B.

COM (5thSEMESTER)

AUDIT

All Question
(Hons & General)

SANDIP KUMAR

FOLLOW ON: /
VTS CLASSES
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CONTENTS
SI.NO. CHAPTERS PAGE NO.
1. Concept, Need and Purpose of 2 - 15
Audit
2. Audit Procedures and 16 - 27
Techniques
3. Audit Risk and Internal Control 28 - 32
System
4. Vouching, Verification and 33 - 38
Valuations
5. Company Audit 39 - 47
6. Audit Report And Certificate 48 - 52
7. Other Thrust Areas 53 - 60

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CHAPTER – 1. CONCEPT NEEDS AND PURPOSE OF AUDIT

Q1) Define Auditing. Discuss the concept of Auditing in brief.

Ans. The term audit is derived from the latin word “audire”, which means to
hear. Earlier, the role of auditing was limited to detection and prevention of
errors and frauds. The owners felt the need of an Independent assessment of
the financial statements of the company, which was managed by the Board of
Directors, who were the employees. The objective of audit, therefore, shifted to
ascertain whether the accounts prepared by the Board of Directors were true
and fair, and not just detection and prevention of errors and frauds.
F.R.M De Paula- An audit demotes the examination of Balance Sheet and Profit
and Loss Account prepared by others together with the books of accounts and
vouchers relating thereto in such a manner that the auditor may be able to
satisfy himself and honestly report that, in his opinion, such as Balance Sheet is
properly drawn up so as to exhibit a true and correct view of the state of affairs
of the particular concern according to the information and explanation given
to him and as shown by the books.
Lawrence R. Dicksee - An audit is an examination of accounting records
undertaken with a view to establishing whether they correctly and completely
reflect the translations to which they purport to relate.
Prof. Montgomery-Auditing is a systematic examination of the books and
records of business or other organization, in order to ascertain or verify and to
report upon the facts regarding its financial operations and the result thereof.
Taylor and Perry- Audit is defined as an investigation of some statements of
figures involving examination of certain evidence, so and to enable an auditor
to make a report on the statement
Spicer & Perry- Audit such an examination of the books of accounts and
vouchers of a business, as well enable the auditor to satisfy himself that the
Balance Sheet is properly drawn up, so as to give a true and fair view of the
state affairs of the business, and whether the profit and loss account gives a
true view of the profit or loss for the financial period according to the best of
his information and explanations given to him as shown by the books, and if
not, in what respect he is not satisfied.
Q2) What are the objectives of Auditing?
Ans. The objectives of auditing may be classified as under:
Primary Objective- The primary objective of the auditor is to express as opinion
whether the financial statements reflect a true and fair view of the company’s
state of affairs and the correct figure of the profit or loss.

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Secondary Objective- The secondary objectives of auditing are:

(i) Detection and prevention of frauds; and
(ii) Detection and prevention of errors.
Fraud refers to inter nation misrepresentation of financial information. It can
take place in the form of manipulation of accounts, misappropriation of cash,
misappropriation of goods, etc. They occur mainly due to ignorance of
accounting principles or negligence of employees.
Q3) Write a note on principles of Audit
Ans. As per SA 200, the basic principles governing an auditor’s professional
responsibilities are given below-
(i) Integrity, objectivity and independence: An auditor should be a man of high
integrity and objectivity. He should remain honest, impartial and free from bias.
(ii) Confidentiality: An auditor should maintain a high level of confidentiality
and should not disclose the information of his client, acquired by him during
the course of audit to any third party, without the prior permission of the client,
unless there is a legal duty to disclose.
(iii) Skill and competence: An auditor should be competent and skilful, and
acquire the necessary training and experience relevant for discharging his
responsibilities in the best manner.
(iv) Work performed by others: Whether to rely on the work done by others
including experts will depend upon the auditor him- self. Where he relies on
such work, he continues to remain responsible for forming and expressing his
opinion on the financial information.
(v) Documentation: An auditor should document the matters which are
important in providing evidence to ensure that the audit was conducted in
accordance with the basic principles. J
(vi) Planning: An auditor should plan his work so that audit can be done in
effective, efficient and timely manner.
(vii) Audit evidence: The auditor should obtain sufficient evidences to satisfy
himself regarding the authenticity of financial statements.
(viii) Accounting System and Internal Control: Maintaining an ac- counting
system and internal controls in the organisation is the responsibility of the
management. However, the auditor must satisfy himself regarding the
adequacy of the same as per the size and nature of the organisation.
Q4) What are the benefits/advantages of auditing?
Ans. Auditing provides a number of benefits including the following:
1. The financial statements become more reliable and authentic.
2. Safeguards the financial interest of the owners.
3. It acts as a moral check on the employees from committing frauds.

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4. Helps in submitting proper income tax and other returns.

5. Helps in reduction of wastage and losses due to inadequacy of internal
control system.
6. Helps to ensure that financial records are properly maintained.
7. Acts as an overall check on the integrity of the management.
8. Helps in easy availability of loans from various financial institutions.
9. Helps in ensuring that all necessary legal rules and regulation have been
complied with.
10. Helps in securing an unbiased assessment of the entity's operational and
financial results.

Q5) Define the terms Fraud and Error. Give examples of conditions which may
indicate the existence of fraud or errors.
Ans. Fraud refers to intentional misrepresentation of financial information. It
can take place in the form of manipulation of accounts, misappropriation of
cash, misappropriation of goods, etc. Errors refer to unintentional mistake in
the financial information. They occur mainly due to ignorance of accounting
principles or negligence of employees, clerical mistakes, etc.
1. Internal control: Weak internal control may increase the chances of errors
and fraud.
2. Management support: Lack of support from management to rectify weakness
in internal control system promotes fraudulent conduct.
3. Unusual transactions: Transactions with un credit worthy parties, sudden
increase in unnecessary expenses, etc. indicate fraudulent conduct as well.

Q6) What are the different types of errors that can be found while auditing the
accounts of a concern?
Ans. The different types of errors that can be found in the books of accounts
are as follows:
1. Error of Omission: When a transaction is omitted from being recorded
in the books of accounts, it is called error of omission.
2. Error of Commission: When a transaction is erroneously recorded, it is
called Error of commission.
(a) Recording with wrong amount
(b) Posting on wrong side
(c) Posting in wrong account
3. Error of Principle: When a transaction is recorded in contravention to
any accounting principle, it is called error of principle. This type of
error does not affect the Trial Balance. For example, installation
expenses of a machine is wrongly debited to revenue account instead
of machine account.

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4. Compensating Error: When the effect of one error gets balanced by

the effect of other errors, they are called Compensating Errors. These
errors do not affect trial balance and hence, are difficult to detect.
Q7) “Fraud does not necessarily involve misappropriation of cash or goods”-
comment
Ans. Fraud refers to intentional misrepresentation of financial information. It
includes not only misappropriation of cash or goods, but a lot of there things.
SA 240, deals with "The Auditor's Responsibilities Relating to Fraud in an Audit
of Financial Statements". Apart from frauds involving misappropriation of cash
or goods, there can be fraudulent financial reporting as well.
Fraudulent Financial Reporting involves manipulation of accounts. It involves:

 Omission or understatement of income to evade taxes

 Fake expenses or overbilling of expenses for reducing profit
 Overstatement of profit to earn more commission in case of profit
linked commission
 Overstatement of profit for better value in case business is to sold
It is generally done by internal staff of the business and involves alteration of
accounting data, records, etc. For investigating the cases of manipulation of
accounts, the following steps may be taken by the auditor: Ensure detailed
checking of purchases and sales.

 Ensure that no fictitious expenditure is included in Profit and Loss

Account.
 Ensure that all incomes are genuine and properly recorded.
 Ensure that revenue and capital expenditure are correctly
assessed.
 Check the methods of valuation of closing stock.
 Check if the same accounting principles are followed every year.
 Check that consistent rate of depreciation is applied every year.
Check the transactions involving bigger amounts in detail.
 Check past year data and trends.
Q8) Auditors are not Accountants. Discuss.
Ans.

Points Accountant Auditor

Definition Accountant is a Auditor is an
permanent Auditor is Independent person
an independent engaged in
employee of the verification and
company engaged in examination books of
preparation and accounts.
maintenance of books
of accounts

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Qualification No qualification is Auditor is usually a

prescribed under any Chartered
law for working as an Accountant.
accountant.
Employee Accountant is a paid Auditor is an
employee of the independent person
organisation and not a paid
employee
Scope It is concerned with It is concerned with
the preparation and the examination and
finalization of verification of
accounts accounts
Span of appointment Accountant is usually Auditor may be
appointed for a long appointed for a
time in the certain time period
organization
Knowledge Knowledge of audit is Knowledge of
not required accounts is required
Working It is done throughout It is usually done after
the year the end of financial
year
Type of Work Work of accountant is Work of auditor is
constructive in nature analytical in nature
Report No need to submit any Auditors need to
report to the owners submit report on
audit to the owners

Q9) Auditors are not blood-hounds. Do you agree? Or "Detection and

prevention of errors and frauds are the main objects of Auditing". Discuss.
Ans. As held in the case of The Kingston Cotton Mills Co. Ltd. (1896) an auditor
is a watch-dog, not a blood-hound. He is required to express an opinion on
whether the financial statements reflect a true and fair picture of the state of
affairs and position of profit or loss of the organization. However, he must
perform his duty with reasonable care and skill and he need not become a
detective or look upon his client with suspicious. The auditor is entrusted with
the responsibility of protecting the interests of the owners. However, he must
act as a watch-dog and believe that the books of accounts and other records,
statements, etc. which have been made available to him are genuine, rather
that acting as a blood-hound, unless there are some definite reasons to support
his suspicion.
Detection of frauds and errors is not the main object of the auditor. The auditor
shall, for ascertaining the truth and fairness of the financial statements,
examine all the books of accounts, documents, etc. with reasonable skill and
care. He cannot guarantee that the books of accounts show a true picture of
the organization. He is neither an in- surer nor blood-hound, but just acts as a

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watch-dog. However, we know that few errors may not be reflected on the trial
balance and balance sheet
Q10) What do you understand by the term 'Investigation'? What are the
features of investigation?
Ans. Investigation of accounts may be defined as the systematic and in- depth
examination of books of accounts, records, documents, etc. for a specific
purpose. In fact, it is an audit, the scope of which varies with the requirements
of the particular purpose. Investigation is primarily conducted to discover the
required facts in detail so as to enable the interested parties to draw
conclusions and make their decisions accordingly.
Features
 It involves in-depth checking of records.
 It is undertaken for some specific purpose.
 Its scope depends upon requirements of the particular matter.
 It covers both financial and non-financial matters.
 The investigator may also require the concerned officials to appear
before him for personal enquiry.
 No standard or guidelines has been prescribed for conducting
investigation.
 The investigator shall work freely according to his judgement,
logic and wisdom.
 It is usually conducted in cases of utmost emergency or upon order
of Central Government.
 The investigator shall work like a detective with suspicious attitude
and apply his scepticism.
 The investigator shall submit his report and remain account-
able/responsible only to his appointing authority.
Q11) How does Investigation differ with Audit?
Ans.
Point Investigation Audit
Objective For evaluating financial To ascertain whether
and non-financial matters financial statements reflect
for some specific purpose a true and fair view of
financial position and
result of the business
Checking It involves in-depth May involve both in-depth
checking of some selected and sample based
areas checking
Suspicion The investigator is a blood The auditor is only a
hound and looks at watch dog and believes
everything with suspicion everything to be correct
except under special
circumstances

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Period It has no fixed time span It is usually conducted for

and may be conducted for a fixed time span. It is a
any duration. It is not regular exercise
regular but occasional
Interested Party Investigation may be done Audit is conducted on
on behalf of the owners, behalf of the owners and
buyers and central govt. in some cases Central
etc. Govt.
Submission of report The investigator shall The auditor reports to the
report only to his shareholders.
appointing authority

Q12) How would you investigate the following:

(a) Misappropriation of Cash.
(b) Misappropriation of goods
(c) Suspected Fraud
Ans. (a) Misappropriation of Cash
Cash may be misappropriated in any of the following ways:
 Non-recording or short-recording of cash receipts
 Excess recording of expenses
 Showing fictitious payments
For investigating the cases of misappropriation of cash, the following steps may
be taken:

 Examine the efficiency of internal check system implemented for

checking cash collections and disbursements.
 Match the counterfoils of paying-in-slips with entries recorded in
the cash book and pass book.
 Check that all discounts are duly approved and within
organizational policy.
 Confirm personally any old balance of debtors to make sure that
payments made by debtors are recorded in books or not.
 Check that bad debts are written off as per organizational policy.
 Ensure that double payment has not been made against single
item of purchase.
 Check whether any fictitious worker has been included in the
payroll.
(b) Misappropriation of Goods
For investigating the cases of misappropriation of goods, the following steps
may be taken:

 Examine the efficiency of internal check system implemented by

the organization regarding receipt and issue of materials.

