7951final_adv_aud_nov05.pdf - PAPER \u2013 3 ADVANCED AUDITING Answer Question Nos 1 and 2 and four from the rest Question 1 As a Statutory Auditor how

7951final_adv_aud_nov05.pdf - PAPER – 3 ADVANCED AUDITING...

This preview shows page 1 - 3 out of 18 pages.

PAPER – 3 : ADVANCED AUDITING Answer Question Nos. 1 and 2 and four from the rest. Question 1 As a Statutory Auditor, how would you deal with the following? (a) ABC Ltd. commenced construction of a flyover in Mumbai in January, 2004 under BOLT scheme. The same was completed in February, 2005. Due to seasonal heavy rains in July, 2004 in the area, the work on the flyover had to be suspended for 1 month. The company accordingly suspended borrowing costs of Rs. 12.50 lakhs for that month from capitalization. (5 Marks) (b) P Ltd. of whom you are the Statutory Auditor appoints M/s XYZ as Branch Auditors for one of its branches. M/s XYZ conducted the audit of the branch without visiting the branch and instead getting the books at the H.O. M/s XYZ has submitted their Branch Audit Report to you. (5 Marks) (c) LM Ltd. has 2 divisions L and M. The finished products of division L are transferred to division M where further processing is carried out before sale to customers. To achieve transparency and accountability between the divisions, division L raises an invoice on division M at cost plus normal margins. At the year end the unrealized profits on inter- division stocks are eliminated. However, the transfers are recorded at the invoice value as sales and purchases in the respective divisions for the purpose of preparing the Profit and Loss Account. Suitable disclosures, for this are given in then ‘Notes to Accounts’. (5 Marks) (d) T Pvt. Ltd. is an unlisted closely held company with turnover less than Rs.50 crores. While finalizing the accounts, Mr. M the Director (finance) disputed the applicability of AS 20 to the company. (3 Marks) Answer (a) Capitalisation of Borrowing Costs: Borrowing costs may be incurred during an extended period in which the activities necessary to prepare an asset for intended use or sale are interrupted. According to AS-16, “Borrowing Costs”, capitalisation of such borrowing costs should be suspended during extended periods in which active development is interrupted. The standard, however, clarifies that capitalisation of borrowing costs is not suspended when a temporary delay is necessary as a part of the process or substantial technical and administrative work is being carried out. Thus, the test as to whether or not to capitalise the borrowing costs depends primarily upon the nature of interruption of activities during “extended periods”. In the instant case, it has been mentioned that the construction activity was interrupted due to seasonal rain and hence being regular feature. Though the rain was heavy, the period cannot be considered as an “extended period” leading to substantial delay in suspension of construction activities. Therefore, borrowing cost of Rs.12.50 lakhs
Image of page 1
PAPER – 3 : ADVANCED AUDITING 41 incurred by ABC Ltd. should be capitalized. Hence, suspension of capitalization by the company is not a correct treatment and statutory auditor should report accordingly.
Image of page 2
Image of page 3

You've reached the end of your free preview.

Want to read all 18 pages?

  • Spring '18
  • Rajit
  • Financial audit

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes