as per applicablefinancial r eporting framework as it might affect his audit opinion.(a) Only Statement (1) is true (b) Only Statement (2) is true(c) Both the Statements are true (d) None of the Statements is true

29. If there is modification in another auditor’s report, then principal auditor, -(a) Need not consider another auditor’s report(b) Shoulder consider another auditor’s report but will not consider that while preparing his own audit

report(c) Consider whether modification in his own audit report is required(d) Ask the management to discuss with another auditor why he modified his audit report30. If auditor concludes that revision ofother information is necessary but management refuses

to makethe revision, then auditor shall include this matter in-(a) Opinion paragraph (b) Other matter paragraph(c) Emphasis of matter paragraph (d) Date paragraph

(30 Marks)Question No. 2 is compulsory. Answer any four from the rest.

Q.2.(a)Discuss the objective of the auditor as per Standard on Auditing (SA) 705 “Modifi cationsto The Opinion in The Independent Auditor’s Report”.

[5 MARKS]Q.2.(b)You have been appointed as an auditor of an NGO, briefl y state the points on which you would

concentrate while planning the audit of such an organisation?[5 MARKS]

Q.2.(c)What are the diff erent testing methods used when auditing in an automated environment.Which is the most eff ective and effi cient method of testing?

[4 MARKS]Q.3.(a)With reference to Standard on Auditing 530, state the requirements relating to audit sampling,

sample design, sample size and selection of items for testing.[6 MARKS]

Q.3.(b)Discuss In Joint Audit, “Each Joint Auditor is responsible only for the work allocated to him”.[4 MARKS]

Q.3.(c)“The Code of Ethics for Professional Accountants, prepared by the International Federation ofAccountants (IFAC) identifies five types of threats.” Explain

[4 MARKS]Q.4.(a)How will you vouch/verify the Receipt of capital subsidy.

[4 MARKS]Q.4.(b)How will you vouch/verify the Provision for income tax.

[4 MARKS]Q.4.(c)Write a short note on reversal of income under bank audit.

[6 MARKS]Q.5.(a)Managing Director of PQR Ltd. himself wants to appoint Shri Ganpati, a practicing Chartered

Accountant, as fi rst auditor of the company. Comment on the proposed action of the ManagingDirector.

[4 MARKS]Q.5.(b)“The auditor shall form an opinion on whether the fi nancial statements are prepared, in all

material respects, in accordance with the applicable financial reporting framework.” Explain.[4 MARKS]

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Q.5.(c) Explain in detail the duties of Comptroller and Auditor General of India[6 MARKS]

Q.6.(a)There are many ways for cash defalcation, one of which is by suppressing cash receipts. List outfew techniques of how the receipts are suppressed.

[4 MARKS]Q.6.(b)“When deviations from controls upon which the auditor intends to rely are detected, the

auditor shall make specific inquiries to understand these matters and their potential consequences”Explain

[4 MARKS]Q.6.(c)The general transactions of a hospital include patient treatment, collection of receipts,

donations, capital expenditures. You are required to mention special points of considerationwhile auditing such transactions of a hospital?

[6 MARKS]Q.7.(a)What are the factors that determine the extent of reliance that the auditor places on results of

analytical procedures? Explain with reference to SA-520 on “Analytical procedures”.[4 MARKS]

Q.7.(b)Define Risk of material misstatement. Explain its components also.[6 MARKS]

Q.7.(c)“Determining materiality involves the exercise of professional judgment”. Discuss stating the factorsthat may affect the identification of an appropriate benchmark. Also give examples.

[4 MARKS]

* * * * * * *

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ANSWER SHEETDATE:23-3-19 CODE:NI-6034 BATCH:INTER REV GR II MARKS:100

CA INTERMEDIATEAUDITING AND ASSURANCE

Syllabus : FULL AUDITA.1. MCQ

1. C 2. C 3. B 4. C 5. D 6. C7. B 8. D 9. C 10. C 11. C 12. A13. A 14. A 15. C 16. D 17. A 18. C19. C 20. A 21. D 22. D 23. B 24. B25. A 26. C 27. D 28. B 29. C 30. B

A.2.(a)Objective of the Auditor- To Express Clearly an Appropriately modified OpinionAs per Standard on Auditing (SA) 705 “Modifi cations To The Opinion In The Independent Auditor’sReport”, the objective of the auditor is to express clearly an appropriately modifi ed opinionon thefi nancial statements that is necessary when:

(a) The auditor concludes, based on the audit evidence obtained, that the financial statements as awhole are not free from material misstatement; or

(b) The auditor is unable to obtain suffi cient appropriate audit evidence to conclude that the fi nancialstatements as a whole are free from material misstatement.