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 Ensure that purchases are made only when necessary.

 Compare the purchase order with actual goods received and
purchase invoice.
 Check that samples distributed are within organizational policy.
 Reconcile the statements of goods sent to branches and received
by the branches at regular intervals.
 Ensure that a responsible officer is appointed for taking stock at
regular intervals.
 Check whether there is surplus or shortage of stock.
 Check whether loss of stock is accounted for.

(c) Suspected Fraud

Fraud may take place in the form of misappropriation of cash or goods, or
manipulation of accounts. The investigator may, in respect of the above check
the following matters:
Misappropriation of Cash
Cash may be misappropriated in any of the following ways:
 Non-recording or short-recording of cash receipts
 Excess recording of expenses.
 Showing fictitious payments
For investigating the cases of misappropriation of cash, the following steps may
be taken:

 Examine the efficiency of internal check system implemented

for checking cash collections and disbursements.
 Match the counterfoils of paying-in-slips with entries re- corded
in the cash book and pass book.
 Check that all discounts are duly approved and within
organizational policy.
 Confirm personally any old balance of debtors to make sure
that payments made by debtors are recorded in books or not.
 Check that bad debts are written off as per organizational
policy
 Ensure that double payment has not been made against single
item of purchase.
 Check whether any fictitious worker has been included in the
payroll.

Q13) Briefly discuss the concept of Statutory Audit and Non- Statutory Audit.
Differentiate between the two.

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Ans. Statutory Audit: The audit which is required to be conducted as per the
provisions of any statute or law is called Statutory Audit. Such an audit is
compulsory in nature and the rights, responsibilities, etc., of the auditor is
governed by the provisions laid down in the statute. For example, audit under
Section 139 of the Companies Act, 2013. This is also known as Financial Audit.
Advantages of Statutory Audit: Statutory Audit helps various stakeholders in
the following manner:
(a) Decision making: The stakeholders can use the audited inform decision
making. fion for wise and proper
(b) Timely tax assessment: It helps in timely assessment of income tax return of
the organization.
(c) Purchase consideration: Statutory Audit helps in determining the purchase
consideration in case the business is acquired by any entity.
(d) Financial Assistance: Audited financial statements help in obtaining
financial assistance from banks, financial institutions, investors, etc.
(e) Evaluation of internal control: It also helps in evaluation of the internal
control systems of the organisation.
Non-Statutory Audit: An audit which is not prescribed by any law or statute,
but conducted for fulfilling some definite purpose or interest of any concerned
person is known as Non-Statutory Audit.

Points Statutory Auditor Non-Statutory

Auditor
Legal requirement Required as per law There is no legal
compulsion
Scope of Audit Scope is determined Scope of audit
and fixed under the depends upon the
particular law nature of Audit and
terms of engagement
Appointment Appointed by the Appointed by the
owners interested parties
Qualification Qualification is No hard and fast
prescribed under the qualification is
respective law prescribed
Removal Can be removed only May be removed by
be the owners the appointing
authority
Remuneration Fixed as per provisions Fixed by appointing
of law authority
Rights and duties Specified in the Depends upon
respective law agreement between
the auditor and
appointing authority

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Report Submitted by the Submitted by the

owners/members appointing authority

Q14) What do you understand by periodical audit and continuous audit?

Discuss the differences between the two.
Ans. Continuous Audit: Under this type of audit, the auditor or his assistant
conducts thorough examination of transactions on a continuous basis. The
features/advantages of Continuous Audit are given below:
(a) Continuous: This type of audit process is conducted throughout the year at
regular intervals say monthly, weekly, etc.
(b) Complete Checking: All transactions are verified by the auditor and nothing
is left unchecked.
(c) Less chances of errors: Since everything is checked, the chance of very less.
any error or fraud remaining undetected is
(d) Creates moral pressure: There is always a moral pressure on the
management and accounting staff to work properly or else their mistakes may
get caught.

Periodical Audit: This type of audit begins after the books of ac- counts have
been closed at the end of a particular financial or accounting period and
continues until completion of the audit work.
Advantages of Periodical Audit :
(a) Less time consuming: Periodical audit is conducted once in a year. So, the
auditor has to devote less time for conducting the audit work.
(b) Economical: Since auditor has to devote less time, he may not charge high
fees for conducting audit.
(c) No alteration of records: Since complete checking is conducted only after
completion of the accounting period, chances of alteration of the books of
accounts, which have already been checked. by the auditor, are very less.

Points Continuous Audit Periodical Audit

Nature It covers through May cover through the
checking of records checking
Corrective actions Since detailed checking Applications of
is done throughout the corrective actions get
year, corrective actions delayed
can be taken at an early
stage
Suitability Necessary mainly for Necessary for all types
large organizations of organization

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Relationship with the Company develops a No close relation is

auditor close relation with the developed between the
auditor company and the
auditor
Expenses It is a costly affair It is less costly in
comparison
Preparation of final Final report is prepared It takes more time to
report quickly after the end of prepare the final report
the financial year
Reliability It is more reliable as Chances of errors
detailed checking is cannot be ruled out
done

Q15) Explain the concepts of Interim Audit and Final Audit.

Ans. Final Audit: This type of audit is conducted after the preparation and
finalization of books of accounts after the end of the financial year. It covers
checking of transactions for the entire accounting period.
Advantages of Final Audit:
(a) Less time consuming: Final audit is conducted once in a year. So, the auditor
has to devote less time for conducting the audit work.
(b) Economical: Since auditor has to devote less time, he may not charge high
fees for conducting audit.

Demerits of Final Audit:

(a) Incomplete Checking: Due to lack of time, there will always re- main a
possibility that few transactions are not verified by the auditor and left
unchecked.
(b) Chances of errors: Since checking has to be completed within a short span
of time, the chance of any error or fraud remaining undetected cannot be ruled
out.

Interim Audit: An audit which is conducted in between two annual audits is

called interim audit. It may be carried out for the following reasons:
 To determine the sales, profitability, etc. of a certain period say 3
months, 6 months, etc.
 For declaration of interim dividend For early completion of final
audit.
 For settlement of accounts in case of admission, retirement or
death of any partner
Advantages of Interim Audit

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 Early detection of errors: It helps to detect and prevent errors and

frauds at an early stage.
 Creates moral pressure: There is always a moral pressure on the
management and accounting staff to work properly or else their
mistakes may get caught.
 Reliable: Since transactions are checked in more detail by the
auditor, the report becomes more reliable
Demerits of Interim Audit
(a) Alteration of records: The records and figures in the books of
accounts, which have already been checked by the auditor, may be
altered after the audit is over.
(b) Inconvenience: Frequent visits made by the auditor may cause
inconvenience to employees at work.
(c) Repetition: Since same job is done by the audit staff more than
once, it also causes repetition of work.
(d) Costly: Since auditor has to check huge number of transactions
and devote more time, they may charge high fees for conducting such
audit.
Q16) What do you understand by EDP Audit or Audit in Computerised
Information System (CIS) environment? Discuss its problems.
Ans. EDP stands for Electronic Data Processing. In case, accounting and other
financial information is maintained by an organization in computers, the
auditor needs to check a number of aspects in addition to normal audit
procedures
 Quick: In CIS environment, data processing is very quick, which
enables the auditor to complete his work within time.
 Multiple works: One computer program can handle a lot of
activities at a single point of time, which reduces various filters and
requirement of a lot of employees
 Accuracy: The chances of calculation and clerical errors will be
negligible.
 Reliable: Since transactions in CIS environment are automated, this
increases reliability of the results produced by it.
 Easy exception reporting Computerised operations make
exception reporting very easy and fast.
Problems of EDP Audit .

 If system does not perform efficiently, it may have an adverse

impact on the business operations.
 Sophisticated computer frauds become difficult to trace out.

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 Lesser people are required to perform the functions, so

authority may be abused.
 Data may be at risk due to online frauds, hacking, etc.
Q17) Discuss Special Audit.
Ans. The Central Government may, if it has reasons to believe that the affairs of
the Company are not being managed in accordance with sound business
practices or the Company is being managed in a manner which is likely to cause
damage to the business community or society or the financial position of the
Company is the chance of such, which might endanger its solvency, order for
conducting an audit of such Company. It is known as special audit.
Few important aspects of special audit are given below:
 The Central Government may appoint either the Company's
auditor or any other Chartered Accountant, whether having
certificate of practice or not, to conduct the special audit
 The Special auditor has the same powers, rights and
responsibilities as the statutory auditor
 The auditor shall submit its report to the Central Government
 The remuneration is fixed by the Central Government but it is
payable by the Company

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CHAPTER – 2. AUDIT PROCDURURES AND TECHNIQUES

Q1) Write a note on Audit Engagement.

Ans. In case of statutory and compulsory audit, the scope and nature of the
audit is governed by respective law or authority. However, in all other cases,
the terms of appointment are mutually decided between the auditor and client.
Both, the client and the auditor brings forward their terms and conditions and
discuss what is expected of each other. On the basis of the mutually agreed
terms, the auditor and the client sign an agreement to avoid any future
misunderstanding. For example, the client may be under an impression that the
auditor is visible for both preparing and auditing the financial statements,
whereas the auditor may think otherwise. Hence, to avoid any dispute, the
auditor and the client shall define the exact scope of audit before- hand and
reduce the same in writing.
following details should be specified in audit
 The objective and scope of audit;
 The responsibilities of the auditor;
 The responsibilities of the management;
 Form and content of report; etc.
 Restriction of auditor's liability engagement letter
 Computation of audit fees and other charges.
Importance of Audit Engagement Letter
 Needed only when audit is not statutorily required.
 Eliminates misunderstanding in future.
 Properly defines the scope and nature of audit.
 Helps in control and supervision of audit work.
 Helps in smooth flow of work
Q2) What are the considerations to be kept in mind by an auditor before
commencement of audit?
Ans. Before commencement of audit, the auditor must follow the given
procedure

 Appointment letter: First of all the auditor should receive the letter
of his appointment and verify the contents of the same
 Previous auditor: The auditor should communicate with the
various auditor to ascertain the reason of not getting re-
appointed.
 Acceptance and intimation of appointment: The auditor shall then
accept the appointment and inform the organization.
 Scope of audit work: Next, the auditor should determine the
nature and scope of audit.

