LECTURE 3 – AUDITOR AND COVERAGE (SCOPE) OF AUDIT…………

LECTURE 3 – AUDITOR AND COVERAGE (SCOPE) OF AUDIT…………

 

Good morning friends once again…………..

 

Before starting today’s lecture quickly revise what we have learned from past lectures?………

 

• Why audit is required?
• Audit tools
• Internal control system
• Compliance procedures and substantive procedures

 

Now lets start with today’s topics……….

 

Wait for some moments before going further just think on some issues…………

 

 

Issue 1 : –  

 

CA Arjun was appointed as an auditor of Hastinapur Sugar Mill Limited. He enjoyed his audit with handsome amount of fees.

 

One day client Mr. Duryodhana (means Director of Hastinapur Sugar Mill Limited) came to CA Arjun having lots of anger on his face.

 

CA Arjun could not understand that why today his client converted his colour of face to Red?

 

Before waiting for a moment client started shouting with anger on CA Arjun.

 

“Do you understand Yourrself as an Auditor?”

 

“Of course, Yes……. Look at the wall. There is degree of ICAI which I have obtained.”

 

Client started thinking for some seconds and then again asked the question……..

 

“Have you done your Articleship purely???”

 

 Now Arjun Started thinking and replied, “ha???…… yes…. But why do you ask me this kind of questions and what happened?”

 

“What happened????……. You were the auditor of my company…… we had trust on you….. we were thinking that in the audit you will be able to find out each and every frauds………… but you are failed Mr. Arjun…….”

 

“Failed and I Am!!!!!!!!……….. what’s happened say clearly……..”

“I hope Mr. Arjun that in the audit you should have verified all the debtors and cash………. Am I right???”

 

Arjun was thinking about that………….. now sweat started on his head. Duryodhana once again started his firing………..

“after completion of your audit we have found that…….. some employee were misappropriating cash by manipulating debtors’ Account……..

 

This fraud is detected by us Mr. Arjun and not by you, though you were the auditor of the same company.

We are considering it as your failure and we will sue on you. and we are demanding our fees paid back ………………………………………………………”

 

 

 

Dear students I hope you have understand it perfectly now there are lots of questions arises in our mind that what may be happened in such situation. Will client Duryodhana win the case or CA Arjun?????

 

Some other questions………

• Is auditor liable and has he to pay his fee back?
• Really auditor has made negligence of professional duty?
• Is it main objective of auditor to find out frauds and errors?
• What is scope of audit?
• Which precaution should auditor take care to avoid such critical situation?
• Did management misunderstand the scope of audit?
• We have listened that auditor should be independent then what is independence of auditor?

 

 

We will discuss on it but later on before that lets understand another issue……..

 Issue 2 :-

 

CA Ram was appointed as auditor of Shyam’s company. Shyam and Ram was very close friends.

 

During the audit process Ram found that Sales was actually of Rs. 360 Crores but in the profit and loss account it was shown by Rs. 500 Crores. Ram informed Shyam about it.

 

Shyam Smiled and replied to Ram, “ I know Ram…….. that’s why I have appointed YOU as my auditor, because you are my friend……”

 

Now ram was in confusion that what should he do????? Sign report with Rs. 500 Crores or Rs. 360 Crores  and forget friendship???

 

 

Dear students I want to ask you that what you will do if you were auditor of that particular company?????

 

Some students had replied that auditor should independently. BUT what is independency?????

 

Now from the above two issues following main concepts we have to understand…………..

 

• Management’s expectation from the auditor and scope of auditor – Clarification
• Independence of auditor.
• Objective of audit and auditor
• What is role of auditor?

 

 

Lets start with discussion

 

• Auditor’s objective

 

Be clear friends that auditor is not a fraud detector. But he is a verifier who expresses his opinion on the financial statements.

 

Auditor’s main objective is to express opinion on the financial statements about its truthness and fairness.

