Auditing [5th Semester: Honours & Pass]

Contents:
S. No. Chapters Page
Number
1. Syllabus 01 - 02
2. Concept, need and purpose of audit (10 03 - 24
marks) (5 + 5)
3. Audit procedures and techniques (15 25 - 46
marks) (5 + 10)
4. Audit risk and internal control system ((10 47 - 54
marks)
5. Vouching, verification and valuation (10 55 - 71
marks)
6. Company audit (15 marks) (1 question of 72 - 92
15 marks)
7. Audit report and certificate (10 marks) 93 - 101
8. Other thrust areas (10 marks) 102 – 113
9. Audit 2019 Honours Question Paper 114 – 115
10. Audit 2019 General Question Paper 116 – 117
11. Audit 2020 Honours Question Paper 118 – 119
12. Audit 2020 General Question Paper 120 – 121
 5th Semester: Honours & General:

Auditing & Assurance

UNIT – I CONCEPT, NEED AND PURPOSE OF AUDIT (10 Marks) (5 + 5)

 Definition-Nature-Scope and Objectives of Independent Financial Audit

 Basic Principles Governing an Audit, Concept of Auditor’s Independence
 Errors and Fraud-Concepts, Means of doing Fraud, Auditor’s Responsibility
towards Detection and Prevention of Fraud, Difference between Audit and
Investigation
 Classification of Audit- Organization Structure wise (Statutory, Non-statutory);
Objective wise (Internal and Independent Financial Audit); Periodicity wise
(Periodical, Continuous, Interim, Final); Technique wise (Balance Sheet, Standard,
Systems, EDP);
 Standards on Auditing (SA)- Concept and Purpose

(This unit should be studied with SA 200 [REVISED] and SA 240 [REVISED])

UNIT – II AUDIT PROCEDURES AND TECHNIQUES (15 Marks) (5 + 10)

 Auditing Engagement-Audit Planning- Audit Programme (Concept)

 Documentation: Audit Working Paper, Ownership and Custody of Working Papers-
Audit file (Permanentand Current) – Audit Note Book- Audit Memorandum.
 Audit Evidence – Concept, Need, Procedures to obtain Audit Evidence
 Routine Checking, Test Checking and Auditing in Depth
 Concept of Analytical Procedure and Substantive Testing in Auditing.
 Audit of Educational Institutions, Hospitals and Hotels
(This unit should be studied with SA 210, SA 230, SA 300, SA 500, SA 520 and SA 530)

UNIT – III AUDIT RISK AND INTERNAL CONTROL SYSTEM ((10 Marks)
 Audit Risk – Concept and Types only.
 Internal Control- Definition, Objectives
 Internal Check- Definition, Objectives
 Internal Audit- Definition, Objectives, Regulatory Requirement, Reliance by
Statutory Auditor on InternalAuditor’s Work
 (This unit should be studied with SA 610)

UNIT – IV: VOUCHING, VERIFICATION AND VALUATION (10 Marks)

 Vouching: Meaning, Objectives - Difference with Routine Checking – Factors to be
Considered duringVouching - Vouching of Following Items: i) Receipts: Cash Sale,
Collection from Debtors, Interest and Dividend from Investment, Sale of Fixed
Assets. ii) Payments: Cash Purchase, Payment to Creditors, Payment of Wages
and Salaries, Advertisement Expenses, Travelling Expenses, Research and
DevelopmentExpenditure, Prepaid Expenses.
 Verification and Valuation: Concept, Objectives, Importance, Difference with
Vouching, Difference
between Verification and Valuation, Verification of following items: i) Non-
Current Assets: Goodwill, Patent and Copy Right, Leasehold Land, Plant and
Machinery, ii) Investments iii) Current Assets: Inventory, Loan and Advance, Cash
and Bank Balances iv) Non-current Liability: Secured Loan v) Current Liability:
Trade Payables (Sundry Creditors).

UNIT - V COMPANY AUDIT (15 Marks) (1 Question of 15 Marks)

 Qualification, Disqualification, Appointment and Rotation, Removal and
Resignation, Remuneration,Rights, Duties and Liabilities of Company Auditor
 Branch Audit and Joint Audit
 Depreciation – Concept and Provisions of the Companies Act
 Divisible Profit and Dividend (Final, Interim and Unclaimed/Unpaid): Provisions of the
Act, Legal Decisionsand Auditor’s Responsibility

UNIT – VI AUDIT REPORT AND CERTIFICATE (10 Marks)

 Definition – Distinction between Report and Certificate- Different Types of Report
 Contents of Audit Report (As per Companies Act and Standards on Auditing)
 True and Fair View – Concept
 Materiality – Concept and Relevance
(This unit should be studied with SA 700)

UNIT – VII OTHER THRUST AREAS (10 Marks)

 Cost Audit – Concepts, Objectives Relevant Provisions of Companies Act
 Management Audit - Concepts, Objectives, Advantages
 Tax Audit – Concepts, Objectives, Legal Provisions
 Social Audit – Propriety Audit – Performance Audit – Environment Audit (Concepts only)
 Notes:
1) The provisions of the Companies Act, 1956 which are still in force would form part of
the syllabus till the time their corresponding or new provisions of the Companies Act,
2013 are enforced.
2) If new Laws or Rules are enacted in place of the existing laws and rules, the
syllabus would include thecorresponding provisions of such new laws and rules with
immediately following Academic Year.
3) Students are expected to develop analytical mind for answering problem based
questions along with thetheoretical questions.

UNIT – I [5 + 5 = 10 Marks]
CONCEPT, NEED AND PURPOSE OF AUDIT
Definition-Nature-Scopeand ObjectivesofIndependent FinancialAudit-Limitation.
Basic Principles Governing an Audit- Concept of Auditor’s Independence
Errors and Fraud- Concepts, Means of doing Fraud, Auditor’s Responsibility towards Detection and Prevention of
Fraud, Difference between Audit and Investigation
Classification of Audit- Organization Structure wise (Statutory, Non-statutory); Objective wise (Internal and
Independent Financial Audit); Periodicity wise (Periodical, Continuous, Interim, Final); Technique wise (Balance
Sheet, Standard, Systems, EDP);
Standards on Auditing (SA)- Concept and Purpose

1. Define auditing.

Evolution of Auditing
The term audit is derived from the Latin term ‘audire,’ which means to hear. In early
days a person usedto listen to the accounts read over by an accountant in order to
check them. He was known as auditor.
MEANING OF AUDITING
Earlier the term ‘adult’ was used to refer ‘hearing of accounts’. In other words,
audit was restricted to only verification of accounting and financial records. Thus,
different celebrated authors defined audit mostly in a narrower sense. A few of such
important definitions are given below for further discussion.
DEFINTION BASED ON A NARROWER CONCEPT
Montgomery defined auditing as ‘a systematic examination of the books and
records of a business or other organizations in order to ascertain or verify and to
report upon the facts regarding the financial operations and the result thereof’.
The concept of audit as given by Spicer and Pegler is somewhat similar to that of
Montgomery. However, they elaborated the concept of audit as below : ‘ an audit
may be said to be such an examination of books of accounts and vouchers of a
business as will 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 of affairs of the
business and whether profit or loss account gives a true and fair view of the profit or
loss for the financial period ,according to the best of the information and
explanation given to him as shown by the books and if not ,to report inwhat respect
he is not satisfied.’ Similarly, R.K. Moutz defined auditing as being ‘concerned with the
verification of accounting data, with determining the accuracy and reliability of
accounting statementsand reports.’

