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CA Intermediate · Auditing and Ethics · Special Features of Audit of Different Type of Entities

CA Kunal is auditing Lotus Partners, a partnership firm, whose partnership deed provides that interest on capital is payable at 9% p.a. and remuneration to working partners is fixed. The firm's books show interest on capital at 12% and remuneration higher than the deed provides, with no supplementary deed. Which is the correct audit response?

The auditor should treat payments beyond the partnership deed as a deviation, quantify the excess and report it, considering the effect on partners' accounts and the opinion. Without a supplementary deed the original terms apply, and auditors should not unilaterally adjust books or ignore it.

  1. AAccept the books because partners can alter payments informally every year
  2. BReport the deviation from the partnership deed, quantify the excess, and consider its effect on partners' accounts and the opinionCorrect
  3. CAdjust the partners' capital accounts himself without informing the firm
  4. DIgnore it since interest on capital is a private matter between partners

Explanation

The partnership deed governs interest and remuneration; payments beyond it, absent a valid variation, are deviations the auditor should examine, quantify and report. Auditors do not make adjustments unilaterally. Informal changes without a supplementary deed do not override the deed.

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