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 Nature of organisation: The auditor should gather an idea about

the nature of organisation for smooth completion of audit work.
 Preliminary checking: The auditor should verify the important
documents such as Memorandum of Association, Articles of
Association, Partnership deed, etc. for getting an idea of the
client's constitution and policies.
 Books of accounts and records: The auditor should provide a list of
books of account and records to the management for his
verification purposes.
 Methods of maintaining accounts: The auditor should understand
the method of maintaining books of accounts, followed by the
organization for better planning of the audit.
 Previous year data: The auditor should then study the previous
years' accounts and auditors' report to see if any qualification,
reservation, etc. was made by the previous auditor.
 Timing: Based on above, the auditor should plan the timing and
staff required to complete the audit work.
 Audit programme: The auditor should then prepare an audit
programme and inform the client regarding the date of his visit.
Q3) What is Audit Programme? What are its advantages and disadvantages.
Ans. An audit programme may be defined as a detailed plan of the auditing
work to be performed. It helps the auditor to chalk out as to what work will be
done by which audit staff, how the work will be done and the expected time by
which the work is to be completed.
Advantages of Audit Programme:
(a) Division of work: Work is distributed among the audit team in an
orderly manner keeping in mind the qualification, experience and
efficiency of each member of the audit team.
(b) Clarity: All the audit staff remain well aware of their duties in advance
which increases clarity.
(c) Complete checking: Since everything is properly planned, no portion
of the work is left unchecked.
(d) Convenient: Division of work is done in such a way that even if
someone is absent, work goes on.
(e) Progress report: The auditor can always have a real time progress of
the work done by his assistants.
(f) Time saving: Since everyone know their jobs in advance, work can be
started immediately without any delay.
(g) Increases responsibility: In case, any aspect remains unchecked, the
responsible person can be easily identified.

Disadvantages/Limitations of Audit Programme:

(a) Suitability: Audit programme is not suitable for small concerns.

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(b) Inflexible: Once prepared and followed, it becomes difficult to change

the programme. (c) No motivation: Assistants are required to blindly
follow the programme and they cannot offer any suggestions, Hence,
they do not feel motivated to take that extra step of effort.
(d) Incomplete: Even if care is taken, it is very difficult to cover each and
every aspect of audit work in programme

Q4) What are Audit Working Papers? What are its advantages? Dis- cuss briefly
about preservation of Audit Working Papers by the Auditor.
Ans. SA 230 on 'Audit Documentation' deals with the 'working papers'. Audit
working papers are the written documents prepared or obtained by the auditor
in the course of audit. They contain the important workings, audit conclusions
and a summary of all other important matters identified and considered by the
auditor while forming his opinion

(a) Completion of work: The assistants usually prepare working

papers of work done by them. By verifying the same, the auditor can
easily understand the level of work completed by the assistants.
(b) Evaluation of audit staff: On the basis of working papers prepared
by the audit staff, the auditor can easily verify whether they are
efficient.
(c) Carrying out of directions: The auditor can also assess whether the
assistants have carried out his directions.
(d) Time Saving: Since information is readily available through
working papers, it helps the auditor to prepare his report without any
delay.
(e) Proof of evidence: If any charge is made against the auditor, he
can use the working papers as evidence.
(f) Smooth conduct of work: Even if any assistant is absent, work will
go on in normal flow.
(g) Basis for planning of subsequent audit: It may serve as a useful
basis for planning the audit of subsequent years thereby saving time
and labour.

Contents of Working Papers

 The nature of client's business.
 The nature of audit engagement.
 Extent of availability of client's records.
 Adequacy of internal controls.
 The audit plan.
 The nature, timing and extent of auditing procedures
performed by the auditor.
 Audit evidence obtained by the auditor.
Ownership and custody of Working Papers

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Working papers are the property of the auditor. The auditor may,
at his discretion, allow the client to take the portions or extracts of
the working papers. These working papers should be preserved by
the auditor in confidential custody for such time as is sufficient to
meet the requirements of his practice or to satisfy any related legal
or professional requirement of record retention
Q4) What is Audit File? current audit file? What are the contents of permanent
and current Audit file?
Ans. He file in which the auditor keeps the various audit related papers and
records is known as audit file. Audit file can be classified into the following two
heads:
(i) Permanent Audit File: It contains such working papers which are of
continuing importance in nature. A permanent audit file normally
includes:

(a) Memorandum and Articles of Association, Partnership Deed,

etc. of the organization.
(b) Copies of important legal documents, agreements, etc.
(c) Copy of initial letter of appointment.
(d) Analysis of internal controls related to the accounting system.
(e) Copies of financial statements of earlier years.
(f) Correspondence with the retiring auditor.
(g) No Objection received from previous auditor.
(h) Analysis of accounting ratios.
(i) Summary of accounting policies.
(j) Observations of previous audits.

ii) Current audit file: It mainly contains information relating to the audit of
current period. A current audit file normally includes:

(a) Letters of annual re-appointment.

(b) Extract of important matters in the minutes of Board Meetings
concerning the audit.
(c) Extract of important matters in the minutes of General
Meetings concerning the audit.
(d) A record of procedures followed for conducting the audit.
(e) A record of supervision of the work performed by assistants.
(f) Correspondence with internal auditor.
(g) Financial statements and audit report of the current period.
(h) Analysis of ledgers and unusual transactions.
Q5) What is Audit note book? What are its contents and advantages?
Ans. While conducting audit, the auditor maintains a note book and record in
it, all the important matters which he has to discuss with the client. t is known

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as audit note book. The auditor might have certain double his mind, which he
may forget due to workload. Further, the client is not always readily available
to clarify the doubts of the auditor Hence, instead of disturbing the client every
now and then, the auditor may note down everything in the note book and
clarify the mat tears whenever the client is free.
Contents of Audit Note Book
 Nature of client's business.
 Record of missing vouchers.
 Matters requiring clarification.
 Working notes prepared while auditing.
 Record of errors and frauds.
 Accounting methods and procedures followed by the client.
 Communication with previous auditor.
 List of accounts maintained by the client.
 Any other matter that may be necessary for preparation of report.
Advantages of Audit Note Book
(a) Clarification of doubts: Instead of disturbing the client on daily
basis, the auditor can sit and clarify the all doubts at a single meeting
(b) Helps in preparation of report: Material information is readily
available in audit note book. Further, it increases the chances that
nothing is omitted. Hence, it helps in preparation of report.
(c) Control: The auditor can check the progress of work and take
necessary actions as and when required.
d) Planning: It may serve as a useful basis for planning the future
audit thereby saving time and labour.
Q6) Write a short note on Audit Memorandum
Ans. An audit memorandum may be defined as a document containing vital
information relating to client's business. It covers audit manual, audit
programme, audit file, etc. and can be of great help to the auditor while
conducting the audit. It shall be prepared very carefully, covering all the
important areas of the client, If required, necessary changes can be made. An
audit memorandum may contain the following information:

 A brief history of the client.

 Addresses of various offices, branches, plants, etc.
 Details of owners or persons in control of the client.
 Details of responsible officers and their roles.
 Details of holding and subsidiary units, if any, of the client.
 Details of assets and net worth of the client.
 List of books of account maintained by the client.
 Nature and size of internal control systems.
 Significant accounting policies of the client.

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Q7) What is Audit evidence? What are its advantages?

Ans. The records, documents and information obtained by the auditor during
the course of audit, on the basis of which, he draws his conclusion and
expresses audit opinion, is known as audit evidence. As per SA 500, an auditor
should obtain sufficient and appropriate audit evidence in support of his
conclusions. Simply stated, the auditor must collect enough evidence to express
an honest opinion on the financial statements.
Need for Audit Evidence
Audit Evidence is required for the following reasons:
(a) Existence: To ascertain whether an asset or liability exist on a certain
date.
(b) Occurrence: To ensure whether a transaction took place during the
relevant period.
(c) Valuation: To ascertain whether an asset or liability is fairly valued.
(d) Right and Obligation: To ensure that an asset is a right and a liability
is an obligation of the business at a given date.
Advantages of Audit Evidence
a) Planning: It may serve as a useful basis for planning the future audit
thereby saving time and labour.
(b) Proof of evidence: If any charge is made against the auditor in future,
audit note book can serve as an important evidence as to what work was
done by him or his assistants.
(c) Basis of opinion: It helps the auditor to form his opinion on the
financial statements.
Q8) What is Test Checking? When it should be done? What factors should be
considered before resorting to test checking What are the advantages and
disadvantages of Test Checking. Discuss the duty of auditor in this connection.
Or, Test Checking is based on presumption. What is that presumption?
Or, What precautionary steps are required to be taken if test checking
procedure is adopted?
Ans. Test Checking may be defined as the process of auditing where the
auditor examines a few transactions out of large number of similar
transactions. In other words, under test checking, the auditor checks less than
100% of the total records. It is believed that checking of the selected
transactions will lead the auditor to the same conclusion a he would derive
after detailed checking.
Need of test checking
Test Checking should be done in following circumstances:

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1. Large number of transactions: Due to large number of transactions,

the auditor may not be able to complete his audit, if he checks each and
every transaction in detail.
2. Objective of audit: The main objective of audit is not to detect errors
and frauds, but to express an opinion regarding truth and fairness of
financial statements. Hence, the auditor may choose to undertake test
checking to determine the degree of authenticity of financial statements.
3. Internal control system: In case, internal control and internal check
systems are adequate, the auditor can rely on test checking.
4. Computerised accounting system: In computerised accounting system,
all castings, carry forward, etc., are done automatically by the computer.
The auditor can, therefore, undertake test checking to satisfy himself
about the reliability of computer system.
Factors to be considered for Test Checking
While determining the extent of Test Checking, the auditor should keep
in mind the following precautions:
(a) Sampling risk: If there is a risk that the actual result will differ from the
results derived out of Test Checking, the auditor will conduct thorough
checking.
(b) Tolerable Error: If the auditor expects that there might be difference
in the actual results, if thorough checking was done, with the results
derived out of Test Checking, and that such differences are within his
tolerable limits, he will go with Test Checking. However, if auditor cannot
tolerate any error, he will con- duct thorough checking.
(c) Expected Error. If the auditor expects that there will be lot of
differences in the results derived out of Test Checking and actual results,
if detailed checking was conducted, he will check more items Similarly if
he expects less errors, sample size will be small.
(d) Nature of transactions: In case transactions are of repetitive nature,
the auditor may select a small sample for checking. However, the sample
size will be large if transactions are of divergent nature.
e) Internal control system: In case internal control system is adequate,
there will less chance of errors and frauds. Hence, auditor can select a
small size of transactions for test checking and vice versa.
(f) Materiality of the transaction: If the item under question is such that
any misstatement would affect the decision of the user of financial
statement, the auditor will conduct detailed checking.
(g) No bias: Sample should be selected in such a way that entire
population of transactions get covered. There should be no bias while
selecting sample.
(h) Non-involvement of client: Effort shall be made that client is not
involved while planning for selection of samples.
(i) Detailed Checking of certain items: All entries of Cash book and pass
book should be checked thoroughly.

Importance/Advantages of Test Checking

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(a) Reduced workload of auditor: Each and every transaction is not

required to be checked, hence, work load of auditor reduces
(b) Evaluation of internal control: Test Checking can be applied
effectively only if the internal control system is strong. Hence, it helps in
taking prompt actions for improving internal control if there is any
lacuna.
(c) Saves time: It helps in saving time and energy of the auditor.
(d) Focus on important areas: Since each transaction is not checked. "the
auditor can focus on more important matters in detail.
(e) Completion of audit within time: Since number of transactions to be
checked is less, audit gets over within time and as per schedule.
Disadvantages of Test Checking
(a) Risk of incomplete checking: There is always a risk that few items of
importance might get avoided and not considered.
(b) Improper selection: Test Checking will be of no use if transactions are
not properly selected.
(c) Fraud in less important areas: Since detailed checking is conducted for
important items, the accountant may develop a habit of committing
fraud in less important areas.
Methods of Selection of Sample
1) Simple random sampling: Under this method, sampling is based on
the entire population of transactions involving sales, purchase, etc.
This method is appropriate only when the range of population is not
diverse.e.it may be applied if all transactions are between 1,000 to
2,000 but not if between 100 to 250,000.
2) Stratified sampling: Under this method, the entire population of Each
group transactions is divided into several smaller groups. Each group
is called a strata and treated as a separate range. Samples are selected
from each range.
3) Systematic sampling: Under this method of sampling, a particular gap
between transactions is selected by the auditor for checking.
examining every 10th voucher. It is also called interval sampling.
4) Block sampling: Under this method, the auditor selects a continuous
block of transactions for sampling, e.g. the first 50 vouchers or the last
50 vouchers in every month.
5) Cluster sampling: Here, the total population is divided into several
smaller groups called clusters. A few clusters are then randomly
selected for sampling.
6) Haphazard selection: When the auditor arbitrarily selects the samples
without any scientific basis, it is called haphazard selection
Q9) What is audit in depth? Discuss advantages and disadvantage of audit in
depth.
Ans. Audit in depth, as the name implies, means extensive examination of any
transaction from its origin till end. Under this technique, few transactions are

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selected by the auditor, and all aspects relating to those transactions, including
validity, arithmetical accuracy, accounting treatment, etc. are checked in detail.
Advantages of In-depth Audit
(a) Reduced workload of auditor. Each and every transaction is not
required to be checked, hence, work load of auditor reduces.
(b) Saves time: It helps in saving time and energy of the auditor
(c)Focus on important areas: Since each transaction is not checked, the
auditor can focus on more important matters in detail.
(d) Completion of audit within time: Since number of transactions to be
checked is less, audit gets over within time and as per schedule.
(e) Low Cost: Since number of transactions to be checked by the auditor
is comparatively less, cost of audit also gets reduced.
(f) Moral Pressure: It creates a moral pressure on the accounts clerk, as
any transaction may be selected for in-depth study.
Disadvantages/Limitations of In-depth Audit
(a) Incomplete: There is always a risk that few items of importance might
get avoided and not considered.
(b) Improper selection: It will be of no use if transactions are not properly
selected.
(c) Redundant audit opinion: In case transactions are not selected
properly, the audit opinion may also become redundant.
(d) Fraud in less important areas: Since detailed checking is conducted
for important items, the accountant may develop a habit of committing
fraud in less important areas.
Q10) What do you mean by Analytical Procedures? What are the various tools
and techniques of Analytical Procedures? How much can the auditor rely on
these procedures?
Ans. Analytical procedure involves study of financial information on the basis
of relationship among various financial and non-financial data, past trends, etc.
As per SA 520 analytical procedure can be conducted with the help of
following tools and techniques:
1) Trend Analysis: Under this technique, analysis is done on the basis of
past trends, usually two to three years.
2) Testing of Reasonableness: Reasonableness testing is done by
reviewing the relationship between two or more variables. e.g. ratio
of raw materials consumed to finished goods produced, wastage to
raw materials consumed, etc.
3) Ratio Analysis: Under this technique, financial ratios are analysed.
e.g., Gross Profit Ratio, Net Profit Ratio, Debt Equity Ratio, Liquidity
Ratio etc.
4) Sources of Information: Various sources of information such as
budgets, government policy, board minutes, etc. may be used for
analytical review.

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5) Common size Analysis: Under this system, each item of balance sheet
is reviewed as a percentage of total assets and each item of the
income statement is reviewed as a percentage of total sales
Extent of reliance on analytical procedures
The reliability of analytical procedures depends upon several factors,
which are given below:
(a) External Sources: Analytical procedures will be more reliable when it
is based on information obtained from external sources.
(b) Materiality: Analytical procedures will be less reliable if items to be
checked are material in nature.
(c) Comparability: Analytical review will be more reliable if data of
competitors can be compared.
(d) Predictability: Analytical review will be more reliable, if financial data
is predictable.
(e) Logical Information: If the information which is to be compared is
logical, analytical review will be more reliable.
Q11) Write a note on Cut off examination.
Ans. Business transactions continuously take place in an organization
throughout the year. It may so happen that due to inadvertence, transactions
of one period get recorded in another period. Hence, effort should be made to
ensure that there is a clear demarcation be- tween transactions of two
accounting periods.
Objectives

 To ensure that the transactions of a particular period have been

recorded in that year only.
 To check if the principle of consistency is followed or not.
 To check if outstanding and prepaid items are recorded correctly.
 To check the correctness of amounts accrued.
Q12) What are the steps for conducting the audit of an Education
Institution/School/College?
Ans. While conducting the audit of an Educational Institution, an audit shall
check the following:
Preliminary matters:
 Study the Memorandum of Association, Trust Deed and other
Rules and Regulations.
 Study the adequacy of internal control systems implemented.
 Study the minutes of the meetings of the governing body.
 Study the method of maintaining accounts.

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Income:

 Check the donations and grants received.

 Check admission forms and admission fee receipts.
 Check the class registers and fee registers
 Compare counterfoils of fee book with the fee register.
 Check whether doubtful fees have been written off as per rules.
 Check whether collection of late fine has been accounted for.
 Check whether interest and dividends received are properly
accounted for.
 Check the rent received for premises let out by the Institution
along with Rent Agreements.
Expenditure: .

 Check whether all salaries and allowances are paid as per

terms of appointment.
 Check whether provident fund, pension fund, tax is required to
be deducted from the salaries.
 Check whether the deductions made regarding above are
deposited into Government Accounts on time.
Assets and Liabilities:
 Conduct physical verification of Fixed Assets.
 Conduct physical verification of stock-in-hand.
 Check the investments register and conduct physical verification of
the investment certificates.
 Check whether depreciation is properly provided for.
 Check the secured and unsecured loans with loan statements.
 Check Loan Agreements, Charge documents, etc.
 Check the balances of Debtors and Creditors.
 Conduct physical verification of cash in hand. Check the Bank
Reconciliation Statement.
Q13) What are the steps involved in conducting audit of Hospital/Nursing
Home?
Ans. While conducting the audit of a Hospital/Nursing Home, an auditor shall
check the following:
Preliminary matters:
 Study the memorandum of Association, Trust deed and other Rules
and regulations.
 Study the adequacy of internal control systems implemented
 Study the minutes of the meetings of govt. body
 Study the methods of maintaining accounts.
Income:

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 Check the donations and grants received

 Check the fee received from patients with the fee register
 Check if any free bad facility is in place
 Check the reimbursement for Mediclaim from Insurance
Companies.
 Check whether interest and dividends received are properly
accounted for.
 Check the rent received for premises let out by the
Hospital/Nursing Home along with Rent Agreements.
Expenditure:

 Check whether all salaries and allowances are paid as per terms of
appointment.
 Check whether provident fund, pension fund, tax is required to be
deducted from the salaries.
 Check whether the deductions made regarding above are
deposited into Government Accounts on time.
 Check whether administrative expenses like maintenance,
electricity, etc., are properly accounted for.
Assets:
 Conduct physical verification of Fixed Assets.
 Conduct physical verification of stock of medicines.
 Conduct physical verification of medical equipment.
 Check the investments register and conduct physical verification of
the investment certificates.
 Check whether depreciation is properly provided for.
 Check the secured and unsecured loans with loan statements.
 Check Loan Agreements, Charge documents, etc.

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CHAPTER – 3. AUDIT RISK AND INTERNAL CONTROL SYSTEM

Q1) What is Internal Check System? What are its objectives? Or "In a good
system of Internal Check the work of an employee is checked indirectly by the
work of another" - Discuss the statement.
Ans. Internal check is a system of division of work and allocation of
responsibility, whereby the work of one employee is checked continuously by
another. It is the system of distributing the total work of the organization
amongst the various employees in such a manner that work done by one
person gets automatically checked by another person. Internal check system
ensures that no work of the organization is left completely under the absolute
control of one single person. It also discourages fraud and collusion among
employees by creating a moral fear of getting caught in their minds.
Objectives of Internal Check System
The main objectives of internal check system are:
(a) Smooth Flow of Work: Internal check aims at distributing the total
work among the employees in a systematic manner for ensuring
smooth flow of work
(b) Early detection of frauds and errors: Internal check tries to detect and
prevent frauds and errors, if any committed, at an early stage. within
(c) Recording of transactions: Internal check ensures that all transactions
have been properly recorded and nothing is omitted.
(d) Improve the design of accounting system: Internal check, through its
systematic application, also improves the design of accounting system
of the organization.
(e) Reliability of accounts: Since transactions are automatically checked,
internal check reduces the chances of errors and frauds and hence,
make the accounts more reliable.
(f) Moral Pressure: Internal check creates a moral pressure over the
employees for working diligently and hence discourages any fraud.
Q2) What are the provisions of Companies Act, 2013 regarding appointment of
Internal Auditor? Is it compulsory for every company?
Ans. The provisions relating to Internal Audit are contained in the Section 138
of Companies Act, 2013 and Companies (Accounts) Rules, 2014. As per the said
provisions, the internal auditor shall either be a chartered accountant whether
engaged in practice or not or a cost accountant, or such other professional as
may be decided by the Board to conduct internal audit of the functions and
activities of the company. The report of internal audit shall be submitted to the
Board of the company.
The following class of companies shall be required to appoint an internal
auditor or a firm of internal auditors, namely:-
(a) every listed company;

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(b) every unlisted public company having-

 paid up share capital of fifty crore rupees or more during the

preceding financial year; or
 turnover of two hundred crore rupees or more during the
preceding financial year; or
 outstanding loans or borrowings from banks or public financial
institutions exceeding one hundred crore rupees or more" at any
point of time during the preceding financial year; or outstanding
deposits of twentyfive crore rupees or more at any point of time
during the preceding financial year
(c) every private company having-
 turnover of two hundred crore rupees or more during the
preceding financial year; or
 outstanding loans or borrowings from banks or public financial
institutions exceeding one hundred crore rupees or more at any
point of time during the preceding financial year
Q3) Can a statutory auditor rely on the work of internal auditor?
Ans. A good system of internal audit can be of great help to the statutory
auditor, and the audit may get completed within a reasonable time. On the
basis of internal audit, the statutory auditor can do away with detailed
checking of records. However, as a basic principle and as per SA 610, the
auditor shall check the effectiveness of the internal audit by conducting
necessary test checks, and shall rely on it only at his own risk. Just because
internal audit is done, it does not reduce the responsibility of the statutory
auditor and he shall continue to remain liable in case any fraud or error is
discovered. he should undertake a study of the internal audit system, but
whether to rely on the work of the internal auditor or not will depend
completely upon his own judgement and risk.
Q4) Differentiate between Internal Check and Internal Audit year; and Or
"Internal Audit cannot replace internal check" - Comment.
Ans.
Basis Internal Check Internal Audit
Definition Allocation of duties in It is It is independent and
an independent an continuous appraisal and
effective manner so that examination of books of
work of one individual is accounts, records, etc.
automatically checked by
others
Nature It is an inbuilt system and Does not take place
works automatically automatically

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Time Conducted while Conducted after work has been

transactions are taking done
place
Results Detects and prevents Detects and prevents frauds
frauds and errors instantly. and errors after work has been
done
Separate No separate staff is Separate department is to be
space required created
Qualifications No special knowledge is Specialized knowledge may be
required required
Reporting Report given to Report sent to top
department head management.

Q5) Differentiate between Internal control and Internal Audit

Ans.
Basis Internal Control Internal Audit
Definition It is the whole system of control It is an independent
implemented by an organization for and continuous
smooth running of the business, appraisal and
safeguarding of assets and examination of books
reliability and accuracy of financial of accounts, records,
records etc.
Scope It encompasses the entire Specific areas as per
accounting and administrative direction of top
areas of the organization management are
reviewed
Responsibility All the employees of each and every Only internal auditor is
department is responsible for responsible
ensuring internal control
Existence It exists throughout the Separate department is
organization there
Extent It is the whole system of control It is a part of internal
control
Reporting Regular reporting to concerned Report sent to top
head departmental management.

