Assignment Assessment Report

Campus: Level: Module Name: Students Name: e-mail id & Mob No Stream Mumbai PCL-II Audit Mihir Joshi Mihir_j@hotmail.com Finance Year/semester Assignment Type Assessors Name Reqd Submission Date Actual Submission Date Submitted to : 2011-13 A Harish Sir 28-02-2013 27-01-2012 Harish Sir

Certificate by the Student: Plagiarism is a serious College offence. I certify that this is my own work. I have referenced all relevant materials. Expected Outcomes Assessment Criteria Grade based on D,M,P,R system Feedback

Mihir Joshi (Students Name/Signatures)

General Parameters
Clarity Analytical ThinkingResearch DoneFormatting & PresentationClear understanding of the concept Ability to analyze the problem realistically Research carried out to solve the problem Concise& clear thinking along with presentation

Subject Specific Parameters

1. 2. 3. Grades P M D Grade Descriptors A Pass grade is achieved by meeting all the requirements defined. Identify & apply strategies/techniques to find appropriate solutions Demonstrate convergent, lateral and creative thinking. Achieved Yes/No (Y / N)

Assignment Grading Summary (To be filled by the Assessor)

OVERALL ASSESSMENT GRADE: TUTORS COMMENTS ON ASSIGNMENT: SUGGESTED MAKE UP PLAN (applicable in case the student is asked to re-do the assignment) REVISED ASSESSMENT GRADE TUTORS COMMENT ON REVISED WORK (IF ANY) Date: Assessors Name / Signatures:

AUDIT ASSIGNMENT A
1. Case Study-Ratio Analysis The Balance sheet and Profit & Loss Account of X&X India Private Limited for the financial year 2010-11 are given below. You are hired as independent consultant to review the financial statements of the company for the financial year 2010-11. With the help of ratios you are advised to evaluate the performance of the company for various entities i.e., Management of the Company, Shareholders, Debtors, Tax authorities and creditors. XYZ India Private Limited Balance Sheet Particulars Amount Particulars Amount Sources Of Funds As At Application of Funds As At 31st March 2011 31st March 2011 Shareholders Funds Fixed Assets 28,350 a. Share Capital (50 shares 50,000 Less: Depreciation (3,665) @ Rs100 each) b. Reserve and Surplus Loan Funds a. Secured Loan b. Unsecured Loan Current Liabilities and Provisions a. Sundry Creditors b. Provisions 1,785 Net Block 5,75 Investments 7,46 Current Assets and Loans & Advances 8,288 a. Inventories 5,43 b. Sundry Debtors c. Cash and Bank d. Loans and advances 61,937 Total 24,685 26,875

1,334 6,574 1,244 1,225

Total XYZ India Private Limited PROFIT AND LOSS ACCOUNT

61,937

Profit and Loss Account Particulars Income Sales and Service Other income Expenditure Material Employee cost Depreciation Other cost Interest Expenses Profit before tax Less: Provision for tax Profit After Tax Amount(Rs) For the year ended 31st March 2011 19,000 1,900 (9,000) (1,200) (2,00) (50) (20) 6,030 (2,000) 8,430