A.2.(b)While planning the audit of an NGO, the auditor may concentrate on the following:(i) Knowledge of the NGO’s work, its mission and vision, areas of operationsand environment in which it

operate.(ii) Updating knowledge of relevant statutes especially with regard to recent amendments,

circulars, judicial decisions related to the statutes.(iii) Reviewing the legal form of the Organisation and its Memorandum of Association, Articles of

Association, Rules and Regulations.(iv) Reviewing the NGO’s Organisation chart, then Financial and Administrative Manuals, Project and

Programme Guidelines, Funding Agencies Requirements and formats, budgetary policies if any.(v) Examination of minutes of the Board/Managing Committee/Governing Body/Management and

Committees thereof to ascertain the impact of any decisions on the fi nancial records.(vi) Study the accounting system, procedures, internal controls and internal checks existing for

the NGO and verify their applicability.(vii) Setting of materiality levels for audit purposes.(viii) The nature and timing of reports or other communications.(ix) The involvement of experts and their reports.(x) Review the previous year’s Audit Report.A.2.(c)When auditing in an automated environment, the following testing methods are used:(a) Inquiry(b) Observation(c) Inspection(d) Reperformance

A combination of inquiry and inspection is generally the most eff ective and efficient testingmethod. However, determining the most eff ective and effi cient testing method is a matter ofprofessional judgement and depends on the several factors including risk assessment, controlenvironment, desired level of evidence required, history of errors/misstatements, complexity ofbusiness, assertions being addressed.

A.3.(a)Audit Sampling: As per SA 530 on “Audit Sampling”, the meaning of the term Audit Sampling is– the application of audit procedures to less than 100% of items within a population of auditrelevance such that all sampling units have a chance of selection in order to provide the auditor with

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a reasonable basis on which to draw conclusions about the entire population.The requirements relating to sample design, sample size and selection of items for testing areexplained below-Sample design - When designing an audit sample, the auditor shall consider the purpose of theaudit procedure and the characteristics of the population from which the sample will be drawn.Sample Size- The auditor shall determine a sample size suffi cient to reduce sampling risk toan acceptably low level.Selection of Items for Testing- The auditor shall select items for the sample in such a way thateach sampling unit in the population has a chance of selection.

A.3.(b)The practice of appointing Chartered Accountants as joint auditors is quite widespread in bigcompanies and corporations. Joint audit basically implies pooling together the resources and expertiseof more than one fi rm of auditors to render an expert job in a given time period which may be difficult to accomplish acting individually. It essentially involves sharing of the total work. This is byitself a great advantage.In specific terms the advantagesthat fl ow may be the following:

(i) Sharing of expertise.(ii) Advantage of mutual consultation.(iii) Lower workload.(iv) Better quality of performance.(v) Improved service to the client.(vi) Displacement of the auditor of the company taken over in a take - over often obviated.(vii) In respect of multi-national companies, the work can be spread using the expertise of the local fi

rms which are in a better position to deal with detailed work and the local laws and regulations.(viii) Lower staff development costs.(ix) Lower costs to carry out the work.(x) A sense of healthy competition towards a better performance.

The general disadvantagesmay be the following:(i) The fees being shared.(ii) Psychological problem where fi rms of diff erent standing are associated in the joint audit.(iii) General superiority complexes of some auditors.(iv) Problems of co-ordination of the work.(v) Areas of work of common concern being neglected.(vi) Uncertainty about the liability for the work done.

