Audit of Various Entities

Question 1

Cineplex, a movie theatre complex, is the foremost theatre located in Bangalore. Along with the sale
of tickets over the counter and online booking, the major proportion of income is from the cafe,
shops, pubs etc. located in the complex. Its other income includes advertisements exhibited
within/outside the premises such as hoardings, banners, slides, short films etc. The facility for
parking of vehicles is also provided in the basement of the premises.

Cineplex appointed your firm as the auditor of the entity. Being the head of the audit team, you are,
therefore, required to draw an audit programme initially in respect of its revenue and expenditure
considering the above mentioned facts along with other relevant points relating to a complex.

Answer 1

Audit Programme of Movie Theatre Complex:

1. Peruse the MOA & AOA of the entity.
2. Ensure the object clause of MOA permits the entity to engage in this type of business.
3. In the case of income from sale of tickets:
   –> a. Verify the control system as to how it is ensured that the collections on sale of tickets of various shows are properly accounted.
   –> b. Verify the system of relating to online booking of various shows and the system of realization of money.
   –> c. Check that there is overall system of reconciliation of collections with the number of seats available for different shows on a day.
4. Verify the ICS and its effectiveness relating to the income from café, shops, pubs, game zone, etc. located within the multiplex.
5. Verify the system of control exercised relating to the income receivable from advertisements exhibited within the premises and inside the hall such as hoarding, banners, slides, short films, etc.
6. Verify the system of collection from the parking areas in respect of the vehicles parked by the customers.
7. In the case of payment to the distributors verify the system of payment which may be either through out right payment or percentage of collection or a combination of both. Ensure at the time of settlement any payment of advance made to the distributor is also adjusted against the amount due.
8. Verify the system of payment of salaries and other benefits to the employees and ensure that statutory requirements are complied with.
9. Verify the payments effected in respect of the maintenance of the building and ensure the same is in order.
10. Verify the insurance premium paid and ensure it covers the entire assets.

Question 2

Y Ltd has five entertainment centers to provide facilities for public especially for children and youngsters at 5 different locations in the peripheral of 200 kms. Collections are made in cash.

Specify the adequate control system towards collection of money.

Answer 2

Control System over Selling and Collection of Tickets:
In order to achieve proper internal control over the sale of tickets and its collection by the Y Co. Ltd, following system should be adopted -

1. Printing of tickets
2. Ticket sales
3. Daily cash reconciliation
4. Daily banking
5. Entrance ticket
6. Advance booking
7. Discounts and free pass
8. Surprise checks
9. Printing of tickets: Serially numbered pre-printed tickets should be used and designed in such a way that any type of ticket used cannot be duplicated by others in order to avoid forgery. Serial numbers should not be repeated during a reasonable period, say a month or year depending on the turnover. The separate series of the serial should be used for such denomination.
10. Ticket sales: The sale of tickets should take place from the Central ticket office at each of the 5 centers, preferably through machines. There should be proper control over the keys of the machines.
11. Daily cash reconciliation: Cash collection at each office and machine should be reconciled with the number of tickets sold. Serial number of tickets for each entertainment activity/denomination will facilitate the reconciliation.
12. Daily banking: Each day’s collection should be deposited in the bank on next working day of the bank. Till that time, the cash should be in the custody of properly authorized person preferably in joint custody for which the daily cash in hand report should be signed by the authorized persons.
13. Entrance ticket: Entrance tickets should be cancelled at the entrance gate when public enters the center.
14. Advance booking: If advance booking of facility is made available, the system should ensure that all advance booked tickets are paid for.
15. Discounts and free pass: The discount policy of the Y Co. Ltd. should be such that the concessional rates, say, for group booking should be properly authorized and signed forms for such authorization should be preserved.
16. Surprise checks: Internal audit system should carry out periodic surprise checks for cash counts, daily banking, reconciliation and stock of unsold tickets etc.

Question 3

XY Ltd. is a manufacturing company, provided following details of wastages of raw materials in percentage, for various months. You have been asked to enquire into causes of abnormal wastage of raw materials.

Draw out an audit plan.

Wastage percentage are
July 2017 2.5%
Aug 2017 2.7%
Sep 2017 2.4%
Oct 2017 8.1%

Answer 3

Audit Plan to inquire causes of abnormal wastage of RM:

Before planning for detailed investigation, the auditor is required to understand the manufacturing operations from the initial stage of purchase of materials, issue of material, consumption of material and conversions into finished goods.