2. Case Study on Fraud List out some examples of fraud that can be done by ledger keeper in Purchase Ledger, Sales Ledger and Suppliers ledger. 3. Case Study on Share Certificate You are appointed as Statutory Auditor of P& B Private Limited. During the period under audit you noted that the company has invested Rs 25 lakhs in share capital of Other Private Limited Company and funds are transferred from companys bank account to transferee Company Bank account. You are also provided company bank statement to substantiate that funds are remitted in lien of share issued to Transferor Company. You as Statutory Auditor of the company how would you ensure the authenticity of the above Investment. Application Based Questions 1. ABC Ltds15% subscribed capital is held by State Financial Corporation and 10% is held by General Insurance Co. Please advise ABC Ltd whether the appointment of the statutory auditor can be done by passing a general resolution at annual general meeting? 2. XYZ private Limited Ltd. has paid up Capital and Reserves of Rs. 60 lacs and secured Loans of Nationalized Banks having sanctioned limit of Rs. 28 lacs and outstanding balance of Rs.23 lacs. The turnover of the company is 5.10 crores for the year ended 31.3.2010. A customer returns goods worth 40 lacs on 2.4.2010, out of sales made during the year ended 31.3.2010. The management of company is of the opinion that CARO, 2003 is not applicable to the company. Please advice the management of the Company? 3. Mr. Y was appointed as an auditor of PQR Ltd. for the year ended 31.3.2009 at Annual General Meeting held on 16.08.2008. Mr. Y has been indebted to the company for sum of Rs. 10,000 as on 1.4.2008, the opening date of accounting year which has been subject to his audit. However, Mr. Y having come to know that he might be appointed as auditor, he repaid the amount on 10.8.2008. One of the shareholders complains that the appointment of Mr. Y as an auditor was invalid because he incurred disqualification of the auditor.Do you agree with the contention of the Shareholder? 4. As a Statutory Auditor, how would you deal with the following Mr. Rajesh is appointed as the auditor of NOIDA Travels Ltd. with audit fees of Rs. 35,000. He purchased air ticked from Delhi to Kolkata and back for Rs. 18,000 from the client for his personal work and the amount remains unpaid at the end of the year as it is a general practice of the client to give credit to all. Mr. Rajesh claims that he does not incur any disqualification of an auditor 5. As an auditor, how would you deal with the following : During the audit for the year ended on 31st March, 2009 of XYZ Ltd you come across certain personal expenses of employees having been debited to Profit and Loss account.

6.

Mr. X is the auditor of XYZ Ltd. For the year ended 31.12.2002. On the basis of the published accounts, certain shareholders has called for some information from him through letters regarding Details of certain travelling expenses, Reasons for variations in expenses as compared to previous year, Explanation for not qualifying the reports Should the auditor answer the various questions raised by the individual shareholder?

7.

T PvtLtds paid up Capital & Reserves are less than Rs 50 lakhs and it has no outstanding loan exceeding Rs. 25 lakhs from any bank or financial institution. Its sales are Rs 6 Crores before deduction Trade discount Rs 10 lakhs and Sales returns Rs 95 lakhs. The services rendered by the company amounted to Rs 10 lakhs. The company contends that reporting under Companies Auditors Reports Order (CARO) is not applicable. Discuss.

Solution Solution1: Case Study-Ratio Analysis The information provided in financial statements can be used to provide insight into the financial strength and weakness of a company. It is important to examine the relationship between accounts in order to take the financial information to the next step. The nature of the ratio analysis depends on what information the reader is looking for. The following are the classified entities for which Ratio Analysis is a key to success:Management of the Company, Shareholders, Debtors, Tax authorities and creditors. If the reader is the Management of the Company, Current ratio: Current Assets / Current Liabilities = 10,377 / 8,831 = 1.18 Quick or Liquid ratio:Quick Assets / Current Liabilities = 9,043 / 8,831 = 1.02 Proprietary ratio: Shareholders funds / Total Assets = 50,000 / 61,937 = 0.80 Fixed assets turnover ratio: Cost of Revenue / Net fixed Assets = 19,000 / 24,685 = 0.77 Current assets to fixed assets ratio : Current assets / Fixed assets = 10,377 / 24,685 = 0.42 Net profit ratio: Net profit after tax / Net Sales = 8,430 / 19,000 = 0.44 Return on total assets: Net profit / Total assets = 8,430 / 61,937 = 0.14 Earnings per share: Income / No. of equity shares = 8,430 / 50 = 168.6 Price -Earnings ratio: Price per share / Earnings per share = 100 / 168.6 = 0.60 If the reader is a Shareholder, Returns on equity: Net Income / Shareholder's Equity = 8,430 / 50,000 = 0.17 Earnings per share: Net Income / No. of equity shares = 8,430 / 50 = 168.6 Price earnings ratio: Price per share / Earnings per share = 100 / 168.6 = 0.60 If the reader is a Debtor,