Q6) Difference between Internal Control and Internal check

Ans.
Basis Internal Control Internal Check
Definition It is the whole system of Allocation of duties in
control implemented by an effective manner so
an organization for that work of one
smooth running of the individual is
business, safeguarding

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of assets and reliability automatically checked

and accuracy of by others
financial records
Scope It encompasses the Specific areas as per
entire accounting and requirement of top
administrative areas of management are
the organization covered
Responsibility All the employees of Specific employees are
each and every responsible
department is
responsible for ensuring
internal control
Extent It is the whole system of It is a part of internal
control control
Flexibility It may be changed Once adopted, the sys-
anytime as per tem is usually
requirement maintained for a long
time

Q7) What do you understand by Internal Control Questionnaire(ICQ)

Ans. Internal control questionnaire is a document containing series of
questions prepared by the auditor for collecting vital information regarding
existence, operation and efficiency of internal control system organization. The
questionnaire helps the auditor in identifying defects relating to internal
control in different areas including authorizations, documentation, recording of
transactions, etc.
Generally, the questionnaire is framed in such a manner that a 'Yes' indicates a
satisfactory position and a 'No' indicates either deficiency in internal control or
further clarification is required. Irrelevant questions are marked as 'Not
applicable'. On the basis of answers given by the management, the auditor
studies the effectiveness and adequacy of internal control and suggests
improvement measures.
Advantages
 It ensures complete review of internal control systems
 It saves time and is easy to use
 It ensures that no area is remaining unchecked It acts as an
evidence in case any charge is made against the auditor in future.
Disadvantages/Limitations

 A simple Yes or No may not reflect the true picture of efficiency of

internal control.
 If inexperienced staff is engaged in preparing ICQ, they may
incorporate irrelevant questions.
 If ICQ is defective, it will result in wastage of time.

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Sample ICQ of various areas purchase

Questions Yes No N/A Comments
Is there any separate purchase department?
Are purchases made through written
orders?
Are all purchase orders approved?
Is there any file of purchase or desires?
Whether file of purchase orders is properly
secured?
Are copies of purchase orders sent to
accounts, stores and receiving
departments?
The cheque bo oks kept in same custody
Is the signing authority authorised by the
Board?
Are disbursements approved?
Whether counterparts are maintained?
Whether vouchers and invoices are
presented before making payment?
Whether petty cash is maintained?
Whether Bank Reconciliation Statement is
reviewed periodically? Wage

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CHAPTER- 4. VOUCHING VERIFICATION AND VALUATION

Q1) What do you mean by vouching? What are its objectives? Or What are the
principle of vouching?
Ans. Vouching means checking the validity and genuineness of any transaction
recorded in the books of accounts with reference to its documentary evidence
in support of the entries made. In simple words, when the auditor verifies the
accounting entries with supporting documents it is called vouching. It does not
mean just checking of arithmetical accuracy of transactions and matching the
entries with the vouchers, but going into deep and looking if the transaction
and matching the entries with vouchers but going into the deep and looking if
the transactions have actually taken place, Vouchers is not routine checking.
>Objectives of vouching<
Ans. The main objective/principles behind conducting vouching are given
below.
1. Evaluation of evidence:- vouching evaluates the collected evidences and
vouchers and helps in determining the genuineness of transactions
2. complete recording:- vouching ensures that all transactions have been
properly recorded and nothing is left unchecked.
3. Record of business transactions only:- Vouching ensures that entries relating
to only business transactions and no other transactions are recorded in the
books of account.
4. Record of relevant transactions:- Vouching ensures that entries relating to
only the concerned period are recorded in the books of accounts
5. Basis of audit opinion:- Vouching forms the basis of expressing the final
audit opinion by the auditor.

Q2) What are the features of the voucher? State the duties of an auditor in
respect of missing voucher?
Ans. Any documentary evidence which supports the entries in the books of
accounts and also establishes arithmetical accuracy, is called voucher. It can
be in the form of cash memo, sales invoice etc.
 All the voucher should be bear the name of the client
 All the voucher should be properly dated
 All the voucher should be serially number
 One voucher should cover only a single transaction
 Every voucher should be approved by be competent authority
 Relevant documents and evidence like challan invoice and etc. should be
attached at every voucher.
 Every voucher should be clearly written and any correction should be
counter signed by the competent authority

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 Different colour may be used for different types of vouchers.

 Transaction shall relate to only business transaction.

>Duties of an auditor in relation to missing voucher<

A voucher may go missing due to number of reasons such as careless attitude

of clerk in filling lack of awareness regarding statutory requirement to maintain
vouchers, accidental loss due to fire, intention to hide any transaction etc.

*Record in audit note book:- Instead of disturbing the accountant every now
and then the auditor should record the details of missing vouchers in his audit
notebook
*Obtain duplicate voucher:- If the transaction covered by the missing vouchers
are important in nature, duplicate vouchers must be obtained
*Avoid double entry:- Care should be taken to ensure that in case duplicate
voucher is obtained, double entry is not made on the basis of duplicate
voucher.
*Inform top management:- If the transactions are of materials importance, the
auditor should intimate the fact of missing vouchers to the top management.
*Certificate of management:- The auditor shall also obtain a certificate from
the management to the effect that transaction covered by the missing vouchers
were actually made and not fictitious.

Q3) “Verification forms an important part of the whole system of audit”- Discuss.
Or do you think that verification of assets and liabilities is necessary when
vouching has been done properly?

Ans. Verification means enquiry the value ownership, existence possession and
encumbrance on the assets. In other words, the auditor must verify whether:
>Assets and liabilities have been fairly valued.
>The company is the absolute owner of the assets.
>The assets and liabilities are actual and exist in reality.
>The company possesses all the assets.
>Assets are free from encumbrances.
Verification is very important aspect of the auditing exercise undertaken by
auditor. In case, verification is not done, the auditor will not be able to expenses
his opinion regarding the truth and fairness of assets and liabilities appearing in
the balance sheet.
Sometimes it is argued that there is no need of verification when vouching has
been properly done. In this regard, it must be noted that natures of vouching
and verification are completely different. While vouching involves checking the
validity and genuineness of transaction recorded in the books of accounts with

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reference its documentary evidence, verification goes to determine the value,

ownership, existence, possession and encumbrance of the assets shown by the
organizations.
It is clear that even after conducting vouching it is important for the auditor to
verify the assest and liabilities appearing in the balance sheet. In other words,
verification forms important part in the whole system of audit and vouching
cannot replace verification.

Q4) “Verification includes valuation”. Discuss.

Or, “An auditor is not a value, but he is intimately connected with values”-
comment.

Ans. Verification means enquiry into the value, ownership, existence,

possession, and encumbrance on the assets. Whereas, valuation of assets means
determining.
the fair value of the assets shown in the balance sheet on the basis of generally
accepted accounting principles *verification include valuation. However, an
auditor is not a value, though he may be said to be closely related to the value*.
The auditor is required to only verify whether the valuation is fair or need. He
need not value the assets himself. He just need to apply his skills, intelligence,
and judgement and take adequate care to confirm that the value of assets stated
in the balance sheet are genuine. Usually asset are valued by specially qualified
experts. So, the auditor may rely on any certificate given by such experts of
determining the genuineness of valuation of any asset. Through an auditor is
not supposed to possess in depth expertise regarding the valuation of all type of
asset, he must at least take responsible care to verify the same with the records
available. In case the auditor feels that valuation is unfair, he should discuss with
same with management and if required, state the fact in his report. He must
exercise care and skills while verification of assets and in case of failure to
exercise care, the auditor may be held liable for negligence.

Q5) It is often said that it is no part of an auditor’s duty to take stock. Discuss the
statement?
Ans. Verification and valuation of stock-in-trade is very important. If the amount
of stock-in-yrade is not properly taken and valued at the valued at the date of
balance sheet, the profit or loss cannot be correctly determined. While verifying
the stock-in-trade, the auditor must ensure that they are fairly and properly
valued, so that he can express an opinion as to whether the balance sheet of the
organization reflects a true and fair view of its state of affairs. Valuation is the
primary responsibilities of the, management, and the auditor is required to only
verify whether the valuation is not fair or not. He need not value the stock
himself. He just need to apply his skills, intelligence and judgement and take
adequate care to confirm that the values of asset stated in the balance sheet are
genuine. The auditor may rely on any certificate given by the management

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regarding the valuation of the stock-in-trade. However, he must use his

intelligence to verify the same with records available. In case the auditor feels
the valuation is unfair, he should discuss the same with the management and if
required, the state the fact in his report. So, that they even though the auditor is
not required to verify the authenticity of the amount stated in the financial
statements. He must exercise care and skills while verification of assets an in case
of failure to exercise care, the auditor may be held liable for negligence.

Q6) Difference between verification and valuation?

Ans.

Basis Verification valuation

Meaning Verification means Valuation of assets
enquiry the value means determining
ownership, existence the fair value of the
possession and
assets shown in the
encumbrance on the
assets. balance sheet on the
basis of generally
accepted accounting
principles.
Time It is done at end of It is done at during
the year. of the year.
Responsibility It is the responsibility It is the responsibility
of the auditor. of the management.
Object It involves enquiry of It involves only
value ownership determination of fair
existence possession value of assets.
and encumbrance of
assets.
Scope It is wide in scope. It is narrow in scope.
Q7) As an auditor, how will VOUCH the following items:
Ans. Travelling expenses-

 Check whether business travel rules are formulated by management

have been followed.
 Check whether tours have got advance approval of competent
authority.
 In case any limit has been specified for tour expenditure check if the
tour expenses have not been debited to the business accounts.
 Check the necessary invoices with payments
 Check the minute books for board approval, if any.
Direct expenses-

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 Check the total numbers of directors

 Checks the terms of appointment.
 Check the type of remuneration, allowances and perquisites which
directors are entitled
 Check whether director’s remuneration has been separately shown in
the profit and loss account.
 Check whether remuneration exceeds the maximum limit prescribed
under companies act,2013.
 Check the minutes books and attendance register.

Preliminary expenses-

 Check whether the expenses are actually incurred for formation of the
company
 Check whether expenses are expenses are justified.
 Check whether the approval from board or shareholder is obtained.
 Check whether they have been written off as per accounting
standards.
 Check the necessary invoices.

Payment of divided-

 Check the computation of dividend.

 Checks the shareholder register.
 Check whether the relevant provisions of companies act,2013 has been
followed.
 Check the counterfoils of the cheques dispatched to the shareholder.

Q8. As an auditor, how will you VERIFY THE FOLLOWING ITEMS:

ANS. GOODWILL-

 Check the agreement entered into with the company from whom
goodwill is purchased.
 In case of partnership firm, check the partnership deed
 Check whether goodwill is written off properly.
 Check if the goodwill is not written off is properly disclosed in financial
statements.
 Check that the same goodwill is not written off twice.
Patent and copyright (Intellectual Property Rights)-

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 Check expiry date of IPR

 Check the term and condition of IPR.
 Check whether the renewal fees have been paid on time
 Check whether IPR have been shown separately to the market
 Check the certificate of registration granted to the company.

Leasehold land-

 Check the lease deed.

 Check whether the lease is registered
 Check that lease rentals are timely paid and charged to profit and loss
account.
 Conduct physical verification of the property.
 Check whether property is properly insured.
Plant and Machinery-

 Check the plant register containing detailed particulars of various items

of plant & machinery.
 Check the invoice of all plant & machinery purchased during the year/.
 Check the ownership documents of all plant and machinery
 Conduct physical verification of the plant and machinery.
 Check whether P/L on sale of machinery has been accounted for.
Inventory stock-

 Check the stock register.

 Check whether goods purchased but not received have been included
in the stock.
 Check the stock physically.
 Verify the fair value of the stock.
 Verify the level of stock with previous year figures.
Secured loan-

 Check the loan agreement.