 

Detecting frauds and errors is secondary objective.

I have already mentioned that detecting frauds and errors is the duty of management and not of Auditor. For it management should have strong internal control system and auditor should strictly verify that internal control system by using compliance procedures.

 

If management expecting more from auditor then sorry BOSS…….. it is mistake of management and not of Auditor…………

 

Now some auditors are taking wrong interpretation of this statement……. Means they are thinking that if they will pay less concentration in audit, still they will enjoy…………..

 

Then I will say that sorry dear, it is not like that way…….. you don’t know our Great Institute…………

 

It doesn’t mean that though auditor has dought, he disregard the matter. Suspicious points are like Red Light. Auditor must have to pay more concentration on those areas by using substantive procedures.

 

If auditor will totally neglect, then he will be held guilty of professional misconduct by not following his duties.

 

If in the Above Issue 1:- CA Arjun has performed his duty well by using audit techniques and evidences thereof are available to him, he will not be held guilty……….. Otherwise……… you can understand what may be happened……….

 

 

• Now come to second issue can CA Ram allow Rs. 500 Crores as sales instead of Rs. 360 Crores by maintaining his relationship with friend.

 

 

The answer is big NO.

 

Institute is not providing us degree of CA for doing SEVA of our friends and relatives. But it is given to us because we have some social and professional responsibilities…………..

 

If CA Ram has allowed Rs. 500 Crores in the report the  it will be termed as Misuse of CA designation and he will be held guilty of professional misconduct.

 

Means auditor should be free from all the bias……… means he should be independent…….

 

 

• Now u will have one more question in mind that What is independency of auditor………

 

Lets start with the topic and………………. Remember this question has been asked many times by our institute in the examination so understand it carefully………..

 

 

• Independency of Auditor

 

–         Independence means opinion of auditor should be his own opinion and it should not be influenced by any force, relation, threat

–         Though there is relation, friendship, pressure but opinion should be that which auditor feels.

–         Standard on auditing issued by the our great institute has also included this quality.

 

Now question why auditor should be independent?

 

Then I will again say that company running is not from its own money BUT money from share holders and investors and they have right to know about true position of company. And it is a duty and responsibility of an auditor to show the true picture to them………….

 

So CA Ram should report in his audit report accordingly (means actual situation).

 

 

• Now there is one question that what is role of auditor???

 

Before going to that discussion lets understand 3 Cases…………..

 

 

 

 

• Bhopal Gas Leak disaster in 1984

 

The Bhopal disaster (commonly referred to as Bhopal gas tragedy) was a gas leak incident in India, considered one of the world’s worst industrial catastrophes.

 

It occurred on the night of December 2–3, 1984 at the Union Carbide India Limited (UCIL) pesticide plant in Bhopal, Madhya Pradesh, India. A leak of methyl isocyanate gas and other chemicals from the plant resulted in the exposure of hundreds of thousands of people.

 

The toxic substance made its way in and around the shantytowns located near the plant Estimates vary on the death toll. The official immediate death toll was 2,259 and the government of Madhya Pradesh has confirmed a total of 3,787 deaths related to the gas release.

 

Others estimate 3,000 died within weeks and another 8,000 have since died from gas-related diseases.

A government affidavit in 2006 stated the leak caused 558,125 injuries including 38,478 temporary partial and approximately 3,900 severely and permanently disabling injuries.

 

(From Ref.:- http://en.wikipedia.org/wiki/Bhopal_disaster)

 

 

• I want to add here further that there was one reporter in Bhopal who had received the news before some days ago of happenings that company has no any strong internal control system for verification of GAS drums periodically.
• Not only to that but drums were containing excess gas than its original capacity.

 

Reporter had suspect about such happenings, and it became true……

 

 

• 2 G spectrum Case

The 2G spectrum scandal involved officials in the government of India illegally undercharging mobile telephony companies for frequency allocation licenses, which they would use to create 2G subscriptions for cell phones.

