Question

3) You work at a company as an entry level internal auditor. Your manager wants to check the completeness of the audit trail for the purchase of a very expensive asset, which is expected to have a big impact on the way the company does business.

Typically, this sort of decision requires a request for tender to be approved. (A request for tender (RFT) is a document put out by the purchaser, letting relevant suppliers know about the opportunity. Suppliers will bid to sell their produce to the customer. In their response to the RFT, interested suppliers have to demonstrate how their product meets the customer’s requirements and budget. By way of background, it is normal for the purchaser and supplier to change the specifications before and after the original contracts are signed. This will have an impact on the cost.)

Required 25 mark

s As stated above, your manager wants you to check the completeness of the audit trail for this acquisition. She wants you to identify the sorts of documents you would request access to. She also wants you to specify the sorts of evidence you would look for on those documents. Your manager is only interested in the audit trail that relates to the financial statements.

Answer 1

INTERNAL AUDIT OF PROCUREMENT OF CUT TO LENGTH LINE MACHINE OF X COMPANY

Objectives:-

1- Ensure that All Expenses which need to be capitalized are capitalized;

2- Company is maintaining proper Records of Cut to Length Line;

3- Deprecation, Profit/Loss on Cut to length Line Correctly Calculated;

4- Compliance of Accounting Standards;

5- Compliance of Revised Schedule VI;

Steps to Achieve the Objectives:-

Step 1: understand the X,s procedure of Cut to Length Line acquisition and disposal

This is the first and very important aspect. In this step, the internal auditor asks the company for Policy and SOPs regarding Cut to length Line. Form this it is obtained the general understanding of X company Working Pattern on Cut to length Line and the internal auditor comes to know who is responsible for what. On the basis of the same internal auditor can plan our audit program on Cut to length Line.

Step 2: Obtain Cut to length Line Register as maintained by the X company  

In CARO we have to comment on whether the proper records of Cut to length line is maintained by the X company. To ensure this we have to obtain Cut to length Line Register maintained by the X company. Further we have ensure that the Cut to length Line Register contained following things:-

a. Year of acquisition;

b. Sufficient description of the assets to make identification possible;

c. Classification, that is, the head under which it is shown in accounts e.g., Land, Building, Plant & Machinery etc;

d. Location;

e. Quantity, i.e. no. of units;

f. Original Cost;

g. Adjustment for revaluation or for increase or decrease in cost consequent on the revolution of Foreign Currency Liabilities if any;

h. Depreciation was written off to date;

i. Written down value;

j. Rate of depreciation and particulars regarding amortization and impairment;

k. Particulars regarding the sale, discarding, demolition, destruction, etc;

l. Particulars of Cut to Length Line that have been retired from active use and held for disposal; previous cut to length line machine which has been obsolete.

m. Whether Cut to length Line Register as per Register/Records agree with General Ledger balance. If not, note the disagreement in respect Plant & Machinery

Step 3: Vouching of Additions to Fixed Asset ( Cut to Length Line)

a. The decision on Sample On the basis of Total Addition, Period and Assessment of Risk decide the % of Addition to being check from total addition made during the period under review.

b. Checking of Bills Ensure that all Cut to length Line additions is the route through proper channel as mention in FA policy and SOPs. Ensure that Cost which form part of installation or commission of Cut to Length Line along with any charges incurred to bring the Cut to length Line to their present location and condition are capitalized. If the company takes credit on duty paid on Cut to length Line, ensure that such duty should not be forming part of the cost. Ensure expenditure prior to date of ready to use had been capitalized and expenditure incurred thereafter is booked as revenue expenditure.

c. Assets on Lease. Obtain the list of Cut to Length Line taken/given on lease during the year. Ensure compliance of AS 19 with respect to assets given/taken on Lease. Ensure that proper classification of Assets taken/given on lease as per Revised Schedule VI. d. Imported Assets. Ensure that all duties on which credit not available should be form part of the cost. Freight and insurance expenses should be capitalized. Ensure that treatment of Exchange Fluctuation should be as per AS-11

e. Other aspects for checking to Securitize all fixed asset/ repair & maintenance accounts to ensure that no items of revenue have been capitalized and visa versa. Ensure that eligible borrowing costs up to of assets becomes ready to use has been capitalized. Ensure that in case of composite acquisition of assets- the price should be bifurcated into assets supported by proper documents. In case of Self capitalization case ensure that overheads are allocated on reasonable basis. Ensure that the replacement of assets is to be capitalized only when erstwhile assets are removed.

Step 4: Vouching of Deletion from Cut to Length Line

a. CARO – Whether Disposal affects the Going Concern Determine that a substantial part of the fixed asset is not disposed off. If substantial part is disposed off, determine that such disposal does not affect the Going Concern Status of the company. If its affect the Going Concern Status of Company then ensure that same should be reported in Audit Report.

b. Decision on Sample On the basis of Total deletion, Period and Assessment of Risk decide the % of deletion to be check from total deletion form Cut to length Line during the period under review.

c. Checking of Sales bills of Disposal Ensure that all Cut to length Line deletions are route through proper channel as mention in FA policy and SOPs. Ensure that profit/loss on disposal is correctly calculated and disclosed Ensure that cost, deprecation are eliminated from Cut to length Line for items which were scrapped and have no residual value.

Step 5: Depreciation and Amortization

Obtained total number of shift worked during the period under review from plant head. Ensure that depreciation/Amortization is calculated as per Accounting Policy, No. of Shift Working and Schedule XIV, AS-26. Depreciation on assets purchased during the year should be charged on pro-rata basis. Lease premium should be amortized over the lease term.

Step 6: Revaluation Identify the basis of revaluation.

Fact of revaluation should be disclosed for subsequent five years. Quantum of Revaluation should be disclosed. Depreciation on revalued amount should be transfer to Revaluation Reserve. If the revalued assets sold, the remaining balance of Revaluation Reserve should be transfer to Revenue Account.

Step 7: Other Ensure that immovable properties held as investments and as stock in trade have been shown accordingly in the accounts.

Ensure that Inter-unit Sales/Purchases are eliminated from Cut to length Line Register and Summary of Inter-unit Sales/Purchase should be available separately. Treatment of Grant received towards cost of assets should be as per AS-12. Obtained Physical verification Report and ensure that it should be carried out at regular intervals. Impairment should be as per AS 28. Ensure that the Cut to length Line are properly insured.