 Check whether any asset is mortgaged
 Check whether the terms and conditions of loan have been satisfied.
 Check relevant correspondence with lenders.

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CHAPTER – 5. COMPANY AUDIT

Q1) What is the procedure for appointment of auditors under the companies
Act,2013?
Ans. The provisions for appointment of auditors are contained in section 139 of
the companies act 2013 and companies (audit and auditors) rules,2014. As
per section139, every company shall, at the first annual general meeting,
appoint an individual or a firm as an auditor who shall hold office from the
conclusion of that meeting till the conclusion of its sixth general meeting and
thereafter till the conclusion of every sixth meeting.
The manner and procedure for selection of auditors by the members of the
company, as prescribed in rule3 of the companies (Audit and Auditor)
Rules2014, are given below:
1. In case of a company that is required to constitute an audit committee
under section177, the committee, and, in case where such a committee is
not required to be constituted, the board shall take into consideration
the qualification and experience of the individual or the firm proposed to
be considered for appointment as auditor and whether such qualification
and experience are commensurate with the size and requirements of the
company.
2. The Audit committee or the board, as the case may, may call for such
other information from the proposed auditor as it may deem, fit.
3. Where a company is required to constitute the audit committee, the
committee shall recommendation the name of an individual or a firm as
auditor to the board for consideration and in the other case, the board
shall consider and recommend an individual or a firm as auditor to the
members in the annual general meeting for appointment.
4. If the board agrees with the recommend the appointment of the audit
committee, it shall further recommend the appointment of an individual
or a firm as auditor to the members in the annual general meeting.
5. The auditor appointed in the general meeting shall hold office from the
conclusion of that meeting till the conclusion of the 6th annual general
meeting, with the meeting where in such appointment has been made
being counted as the first meeting
Q2) Briefly explain the procedure for Removal of auditor?
Ans.
 Removal of Auditor:
As per section 140(1) of the companies act 2013, an auditor appointed
under section 139 may be removed from his office before the expiry of
his term only after obtaining previous approval of the central
government and passing a special resolution by the members. The

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application to central government shall be made in the form ADT-2

within 30 days from the date of resolution passed by the board for
removal of auditor. The company shall, them hold a general meeting
within 60 days from the date of receipt of approval from the central
government for passing special resolution.
A special notice shall be required for a resolution at an annual general
meeting for appointment of any person other than a retirement auditor,
as the auditor of the company or providing expressly that the retiring
auditor has completed consecutive tenure of five years or ten years. The
retiring auditor makes any representation in writing to the company and
request the company to notify hid representation to the members of the
company, the company shall, unless the representation is received by it
too late to notify, state the fact of the representation having been made
in any notice of the resolution given to the members of the company.

Q3) What are the qualification and disqualification of auditors as per companies
act 2013? Or, briefly discuss the eligibility criteria for appointment of auditor.
Ans. The eligibility of the criteria for appointment of any individual or firm as
auditor is given in section 141 of the companies (Auditor and auditors) rules,
2014.

Qualification for appointment as auditor:

A person shall eligible for appointment as an auditor of a company only if he

is charted accountant.

A firm can be appointed as an auditor of a company only if majority of its

partner practicing India are qualified for appointed as an auditor of a
company.

Where a firm including an LLP appointed as an auditor of a company only

those partners

who are chartered accountants shall be authorized to act and sign on behalf
of the firm.

Disqualification for appointment as an auditor:

(a) a body corporate other than a limited liability partnership registered under
the limited liability partnership act,2008.

(b) an office or employee of the company;

(c) a person who is a partner or who is in the employment, of an officer or

employee of the company.

(d) a person who, or his relative or partner-

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(i) is holding any security of or interest in the company or its subsidiary or of

its holding or associate company or a subsidiary of holding company.
Provided that the company relative may hold security or interest in the
company of the face value not exceeding rupees one lakhs.

(ii) is indebted to the company, or its subsidiary or its holding or associate

company or a subsidiary of such holding company in excess of rupees five
lakhs.

(iii) has given a guarantee or providing any security in connection with the
indebtedness or any third party/person to the company, or its subsidiary or
its holding or associate company or a subsidiary of such holding company, un
excess of rupees one lakhs.

(iv) a person whose relative is a director or it is in the employment of the

company as a director or key managerial personnel,

(v) a person who has been convicted by a court of an offence involving fraud
and a period of ten years has not elapsed from the date of such conviction.

Q4) How is remuneration of auditors fixed?

Ans. Section 142 of the companies act, 2013 deals with remuneration of
auditors. As per section 142 remuneration of the auditor of a company shall be
fixed in its general meeting or in the manner as determined in the general
meeting. the remuneration of the first auditors appointed by the board maybe
be fixed by the board

In addition of the fee payable to an auditor remuneration shall also include the
expenses, if any incurred by the auditor in connection with the audit of the
company and any facility extended to him but does not include any
remuneration paid to him for any other services rendered by him at the request
of the company.

Q5) What are the powers or right of an auditor under the companies act,2013?
Ans.
(a)Right to access books of account: the auditor shall at all times have a right
to access the books of accounts and vouchers of the company whether kept
at the registered office of the company or at any other place.
(b)Right to obtain information and explanation: the auditor shall be entitled
to require from the officers of the company, such information and
explanation as he may consider necessary for the performance of his duties
as auditors.
(c)Right to inquiry: the auditor shall have the right to, amongst other matters,
inquire into the following.
(d)Whether loans and advance made by the company on the basis of security
have been properly secured and whether the terms on which they have been
made are prejudicial to interests of the company or its, members.

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(e)Transactions of the company which are represented merely by books

entries are prejudicial to the interest of the company.
(f) whether loans and advance made by the company have been shown as
deposits.
(g) whether personal expenses have been charged to revenue account.

Q6) What are the duties of an auditor under the companies Act,2013?

Ans. Section 143 of the companies act, 2013 and rule 11 of the companies (Audit
and Assurance) rules 2014, an auditor has the following duties:

(a) True and fair view: the auditor shall make a report to the members of the
company on whether the financial statements give a true and fair view of
the state of the company affairs as at the end of its financial year and profit
or loss and cash flow for the year.

(b) Information and explanation: the auditor shall report whether he has
sought and obtained all the information and explanations which to the best
of its knowledge and belief were necessary for the purpose of his audit and if
not the details thereof and the effect of such information on the financial
statements.

(c) books of accounts: the auditor shall report whether, in his opinion, proper
books of account as required by law have been kept by the company so far as
appears from his examination of those books and proper returns adequate
for the purpose of his audit have been received from branches not visited by
him.

(d) Branch audit report: the auditor shall specify whether the reports of an
account of any branches office of the company audited by a person other
than himself has been sent to him and the manner in which he has dealt with
it in preparing his report.

(e) financial statement: the auditor shall state whether the company balance
sheet and profit and loss account dealt with in the report are in agreement
with the books of account and return.

(f) accounting standards: The auditors shall report whether in his opinion the
financial statements comply with the accounting standards.

(g) advice effect: the report shall contain the observations or comments of the
auditors on financial transactions or matters which have any adverse effect
on the functioning of the company.

(h) Director’s disqualification: the auditors shall report whether any directors
is disqualified from being appointed as a director under sub section (2) of
section 164.

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Q7) Differentiate between internal auditor and statutory auditor?

Ans.

POINTS INTERNAL AUDITOR STATUTORY AUDITOR

APPOINTMENT APPOINTED BY APPOINTED BY

MANAGEMENT OWNERS/SHARE
HOLDER

QUALIFICATION NO HARD AND FAST QUALIFICATION IS

QUALIFICATION IS UNDER PRESECRIBED
PRESECRIBED UNDER COMPANIES
ACT,2013.

EMPLOYEE MAY OR MAY NOT BE HE IS AN

A PAID EMPLOYEE OF INDEPENDENT
THE ORGANIZATION PERSON AND NOT A
PAID EMPLOYEE

REMOVAL CAN BE REMOVED BY CAN BE REMOVED BY

THE MANAGEMENT THE SHARE HOLDERS

REMUNERATION FIXED BY FIXED BY

MANAGEMENT SHAREHOLDERS

ATTENDENCE HE HAS NO RIGHT TO HE HAS RIGHT TO

ATTEND GENERAL ATTEND GENERAL
MEETING MEETING

INTERNAL CONTROL IT IS A PART IT IS NOT A PART

INTERNAL CONTROL INTERNAL CONTROL

LEGAL IT IS NOT IT IS COMPULSORY

REQUIREMENTS COMPULSORY FOR FOR EVERY
EVERY COMPANY COMPANY

Q8) What is depreciation? What are the purpose of providing depreciation?

What are the factors to be taken into the consideration for measuring the
extent of depreciation?

Ans. Depreciations may be defined as the gradual and permanent decrease in

the value of an asset due to wear and tear obsolescence etc.

 Purpose of providing depreciation

Depreciation on asset is provided for the following purposes:

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(a) for determining cost of production: a portion of the fixed asset gets
expired in the process of production. This expired portion is regarded as
depreciation and must be considered as any other expenses to arrive at
the proper cost of production.

(b) for measuring correct profits: in case depreciation is not charged, the
account of the entity will not cover loss in the value of assets and used
in production and hence, the amount of profit may be misleading

(c) True and fair presentation of balance sheet: in case depreciation is not
charged, balance sheet will show a higher than actual value of the
assets. Hence, depreciation must be properly accounted for.

(d) funds for replacement of asset: depreciation is non cash expenses and
hence results in accumulation of funds. The accumulated fund can itself
provide for replacement of assets and no further capital is required in the
future for the same.

(e) legal requirement: as per section 123 of the companies act, 2013, a
company can declare dividend only after providing for depreciation.

Q9) What are the provisions of companies act 2013, regarding declaration and
payment of dividend?

Ans. The provisions regarding declaration and payment of dividend by a

company are contained in section 123 to 127 of the companies act2013.

Sources of dividend: as per section 123 of the companies act 2013, dividend
can be paid out of the following sources:

 Current year profits after providing for depreciation.

 Past reserves created out of profits brought forward after providing for
depreciation.
 Both current year and passed year profits after providing for
depreciation.
 Money provided by the central government or state government in
pursuance of guarantee given by the government.

Transfer to Reserves: Before declaration of dividend in any financial year,

the company may transfer such profits of the percentage of it profits for
that financial year to reserves, as it may consider appropriate.

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Inadequate or absence of profits: A company may declare dividend out

of accumulated profits earned by it in previous financial years and
transferred to the free reserves.

Utilization of other reserves: no dividend shall be declared or paid by a

company from any of its reserves other than free reserves.

Separate bank account: the company shall deposit the amount of

dividend including interim dividend in a separate account in any
schedule bank within 5days from the date of declaration of dividend.

Time limit for payment: dividend declare by the company shall be paid
with in 30days from the date of declaration of dividend.

Mode of payment: dividend shall be paid by a company only to the

registered shareholders of such share or its share to his order or to his
banker, either through cheque or warrant or in any electronic mode.

Q10) Can dividend be paid out of current profits without making good past
capital losses?

Ans. A capital loss arises when a capital asset is sold at a price lower than the
original purchase price. It is not a regular business activity and non-recurring in
nature.

 Current year profits after providing for depreciation

 Past reserves created out of profit brought forward after providing for
depreciation.
 Both current year and past year profits after providing for depreciation
 Money provided by the central government or state government in
pursuance of guarantee given by that government no company shall
declare any dividend unless carried over previous losses and depreciation
not provided in previous year or years are sett off against profit of the
company for the current year.

Q11) Can divided be paid out of current profit without making good past
revenue losses?

