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

CA Nisha audits Kaveri Polytechnic Trust, a public charitable trust. She notices that the trust's investments in shares of a company owned by the managing trustee's family were made out of corpus funds, in a manner that may breach the trust deed and the law governing trust investments. Which response is most appropriate?

The auditor should study the trust deed and the law on permitted investments, assess the related party and non-compliance aspects, and evaluate the consequence for disclosure and the audit report. Overlooking it, limiting it to a private letter, or asking for the entry to be reversed would not be appropriate.

  1. AIgnore it, since investment of trust funds is a management decision outside the auditor's scope
  2. BReport it only in the management letter because trusts are not subject to statutory audit reporting
  3. CExamine the trust deed and applicable law on permitted investments, evaluate whether the transaction is a related party matter and breach, and consider the effect on the audit report and disclosuresCorrect
  4. DAsk the managing trustee to reverse the entry in the books so that the investment does not appear

Explanation

The auditor must read the trust deed and applicable legal requirements, consider the related party and non-compliance aspects, and evaluate the effect on the report. Ignoring it or having the entry reversed would hide a real transaction. Option B is wrong as the auditor reports to the trustees and the findings may need to be reflected in the report.

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