CA Intermediate · Auditing and Ethics · Special Features of Audit of Different Type of Entities
CA Tanvi is the statutory auditor of Ganga Power Distribution Ltd, an electricity distribution company, and has been told by management that, because of the industry's regulated nature, tariff-related revenue need not be tested. The company's revenue includes billed amounts and unbilled revenue estimated at year end. Which of the following is the most appropriate audit approach?
The auditor should verify that revenue follows the applicable tariff orders and should test the basis and calculation of unbilled revenue as an accounting estimate. Regulation of tariffs and management's representations are not substitutes for audit evidence, and unbilled revenue involves estimation risk that must be evaluated.
- ARely on the regulator's approval of tariffs and perform no testing of revenue
- BTest only billed revenue, since unbilled revenue is an estimate
- CVerify that revenue is recognised as per the applicable tariff orders, test the basis and computation of unbilled revenue, and evaluate it as an accounting estimateCorrect
- DAccept management's representation about unbilled revenue as sufficient evidence
Explanation
Revenue in utilities depends on tariff orders, meter readings and year-end estimates of unbilled supply. The auditor must test application of the approved tariff and evaluate the unbilled revenue estimate under the standard on accounting estimates. A management representation alone is not sufficient evidence, and regulatory approval of tariffs does not remove the need to test revenue.
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.
More Special Features of Audit of Different Type of Entities questions
- Mehta & Associates audit Greenfield Cooperative Sugar Mill Ltd., a cooperative society. In planning the audit, the team wants to identify th…
- CA Rohan is auditing Bharat Rural Cooperative Credit Society. Management says that as a small society it is outside any statutory audit fram…
- CA Meera is auditing the financial statements of a charitable trust registered under a State Public Trusts Act. The trust runs a hospital an…
- CA Meera is auditing Lakshmi Co-operative Urban Credit Society for the first time. She wants to identify the law that governs the audit and …
- CA Arvind is the statutory auditor of Lotus Finserv Ltd, a non-banking financial company. While auditing, he finds that the company has clas…
- CA Tarun is auditing Sundaram Finance Services Ltd, an NBFC. Management has not made provision on a loan account where instalments are overd…