AUDITING IN A BROADER SENSE

With the rapid change in social and economic environment, the concept of audit has
been modified. Auditing today is not confined to verification of financial and
accounting records only. It now reviews operations and performances of the
organization apart from reporting on its financial statements. Thus, according to
General Guidelines on Internal Auditing issued by the ICAI, “Auditing is a systematic
and independent examination of data, statements, records, operations and
performances (financial or other-wise) of an enterprise for a stated purpose. In any
auditing situation , the auditor perceives and recognises the proposition before him for
examination, collects evidences, evaluates the same and on this basis formulates his
judgement which is communicated through his audit report”

DEFEINITIONS:

According to General Guidelines on Internal Auditing issued by the ICAI, “Auditing is

defined as a systematic and independent examination of data, statements, records,
operations and performances (financial or otherwise) of an enterprise for a stated
purpose. In any auditing situation, the auditor perceives and recognises the
propositions before him for examination, collects evidence, evaluates the same and
on this basis formulates his judgement which is communicated through his audit
report.”
 2. Discuss the scope of an audit?

Which aspects of the enterprise are to be covered in an audit will be determined by the
auditor after considering the terms of his engagement, the requirement of the relevant
legislation and the pronouncements of the Institute of Chartered Accountants of India.
However, auditor should take care that no aspect of the enterprise which are relevant
to the financial statements is left unexamined.
According to SA200A Objectives and Scope of Financial Audit, the main aspects to be
covered in an audit are as follows:

i. Reliability and sufficiency of information: The auditor must satisfy himself that
the financial
statements have been prepared on the basis of reliable and sufficient information.

In order to assess the reliability and sufficiency of the information contained in

the underlying accounts and other source data, the auditor will undertake
following audit procedures.
 Compliance Procedures: Compliance procedures refer to study and evaluations of
accounting
systems and internal control. Based on this evaluation, the auditor determines
the nature, extend and timing of other auditing procedures.
 Substantive procedures: Substantive procedure refers to testing the authenticity
of information contained in the accounting records. It involves checking
arithmetical accuracy, vouching of receipts and payments, verification of assets
and liabilities etc.
ii. Disclosure of relevant information in a proper way: The auditor will examine to
see whether relevant information have been properly disclosed in the financial
statements in conformity with statutory requirements.
For ensuring disclosure of relevant information in the financial statements, the
auditor will adopt following course of action:
 Comparing source records and data: The auditor will compare the financial
statements with underlying accounting records. He will ensure that transactions
and events as recorded in the accounts are properly summarized in the financial
statements.
 Assessing accounting policies: He will assess the selection and consistent
application of accounting policies and their adequate disclosure.
 It is thus clear that audit of present day is not restricted to the verification of
arithmetical accuracy of the books of accounts. The auditor must go to root of
transaction and examine its authenticity. He will see that entries are recorded,
posted and totaled correctly; The entries are properly summarized and disclosed
in the financial statements; the assets as reported belong to the company;
liabilities are truly owed by the company and so on. Finally, he will verify that
financial statements have been drawn up in conformity with the applicable
statutory requirement and they reflect a true and fair view of state of affairs of the
business.

3. What is Independent financial audit? What are its

features/objectives?**

Independent financial audit is the audit conducted by a person who is ‘independent’ of

the firm. He is an outsider, usually a professional Chartered Accountant, who verifies
books of accounts on the basis of supporting documents and vouchers to form an
unbiased opinion on the reliability and fairness of financial statements. As the
independent auditor is not an employee of the firm there is no interference in his work
from the management. So his report on the financial can be considered trustworthy
and reliable.

Features/objectives of Independent Financial Audit:

The audit under broader concept has got the following features:

i. Systematic and independent examination: Modern audit involves a systematic

and independent examination of accounts by a professional accountant. He will
arrange the audit procedures in a logical sequence and is required to be free
from any bias in his work. He will not get influenced byany kind of pressure while
discharging his duties.
ii. Expression of opinion: The main purpose of audit is to express opinion by the
auditor about the reliability and fairness of financial statements. The auditor can
never give absolute assurance about the sanctity of financial statements.
iii. Determination of proportions: Audit starts with the determination of proportions
to be examinedfor achieving the audit objective. Haphazard examination without
a clear idea about propositions leads the auditor nowhere.
iv. Application of logic: The modern audit has its principal roots in logic and
 judgement. It is now analytical and investigative. The auditor now pushes pencil
less and pushes brain more.
v. Collective and evaluation of evidence: In order to examine the proportions, the
auditor collects evidences judiciously and evaluates them to arrive at a
conclusion about the propositions.
vi. Formation of opinion: The audit requires the auditor to form an unbiased opinion
on the assertions made by the management in the financial statements.
vii. Communication of opinion: The process of audit ends with the communication of
opinion by the auditor through the audit report to client or shareholders.