Ans. A revenue loss arises when goods are sold at a price lower than the
original purchase price and other than losses forming part of the regular
business activates of the company act 2013, dividend shall be paid out of the
following sources:

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 Current year profits after providing for depreciations

 Past reserves created out of profit brought forward after providing for
depreciation
 Both current year and past year profit after providing for depreciation
 Money provided by the central government and state government of the
pursuance of guarantee by that government

No company shall declare any dividend unless carried over previous loss
and depreciation not provided in the previous years or years are set of
against profit off the company for the current year. It is clear that
dividend can be paid out of current year profits only after adjustment of
previous year losses and depreciations. Hence, it can be concluded that
past revenue losses should be set off before declaring any dividend.

Q12) Can dividend be paid out of capital?

Ans. As per section 123 of the companies act 2013 a company can pay dividend
only out of the following sources:

 Current year profits after providing for depreciations

 Past reserves created out of profit brought forward after providing for
depreciations
 Both current year and past year profits after providing for depreciations
 Money provided by the central government and state government in
pursuance of guarantee given by the government. Payment of dividend
out of capital shall also be not allowed to protect the interest of creditors
and preference share holder who shall have priority on return of capital
during winding up of company. Hence, we may conclude that no
dividend shall be paid out of capital.

Q13) Can dividend be paid out of capital profits?

Ans. Capital profits refers to profits earned by a company from the sale of its
fixed assets. Further, if the shares and debentures are issued at a

Premium such premium is also called capital profit.as per section 123 of
the companies. Act,2013, accompany can pay dividend only out of the
following sources;

 Current year profits after providing for depreciation;

 Past reserves created out of profit brought forward after providing for
depreciation
 Bot current year and passed year profit after providing for depreciation

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 Money provided by the central government and the state government in

pursuance of guarantee given by that government.

The above does not clearly specify which type of profit and revenue or
capital can be utilized for distribution as dividend. However, we know
that capital profit is not earned in the ordinary course of the business
and are transferred to capital reserve of the company. Hence these are
not free reserves available for distribution as dividend.

Q14) What is unclaimed dividend? How should unclaimed dividend be treated

in the books of accounts? discuss the provision regarding unclaimed dividend
as per companies act 2013?

Ans. The dividend which has been already declared and paid by the company
but not claimed by the share holders is called unclaimed dividend. As per
schedule 3 of the companies act 2013, such dividend shall be shown as unpaid
dividend under the heading’ other current liabilities.

As per section 124 of the companies act 2013, where a dividend has been
declared by a company but not claimed within 30 days from the date of the
declaration by the shareholders entitled to the payment of dividend the
company shall, within 7 days from the date of expiry of the said period of 30
days, transfer the total amount of such unclaimed dividend to a special
accounting in any scheduled bank. Such account shall be called unpaid
dividend account. If the company fells to transfer such unclaimed dividend or
any part thereof to the unpaid dividend account within the prescribe period, it
shall pay, from the date of such default, interest on the amount not be
transferred at the rate of 12% per annum.

Any person claiming to be entitled to any money transfer to the unpaid

dividend account of the company may apply to the company for payment of
the money claimed in case any money transfer to the unpaid dividend account
mains unclaimed for a period of 7years from the date of such transfer, the
amount remaining unclaimed and lying in the unpaid dividend account shall be
transfer by the company along with interest acquired, if any, to investors
education protection fund.

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CHAPTER – 6. AUDIT REPORT AND CERTIFICATE

Q1) What is an audit Report?

Ans. A report is statement of collected and considered facts, so drawn up as to
give clear and concise in formation to person who are not already in
possession of the full fact subjects matter of the report.
Audit report may be defined has the medium through which the auditor
conveys his opinion on whether the financial statement reflect a true and fair
view of the state of affairs and working results of the organization or not. It is
the ultimate end product of audit work. While expressing his opinion on the
financial statements the auditor can also make such reservation or
qualifications as he may deem fit. It must be noted that audit report is just a
means of information and not information in itself.
Q2) What do you understand by auditor’s certificate?
Ans. Auditors certificate may be defined as a document through which the
auditor confirms the accuracy of certain information of correctness of curtained
figure contained in it. It is very specific in nature and does not involve detailed
verification of the books of account of the company. It does not contain any
opinion of the auditor and is usually issued on the basis of documentary
evidence made available to the auditor.
Q3) Differentiate between Auditors report and auditors certificate?
Ans.
Point Auditor report Auditors certificate
Meaning Audit report may be Auditors certificate may be
defined as the medium define as documents
through which the through which the auditor
auditor conveys his confirm the accuracy of
opinion and whether the certain information of
financial statement correctness a certain figure
reflects a true and fair contained in it
view of the state of
affairs and working
results of the
organization or not.
Coverage It cover entire financial It cover certain specific
matter of a counting matter
period
Nature It is concerned with truth It is concerned with
and fairness of financial arithmetical accuracy
statements figures

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Responsibility Auditors shall not be Auditors shall be

responsible for mistake in responsible for mistake in
report if he has exercise certificate.
reasonable skill care
Qualification Report may contain both It contain neither criticism
criticism as well as nor suggestion
suggestion
Time of It is usually submitted It is usually submitted as
submission after end of financial and when required.
year
Vouching It involves vouching of It does not involve
transaction vouching.

Q4) What are the essential features of good audit report?

Ans. the essential features of good audit report are given below

 Simple: the language used in the report should be simple and easy
understandable.
 Logical: the report should be based strictly on logics and rationality.
Reference to any vague concept shall be avoided
 Relevant: the audit report should be disclose as far as predictable all the
relevant information which would otherwise not be known to the users
of the report.
 Brief: the report should be as brief as predictable and to them. Irrelevant
details should be avoided.
 Clear: the auditor should avoid the usage of double meaning words and
keep his reports as his clear as may be possible.
 Factual: the audit report should be based on facts and not only stated
and not assumed by the auditor.
 Qualification: the auditor shall clearly specify qualification if any in his
report.

Q5) Explain the different type of audit report?

Ans. The different type of audit reports are discussed in details below:
(a) Clean report or unqualified report
The report of an auditor which specifies that the financial statements reflect
a true and fair and view of the state of affairs and working results of the
organization without any qualification or reservation is known as clean or
unqualified report.

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 The books of account have disclosed all materials facts relevant to

financial statements
 All the business transaction are recorded correctly in the books of
account
 There are no errors and fraud present in the books of account.
 The books of account have been prepared according to the generally
accepted accounting principles and accounting standards.
Modified report
When the auditor issues any report other than unqualified report it is said to
be modified. A modified. A modified report can be following types:
(b) qualified report
Qualified audit report is one where the opinion of the auditor on the truth
and fairness of financial statements is given subject to certain reservations. The
auditor reservation is shown as subject to the above , we report that the
balance sheet show as a true and fair view. A qualified opinion is expressed
when the impact of any disagreement between the auditor and the
management is not so material that it requires an adverse opinion but still it
need to be disclosed to the users of information.

 Where the auditor is unable to obtain all the necessary information and
explanation, eg, absence of vouchers destruction of books and record by
fire or accident
 Where proper books of account have not been maintained as per law.
 Where the balance sheet and profit and loss account are not in
agreement with the books pf account
 When the rules terms, of memorandum articles etc. have not been
followed
(c)Adverse report
An adverse report or negative report is given when the auditor does not agree
with the financial statements and expenses opinion that the financial
statements do not reflect a true and fair view of the state of affairs and
working results of the organization.
(d)Report with disclaimer
A disclaimer of opinion report is given by the auditor when he is unable to
form an opinion on the overall matters contained in the financial statements.
when the possible impact of a limitation is material and the auditor has not
been to obtained sufficient evidence due to which he is unable to express an
opinion on the financial statements.
(e)Piecemeal report
Sometimes the auditor may find that the financial statements present only a
partial true and fair view and that he may be able to expenses an unqualified

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opinion only foe certain items in such a situation the auditors would give a
piecemeal opinion. The auditor shall clearly specify reasons for giving such
partial report.
Q6) What are the content of audit report as per section 143 of the companies
act 2013?
Ans. As per section 143, and other than provisions of the companies act 2013
and rules made there under, the following information are:

 True and fair view: the auditor shall make a report to members of the
company on whether the financial statements give a true and fair view of
the state if the company affairs as at the end of the financial years and
profit and loss and cash flow for the year.
 Information and explanation: the auditor shall report whether he has
sought and obtained all the information and explanation which to the
best of his knowledge and belief for necessary for the purpose of his
audit.
 Accounting standards : the auditor shall report whether in his opinion
the financial statements comply with the accounting standards
 Adverse effect: the report shall contain the observation or comments of
the auditors an the financial transactions or matter which have any
adverse effect on the functioning of the company.
 Directors disqualification: the auditor shall report whether any directors
any disqualification from being appointed as a director under sub
section(2)of section 164.
 Others matter to be include in auditors report : the auditors report shall
also include their views and comment on following matters.

Q7) Write a note on true and fair view?

Ans.

 The profit and loss and balance sheet: the profit or loss shown in the
profit profit and loss account shows the correct working results and the
value of assets and liabilities appearing in the balance sheet shows the
correct state of affairs of the organization.
 Materials items: the books of account have disclosed all materials fact
relevant to the financial statement and nothing is omitted.

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 Books of account: all the business transaction are recorded correctly in

the books of account
 Errors and fraud : there are no errors and frauds present in the books of
account
 Generally accepted accounting principles and accounting standards: the
books of account have been prepared according to the generally
accepted accounting principles and accounting standards

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CHAPTER – 7. OTHER THRUST AREAS

Q1) What is Cost Audit? What are its objectives?

Ans. Cost audit may be defined as the systematic and independent examination
of cost records maintained by an organisation. It is conducted with the view to
ascertain whether cost records are properly maintained as per cost accounting
principles or not.
As per The Institute of Cost and Works Accountants of India, cost audit is
defined as a "system of audit introduced by the Government of India for the
review, examination and appraisal of the cost ac- counting records and
attendant information required to be maintained by specified industries"
Objectives of Cost audit
The objectives of conducting Cost Audit are as follows:
(a) Verification of cost records:- To verify the correctness and
genuineness of transactions entered in the cost records.
(b) Verification of stock:- To verify whether the value of closing stock of
raw materials, work in progress and finished goods a properly
recorded or not. Thus Angulate deduction a Correction taxation and
the business Reduction
(c) Verification of product wise cost:- To examine whether the total cost
of each product has been correctly recorded.
(d) Helps management:- To help the management in reducing the cost of
production by highlighting the unnecessary cost incurred by the
company thereby resulting in reduction of wastage as well.
(e) Submission of cost data to Government:- To check whether the
organisation has furnished the required information and data to
Central Government in timely manner.
(f) Comparison with budget:- To check whether actual cost incurred by
the organisation is in line with the budgets prepared by it and
suggesting corrective steps in case of deviation.
(g) Fixing prices:- To help the management in fixing price of the goods
and services.
(h) Reduction of tax evasion: To help the Government in reducing tax
evasion in is deduction o Creates m the staff to me of error Corrective
actual of any dev Maintenance accounting prescribed vantages to
(i) Benefit to consumers:- To help the Central Government in com piling
the data of cost incurred by various organisations and pressurising
the industries for reducing the selling prices, thereby Economic
benefiting the consumers.
(j) Better utilisation of resources:- To suggest necessary improvements in
the production procedure and product mix to ensure that scarce
resources of the country are not wasted.

Q2) Discuss the various advantages of cost audit.