The shortfall between the money collected and the money which the law mandated to be collected is estimated to be 176,645 crore (US$38.86 billion) as valued by Comptroller and Auditor General of India based on 3G and BWA spectrum auction prices which held in 2010.

However the exact loss is disputed, Central Bureau of Investigation (CBI) pegged the loss at 30,984.55 crore (US$6.82 billion) in its first charge sheet filed on 2 April 2011, whereas Telecom Regulatory Authority of India in a response to CBI’s query said that the Govt. has actually gained 3,000 crore (US$660 million) by selling the spectrum.

Kapil Sibal, minister for communications & IT, said in a press conference that there was no loss caused by selling 2G licenses.

However in September 2011, CBI argued before the Supreme Court that it was unsafe to read a “no loss” conclusion in the telecom regulator’s calculations on irregular spectrum allotment as the methodology adopted admittedly did not take into account the market mechanism.

All the speculations of profit, loss and no-loss were put to rest when on 2 February 2012 the Supreme Court of India delivered judgement.

The Supreme Court declared the allotment of spectrum as “unconstitutional and arbitrary” and quashed all the 122 licenses issued during tenure of A. Raja, the main accused in the 2G scam case.

The court further said that A. Raja “wanted to favour some companies at the cost of the public exchequer” and “virtually gifted away important national asset”.

The issuing of licenses occurred in 2008, but the scam came to public notice when the Indian Income Tax Department was investigating political lobbyist Nira Radia.

The government’s investigation and the government’s reactions to the findings in the investigation were the subject of debate, as were the nature of the Indian media’s reactions. Much of the credit of bringing this whole scam into the public light (by pursuing it in the court of law) goes to Subramanian Swamy who is the chief petitioner for this case in the court of law.

In 2011, Time magazine listed the scam at number two on their “Top 10 Abuses of Power” list (just behind the Watergate scandal).

Ref:- http://en.wikipedia.org/wiki/2G_spectrum_scam

• Now there you will have one question that what is Comptroller and auditor general of India?  For that please have some patience, I will discuss it on later lectures………….

 

• Satyam Scam (Raju Ramlingam Scam)

Ramalinga Raju resigned from the Satyam board after admitting to cheating six million shareholders.

 After being held in Hyderabad‘s Chanchalguda jail on charges including cheating, embezzlement and insider trading, Raju was granted bail on 18 August 2010.

A botched acquisition attempt involving Maytas in December 2008 led to a plunge in the share price of Satyam.

In January 2009, Raju indicated that Satyam’s accounts had been falsified over a number of years. He admitted to an accounting dupery to the tune of 14000crore rupees or 1.5 Billion US Dollars and resigned from the Satyam board on January 7, 2009. In his letter of resignation, Raju described how an initial cover-up for a poor quarterly performance escalated: “It was like riding a tiger, not knowing how to get off without being eaten.”

Raju and his brother, B Rama Raju, were then arrested by the CID Andhra Pradesh police headed by Mr. V S K Kaumudi, IPS on charges of breach of trust, conspiracy, cheating, falsification of records. Raju may face life imprisonment if convicted of misleading investors. Raju had also used dummy accounts to trade in Satyam’s shares, violating the insider trading norm.

It has now been alleged that these accounts may have been the means of siphoning off the missing funds. Raju has admitted to overstating the company’s cash reserves by USD$ 1.5 billion. Raju was hospitalized in September 2009 following a minor heart attack and underwent angioplasty. Raju was granted bail on condition that he should report to the local police station once a day and that he shouldn’t attempt to tamper with the current evidence. This bail was revoked on 26 October 2010 by the Supreme Court of India and he has been ordered to surrender by 8 November 2010. The people of his native village, Garagaparru, hail the development works undertaken by the Byrraju Foundation, the charitable arm of Satyam.

Ramalinga Raju was Granted a bail by the supreme court on 4th november 2011 after the Central Bureau of investigation failed to chargesheet Raju within the statutory period.

 

• After this scam ICAI became active to action……… read this article which was written on 7^th January, 2009. (Means at the time of scam)

 

New Delhi: The apex chartered accountants’ body ICAI will seek an immediate explanation from Satyam Computer’s auditors, PriceWaterHouse Cooper (PwC), on the financial fraud unearthed by the software company’s chairman B Ramalinga Raju, before taking any action.

“ICAI will write a letter to PwC on 8 January and will seek an immediate reply on the issue and inform them about the process of investigation, which is on,” ICAI president Ved Jain told PTI.

He said that strict action will be taken if the auditors, of country’s fourth largest IT firm Satyam, are found guilty.

“We will ensure that to any person who has not worked according to our standards and our expectations, severe punishment be given,” he said.

PwC’s comments are still awaited.

Following a letter from the Satyam chairman, who accepted that he had misrepresented facts in the company’s balance sheet, role of auditors and accountants for the company has also come under scanner.

In fact, the Ministry of Corporate Affairs announced that role of directors and auditors at Satyam would be scanned by ICAI and the apex body of company secretaries ICSI.

However, Jain also pointed out that before the body takes any action against the members involved in the “fraud”, it needs to collect facts and information. “So we are looking into that and we will start our proceedings,” he added.

“All one needs to prove is he (auditor) was a party to the fraud. He can be booked under the Companies Act and the Chartered Accountants Act… in case of negligence by the chartered accountant, we have a severe punishment,” Jain said.

Dear students please read above cases carefully…….. and try to understand that how important is the role of auditor…………..

• In the Bhopal case if auditor would have performed his duty well by using surprise check of Gas drum then it might be possible that, whatever had happened it could be stopped…………..
• In the 2G Spectrum scam the auditor has performed his duty well and with the surprise I will say that telecome minister has to go in the JAIL……………
• In the 3^rd case of Satyam computer auditor was not able to detect this much BIG fraud……….. So I can say that he has not performed his duty well.

 

Many of you have joined the article ship and in that you are doing lots of vouching……… and may feel that audit means only vouching but no friends it is more broader than that………..

• Lets understand that what is coverage of audit… means what should we do in the process of audit?????

First.

–         Decide terms of engagement between auditor and management

–         Consider statutory requirements (Means Acts and provisions thereof applicable to organization)

–         Auditor should take in to consider the announcement made by the institute.

Now what these announcements are?

• Announcements mean Standard on auditing and guidance notes issued by the institute.

We will discuss about these things later on.

–         Legal judgments given by the various courts of statute.

Second

–         Check the appropriateness of accounting and internal control system by using compliance procedures

–         Check the appropriateness of transactions by comparing them with supportive documents and evidences.

–         If organization is maintaining manual system of accounting then verify the arithmetical accuracy in totaling, posting, casting, brought and carry forward of balances.

–         Verification of different assets and liabilities with having supportive documents and evidences.

• what is difference between vouching and verification
• Vouching is generally made for profit and loss account item which are just transactions like – Income, Expenditure, Sales, purchase, adjustments etc. Here auditor is checking recording, correctness of total, transaction relation, concern with particular year, capital and revenue difference of transaction.
• When verification is made for balance sheet items with supportive documents and evidences to check whether the same balances are available on the same date or not. Here auditor should verify the existence, ownership, valuation and shown in balance sheet.

Dear friends according to me auditor should physically check each and every item presented in balance sheet.

Now Just think that if this tool was used in the case of Bhopal or Satyam by the auditor then it could detect it before happenings…………….

–         Application of Accounting Standards, standards on asuditing.

–         Disclosure requirement of Financial statements.

–         Check that expenses, revenue, sales and purchase of current year is recorded in same year.

–         Verify the allocation between revenue and capital

 

Thanks friends……….

In the next lecture we will discuss about audit evidence…….. and financial statement

Have a nice day………………