With a view to providing a clear idea of the professional responsibility undertaken by thejoint auditors, the Institute of Chartered Accountants of India had issued a statement on theResponsibility of Joint Auditors which now stands withdrawn with the issuance of SA299,“Responsibility of Joint Auditors” w.e.f. April, 1996. It requires that where joint auditors areappointed, they should, by mutual discussion, divide the audit work among themselves. The divisionof work would usually be in terms of audit of identifi able units or specifi ed areas. In some cases,due to the nature of the business of the entity under audit, such a division of work may not bepossible. In such situations, the division of work may be with reference to items of assets or liabilitiesor income or expenditure or with reference to periods of time. Certain areasof work, owing to theirimportance or owing to the nature of the work involved, would often not be divided and would becovered by all the joint auditors. Further, it states that in respect of audit work divided among thejoint auditors, each joint auditor is responsible only for the work allocated to him, whether or nothe has prepared a separate report on the work performed by him. On the other hand, all the jointauditors are jointly and severally responsible –

(a) in respect of the audit work which is not divided among the joint auditors and is carried out by allof them;

(b) in respect of decisions taken by all the joint auditors concerning the nature, timing or extent ofthe audit procedures to be performed by any of the joint auditors. It may, however, be clarifi edthat all the joint auditors are responsible only in respect of the appropriateness of the

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decisions concerning the nature, timing or extent of the audit procedures agreed upon among them;proper execution of these audit procedures is the separate and specifi c responsibility of the jointauditor concerned;

(c) in respect of matters which are brought to the notice of the joint auditors by any one of them andon which there is an agreement among the joint auditors;

(d) for examining that the fi nancial statements of the entity comply with the disclosure requirementsof the relevant statute; and

(e) for ensuring that the audit report complies with the requirements of the relevant statute.If any matters of the nature referred above are brought to the attention of the entity or otherjoint auditors by an auditor after the audit report has been submitted, the other joint auditorswould not be responsible for those matters.[Note: Student may refer SA 299 “Responsibility of Joint Auditors” reproduced in “AuditingPronouncements” for comprehensive knowledge.]

A.3.(c)The Code of Ethics for Professional Accountants, prepared by the International Federation ofAccountants (IFAC) identifi es fi ve types of threats. These are:

1. Self-interest threats, which occur when an auditing firm, its partner or associate could benefi tfrom a fi nancial interest in an audit client. Examples include (i) direct financial interest or materiallysignifi cant indirect fi nancial interest in a client, (ii) loan or guarantee to or from the concernedclient, (iii) undue dependence on a client’s fees and, hence, concerns about losing the engagement,(iv) close business relationship with an audit client, (v) potential employment with the client, and(vi) contingent fees for the audit engagement.

2. Self-review threats, which occur when during a review of any judgement or conclusionreached in a previous audit or non-audit engagement (Non audit services include any professionalservices provided to an entity by an auditor, other than audit or review of the fi nancial statements.These include management services, internal audit, investment advisory service, design andimplementation of information technology systems etc.), or when a member of the audit team waspreviously a director or senior employee of the client. Instances where such threats come into playare (i) when an auditor having recently been a director or senior offi cer of the company, and (ii)when auditors perform services that are themselves subject matters of audit.

3. Advocacy threats,which occur when the auditor promotes, or is perceived to promote, a client’sopinion to a point where people may believe that objectivity is getting compromised, e.g. when anauditor deals with shares or securities of the audited company, or becomes the client’s advocate inlitigation and third party disputes.

4. Familiarity threats are self-evident, and occur when auditors form relationships with the clientwhere they end up being too sympathetic to the client’s interests. This can occur in many ways: (i)close relative of the audit team working in a senior position in the client company, (ii) former partnerof the audit fi rm being a director or senior employee of the client, (iii) long association betweenspecific auditors and their specifi c client counterparts, and (iv) acceptance of significant gifts orhospitality from the client company, its directors or employees.

5. Intimidation threats, which occur when auditors are deterred from acting objectively withan adequate degree of professional skepticism. Basically, these could happen because of threatof replacement over disagreements with the application of accounting principles, or pressureto disproportionately reduce work in response to reduced audit fees.