4. Discuss the advantages of Auditing.

Advantages of Auditing:

(i) Satisfaction of Owner: It is because of audit that the owner will be satisfied
about the business operations and working of its various departments.
(ii) Detection and Prevention of Errors and Frauds: The errors whether committed
innocently or deliberately are discovered by the process of audit and its
presence prevents their occurrence in the future. No one will try to commit
an error or fraud as the accounts are subject to audit and hence they will
have a fear of being detected. Just like errors, frauds are discovered by
audit and its presence minimizes future possibility if not eliminated totally.
(iii) Verification of Books: Another advantage of audit is the verification of the
books of accounts, this helps in maintaining the records up to date at all times.
(iv) Independent Opinion: Auditing is very useful in obtaining the independent
opinion of the auditor about business condition. If the accounts are audited
by an independent auditor, the report of the auditor will be true and fair in all
respects and it will be of extreme importance for the management of the
company.
(v) Moral Check: The process of audit will establish a check on the minds of the
staff working in the business and they will not be able to commit any
irregularity, as they will have a fear and will also be aware that the accounts
will be examined in the near future and that action would be taken against
them if any irregularity is discovered. Thus the audit prevents the happening
of any irregularity before it starts and the staff hence becomes more active
and responsible. The fear of their getting caught act as a moral check on the
staff of the company.
(vi) Protection of the Rights and Interests of Shareholders: Audit helps in
protecting the interests of shareholders in case of joint stock company. Audit
 gives assurance to the shareholders that the accounts of the company are
being maintained properly and their interest will not suffer under any
circumstances.
(vii) Reliance by Outsiders: Outsiders like creditors, debenture holders and banks
etc. will rely on the books of accounts and financial statements of the business
if they are audited by an independent authority (external auditor).
(viii) Ensures Compliance with Legal Requirements: Audited statements are
necessary to fulfill certain legal requirements e.g. listing requirements of stock
exchange etc.
(ix) Reinforce and Strengthen Internal Control: Since auditing exercise involves the
review of internal control system, an auditor will identify the gaps in internal
control system and can suggest the necessary changes in the internal control
system.
(x) Loan Facility: Money can be borrowed easily on the basis of audited balance
sheet from financial institutions. If accounts are audited the true picture will
be visible to banks and it will be easy for them to issue loans as early as
possible.

5. Do you agree with the view that there are inherent

limitations of Audit?

Besides having various benefits, there are some inherent limitations of auditing. These are
as follows :

(a) Higher Cost Burden: Due to Higher Cost Burden, the auditor limits his scope of
work to selective testing or sampling thus in depth checking of books of
accounts is not possible.
(b) Based on test checks. Generally an auditing exercise is based on test checking.
Inferring a result on the basis of test check always need not to be true.
(c) Insufficient Time: Generally an auditor needs to release the report up to a
specified timeline. Sometime this timeline become a constraint for an auditor in
carrying out the auditing exercise effectively. This time constraint may affect the
amount of evidence that can be obtained concerning events and transactions
after the balance sheet date that may have an effect on the financial
statements. Moreover, there is a relatively short time period available for
resolving uncertainties existing at the financial statement date.
(d) Inconclusiveness of Evidences: The evidences obtained by an auditor are
persuasive rather than conclusive. For example, an architect’s certificate of
 valuation for a newly constructed building of a client may not be conclusive
evidence of the correct value of building.
(e) Based on Estimates: Estimates are an inherent part of the accounting process,
and no one, including auditors, can foresee the outcome of uncertainties.
Estimate range from the allowance for doubtful accounts and an inventory
obsolescence reserve to impairment tests of fixed assets and goodwill. An audit
cannot add exactness and certainty to financial statements when these factors
do not exist.
(f) Based on the Information provided by the Management: The audit opinion is
based on the information provided by the management. Hence, outsiders
cannot fully rely on the auditor’s report.

6. What are the Basic Principles governing an Audit as laid

down in AAS - 1?
SA 200 describes the basic principles which govern the auditor’s professional
responsibilities and which should be complied with whenever an audit is carried out.
Compliance with the basic principles requires the applicationof auditing procedures and
reporting practices appropriate to the particular circumstances. The basic principles as
stated in this guideline are:
(a) Integrity, objectivity and independence: The auditor should be straightforward,
honest and sincere in his approach to his professional work. He must be fair and
must not allow prejudice or bias to override his objectivity. He should maintain an
impartial attitude and appear to be free of any interest which might be regarded,
whatever its actual effect, as being incompatible with integrity and objectivity.
(b) Confidentiality : The auditor should respect the confidentiality of information
acquired in the course of hiswork and should not disclose any such information to a
third party without specific authority or unless thereis a legal or professional duty to
disclose.
(c) Skills and competence: The audit should be performed and the report prepared with
due professional care by persons who have adequate training, experience and
competence in auditing.
(d) Work performed by others: When the auditor delegates work to assistants or uses
work performed by other auditors and experts he continues to be responsible for
forming and expressing his opinion on the financial information.
(e) Planning: The auditor should plan his work to enable him to conduct an effective
 audit in an efficient and timely manner. Plans should be based on a knowledge of
the client’s business.
(f) Audit Evidence: The auditor should obtain sufficient appropriate audit evidence
through the performanceof compliance and substantive procedures to enable him
to draw reasonable conclusions therefrom on which to base his opinion on the
financial information.
(g) Accounting System and Internal Control: Management is responsible for
maintaining an adequate accounting system incorporating various internal
controls to the extent appropriate to the size and nature ofthe business. The auditor
should reasonably assure himself that the accounting system is adequate and that
all the accounting information which should be recorded has in fact been recorded.
(h) Audit conclusions and reporting: On the basis of the audit evidence, he should review
and assess the auditconclusions. He should ascertain:
a. As whether accounting policies have been consistently applied;
b. Whether financial information complies with regulations and statutory requirements;
and
c. There is adequate disclosure of material matters relevant to the presentation
of financialinformation subject to statutory requirements.
The auditor’s report should contain a clear written opinion on the financial information.

7. Accounting is a necessity while auditing is a luxury for a

business enterprise’ --- do you agree? Give reasons for your
answer.***
A question often arises in the minds of businessmen whether audit is luxury or not.
They say accounting is necessity and auditing is a wastage of time and money.
Auditing may be luxury from the point of view of an ordinary businessman because of
following reasons:-
(a) The remuneration paid to the auditor is an unnecessary waste of funds.
(b) Too many formalities attached to auditing create difficulties for an average businessman.
(c) The businessman feels that auditing means waste of time and disturbance in
routine work of theaccountant and his subordinates.
(d) Audit is not perfect method of detecting errors and frauds.
Thus, auditing for a small business may be luxury but it is a necessity for a large
business organization for thefollowing reasons:-
(a) Accounting data needs to be verified as to their reliability and accuracy.
(b) Public funds invested in the private sector of economy need to thoroughly
examined as to their properutilization.
(c) Various social groups who are interested in affairs of a business entity need to be
assured that the entity functions are discharged efficiently and to the best
advantage of social will-being.
(d) Absentee shareholders created out of widely dispersed ownership of management
need to be providedwith sufficient assurance that the figures in the profit and loss
account and balance sheet are fair representations of the financial conditions of a
business.
Thus, keeping in view the above, one can not say that auditing is luxury. Auditing is
necessity of big organizations. Auditing is compulsory in case of Private Limited
Companies, Limited Companies, CharitableTrusts, Societies, Banks etc. The partnership
firms or proprietorship firms can also engage the auditors to have the fair view of
accounts. Auditing is not wastage of money because so many frauds can be detected
from auditing and the money paid to the auditors looks very petty amount in
comparison of the frauds detected. Auditing is not the wastage of time also. Normally,
auditors do not disturb the accounting staff. The do their ownwork. Very few interference
is done by them with the accounting staff. The findings or benefits of audit are more
precious than wastage of little time of accounting staff. In my view, every business firm
whether it is small orbig, must avail the services of the auditors.

