Question

this is a question in auditing.

you are required to select and research any real-world case involving auditors and: 1000 words

 provide an overview of the facts of the case (in your own words);

 discuss the theoretical principles applicable to the case

Answer 1

Case Law

C Ltd. declared dividend amounting to Rs. 5 lakhs out of profits for the year ended 31/03/2009.

Subsequently, it was noticed that company had failed to make provisions for outstanding expenses of Rs. 7.80 lakhs and and closing stock was also over valued, which was not reported by auditors of the company. Management of C Ltd. helds auditors responsible for this situation.

Analysis of the above situation:-

Failure to detect untrue and incorrect financial position of a company.

Facts of the case:-

In the given case, Profit of the company has been inflated by non-provisioning of outstanding expenses of Rs. 7.80 Lakhs and by Overvaluation of closing stock and based on such inflated profit the company has declared and paid dividend of Rs. 5 lakhs. Thus it can be said that dividend has been paid out of "inflacted profit" and not out of "real profit". If there is insufficient profit after above adjustment of outstanding expenses and corrections of stock valuation and there is no past reserve, it would amount to pay dividend out of capital.

Theoretical principles applicable to the Case:-

It was the duty of auditors ro ascertain whether the Balance Sheet and Profit and Loss A/C of the Company show a true and fair view of the financial position and revenue earning capacity. For that he has to exercise proper audit procedure of substantive Test (that is Vouching and verification) and valuation of various items of Balance Sheet and Profit and Loss A/C.

Principal aspect to be covered in an audit:-

1. Checking of the arithmetical accuracy of the bookds of accounts.

2. Comparision of the Balance Sheet and Statement of Profit and Loss or Other Statements with the underlying record.

3. Verification of the title, existence and valur of the assets appearing in the Balance Sheet.

4. Verification of the Liabilities stated in the Balance Sheet.

The auditor should have checked whether all the outstanding expenses have been provided or not and whether closing stock has been properly valued as per Accounting Standard on Valuation of Inventory ( IND AS - 2). If he was not satisfied, He should have issued a qualified report or adverse report. In the instant case he had failed to do so, he will be guilty of gross regligence in the performance of his duty as per SA 200 overall objective of the independent Auditor and the conduct of an Audit in Accordance with Standards on Auditing.

The facts of the case are similar to the established judgement on "The leeds Estate Building & Investment Co. Ltd vs Shepherd (1887)", Where, it was held, that it was an auditor's duty to ascertain that the accounts, he cerifies, are correct and that if he fails in his duty, he is liable for damages for dividends wrongly paid by the company out of capital.