A.4.(a)Receipt of Capital Subsidy:(i) Refer to application made for the claim of subsidy to ascertain the purpose and the scheme under

which the subsidy has been made available.(ii) Examine documents for the grant of subsidy and note the conditions attached with the same relating

to its use, etc.(iii) See that conditions to be fulfi lled and other terms especially whether the same is for a specifi c

asset or is for setting up a factory at a specifi c location.(iv) Check relevant entries for receipt of subsidy.(v) Check compliance with requirements of AS 12 on “Accounting for Government Grants” i.e. whether

it relates to specifi c amount or in the form of promoters’ contribution and accordingly accounted

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for as also compliance with the disclosure requirements.A.4.(b)Provision for Income Tax:(i) Obtain the computation of income prepared by the auditee and verify whether it is as per the

Income-tax Act, 1961 and Rules made thereunder.(ii) Review adjustments, expenses, disallowed special rebates, etc. with particular reference to the

last available completed assessment.(iii) Examine relevant records and documents pertaining to advance tax, self assessment tax and

other demands.(iv) Compute tax payable as per the latest applicable rates in the Finance Act.(v) Ensure that overall provisions on the date of the balance sheet is adequate having regard to current

year provision, advance tax paid, assessment orders, etc.(vi) Ensure that the requirements of AS 22 on Accounting for Taxes on Income have been appropriately

followed for the period under audit.A.4.(c)

The following items are included under this head:

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A.5.(a)Appointment of First Auditor of Company: Section 139(6) of the Companies Act, 2013 laysdown that the fi rst auditor or auditors of a company shall be appointed by the Board ofdirectors within 30 days from thedate of registration of the company.In the instant case, the appointment of Shri Ganapati, a practicing Chartered Accountant asfi rst auditors by the Managing Director of PQR Ltd. by himself is in violation of Section 139(6) ofthe Companies Act, 2013, which authorizes the Board of Directors to appoint the fi rst auditor ofthe company within 30 days of registration of the company.In view of the above, the Managing Director of PQR Ltd. should be advised not to appoint the fi rstauditor of the company.

A.5.(b)To Form Opinion - Auditor to Obtain Reasonable AssuranceIn order to form that opinion, the auditor shall conclude as to whether the auditor has obtainedreasonable assurance about whether the fi nancial statements as a whole are free from materialmisstatement, whether due to fraud or error.That conclusion shall take into account:

(a) whether suffi cient appropriate audit evidence has been obtained;(b) whether uncorrected misstatements are material, individually or in aggregate;(c) The evaluations.A.5.(c)Duties of C&AG: The Comptroller & Auditor General’s (Duties, Powers and Conditions of

Service) Act, 1971 lays down duties of the C&AG as under-(i) Compile and submit Accounts of Union and States -The C&AG shall be responsible for compiling

the accounts of the Union and of each State from the initial and subsidiary accounts rendered tothe audit and accounts offices under his control by treasuries, offi ces or departments responsiblefor the keeping of such account.

(ii) General Provisions Relating to Audit - It shall be the duty of the C&AG –(a) to audit and report on all expenditure from the Consol idated Fund of India and of each Stateand of each Union Territo ry having a Legislative Assembly and to ascertain whether the moneysshown in the accounts as having been disbursed were legal ly available for and applicable to theservice or purpose to which they have been applied or charged and whether the expendi ture conformsto the authority which governs it;(b) to audit and report all transactions of the Union and of the States relating toContingency Funds and Public Accounts;(c) to audit and report on all trading, manufacturing profi t and loss accounts and balance-sheets and other subsidiary accounts kept in any department of the Union or of a State.

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(iii) Audit of Receipts and Expenditure - Where any body or authority is substantiallyfinanced by grants or loans from the Consolidated Fund of India or of any State or of any UnionTerritory having a Legislative Assembly, the Comptroller and Auditor General shall, subject to theprovisions of any law for the time being in force applicable to the body or authority, as the casemay be, audit all receipts and expenditure of that body or authority and to report on the receiptsand expenditure audit ed by him.

(iv) Audit of Grants or Loans -Where any grant or loan is given for any specific purpose from theConsolidated Fund of India or of any State or of any Union Territory having a Legisla tive Assemblyto any authority or body, not being a foreign State or international organisation, the Comptrollerand Auditor Gener al shall scrutinise the procedures by which the sanctioning authority satisfiesitself as to the fulfi llment of the condi tions subject to which such grants or loans were given andshall for this purpose have right of access, after giving reasonable previous notice, to the booksand accounts of that authority or body.