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Ans. The various advantages of cost audit are discussed below:

Advantages to Management
(a) Helps in strategic decision making:- Cost audit provides reliable data to
the management, thereby enabling it to take various strategic decisions.
(b) Regulate production:- It helps the management to regulate production
as per requirements.
(c) Detection of errors and frauds:- It helps the management in detection
and prevention of errors, frauds and irregularities and run the business in
a smooth manner.
(d) Reduction in cost of production:- Cost audit helps the management in
identifying the various wastages and thereby helps in reduction of cost
of production.
(e) Creates moral pressure:- Cost audit creates a moral pressure on the staff
to work diligently and hence, helps in reducing the volume of errors and
frauds.
(f) Corrective actions:- Cost audit helps the management in comparing
actual results with budgets and take corrective actions in case of any
deviation.
(g) Maintenance of cost records:- Cost audit ensures that proper cost
accounting records are maintained in accordance with the rules
prescribed by the Central Government.
Advantages to Shareholders
(a) Economic and efficient working:- Cost audit gives assurance to the
shareholders that the organization is working in efficient and economic
manner.
(b) Return on Investments:- Cost audit enables the shareholders to
determine whether they are getting a fair return on their investments.
(c) True and fair picture:- Cost audit presents before the shareholders a true
picture of the operations of the company.
Advantages to Government
(a) Decision making:- Cost audit helps the Government to decide on the
basis of data received from various organizations, whether any subsidy
shall be given to any particular industry.
(b) Fixing up price:- On the basis of cost data received, Government can fix
up the prices of various essential commodities.
(c) Help to sick units:- Cost audit helps the Government to take necessary
measures for revival and rehabilitation of sick industrial units.
(d) Tax rates:- Cost audit may also help the Government in decide the tax
rates or the commodities on which tax should be imposed

Q3) What are the provisions relating to Cost Audit under the Companies Act,
2013?
Ans. The provisions relating to cost audit are contained in Section 148 the
Companies Act, 2013 and Companies (Cost Records and Audit Rules, 2014. Cost

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audit involves verification of cost records. Hence it is important to first

understand the requirement of maintenance cost records.
Maintenance of Cost Records
Maintenance of cost records is not compulsory for every company. As per
section 148 (1) of the Companies Act 2013, the Central Government may, by an
order, direct certain class of companies engaged in the production of such
goods or providing such services as may be prescribed, to maintain cost records
and include the particulars relating to utilisation of material or labour or to
other items of cost in their books of account. imposed As per Rule 3 of the
Companies (Cost Records and Audit) Rules, 2016 2014, production/rendering
of various goods/services have been classified into two sectors, Regulated and
Non-Regulated. The sec- tors/industries covered under Table A of Rule 3 have
been classified as Regulated Sector and those covered under Table B of Rule 3
have been classified as Non-Regulated Sector.
As per Rule 3, such class of companies, including foreign companies defined in
clause (42) of section 2 of the Act, which are engaged in the production of such
goods or providing such services as specified in Table A or Table B of the said
Rule, and having an overall turnover rupees 35, crore or more from all its goods
and services that during the immediately preceding financial year, shall include
cost records for such goods or services in their books of account. As per Rule 5,
such cost records shall be maintained in Form CRA-1.
Applicability of Cost Audit As per section 148(2) of the Companies Act, 2013, if
the Central Government is of the opinion, that it is necessary to do so, it may,
by an order, direct such class of companies, which have net worth or turnover
of such amount as may be prescribed, to get their cost re- cords audited in the
manner specified in the order.
As per Rule 4 of the Companies (Cost Records and Audit) Rules, 2014, every
company specified in Table A of Rule 3, i.e., engaged in Regulated Sector, shall
get its cost records audited in accordance with these rules if the overall annual
turnover of the all its products and services during the immediately preceding
financial year is rupees fifty crore or more and the aggregate turnover every
reservation or qualification contained therein, in form CRA-4. It is to be noted
that the Cost Audit Report shall be filed in Extensible Business Reporting
language (XBRL) format.
Provided that the Companies which have got extension of time for holding
Annual General Meeting under section 96 (1) of the Companies Act, 2013, may
file form CRA-4 within the resultant extended period of filing financial
statements under section 137 of the Companies Act, 2013.
If after considering the Cost Audit Report and the information and explanation
furnished by the company, the Central Government is of the opinion that any
further information or explanation is necessary, it may call for such further
information and explanation and the company shall furnish the same within
such time as may be specified by the Government

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Q4) Write a note on Management Audit.

Ans. Management audit can be defined as review and appraisal of
management plans, policies, and procedures. It is also known as board level
audit. Management audit is not at all compulsory for any type of organisation
and it depends upon the choice of a particular enter- prise. It is not done for
any fixed period of time and it may be conducted even for 5 to 10 years or
more.
Objectives of Management audit
(a) Evaluation of management:- Management Audit is conducted to
check whether management is performing its tasks efficiently.
(b) Moral pressure:- It is conducted with a view to create a moral
pressure on the management so that they become more cautious while
executing their jobs.
(c) Review of policies:- It results in review of the various plans and
policies formulated by the management.
(d) Areas of weakness:- Management Audit is conducted with a view to
ascertain the major areas of weakness where management has not been
able to perform as per standards.
(e) Corrective steps:- It facilitates control and supervision in the areas
where improvement is required. In short, it recommends the corrective
steps to overcome the weaknesses.
(f) Better decision making:- Management Audit also aims at improving
the quality of decisions made by the management.
Advantages of Management Audit
(a) Improves efficiency:- Management Audit checks how the
management is performing its tasks and hence, helps in improving the
efficiency of management.
(b) Fixes responsibility:- By creating a moral pressure on the
management, it helps in making them more cautious and responsible.
(c) Review of policies:- It also helps in review of the various plans and
policies formulated by the management.
(d) Areas of weakness:- Management Audit helps in understanding the
major areas of weakness where management has not been able to
perform as per standards.
(e) Corrective steps:- On the basis of management audit, the auditor can
recommend the corrective steps which can be taken by the company to
overcome the weaknesses of management.
(f) Better decision making:- Management Audit helps to understand
where management has made a mistake and hence, helps in im proving
the quality of decisions in future. Disadvantages of Management Audit
(a) Costly:- Management Audit is a costly exercise and may be suit able
only for large organizations.
(b) Time consuming:- Review of management plans and policies requires
analytical skills and hence, may involve huge time to finish.

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Q5) Write a note on Tax Audit.

Ans. Tax Audit can be defined as examination of financial records/information
of an entity to evaluate the authenticity of computation of its taxable income
and ensuring compliance with provisions of Income Tax Act, 1961. The various
objectives of conducting Tax Audit are given below:
Objectives of tax audit
(a) Proper books of accounts: Tax Audit is conducted with a view to
ensure that proper books of accounts are maintained.
(b) Report of discrepancies: Tax Audit helps in uncovering the
discrepancies as may be noted by the tax auditor after a systematic
checking of books of account.
(c) Evaluation of compliance: It reports whether important provisions
relating to income tax law have been complied with or not. This also
saves time of tax authorities in verifying the correctness of income tax
return filed by the taxpayers.
Provisions relating to Tax Audit under Income Tax Act
Following categories of taxpayers are required to get tax audit done:
Category of Assessee Threshold
Carrying on business If the total sales, turnover or gross
receipt in business for the previous
year exceeds 1 crore. However,
where an assessee declares profits
and gains for the previous year as per
Presumptive Taxation Scheme u/s
44AD and the total sales, turnover or
gross receipts in business for the
previous year does not exceed 2
crores, the provisions of tax audit
shall not apply to such asssessee.
Carrying on profession Gross receipts of assessee in the
previous year exceeds 50 lakhs
Assessee covered u/s 44AE , 44BB or Assessee has claimed that his income
44BBB from 8 such business is less than the
deemed in- come computed as per
the respective sections.
Asessee covered Assessee has claimed that his income
is

Q6) Write a note on Social Audit.

Ans. Social audit may be defined as evaluation of social performance of an
organisation, i.e., whether the organisation has passed on benefits equivalent
to the cost imposed by it on the society. It is a way of measuring,

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understanding, reporting and improving an organization's performance

towards meeting its social and ethical objectives.
Objectives of Social audit
(a) Determination of society's needs: To determine the needs of the
society and assessing the availability of resources to fulfil those needs.
(b) Measures towards pollution control: To check whether the company
is taking adequate measures to control pollution in the surroundings.
(c) Utilisation of resources: To check whether the company has utilised its
resources efficiently and efforts are made towards sustainable
development.
(d) Protection of consumer's interests: To check whether the consumers
are protected against unethical activities and hazardous products.
(e) Employee welfare: To check whether the organisation has provided
necessary facilities for welfare of its employees and society in general.
(f) Healthy working conditions: To check whether the organisation is
providing healthy working conditions to its employees and the
employees are protected against any unforeseen event.
Advantages of Social Audit
 It builds a fair image of the organisation.
 It promotes community participation in business activities.
 Ensures environmental protection and pollution free
surroundings.
 It builds customer loyalty and trust.
 Gives satisfaction to the employees and motivates them to work
efficiently.
 It promotes sustainable development of the economy.
Q7) Write a note on Property Audit.
Ans. Propriety audit may be defined as evaluation of various actions and
decisions of the organisation to see whether they have been executed in the
best interest of the organisation or not. It is also concerned with the scrutiny of
various decisions taken by the organization which may influence the public
interest. On many occasions it is seen that employees engage in such activities
which are more beneficial to themselves rather than the organisation. Propriety
Audit ensures that employees exercise the same level of skills and care while
executing their official duties as they exhibit for their own transactions. It
ensures whether the transactions have been done in conformity will
established rules, principles and standards. The system of Properties Audit is
usually applied in Government companies and department where public
money and public interest are involved.
Objectives of Propriety audit
(a) Proper recording: To ensure that all transactions have been properly
recorded in the books of accounts.
(b) Safeguarding of assets: To ensure that assets have not been mi
utilised and are properly safeguarded.

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(c) Expenses: To check whether all expenses have been incurred in the
best interest of the organisation.
(d) Personal benefit: To ensure that the employees are not deriving any
personal benefit from any transaction
(e) Honesty: To bring honesty and sincerity in the working of employees.
(f) Utilisation of business funds: To ensure that business funds have been
utilised only for business purposes.
(g) Expected results: To see whether the organization is yielding the
expected results.

Q8) Write a note on performance audit.

Ans. According to the Comptroller and Auditor General of India, Performance
audit is an independent, objective and reliable examination of whether public
sector undertakings, systems, operations, programmes, activities or
organizations are operating in accordance with the principles of economy,
efficiency and effectiveness. It also promotes accountability and transparency.
In simple words, performance audit is an evaluation of the operational
efficiency of the organisation.
Objectives of Performance audit
(a) Safeguarding of assets: To ensure that assets have not been miss-utilised
and are properly safeguarded.
(b) Economic operations: To acquire resources of the right quality at the lowest
possible cost.
(c) Efficient use of resources: To ensure that optimal quantity of resources are
used to produce the required output. In simple words, there must a standard
relationship between input and output.
(d) Effectiveness: To see whether each function is being performed effectively
within the standard time.
(e) Provide information: To provide the management with necessary
information on the measures that could be adopted to improve performance,
i.e., economy, efficiency and effectiveness.

Q9) Write a note on environment audit.

Ans. According to the United States Environmental Protection Agency (USEPA),
Environmental Audit may be defined as a systematic, documented, periodic
and objective review by a regulated entity of facility, operations and practices
related to meeting environmental requirements. In simple words, environment
audit may be defined as evaluation of environmental performance of an
organisation, i.e., whether the organisation has passed on benefits equivalent
to costs imposed by it on the environment. It protects the environment from
pollution of air, water, soil, etc.
Objectives of Environment audit
(a) Measures towards pollution control: To check whether the company is
taking adequate measures to control pollution in the surroundings.
(b) Utilisation of resources: To check whether the company has utilised its
resources efficiently and efforts are made towards sustainable development.

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(c) Eco-Friendly products: To check whether the organisation is us ing eco-

friendly technology and producing eco-friendly products.
(d) Propriety of expenses: To check whether expenses incurred by the
organisation for environment protection is not a waste of money and actually
keeping the environment safe.
(e) Compliance with laws: To check whether the organisation is following
various environmental rules and regulations.

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