Skip to content

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

CA Nikhil is auditing Gandhar Foundation, a company registered under section 8 of the Companies Act, 2013 with objects of promoting education. During the year the company paid a substantial sum to a director's relative for consultancy, while its memorandum prohibits payment of dividends and permits remuneration to members only for services rendered. Which audit response is MOST appropriate?

The auditor should examine whether the payment was for real services at a reasonable amount and allowed by the memorandum and articles, check related party disclosure, and report appropriately if it is a diversion of the company's income. Section 8 companies are audited, so ignoring the payment or covering it only in a representation letter is wrong.

  1. AIgnore the payment because section 8 companies are exempt from the audit requirements of the Companies Act
  2. BExamine whether the payment is for services actually rendered at a reasonable amount and permitted by the memorandum and articles, consider related party disclosure and applicable law, and report as required if the payment appears to be a diversion of incomeCorrect
  3. CDisclose the payment only in the management representation letter and not in any report
  4. DConclude that the payment is valid because the relative is not a member of the company

Explanation

Section 8 companies are subject to audit and must apply income to their objects without distributing profits to members. The auditor should test whether the payment was for services rendered, at a reasonable rate and allowed by the constitutional documents, and whether related party disclosures are adequate, and report appropriately if it is a diversion of income. Mentioning it only in the representation letter fails the reporting duty, and the relative not being a member does not remove the related party concern.

Did you get it right without looking?

One question tells you little. A timed set on Special Features of Audit of Different Type of Entities shows your real accuracy, how long you take and where you lose marks.

Practise Special Features of Audit of Different Type of EntitiesFree diagnostic mock

More Special Features of Audit of Different Type of Entities questions