8. Accountancy begins where book-keeping ends &

accountancy ends where auditing begins. Discuss**
Book-Keeping, Accountancy and Auditing are the three aspects of the term
`Accountancy' itself in its widestsense.
Book-keeping:
Book-keeping is the art of recording the daily transactions in a set of financial books. It is
concerned withsystematic recording of transaction in the books of original entry and their
posting into ledger.
Accountancy
Accountancy begins where book-keeping ends." It means that an accountant comes
into the picture only whenthe book keeper has done his job. The functions of accountant
can be classified as under :
(i) Checking the work of book-keeper.
(ii) Preparation of trial balance,
 (iii) Preparation of Trading and Profit and loss Account.
(iv) Preparation of balance sheet,
(v) Passing entries for rectification of errors and making adjustments.
An accountant is supposed to be an expert in the accounting procedures as he has to
examine analytically the final accounts. But it is not necessary for him to pass the
chartered Accountant's examination. He it's not supposed to submit his report after the
completion of work.
Auditing
It is said, "where accountancy ends, auditing begins." It is slightly said. An auditor has
to verify the entries passed by the accountant and the final accounts prepared by him.
Thus, auditing is the checking of the accounts of a business with the help of vouchers,
documents and the information given to him and the explanations submitted to him.
An auditor has to satisfy himself after due verification and complete. Checking of
accounts asto whether the transactions entered into the books are accurate. An auditor
is required to submit his report to theeffect whether or not the balance sheet is a true
and fair representation of the existing state of affairs of a business concern.
Thus, an auditor should have the proper knowledge of accounting principles. That is
why he should be a chartered Accountant. He has to express his impartial opinion in
his report which he can not give unless he satisfies himself completely with the proper
recording of transactions. Thus, auditing is based on accountancy and not
accountancy on auditing. An auditor must be well familiar with the principles and
practical aspects of accountancy but it is not necessary for an accountant to be an
expert in the audit work.
The following table makes the distinction clear among book-keeping accountancy and
Auditing.
(a) Book-keeping :
(i) Journalizing.
(ii) Posting into Ledger.
(iii) Totaling of different accounts in the Ledger
(iv) Balancing,
(v) Checking the work of the Book-keeper.
(vi) Preparation of Trial Balance
Accountancy
(i) Preparation of Trading & Profit & loss account
(ii) Preparation of Balance sheet, (Theoretical part)
(iii) Passing entries for rectification of errors and making adjustments,
Auditing
Checking the work done by the accountant. (Examination of Records) (the Analytical part)
 9. “Auditing may be defined as ‘Accounting control”
Comment****
Accounting is concerned with measurement and communication of financial events
based on some established principles and procedures. Auditing, on the other hand
deals with checking and confirmation of what are recorded and to be communicated.
It aims at ensuring that
(i) All transactions are undertaken in accordance with plans and procedures as laid down by
the management,
(ii) Transactions are promptly and properly recorded so that financial statements is
prepared timely andpresented in a fair way.
(iii) No fraud takes place so that assets of the business are safeguarded.
So, audit is the control of the accounting system of the organisation. It sees that
accounting system has been designed to prevent occurrence of errors and frauds and it
can generate authentic and reliable financial statements. Auditing is, therefore,
appropriately defined as 'accounting control'.
However, the developments in the last few decades have extended the scope of audit
beyond the accounting system. The audit now a days is also concerned with
operational efficiency and performance of the business. It has now become control
mechanism of all business activities. Accordingly the Institute of Chartered Accountants of
India has recently defined auditing as "a systematic and independent examination of
data, statement, records, operations and performances (financial or otherwise) of an
enterprise for a stated purpose." So overall control and monitoring of all business
activities is now the object of audit. Hence it has been rightly said that “The relationship
of auditing to accounting is close, yet their natures are different, they are business
associates,not parent and child"

10. "An auditor is not an insurer" - Explain.****

SA 200A on “Objective and Scope of Audit of Financial Statements” states that

auditor’s opinion is not an assurance as to the future viability of the enterprise or the
efficiency or effectiveness with which the management has conducted the affairs of
the enterprise. The auditor does not insures the interest of users of accounts but only
states his opinion after taking all reasonable care and skill, that the statements show a
true and fair picture. The ultimate responsibility is of the management. The audit of
financial statements does not relieve management of its responsibilities.
But According to Companies Act 2013: The financial statements shall give a true and
fair view of the state of affairs of the company or companies as at the end of the
financial year [Sec. 129(1) of 2013 Act]. The auditor’s report shall state that— to the best
of his information and knowledge, the said accounts, financial statements give a true
and fair view of the state of the company’s affairs as at the end of its financial year
and the profit or loss and cash flow for the year and such other matters as may be
prescribed [Sec. 143(2) of the 2013 Act]. The aforesaid definition is very authoritative. It
makes clear that the basic objective of auditing, i.e., expression of opinion on financial
statements does not change with reference to nature, size or form of an entity. The
definition given above is restrictive since it covers financial information aspect only.
However, the scope of auditing is not restricted to financial information only, but, today
it extends to variety of non-financial areas as well. That is how various expressions like
marketing audit, personnel audit, efficiency audit, production audit, etc. came into
existence. But here we should study only financial audit unless and until otherwise
specified.
11. Detection and prevention of errors are the main objects of
auditing- Discuss it fully and explain the duties of an
auditor in this regard*****
DETECTION OF FRAUD & ERRORS
The term fraud means the willful misrepresentation made with an intention of
deceiving others. It is a deliberate mistake committed in the accounts with a view to
get personal gain. In accounting, fraud means two things. a. Defalcation involving
misappropriation of either cash or goods; and b. Fraudulent manipulation of accounts
not involving defalcation.
THE AUDITOR CAN SUSPECT FRAUD UNDER THE FOLLOWING CIRCUMSTANCES.

(i) When vouchers, invoices, cheques, contracts are missing etc.