(v) Audit of Receipts of Union or States - It shall be the duty of the Comptroller andAuditor General to audit all receipts which are payable into the Consolidated Fund of India andof each State and of each Union Territory having a Legislative Assembly and to satisfy himself thatthe rules and procedures in that behalf are designed to secure an eff ective check on the assessment, collection and proper allocation of revenue and are being duly observed and to make thispurpose such examination of the accounts as he thinks fit and report thereon.

(vi) Audit of Accounts of Stores and Inventory -The Comptroller and Auditor General shall haveauthority to audit and report on the accounts of stores and inventory kept in any offi ce ordepartment of the Union or of a State.

(vii) Audit of Government Companies and Corporations - The duties and powers of theComptroller and Auditor General in relation to the audit of the accounts of government companiesshall be performed and exercised by him in accordance with the provisions of the Companies Act,2013. The comptroller and Auditor-General of India shall appoint the auditor under sub-section (5) or sub-section (7) of section 139 (i.e. appointment of First Auditor or Subsequent Auditor)and direct such auditor the manner in which the accounts of the Government company are requiredto be audited and thereupon the auditor so appointed shall submit a copy of the audit report to theComptroller and Auditor-General of India which, among other things, include the directions, if any,issued by the Comptroller and Auditor-General of India, the action taken thereon and its impact onthe accounts and financial statement of the company.

A.6.(a)Defalcation of cash has been found to perpetrate generally in the following ways:

(a) By inflating cash payments:Examples of inflation of payments:(1) Making payments against fictitious vouchers.(2) Making payments against vouchers, the amounts whereof have been inflated.(3) Manipulating totals of wage rolls either by including therein names of dummy workers or byinfl ating them in any other manner.(4) Casting a larger totals for petty cash expenditure and adjusting the excess in the totals of the

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detailed columns so that cross totals show agreement.(b) By suppressing cash receipts:

Few techniques of how receipts are suppressed are:(1) Teeming and Lading: Amount received from a customer being misappropriated; also toprevent its detection the money received from another customer subsequently being credited tothe account of the customer who has paid earlier. Similarly, moneys received from the customerwho has paid thereafter being credited to the account of the second customer and such a practiceis continued so that no one account is outstanding for payment for any length of time, which maylead the management to either send out a statement of account to him or communicate with him.(2) Adjusting unauthorised or fictitious rebates, allowances, discounts, etc. to customer’accounts and misappropriating amount paid by them.(3) Writing off as debts in respect of such balances against which cash has already beenreceived but has been misappropriated.(4) Not accounting for cash sales fully.(5) Not accounting for miscellaneous receipts, e.g., sale of scrap, quarters allotted to the employees,etc.(6) Writing down asset values in entirety, selling them subsequently and misappropriating theproceeds.

(c) By casting wrong totals in the cash book.A.6.(b)Audit evidence to draw reasonable conclusions on which to base the auditor’s opinion is obtained

by performing:(a) Risk assessment procedures; and(b) Further audit procedures, which comprise:

(i) Test of controls, when required by the SAs or when the auditor has chosen to do so; and(ii) Substantive procedures, including tests of details and substantive analytical procedures.The audit procedures inspection, observation, confi rmation, recalculation, reperformance andanalytical procedures, often in some combination, in addition to inquiry described below may beused as risk assessment procedures, test of controls or substantive procedures, depending on thecontext in which they are applied by the auditorRisk assessment procedures refer to the audit procedures performed to obtain an understandingof the entity and its environment, including the entity’s internal control, to identify and assess therisks of material misstatement, whether due to fraud or error, at the fi nancial statement andassertion levels.Nature and Timing of the Audit ProceduresThe nature and timing of the audit procedures to be used may beaff ected by the fact that some ofthe accounting data and other information may be available only in electronic form or only at certainpoints or periods in time. For example, source documents, such as purchase orders and invoices, mayexist only in electronic form when an entity uses electronic commerce, or may be discarded afterscanning when an entity uses image processing systems to facilitate storage and reference.Certainelectronic information may not be retrievable after a specifi ed period of time, for example, iffiles are changed and if backup files do not exist. Accordingly, the auditor may fi nd itnecessary as a result of an entity’s data retention policies to request retention of some informationfor the auditor’s review or to perform audit procedures at a time when the information is available.Audit ProceduresAudit procedures to obtain audit evidence can include:

(i) Inspection(ii) Observation(iii) External Confi rmation(iv) Recalculation(v) Reperformance(vi) Analytical Procedures(vii) Inquiry

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A.6.(c)Special points of consideration while auditing certain transactions of a hospital are stated below-(i) Register of Patients: Vouch the Register of patients with copies of bills issued to them. Verify

bills for a selected period with the patients’ attendance record to see that the bills have beencorrectly prepared. Also see that bills have been issued to all patients from whom an amountwas recoverable according to the rules of the hospital.

