Question 1

Examine with reasons whether the following statements are correct or incorrect. (Answer any seven out of eight):

Accepted Answer

**Answer to True/False Statements (Any Seven out of Eight):**

**(a) CORRECT.** Even if law or regulation prescribes sufficient details of audit engagement items, the auditor must still record them in a written agreement. **SA 210 (Agreeing the Terms of Audit Engagements)** mandates that the auditor should agree with the client on engagement terms and document them in writing. This written agreement serves to establish mutual understanding, clarify responsibilities, and provide evidence of the engagement scope. Recording in writing is a fundamental requirement regardless of whether regulatory provisions exist.

**(b) INCORRECT.** The auditor is required to periodically review the audit engagement understanding with the client. As per **SA 210**, the auditor should communicate with management if circumstances change or if there are modifications to the engagement terms. Periodic review ensures the engagement understanding remains appropriate, relevant, and complete. Non-review of engagement understanding fails to address changing circumstances and potential misunderstandings.

**(c) INCORRECT.** Dividends are not recognized in the statement of profit and loss as described. Under **Ind AS 1 (Presentation of Financial Statements)**, dividends paid or payable are presented in the statement of changes in equity, not in the profit and loss statement. Additionally, the criterion for recognizing a dividend liability is when the entity has a present obligation (typically when declared…

Question 2

You are appointed as Statutory Auditor of DEF Bank Limited for the year 2019-20. As an Auditor how will you verify Provisions created by DEF Bank Limited?

Accepted Answer

**Verification of Provisions by DEF Bank Limited's Statutory Auditor**

**1. Understand the Regulatory Framework**
The auditor must first comprehend the RBI's guidelines on Asset Classification and Provisioning norms, including the Master Circular on Prudential Norms. These norms prescribe mandatory provisions for Non-Performing Assets (NPAs), standard assets, and contingent liabilities. The auditor should review DEF Bank's Provisions Policy to ensure consistency with RBI requirements and previous years' practices.

**2. Verify Asset Classification**
The auditor should obtain the bank's NPA schedule and verify that assets are correctly classified as Standard, Sub-standard, Doubtful, or Loss based on RBI criteria (primarily, arrears of 90 days or more). Sample test selected loan accounts to confirm classification dates, aging of arrears, and whether accounts meeting NPA criteria have been properly identified. Particularly scrutinize accounts with arrears near the 90-day threshold and advances to related parties.

**3. Verify Provision Percentages Applied**
The auditor should verify that provisions comply with RBI norms:
- **Standard Assets**: 0.40% general provision (or as per bank's higher policy)
- **Sub-standard Assets**: 15% provision
- **Doubtful Category I** (up to 1 year): 25% provision
- **Doubtful Category II** (1-3 years): 40% provision
- **Loss Assets**: 100% provision

Test a sample of accounts in each category to ensure correct percentage application.

**4. Reconc…

Question 3

You are appointed as an auditor of co-operative society. State the special features of the cooperative audit to be borne in mind by the auditor, concerning: (1) Audit classification of society. (2) Discussion of draft audit report with the managing committee.

Accepted Answer

The audit of cooperative societies involves special features that distinguish it from ordinary commercial audit. The two key aspects are:

**1. Audit Classification of Society:** Cooperative societies must be classified based on criteria such as membership strength, share capital, area of operation, and nature of activities (credit, consumer, producer, or service cooperative). This classification is critical as it determines the scope, extent, and nature of audit procedures applicable. The classification directly impacts audit materiality levels, sampling methods, testing depth, and the level of detailed verification required. A large cooperative with extensive membership and significant capital operations will warrant more comprehensive audit procedures compared to a small, localized society. The auditor must classify the society appropriately at the commencement of the audit to ensure audit planning, risk assessment, and procedure design are proportionate to the organization's size, complexity, and regulatory obligations. Different classifications may also involve different regulatory requirements and statutory compliances to be verified.

