Page 74 - DCOM204_AUDITING_THEORY

Auditing Theory

Notes stock statement for the year ending position in March and the value of stocks declared
in the annual accounts subsequently are on account of this.)
(b) Dealing with group accounts: Normally this is where diversion of funds take place.
CAs also should comment whether transactions are at par with commercial
transactions done with other parties. CAs also should comment whether investments
in group companies are safe and sound.
(c) It should also be commented whether any bad debt is included under Sundry Debtors,
whether loans and advances to group companies are camouflaged under sundry
debtors to avail book debt finance, whether any fictitious debt is created to avail
finance from banks (like fertilizer subsidy financed against by banks).

(d) Whether any fictitious sales are booked to inflate sales/profit.
2. Stock Audit of Borrowal accounts: CAs should bear in mind that based on their certificate,
the banks value the security. Any false certificate will affect the security of the bank and
jeopardize their funds. The valuation of stocks should be judged correctly. The valuation
of especially work-in-progress should be studied in depth. The sundry creditors position
should be analyzed to see whether paid for stocks is adequate. The sundry debtors position
should be analyzed to ensure that:

The debts are good and realizable;
No bad debt is included;
In case of debts relating to group company, they are reflecting genuine commercial
transaction;

No fictitious debt is created.
Regarding specific certificates/tasks, sometimes, in order to comply with the terms of
sanction in a hurry, banks get these certificates from any CA. The purpose of the banks
will be served better, if they insist that the ‘statutory auditors’ to the company should give
these certificates.
3. Specific certificate with respect to infusion of capital or family loans.
4. Monitoring of accounts with a specific objective.
5. Certification of utilization of funds for the desired end-use.
However the plight is that these certificates and reports do not give the required information in
the required manner and therefore fail to serve the desired purpose. Besides the large number of
disclaimers made lessen the authenticity of the Report made by the Chartered Accountant. At
times CAs also function as directors of companies on their Boards.
What is to be Code of Conduct for them is well defined in Naresh Chandra Committee Report
and should be implemented? If these certificates and reports are objectively prepared keeping in
view the statements, standards and guidance notes issued by ICAI, it is believed that the required
information in the required manner will be available to a large extent. In short, the essence of
the whole issue is that the rigorous disciplinary action of ICAI also seems to be ineffective to
some extent in deterring some of the Chartered Accountants from resorting to undesirable
practices. The reason for this, seems to be that many a time undesirable practices are not caught
and only sparingly CA(s) get punished for their intentional misdeeds; which again is a time
taking process.
It is suggested that the following be mandated as a Policy:-

(a) Banks and financial institutions have independent assessment of the work of Chartered
Accountants and a list of Chartered Accountants, who work objectively, may be evolved

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