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CMA Intermediate · Corporate Accounting and Auditing · Auditing of Different Types of Undertakings

While auditing a co-operative society, the auditor finds that members' loans were granted beyond the limit fixed in the society's bye-laws, although the managing committee approved them. What is the auditor's most appropriate course?

The auditor should report the irregularity. A co-operative society's committee is bound by the Act, rules and bye-laws, so its approval cannot validate loans exceeding the bye-law limit. The breach is reportable whether or not the loans are recoverable.

  1. AReport the irregularity, since the bye-laws bind the committee and committee approval does not override themCorrect
  2. BIgnore it, because committee approval makes the loans valid
  3. CCorrect the loan register to the permitted limit on his own
  4. DReport it only if the loans have already become bad debts

Explanation

A co-operative society operates under the Act, rules and bye-laws, which bind the managing committee. Approval by the committee cannot validate a breach of the bye-laws. The auditor reports the matter whatever the recoverability of the loans, so waiting for bad debts is wrong.

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