To locate the reasons for the abnormal wastage, the audit plan may include the following:

1. Obtain a list of RM used in the production process mentioning therein the names and detailed characteristics of each raw material.
2. Ascertain the basis of computation of normal wastage figures and its consistency as compared to previous months.
3. Obtain internal control reports, in respect of manufacturing costs incurred with reference to predetermined standards or budgets.
4. Examine the stock records so as to determine the raw material purchased, material issued to production.
5. Examine the production records so as to determine the material received from the stores and actual material consumed in the production and waste produced in the production process.
6. Study the Maintenance Programme of machinery to ensure that the machinery does not consume more raw material and quality of goods manufacture is not of sub-standard nature.
7. Ascertain whether employees engaged in production are properly trained and working efficiently.
8. Determine the existence and effectiveness of quality control techniques employed in the entity.
9. Examine inventory controls in respect of storage, pilferage, issues etc.
10. Obtain a statement showing break up of wastage figures in storage, handling and production for the period under reference and compare the results of the analysis for each of the month.
11. Consider the existence of following situations that may also cause the abnormal wastage:
    (a) Purchase of poor quality of raw materials.
    (b) Machinery breakdown or power failure.
    (c) High rate of rejections of finished goods
    (d) Deterioration of raw material lying in godowns
    (e) Abnormal wastages in storage and handling.
    (f) Commencing new production line.

Question 4

As an internal auditor for a large manufacturing concern, you are asked to verify whether there are adequate records for identification and value of P&M, tools and dies and whether any of these items have become obsolescent and not in use.

Draft a suitable audit programme for the above.

Answer 4

The Internal Audit Programme in connection with P&M, Tools and Dies may be on the following lines:

(i) Internal Control Aspects - The following may be incorporated in the audit programme to check the internal control aspects:

(a) Maintaining separate register for hired assets, leased asset and jointly owned assets.
(b) Maintaining register of fixed asset and reconciling to physical inspection of fixed asset and to nominal ledger.
(c) All movements of assets are accurately recorded.
( d) Authorisation be obtained for -
(i) a declaring a fixed asset scrapped.
(ii) selling a fixed asset.
(e) Check whether additions to fixed asset register are verified and checked
by authorised person.
(f) Proper recording of all additions and disposal.
(g) Examining procedure for the purchase of new fixed assets, including
written authority, work order, voucher and other relevant evidence.
(h) Regular review of adequate security arrangements.
(i) Periodic inspection of assets is done or not.
(j) Regular review of insurance cover requirements over fixed assets.
(ii) Assets Register: To review the registers and records of plant, machinery, etc.
showing clearly the date of purchase of assets, cost price, location,
depreciation charged, etc.
(iii) Cost Report and Journal Register: To review the cost relating to each plant
and machinery and to verify items which have been capitalised.
(iv) Code Register: To see that each item of plant and machinery has been given
a distinct code number to facilitate identification and verify the maintenance of
Code Register.
(v) Physical Verification: To see physical verification has been conducted at
frequent intervals.
(vi) Movement Register: To verify (a) whether a Movement Register for movable
equipments and (b) log books in case of vehicles, etc. are being maintained
properly.
(vii) Assets Disposal Register: To review whether assets have been disposed off
after proper technical and financial advice and sales/disposal/retirement, etc.
of these assets are governed by authorisation, sales memos or other
appropriate documents.
(viii) Spare Parts Register: To examine the maintenance of a separate register of
tools, spare parts for each plant and machinery.
(ix) Review of Maintenance: To scrutinise the programme for an actual periodical
servicing and overhauling of machines and to examine the extent of utilisation
of maintenance department services.
(x) Review of Obsolescence: To scrutinise whether expert’s opinion have been
obtained from time to time to ensure purchase of technically most useful
efficient and advanced machinery after a thorough study.
(xi) Review of R&D: To review R&D activity and ascertain the extent of its
relevance to the operations of the organisation, maintenance of machinery
efficiency and prevention of early obsolescence.

Question 5

M/s A & Co. was appointed as auditor of G Airways Ltd.

As the audit partner, what factors shall be considered in the development of overall audit plan?

Answer 5

Development of an Overall Plan: Overall plan is basically intended to provide
direction for audit work programming and includes the determination of timing,
manpower development and co-ordination of work with the client, other auditors and
other experts. The auditor should consider the following matters in developing his
overall plan for the expected scope and conduct of the audit-
(i) Terms of his engagement and any statutory responsibilities.
(ii) Nature and timing of reports or other communications.
(iii) Applicable Legal or Statutory requirements.
(iv) Accounting policies adopted by the clients and changes, if any, in those
policies.
(v) The effects of new accounting and auditing pronouncement on the audit.
(vi) Identification of significant audit areas.
(vii) Setting of materiality levels for the audit purpose.
(viii) Conditions requiring special attention such as the possibility of material error or
fraud or involvement of parties in whom directors or persons who are substantial
owners of the entity are interested and with whom transactions are likely.
(ix) Degree of reliance to be placed on the accounting system and internal control.
(x) Possible rotation of emphasis on specific audit areas.
(xi) Nature and extent of audit evidence to be obtained.
(xii) Work of the internal auditors and the extent of reliance on their work, if any in
the audit.
(xiii) Involvement of other auditors in the audit of subsidiaries or branches of the
client and involvement of experts.
(xiv) Allocation of works to be undertaken between joint auditors and the
procedures for its control and review.
(xv) Establishing and coordinating staffing requirements.