Debtors Turnover Ratio:Debtors / Total sales x365 = 6,574 / 19,000 x365= 126.29 days If the reader is the Tax authority, Earnings per share: Net Income / No. of equity shares = 8,430 / 50 = 168.6 Price- Earnings ratio: Price per share / Earnings per share = 100 / 168.6 = 0.60 Net profit ratio: Net profit / Net sales x100 = 8,430 / 19,000 = 0.4437 Return on total assets: Net profit / Total assets = 8,430 / 61,937 = 0.14 Fixed assets turnover ratio: Cost of Revenue / Net fixed Assets = 19,000 / 24,685 = 0.77 If the reader is a Creditor, Creditors Turnover Ratio: Creditors / Cost of sales x365 days = 8,288 / 19, 000 x365= 159.22 days Evaluation and Conclusion: When evaluating a good return rate, one has to consider the level of business risk assumed. (For example, 6.2% earnings may be acceptable in a bank account but not in a risky business environment). The Return on Equity is 17%, which is quite good for a shareholder. The Return on total assets ratio is 14%, which is a positive leverage, which results in greater return on equity than the return on assets. A ratio of 1:1 indicates a more positive in the Net working capital. Here we got the Current ratio as 1.18. Overall, the companys performance is satisfactory.

Solution 2: Case Study on Fraud The following are few examples of fraud that can be done by ledger keeper in Purchase Ledger, Sales Ledger and Suppliers ledger. (a) Over-casting the payments side of the cash book; (b) Under-casting the receipts side of the cash book; (c)Entering fictitious transactions in the cash column to show that amounts have been deposited in the account actually when there is no deposit has been made; (d) Posting an amount of cash sale to the credit of a party and subsequently withdrawing the amount;

(e) Wrong totals or balances being carried forward in the cash book or in the ledger; (f)Crediting the account of a supplier on the basis of a fictitious invoice; (g)Crediting an amount due to supplier not in his account but under a fictitious name and misappropriating the amount paid against the credit balance; (h)Teeming and Lading (i) Writing off the amount receivable from a customers bad debt account and misappropriating the amount received in payment in payment of the debt

Solution 3: Case Study on Share Certificate In order to ensure the authenticity of investment, I would check all the necessary documents. The documents are: (a)Documents of all new investments for the year with investment date (b) Copies of remittances of all income from investments and expenses incurred during investment (c)Include proof of valuation of variable value investments at the balance sheet date. I will need to know if values of investments have been impaired (d) Copies of all contracts and certificates of registration, revealing rights and obligations affecting investments with signature of directors or authorize persons (e) Specifically, as regards to this case study verifying the Demat account of the company so as to ensure whether the shares are actually purchased is also one of the ways to ensure the authenticity of the investment.

Application Based Questions Solution 1: ABC Ltds 25% subscribed capital is held by the below mentioned categories. According to section 224 (1) of the companies Act, 1956, the appointment or reappointment of an auditor or auditors at each Annual General Meeting shall be made by passing a special resolution in case of a company in which not less than 25% of the subscribed share capital is held, whether singly or in any combination, by A public financial institution or a government company of central government or any state government, or Any financial or other institution established by any provincial or state act in which a state government holds not less than fifty one percent of the subscribed share capital, or A nationalized bank or an insurance company carrying on general insurance business In case, the company fails to appoint an auditor at its annual general meeting by passing a special resolution,the central government is to be informed and it will exercise its power of appointing the auditors So, the appointment of auditor shall be made only by passing a special resolution not by a general resolution.

Solution 2: Clause 4(vii) of CARO, 2003 requires the auditor to comment whether the company has an internal audit system commensurate with the size and nature of the business. In respect of non-listed companies the clause is applicable only if: (i) The paid-up capital and reserves of the company are more than 50lakhs as at the commencement of the financial year; or

(ii) Average annual turnover exceeds 5crores for a period of 3 consecutive financial years immediately preceding the financial year concerned. (iii) And have outstanding loan exceeding 10lakhs or more from any bank or financial institutions. So, the contention of the XYZ (P) Ltd. is not correct.

Solution 3: According to sec.226(3), following persons are not qualified for appointment as auditors of a company A body corporate An officer or an employer of the company A person who is a partner or who is in the employment of an officer or employee of the company A person who is indebted to the company for more than Rs. 10,000 or who has given a guarantee or provided any security in connection with the indebtedness of any their person to the company for more than Rs.10,000 A person holding any security of that company A person is not eligible for appointment as auditor of any company ,if he is disqualified from acting as auditor of that companys subsidiary or holding company or of any other subsidiary of the same holding company sec.226(4). If an auditor is disqualified u/s 226(3),226(4) there is an automatic vacation of office sec.226(5). Here, Mr. Y has repaid the amount before the annual general meeting. So, at the time of appointment, Mr. Y is no more indebted to the company . Hence, the contention of the Shareholder is incorrect.

Solution 4: Here, the contention of the auditor, Mr. Rajesh is incorrect as, he owes Rs. 18000 to NOIDA Travels Ltd.

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A person who is indebted to the company for more than Rs. 10,000 or who has given a guarantee or provided any security in connection with the indebtedness of any their person to the company for more than Rs.10,000 - Sec. 226 (3)

Solution 5:

On the basis of companys contractual obligation or in accordance with the accepted business practice, personal expenses of employees debited
to Profit and Loss account, are considered normal and the auditor need not comment on this. In case, personal expenses not covered by contractual obligations or by accepted business practice, when charged to profit and loss account, it would be the auditors dutyto report thereon in terms of Section 227 (IA) of Companies Act, 1956. The charging of such personal expenses of the employees by the company to its profit and loss account is justified. If the terms and conditions of employment include payment of expenses of the personal nature, then such expenses can be incurred by the company. However, the contract of employment does not contain any provision for payment of expenses of a personal nature, and then there is no warrant for incurring or reimbursement of such expenses by the company. Such expenses are conveyance for personal use, medical re-imbursement, expenses on leave travel, maternity benefits, etc.

Solution 6: Auditor is not liable to give answer on any other type of questions which are not related to his report. Auditor is not liable for Details of certain travelling expenses Reasons for variations in expenses as compared to previous year

According to Sec.227 of the Companies Act, 1956, an auditor is required to express an opinion as to whether the annual accounts give a true and fair view of the companys state of affairs and financial position. To formulate

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such an opinion, the auditor needs to examine the companys internal accounting system, inspect its assets, test-check of accounting transactions. However, auditor is liable questions raised on auditors reports as to why are the reports not qualified. Thus the query raised on not qualifying reports has to be answered by the auditor.

Solution 7: CARO 2003 is applicable to a private limited company if any one of the following three conditions is fulfilled at any point of time during the period covered by the audit report its paid up capital and reserves are more than Rs. 50lacs Its outstanding loan from bank or financial institution is more than Rs. 25Lacs. Its turnover exceeds Rs. 5Crores.

CARO will be applicable even if one of the conditions is satisfied. In this case, paid up capital and reserves of T Pvt. Ltd. is less than Rs. 50Lakhs and has no loan outstanding exceeding rupees 25Lakhs from any bank or financial institution. Turnover is not defined in the CARO. Part II of Schedule VI defines the term turnover as the aggregate amount for which sales are affected by the company. Salesaffected would include sale of goods as well as services rendered by the company.

CARO is applicable to T. Pvt. Ltd. To ascertain the turnover though trade discount and sales returns should be deducted, the inclusion of services rendered would result in a turnover of Rs. 5.05crores (6Crores -10Lakhs 95Lakhs + 10Lakhs).

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