State whether the following statements are true or false, giving reasons (10 x 2 = 20 marks):

i) The risk of fraud remaining undetected is called audit risk.

ii) An auditor is not responsible for frauds remaining undetected after the audit is completed.

iii) Tolerable error is the difference in the total of balance-sheet which the auditor is willing to accept.

iv) Management of an entity has more knowledge of the business than the auditor.

v) The service provider is under no obligation to provide information to the auditor.

vi) Test check is an accepted audit practice.

vii) The auditor should not rely on internal evidence.

viii) Amounts payable on credit cards is an unsecured loan.

ix) Depreciation is not charged on the assets destroyed.

x) Borrowing costs are to be suspended during monsoon when the site of construction is waterlogged.

2) Give your views on the following: a) A company held an old car standing in its books at Rs 35,000 (before depreciation). Before March 31, 2009, the company advertises in newspapers to sell the car and the best offer was for Rs 30,000.

During April, the company finds a buyer and sells the car for Rs 40,000. The company charges depreciation on its vehicles at 15 per cent per annum as a policy. What is the value to be considered for the purposes of financial statements as on March 31, 2009? (8 marks)

b) Continuing the above situation, the company utilises the profit on sale of the car for proposing dividends to its shareholders. Do you agree? (6 marks)

c) Mr Smart is appointed as the auditor of a company at its annual general meeting (AGM) held in August 2008 to hold office till completion of the next AGM. He completes the audit for the year ended March 31, 2009, and releases his audit report during June 2009.

The managing director proposes him to join the board of directors and offers to induct him in to the board at the ensuing AGM. The auditor accepts the proposal. What is the procedure to be adopted? (6 marks)

3) In an audit, some of the respondents send in confirmations and some do not. How do you deal in both the situations? (10 marks)

4(a) What special points are to be considered in the course of the audit of a leasing company? (5 marks)

b) How does a local authority generate funds? How do you audit them? (5 marks)

5) How do you vouch/verify any two of the following: a) intangible assets; b) income tax; and c) deferred tax liability. (5x2 = 10 marks)

6(a) What are the different ways in which an auditor can be appointed by a company? ( 5 marks)

b) What are the rights of the auditor of a company? (5 marks)

7(a) What points are to be considered by the CAG while carrying out audit of expenditure? (5 marks)

b) Vouching of expenditure is more difficult than vouching of income. Comment. (5 marks)

8) Write short notes on any two of the following: a) walk through procedures; b) retail method; and c) CARO. (5x2 = 10 marks)

(The author is a Hyderabad-based chartered accountant.)