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Test 3 (Ch4)

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13 views2 pages

Test 3 (Ch4)

Uploaded by

rrrakshana2k5
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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TEST 3 – CHAP 4

1. AR Private Limited is a medium-sized company engaged in the business of trading of


electronic equipment. The company has various warehouses where all of these equipment are
kept and has an inventory levels of generally 2-3 months.

The internal environment of the company is driven by various processes some of them are
manual and some automated. Accordingly, the management has also set up various controls
both manual and automated and is comfortable with their design and operating effectiveness.

During the course of audit of the financial statements for the year ended 31 March 2020, the
auditors raised various queries regarding various processes where the controls were operating
effectively. This was because of the fact that auditor was considering either only manual
controls or only automated controls in a process.

As per the auditor, the management should have adopted the same approach and hence they
would like to increase the substantive audit procedures because they had a view that as per
the current approach of the management, controls should be considered as ineffective
irrespective of the fact that the testing which the audit team had performed resulted in the
controls being effective.

Currently, the concern was regarding the approach on which management was also stuck on
their point.

You are required to provide your inputs to resolve this matter.

(a) The approach of the management doesn’t seem to be correct because of the nature of the
operations of the company. The current approach which the management has followed can
be accepted only in case of manufacturing industry.

(b) The management should have discussed their approach with the auditors before
appointing them. The Companies Act 2013 provide specific guidance on these matters
wherein the management of the company can follow such approach by taking pre-approval
from their auditors and in such a case, the report of the auditors is always clean.

(c) The approach of the management is completely fine. The auditors need to correct their
understanding of the internal controls and the application of internal controls. A process
cannot be limited to have either only manual control or automated control.

(d) Considering the size of the company, such matters should be ignored by the auditors. Even
if the approach of the management is not correct, it would not have any impact on the work
of the auditors because all such matters get resolved at the time when auditors perform final
analytical procedures.

DESCRIPTIVE

1. While assessing the impact of uncorrected misstatements in the audit of MINI Builders Private
Limited, Mr. Gautam encountered a significant issue related to the calculation of materiality
on revenue. The initial materiality calculation was based on estimated figures provided by the
management. Management, to estimate full-year revenue, extrapolated the sales for 11
months to arrive at a figure for 12 months. However, given the nature of MINI Builders as a
company in the construction sector, where monthly sales exhibit substantial variations, a
unique challenge emerged.

The actual sales for the last month deviated significantly from the estimated sales due to an
unexpected slowdown in project completions. As a result, the last month's actual sales
represented only 30% of the estimated sales. Now, Mr. Gautam is confronted with a
dilemma regarding the appropriate approach to evaluate uncorrected misstatements using
the previously calculated materiality. Kindly Guide Mr. Gautam in the light of relevant
Standards on Auditing. (5 Marks)

1. AMRO Ltd. is a manufacturing and trading Company of leather goods since last 10 years. You
are the internal auditor of the company for the year 2023-24. In order to review internal
controls of the company, you visited the departments and noticed:

(1) The head of procurement, Mr. Amit, has complete control over purchasing, receiving
goods, and approving payments to suppliers. His actions are not reviewed by any other
person in the company.

(2) The company's staff has been working in the same roles for over five years without
any rotation. The finance manager, Mr. Sachin, in particular, has never had his duties rotated
since joining the company.

(3) The store manager, Mr. Gupta, who is responsible for maintaining the inventory, also
keeps the inventory records.

(a) Briefly discuss the general conditions pertaining to the internal check system to be
ensure by you as an auditor.

(b) Do you think that general conditions pertaining to the internal check system are
violated in the given situation? ( 6 MARKS)

2. PADHAM Ltd is engaged in the business of manufacturing of carpets. The company is


planning to expand and diversify its operations. The management has increased the focus on
internal controls to ensure better governance. The management discussed with the statutory
auditors to ensure the steps required to be taken so that the statutory audit is risk based and
focused on areas of greatest risk to the achievement of the company’s objectives.

(a) Name the key steps and phases involved in Risk Based Audit.

(b) Also, discuss the steps to be taken for the risk assessment phase of the audit. (4
Marks)

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