(iii) Appraisal of objectives and plans: Everything in an organisation is the product of basic plans and objectives set by the management. If the management policy favours installation of controls or specifies the extent of controls whether satisfactory or not, controls would have to stay within the policy frame. Therefore, the basic thing that should be evaluated is management policies, plans and objectives. Operational auditor may look into the aspects like whether objectives
FINAL EXAMINATION : NOVEMBER, 2005 46 are clearly spelt out and properly communicated to the personnel responsible for implementation and whether the personnel have understood the objectives in the sense meant by the management. Also, he can take note of any apparent conflict in the objectives for its effect on operations. (iv) Appraisal of organisational structure: Organisational structure provides the line of relationships and delegation of authority and tasks. This is an important element of the internal control design. Therefore, this is also another important area for appraisal by the operational auditor. In evaluating organisational structure, the aspects that may be considered by the operational auditor whether the organisational structure in conformity with management objectives and is drawn up on the basis of matching of responsibility and authority. (c) Evaluating Going Concern Assumption: AAS 16, “Going Concern”, requires that while planning a performing audit procedures and in evaluating the results thereof, the auditor should consider the appropriateness of the going concern assumption underlying the preparation of the financial statements. In assessing such a risk, the auditor should examine the following indications. I. Financial indications: ♦ Negative net worth or negative working capital ♦ Excessive use of short term borrowing for long term assets ♦ Fixed term borrowings approaching maturity without prospect of renewal or repayment. ♦ Adverse key financial ratio ♦ Substantial operating losses ♦ Substantial negative cash flow from operations ♦ Arrears or discontinuance of dividend payment ♦ Inability to pay creditors in time ♦ Default in compliance with loan agreements ♦ Change from credit to cash term with suppliers ♦ Inability to arrange finance for new development need ♦ Arrangement with creditors for reduction in liabilities II. Operating Indications: ♦ Turnover and departure of key management personnel without replacement ♦ Loss of market, franchise, license or key supplier ♦ Labour difficulties or shortage of important supplies
PAPER – 3 : ADVANCED AUDITING 47 III. Other indications: ♦ Non-compliance with statutory requirements ♦ Legal cases with possibility of adverse judgement which could not be met ♦ Changes in legislations or government policy ♦ Sickness of the entity under any statutory definition.
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