(ii) When control account does not agree with subsidiary books.
(iii) When the difference in trial balance is difficult to locate.
(iv) When there are greater fluctuation in G.P. and N.P. ratios.
(v) When there is difference between the balance and the confirmation of the balance
by the parties.
(vi) When there is difference between the stock as per records and the stock physically
counted.
(vii) When the explanation given by the client is not satisfactory.
(viii) When there is a overwriting of some figures.
(ix) When there is a contradiction in the explanation given by different parties.

PROCEDURE TO BE FOLLOWED TO DETECT ERRORS.

Following procedures may be adopted by the auditor to detect the errors.
(i) Check the opening balances from the balance sheet of the last year.
(ii) Check the posting into respective ledger accounts
(iii) Check the total of the subsidiary books.
(iv) Verify all the castings and the carry forwards.
(v) Ensure that the list of debtors and creditors tally with the ledger accounts.
(vi) Make sure that all accounts from the ledger are taken into accounts.
(vii) Verify the total of the trial balance.
(viii) Compare the various items from the trial balance with that of the previous year.
(ix) Find out the amount of difference and see whether an item of half or such
amount is enteredwrongly.
(x) Check differences involving round figures as Rs. 1,000; Rs. 100 etc .
 (xi) See where there is misplacement or transposition of figures that is 45 for 54; or 81 for
18 etc.
(xii) Ultimately careful scrutiny is the only remedy for detection of errors. 13. See
that no entry of theoriginal book has remained unposted.

THE AUDITOR SHOULD PERFORM THE FOLLOWING DUTIES IN RESPECT OF FRAUD.

(i) Examine all aspects of the finance.
(ii) Vouch all the receipts from the counterfoils or carbon copies or cash memos,
sales mart reportsetc.
(iii) Check thoroughly the salary and wages register.
(iv) Verify the methods of valuation of stocks.
(v) Check up stock register, goods inwards notes, goods out wards books and delivery
challans etc
(vi) Calculate various ratios in order to detect fraudulent manipulation of accounts
(vii) Go through the details of unusual items.
(viii) Probe into the details of the problems when there is a suspicion.
(ix) Exercise reasonable skill and care while performing the duty. 1
(x) Make surprise visit to check the accounts.

12. Distinguish between Accountancy & audit****

Or
“Auditor is not an accountant” – Explain****

Accounting is a systematic process of recording, classifying and summarizing

transactions and economic events which affect the business. At the end of this
process, accounting prepares financial statements which should contain information
useful to the management and other stakeholders for decision making.
Auditing is concerned with verification of financial statements as prepared by the
accountant and thereby expressing opinion on their reliability and fairness. The auditor
verifies the financial statements with help of relevant documentary evidence and
explanation and information given to him. So auditing begins, where accounting ends.
In other words, accounting is followed by auditing which confirms the accuracy and
fairness of the former. Unless auditing is carried out, the reliability of the financial
statements will not be ensured. Consequently, the management and other
stakeholders will not find the financial statements useful for decision making. So
auditing and accounting are closely related although they are district disciplines.

Points of difference Accountancy Audit

(a) Scope Accountancy is concerned Auditing is concerned with the
with the preparation of final
verification and examination of
accounts and other
those recorded in books of
explanations which are
helpful to the management. account.

(b) Object The object of accountancy is The object of audit is to verify

to show the financial position the truth and fairness of
of the business on a specific financial position and of the
date and to determine the operating result of the concern
operating result for the and at the same time to
specific periodof time. discover errors andfrauds if any,
in accounts.
(c) Qualification There is no hard and first rule In order to acquire qualification,
that an accountant should be aprofessional auditor must be a
a Chartered Ac- countant. CharteredAccountant.
(d) Status The accountant is a paid An auditor is not a paid
employee of the concern. The
employee of the concerned
owners for a specific purpose
organisation and performs his
appoint an independent person
functions under the control as an auditor.
of management
(e) Tenure The accountant is the An auditor may not be
permanentemployee of appointed for longtime in the
the concern. same concern.

(f) Knowledge in An accountant may not An auditor, having no

thesubject knowledge in accountancy
necessarilypossess the
cannot perform his func- tions
knowledge of auditing.
of audit well.
(g) Ranking The work of accountancy has After the work of accountancy
ends, the work of audit begins.
to be done at first. So, it is
So, without performing the work
done before the work of audit
of accountancy, auditing can
begins. not start.
(h) Time period of The work of accountancy The work of audit may be done
work at the end of financial year or
continuesthroughout the year.
continuously throughout the
year.
(i) Control For the work of accountancy The work of audit is always
there is no scope for regulated by the rules and
professional control or regulations of the association.
regulation.
(j) Type of work The accountant takes the The auditor does not prepare
responsibility of the account, but reviews and
preparation of accounts. As analyses the accounts
such,its work is constructive in prepared by accountant. As
such, his work is analytical in
nature
nature.
(k) Submission of The accountant after The auditor after examining
report completion of his preparation and reviewing the accounts
of account need not submit must have to sub-mit a report
report to the owner or to to the owner or to
management. management.
 13. Distinguish between Internal audit & statutory
audit.*****
Or
"Internal Audit is no substitute for Statutory Audit."—Discuss.

Point of Difference Internal Audit Statutory Audit

(a) Appointment The internal auditor is The statutory auditor is
generally appointed by the
ofauditor appointed by thedirectors of the
shareholders, but in specific
company. cases by die director or by the
government.
(b) Qualification The directives of the The statutory auditor must
companies act regarding have the qualification as
ofauditor
qualification is not applicable prescribed by the companies
here act.

(c) Status of Internal auditor has no The statutory auditor is an

independent status as he is a independent and impartial
theauditor
paid employee of the under- person, not a paid employee of
taking. thecompany
(d) Removal of The appointing authority i.e. the The shareholders in general
theauditor directorscan remove the internal meeting canremove the
auditor statutory auditor.
(e) Remuneration The directors generally fix up the The shareholders in general
amount of remuneration meeting fix upthe remuneration
payable to the internalauditor payable to the statutory
auditor.
(f) Special right The internal auditor has no right The statutory auditor has a right
to attendthe general meeting of to attend thegeneral meeting of
the company. the company
(g) Reasons for Internal audit is carried out to The statutory auditor is earned
audit out for preservation of
satisfy thedirectors.
shareholders' interest or third
party's interest.
(h) Legal obligation There is no legal obligation for Statutory audit is compulsory
conducting internal audit. It for the Joint Stock Company as
depends upon the intention of per provisions of the
 the directors. Companies Act.