(ii) Collection of Cash: Check cash collections as entered in the Cash Book with the receipts, counterfoilsand other evidence for example, copies of patients bills, counterfoils of dividend and other interestwarrants, copies of rent bills, etc.

(iii) Legacies and Donations: Ascertain that legacies and donations received for a specifi c purposehave been applied in the manner agreed upon.

(iv) Reconciliation of Subscriptions: Trace all collections of subscription and donations from theCash Book to the respective Registers. Reconcile the total subscriptions due (as shown by theSubscription Register and the amount collected and that still outstanding).

(v) Authorisation and Sanctions: Vouch all purchases and expenses and verify that the capitalexpenditure was incurred only with the prior sanction of the Trustees or the Managing Committeeand that appointments and increments to staff have been duly authorised.

A.7.(a)Extent of Reliance on Analytical Procedures (SA-520):The reliability of data is infl uenced by itssource and nature and is dependent on the circumstances under which it is obtained. Accordingly,the following are relevant when determining whether data is reliable for purposes of designingsubstantive analytical procedures:

(i) Source of the information available. For example, information may be more reliable when it isobtained from independent sources outside the entity;

(ii) Comparability of the information available. For example, broad industry data may need to besupplemented to be comparable to that of an entity that produces and sells specialised products;

(iii) Nature and relevance of the information available. For example, whether budgets have beenestablished as results to be expected rather than as goals to be achieved; and

(iv) Controls over the preparation of the information that are designed to ensure its completeness,accuracy and validity. For example, controls over the preparation, review and maintenance of budgets.The auditor may consider testing the operating eff ectiveness of controls, if any, over the entity’spreparation of information used by the auditor in performing substantive analytical procedures inresponse to assessed risks. When such controls are eff ective, the auditor generally has greaterconfi dence in the reliability of the information and, therefore, in the results of analytical procedures.The operating eff ectiveness of controls over non-fi nancial information may often be tested inconjunction with other tests of controls. For example, in establishing controls over the processingof sales invoices, an entity may include controls over the recording of unit sales. In thesecircumstances, the auditor may test the operating eff ectiveness of controls over the recording ofunit sales in conjunction with tests of the operating eff ectiveness of controls over the processingof sales invoices. Alternatively, the auditor may consider whether the information was subjectedto audit testing. SA 500 establishes requirements and provides guidance in determining the auditprocedures to be performed on the information to be used for substantive analytical procedures.

A.7.(b)Risk of material misstatement may be defi ned as the risk that the fi nancial statementsare materially misstated prior to audit. This consists of two components described as follows atthe assertion level (a) Inherent risk—The susceptibility of an assertion to a misstatement thatcould be material before consideration of any related controls. (b) Control risk—The risk that amisstatement that could occur in an assertion that could be material will not be prevented ordetected and corrected on a timely basis by the entity’s internal control. Less evidence would berequired in case assertions that have a lower risk of material misstatement. But on the otherhand if assertions have a higher risk of material misstatement, more evidence would be required.

A.7.(c)When establishing the overall audit strategy, the auditor shall determine materiality for the financialstatements as a whole. If, in the specific circumstances of the entity, there is one or more particularclasses of transactions, account balances or disclosures for which misstatements of lesser amountsthan the materiality for the fi nancial statements as a whole could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements, the auditorshall also determine the materiality level or levels to be applied to those particular classes of

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transactions, account balances or disclosures.Performance Materiality defi ned : Performance materiality means the amount or amounts setby the auditor at less than materiality for the fi nancial statements as a whole to reduce to anappropriately low level the probability that the aggregate of uncorrected and undetectedmisstatements exceeds materiality for the fi nancial statements as a whole. If applicable,performance materiality also refers to the amount or amounts set by the auditor at less than themateriality level or levels for particular classes of transactions, account balances or disclosures.

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