**2. Discussion of Draft Audit Report with Managing Committee:** A distinctive feature of cooperative society audit is the requirement to discuss the draft audit report and principal audit findings with the managing committee before finalizing the report. This discussion allows the managing committee to provide explanations, context, or c…

Question 4

The audit of receipts of government is not an old an audit of expenditure but with the rapid growth of public enterprise audit of receipts tax or non-tax has come to stay. Discuss audit of receipts with respect to Government Audit.

Accepted Answer

**Audit of receipts** in Government Audit refers to the systematic examination and verification of all revenue collections—both tax and non-tax—to ensure proper authorization, accurate recording, timely deposit into the treasury, and prevention of revenue leakage.

**Nature and Importance:**
While audit of expenditure has traditionally been the primary focus, audit of receipts has gained prominence with the expansion of public enterprises and multiple collection centers. Government receipts form the financial lifeblood of public administration, making their verification equally critical. The audit must ensure that all entitled revenues are collected and properly accounted for without leakage or misappropriation.

**Types of Receipts Subject to Audit:**
Receipts comprise **tax receipts** (income tax, GST, customs, excise, property tax) and **non-tax receipts** (user charges, fees, licenses, penalties, interest, dividends from PSUs, rents). Each category requires specific audit procedures based on the nature and complexity of collection mechanisms.

**Objectives of Audit of Receipts:**
**First**, to verify that all eligible revenues have been assessed and collected in accordance with applicable laws and regulations. **Second**, to ensure that receipts are properly recorded in the books of accounts with supporting documentation. **Third**, to confirm that collections are deposited promptly and in full into the designated government treasury or bank account, preventing unauthoriz…

Question 5

Explain the different types of revenue grants which local bodies may receive.

Accepted Answer

**Types of Revenue Grants to Local Bodies:**

**1. Unconditional/General Grants** - Grants provided without any restrictions or conditions. Local bodies have complete discretion in their utilization for meeting revenue expenditure. These enhance the financial flexibility of local bodies.

**2. Conditional/Specific Grants** - Grants linked to specific purposes, schemes, or objectives. The local body must utilize these funds only for the stated purpose and in accordance with conditions prescribed by the grantor. These ensure funds are deployed as per grantor's priorities.

**3. Matching Grants** - Grants provided on a matching basis where the local body must contribute a specified percentage of total project cost from its own resources. This encourages fiscal responsibility and ensures local stake in implementation.

**4. Ad-hoc/Discretionary Grants** - Grants given at the discretion of higher authorities (central or state) for specific situations, emergencies, or unforeseen circumstances. These are temporary in nature and not recurring regularly.

**5. Statutory Grants** - Grants mandated by law or constitutional provisions. In India, Finance Commission recommendations provide statutory grants to local bodies for revenue deficit reduction as per Articles 243G (Municipalities) and 243W (Panchayats). These are regular and predictable.

**6. Performance-based Grants** - Grants linked to achievement of specified performance indicators or targets such as revenue collection, service…

Question 6

What is the function of audit while examining various rules, regulations and orders with regard to Audit against Rules & Orders by C.A.G.?

Accepted Answer

The audit function of the CAG while examining various rules, regulations and orders serves as a critical mechanism of accountability in government. The primary functions are:

**Verification of Authority**: The audit examines whether every financial transaction has been authorized by law, rules, or properly delegated orders. Each transaction must have legal backing and must be within the scope of authority granted to the officer executing it.

**Compliance with Regulatory Framework**: The CAG verifies that all transactions have been executed strictly in accordance with the applicable budgetary provisions, financial rules, and standing orders issued by the government. This ensures that no authority has exceeded its prescribed limits or overstepped the boundaries defined in rules.

**Examination of Regularity and Propriety**: The audit checks not only the legality of transactions but also their regularity—whether they were executed according to prescribed procedures and in the proper manner. The CAG ensures that public funds have been spent with regard to both authority and propriety, meaning the expenditure represents a prudent and appropriate use of public resources.

**Verification of Delegated Powers**: Since administrative authority is often delegated through orders and rules, the audit examines whether actions taken were within the scope of delegated powers and whether the delegation itself was properly authorized. This prevents misuse or abuse of authority.

**Ensuring A…

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