(i) Object of audit The main object of internal In case of statutory audit apart
from detection of errors and
audit is todetect the errors and
frauds, certification of final
frauds. accounts of the concern is the
main object.
(j) Pervasiveness The internal auditor has to The statutory auditor may
examine all the transactions of examine the transactions
ofwork
the businessthoroughly. thoroughly or may adopt the test
checking.
(k) Report The internal auditor is not As the shareholders appoint
appointed bythe shareholders. . the statutory auditor, so, he is
So, he is not required to submit required to submit the audit
report to them. report to them
 14. Distinguish between continuous audit & periodic
audit.

Point of Difference Continuous Audit Periodical Audit

(a) Definition Continuous audit is that The system of audit which is
system of audit under which
taken up after the books have
the auditor or his assistant
makes a detailed examination been closed at the end of
of all the transactions financial or accounting period and
continuously throughout the
thereafter carried on continuously
year or at regular intervals, say
weekly, fortnightly or monthly, until completed, is called the
etc. periodical audit.
(b) Features The main feature of In case of periodical audit, after
continuous audit is that
the completion of accounting for
recording of transactions and
the work of verifying them are financial year, the work of audit
carried on simultaneously. begins.
(c) Nature of As it is carried on regularly at At the close of the accounting year,
the workof audit is taken up. So, all
auditwork short intervals, all the
the transactions in case of large
transactions can be verified concerns cannot be examined
thoroughly. thoroughly.
(d) Fairness As all the transactions are At the end of the financial year,
& verified minutely, so if any error the work begins. So, it will not be
correctness or fraud is crept in account, possible to verify them minutely.
of accounts that can be disclosed and As such, errors or frauds maycreep
timely steps, can be taken. in accounts.
(e) Case of In case of large concerns and Whatever may be the size of the
necessity where the number of
concern and whatever may be the
transactions are numerous, the
necessity of applying the number of transactions, its
continuous audit is felt. necessity is felt everywhere.
(f) Relationship of Under this system of audit, a Under this system of audit, no
theauditor with close relationship is formed close relationship is formed
the concern between the auditor and the between the auditor and the firm.
firm
(g) Scope of This system involves much This system does not involve
expenditure. So, it cannot be much expenditure and as such is
expendi-ture :
applied to small concerns. applicable to alltypes of concerns.
(h) Under this system, it requires Under this system, it required
less time toprepare and submit much time toprepare and submit
Certification of
the report relating to the report concerning the certification
accounts : certification of final accounts. of final accounts.

15. Distinguish between interim audit & Internal audit

Point of Difference Interim Audit Internal Audit

(a) Audit work done During the course of the Internal audit is a part of
financial year,interim audit is normaladministrative
done at any time routine work.
(b) Work carried on In case of interim audit, the Internal auditing work is
work ofaudit is carried on by an performed by thepersons of the
outsider. concern itself.
(c) Objects of audit when the accounts are Internal audit is a constant
prepared for the part of die review of theaccounts carried on
financial year, interim audit is
throughout the year.
meant to check the accounts
as it has some interim
purposes.
(d) Work of audit In interim audit, the work of Internal audit goes on
pertaining to a audit isrelating to certain date continuouslythroughout
period in a year the life-time of a concern.
(e) Submission In case of interim report, the The question of reporting does not
ofreport auditorrequires to submit his arise incase of internal audit.
report.
(f) Purpose to Interim audit is always Internal audit is a part and parcel
subjected to the need. That is,
befulfilled of the organisational and
it is conducted whenever there
are interim purposes to be administrative procedure of an
fulfilled. undertaking.

16. Distinguish between Balance sheet audit & Final audit

Point of Difference Balance Sheet Audit Final Audit

(i) Scope of work Here the audit work extends Under this system examination
begins from books of prime entry
beginning from balance sheet
and related vouchers and
to examination of books of documents continuous audited
prime entry and documents. balance sheet.

(ii) Internal The reliable internal control In this case it is not compulsory to
and internal check system are
control and introduce internal control and
not introduced. So, it is not
Internal check possible to run these system. internal check system.
system
(iii) Verification There is no need of examining In final audit examination of
ofvouching the verification of transaction, verification of transactions,
determination of the balance of determination of balance of
accounts etc accounts etc. are needed.
 17. Distinguish between statutory audit & non-statutory
audit?*

Point of Difference statutory Audit non-statutory Audit

(i) Legal obligation According to the companies act, There is no legal obligation on the
part of the sole-trader, partners to
the audithas been made
get theiraccount audited.
compulsory
(ii) Nature and The nature and scope of audit The nature and scope of audit is
is governed by the provisions of determined by an agreement with
Scopeof audit
the Companies Act and the the proprietor in case of sole-
Articles of Association. trader and the partners in case of
partnership firm.
(iii) Appointment The auditor is appointed by the
The sole-trader himself in the
shareholders in the general
ofAuditor case of sole- trading business,
meeting. But in specific cases,
the board of directors or the appoints and in case of
Central Government appoints
partnership firm, the partners
an auditor.
appoint an auditor.
(iv) Role of Auditor Whoever may be the The auditor represents himself for
appointing authority, the the proprietor in case of sole-
auditor discharges his role as a trading business and for the
representative of the partners in case of partnership
shareholders. firm.
(v) Rights, Duties The Companies Act lays down The matters concerning
andLiabilities of in different provisions relating qualification, rights, duties and
Auditor to qualification, rights, duties liabilities of auditor are dependent
and liabilities of auditor. No on the agreement made between
interference can be made on the auditor and the owner or
such provisions. partners. The conditions may be
increased or decreased.
(vii) Power of According to the provisions of The auditor is not entitled to enjoy
Auditor the Companies Act, the auditor abundant power. He has to
is entitled to enjoy enormous
perform his functions subject to
power. The share-
the conditions laid down by the
holders/directors cannot curb
employer.
them. For performing this
function, he can adopt such
 measures as he thinks
necessary.
(viii) The auditor usually conducts The auditor conducts his work of
Organisation of his work of audit on the basis of audit according to the instructions
Audit Work Companies Act, Memorandum, given in the agreement with the
Articles, Prospectus and owner or the partners as the case
Directors' Minute Book, etc. may be.
(ix) Submission The auditor is required to The auditor submits his report to
ofreport submit hiswritten report to the theemployer.
shareholder
 18. What is Interim Audit? What are the objectives of Interim
Audit?**
Interim audit is the audit which is conducted in between two annual audits. In other
words, it is conducted for a part of the accounting year say, for three months or six
months as per requirement. This audit is conducted for some specific purpose.
The main objectives of interim auditing are stated below:
(i) To get the half-yearly or periodic data of the sales, profit, net profit etc.
(ii) To get the profit for the period which may help the management to declare interim
dividend.
(iii) With the help of interim audit, the management and the auditor can complete Final
Audit early.
(iv) To detect errors and frauds at the earliest.
(v) To ascertain the interim profit or loss or state of financial affairs of the concern.
(vi) The introduction of interim audit is needed to save time in the final audit.
(vii) To gather some important points with regard to the concern which may be of
help to him later whileconducting the final audit.
(viii) In the event of admission, retirement or death interim audited accounting data is
needed in the middleof the year.
(ix) Where an investigation becomes necessary covering an interim period.
(x) In the case of transfer, sale or change of ownership of a business, it becomes
necessary to know thetrue result of operation and the true financial position at
the end of interim period.

19. What is standard audit? What are its advantages and

disadvantages?**

Standard audit, according to Irish, an Australian author, is “a complete check and

analysis of certain itemsand, contingent upon effective internal check, appropriate
test checks on remaining items, the whole workbeing in accordance with general
auditing standards quite adequate to justify an unqualified opinion.” Advantages of
Standard Audit:
(i) Audit programme can be suitably designed based on standard audit principle.
(ii) It influences the nature and extent of documents and evidences to be obtained
through auditprocedure.
(iii) New auditing standards compatible with the changing socio-economic condition
of the country can bedeveloped after the scrutiny of the existing auditing standard.
(iv) The criticism that collusion often exists between the management and the auditor
leading to distortionof financial statements can be stopped through the
application of standard audit procedure.
Disadvantages of Standard Audit:
(i) Uniform application of standard audit is a remote possibility as it is very difficult
to bring all the firmsunder the same footing.
(ii) Application of standard audit may render some areas unaudited. So chance of
undetected errors andfraud cannot be ruled out.
(iii) Standard audit may bring rigidity in approach because of changing business
environment.
(iv) Setting up standard is contrary to the development of creativity in audit.
 20. “It is no part of an auditor’s duty to give advice either
to directors or shareholders as to what they ought to do”
Comment*
Or
“An auditor is not concerned with the proprietary of business
conduct” Comment*
Or
“It is nothing to auditor whether the business of company is
Being conducted prudently or imprudently, profitably or
unprofitably” Comment*

The objective of an audit of financial statements of an enterprise, according to SA

200A entitled ‘Objective and Scope of the Audit of Financial Statements’, is to enable
an auditor to express an opinion as to the truthfulness and fairness of financial
statements.
The auditor’s opinion helps to establish reliability of the financial statements. The
auditors, however, does not give opinion on the propriety of business conduct or its
future prospects.
SA 200A has specifically pointed out that the user of the “financial statements should
not assume that the auditor’s opinion is an assurance as to future viability of the
enterprise or the efficiency or effectiveness with which the management has
conducted the affairs of the enterprise”.
In pursuance of the role of the auditor in lending credibility to the financial statements
the Companies Act, 1956, has provided that he should be concerned about propriety of
some specific transactions.
Section 227(1A) of the Act requires the auditor to enquire into six specified matters and
report by exception. This section has been inserted into the Act to ensure that the
funds of the company have not been siphoned off by the directors.
Also under CARO, 2003 issued by the Central Government in pursuance of powers
given to it by Section 227 (4A) of the Companies Act, 1956, the company auditor is
required to examine the financial propriety of some transactions.
Further, SA 570, ‘Going concern’ requires the auditors to evaluate whether the going
concern concept is applicable to the circumstances of the entity and whether it will
continue for a foreseeable future i.e., a period not exceeding one year after balance
sheet. In other words, future viability for one year is to be assessed. 93
To conclude, we can say that though, generally, an audit is neither concerned with
propriety of business conduct nor its future viability yet the auditor would be required
to examine the former for the purposes of Section 227(1A) and Section 227(4A) of the
Act and the latter for assessing applicability of going concern assumption as per the
requirements of SA 570
 21. “Fraud does not necessarily involve misappropriation of
cash or goods.” Comment**
Any act committed with some mischievous objectives is called fraud. It includes not
only misappropriation of wealth but also misrepresentation of facts for misleading
others. So far fraud in a business is concerned, it involves either misappropriation of
cash and goods or manipulation of accounts for false representation of state of
affairs of the business. Manipulation of accounts is done generally by responsible
and trustedofficials of the business with motives like:
(a) Defrauding the state by not paying tax.
(b) Earning higher amount of commission on profit.
(c) Playing false with investors and creditors.
(d) Disposing of shareholding at inflated price etc.
By violating the realisation principle of revenue determination and by improper
matching of costs withrevenue, accounts are manipulated. Some of the methods of
falsification of accounts are as follows:
1. Manipulation of sales: Very often to show more profit in particular accounting year,
finished stock are shown as sold by preparing challans, gate passes and invoices
before the last date of the accounting year. Again actual sales within the year may not
be credited to sales account for suppressing profit.
2. Depreciation: Systematic allocation of cost of fixed tangible assets over its
estimated life to the successive profit and loss A/c is known as depreciation. Very often
this allocation is not done systematically. Again lack of consistency in the method of
charging depreciation is another way of falsification of accounts. For example, if a
Company following reducing balance method switches over to straight line method of
charging depreciation without any valid ground and without disclosing the impact on
the working results, it would be a case of falsification of accounts.
3. Stock valuation: It involves lot of calculation, approximations and estimation. For
example there are various methods of charging consumption of material viz, FIFO, LIFO,
Average method etc. Valuation of W-I-P and finished stock involves the question of
absorbing a share of overhead. As there is a lot of subjectivity in stock valuation, it is
very often manipulated by management for some ulterior motive.
4. Sundry debtors: Sometimes old debtors are allowed to continue in accounts
although there is no possibility of their realisation. Again to suppress profit, provisions
for bad debt may made unnecessarily. Accordingly, actual profit and financial position
of the business may be distorted.
5. Improper apportionment of revenue and capital expenditure: If capital expenditures
are recorded as revenue expenditures it will show less profit and create secret reserve.
On the other and if revenue expenditures are treated as capital expenditure it will show
more profit artificially and results in window dressing of balance sheet.
6. Recording of fictitious purchase and expenses: This practice will suppress the profit of the
business.
It is, therefore, clear that manipulation of accounts is very often practiced by
management to defraud the various parties directly o indirectly connected with the
business. So the statement that "fraud does not necessarily involve misappropriation
of cash or goods" holds good.
 22. What is system audit? What are its advantages and
disadvantages?**
The audit which is conducted to examine the suitability of various systems of
accounting prevailing in the firm is called system audit. It assesses the existing
systems of accounting to determine whether they work efficiently or not so that
appropriate opinion can be formed on financial statements. It is an audit to explore
inside the systems and discover whether they produce desired results.
System audit is a kind of investigation of the system of accounts. Its purpose is to
design appropriate system of accounts suitable for the business or revise the existing
system suitably. It is no denying the fact that the business world is dynamic in nature.
The information requirement of different stakeholders is constantly changing. So, the
accounting systems frequently need to be revised so that they provide the information
desired by the stakeholders as an aid to decision making. Therefore, companies
should employ auditors to analyze their accounting systems and business methods to
ascertain whether accounting records and practices are up to date and economical;
and whether such records and practices may be changed so as to do the work better,
quicker and at less cost under the changing conditions.
Advantages:
(i) The accounting procedure can be revised or designed according to the changing
business environment.
(ii) The users of financial statements are immensely benefited as the accounting
system newly revised ordesigned by this kind of audit can generate information
useful to decision making.
(iii) The system does not allow opportunity to commit errors and fraud.
(iv) The profitability of the business is increased due to the introduction of system audit.
(v) The system audit is dynamic in the sense that old concepts and systems are
subject to review in thelight of changing demand of the society.
Disadvantages:
(i) The introduction of system audit is likely to increase the overhead cost.
(ii) The introduction of system audit may be resisted by the accounting staff who
may be prone toorthodox ideas.
(iii) If the system fails to attain desired result, it will entail wastage of money, time and energy.

23. What is EDP auditing? **

The principal object of an audit is to ensure that the accounts on which the auditor is
reporting to show a true and fair view of the state of affairs at a given date and of the
results for the period ended on that date.
The overall objective and scope of an audit does not change in an EDP environment.
However, the use y a computer changes the processing and storage of financial
information and may affect the organization and procedures employed by the entity
to achieve adequate internal control. Accordingly, the procedures followed by the
auditor in his study and evaluation of the accounting system and related internal
controls and nature, timing and extent of his other audit procedures may be affected
by an EDP environment.
Essential requirement of EDP audit
(a) Skills and Competence: When auditing in an EDP environment, the auditor should
have an understanding of computer hardware, software and processing systems
sufficient to plan the engagement and to understand how EDP affects the study
and evaluation of internal control and application of auditing procedures
including computer-assisted audit techniques. The auditor should also have
sufficient knowledge of EDP to implement the auditing procedures,
(b) Work Performed by Others: The auditor is never able to delegate his responsibility
for forming important audit conclusions or for forming and expressing his opinion
on the financial information. Accordingly, when he delegates work to assistants or
uses work performed by other auditors or experts, the auditor should have
sufficient knowledge of EDP to direct, supervise and review the work of assistants.
(c) Planning: The auditor should gather information about the EDP environment that
is relevant to the audit plan, including information as to how the EDP function is
organized and the extent of concentration or distribution of computer processing
24. Distinguish between investigation & audit?******
throughout the entity.

Points of distinction Audit Investigation

1. Objective Audit is undertaken to ascertain Investigation is undertaken
whether accounts have been
for somespecificpurpose, say,
properly drawn up and whether
to ascertain:
they disclose a true and fair view
of financial position and i. Financial position of the firm
results of the business. ii. Earning capacity of the firm
iii. Extent of fraud committed etc.
2. Scope It deals with entire area of As it is conducted for some
books of accounts. So the
specific purpose, it involves
auditor has no alter – native
thorough examination in some
but to resort to test – checking
orsamplechecking. selected areas.

3. Nature The auditor is required to The investigator proves into

express his opinion about
the matter and looks for
generally reliability and
substantive and conclusive
fairness of accounts. He,
therefore, relieson persuasive or evidence to establish the
prima – facie evidence to fact. He is a blood hound and
support his findings. He is only takes everything as suspicious
a watch dog and takes unless proved otherwise.
everything as correct in the
absence of suspicion.
4. Time Span Time span of audit is generally It has got no fixed time span.
financial year which may
It is undertaken covering any
extend to 15 months in some
time period depending upon
special cases. It is a regular
 matter undertaken cases. It is not regular but
compulsorily in case of joint occasional.
stock company.
5. Interested Audit is conducted on behalf of An investigation is done
party the ownersor shareholders and i. On behalf of owners;
in some cases for Central ii. On behalf of prospective
Government. buyersor would be
owners;
iii. On behalf of incoming
partners;
iv. On behalf of Central
Govt. atthe request of
shareholders.
6. Adjustment of An auditor is not required to The investigator may have to
profit adjust the net profit as
adjust the netprofit as
calculated by accountant to
ascertained by accountant.
arrive at the actual profit
earningcapacity.
The auditor is required to The investigator does not
7. Use of GAAP ensure that accounts have bother about the compliance
been prepared in conformity of generally accepted
with generally accepted accounting principles. He is
accounting practices and not concerned with whether
relevant accounting standard. accounting policy of the
He is required to be well versed company is being followed or
in accountancy and generally not. He may belong to
becomes a Chartered accounting profession or other
Accountant. profession.
8. Reporting The report of auditor is The report of the investigator is
stereotyped and as per format made in detail and refers to
prescribed by the Companies (a) the instructions given to
Act and SA700, ‘Forming an him; (b) method of approach
Opinion and Reporting on followed by him; (c)
Financial Statements’. documents relied upon; (d)
his findings and observations;
and (e) his recommendation to
his client.
 25. What do you mean by auditor’s independence? Why is it
so important?*

Auditor’s independence means ability of the auditor to express opinion on the financial
statements without any influence from parties that have an interest in the results
published in the financial statements of the entity. It implies that the auditor’s
judgement on the authenticity of the financial statements is not subordinate to the
wishes of directors or other parties, more specifically company managers/directors or
to his own self interest. Independence is characterized by integrity and an objective
approach to the audit process. The concept requires the auditor to carry out his or her
work freely without any pull and pressure.
Real Independence and Perceived Independence:
There are two aspects of auditor’s independence – independence in fact (real
independence) and independence in appearance (perceived independence). Together,
both forms are essential to achieve to goals of independence. Real independence refers
to independence of mind. It determines how the auditor is going to deal with a
particular situation. It enables him to make independent decisions even if he is under
some pressure from company directors. Independence in appearance, on the other
hand, implies that the auditor should act in a manner that other people consider him
independent.
It is essential that the auditor not only acts independently, but appears independent too.
If an auditor is in fact independent, but one or two factors suggest otherwise, people will
be led to conclude that financial statements do not reflect a true and fair view. For
example, if the auditor renders any consultancy service to the client apart from
conducting statutory audit, his independence is likely to be suspected.
Types of Independence:
The statutory auditor should have three types of independence. These are as follows:
1. Programming independence: It implies that the auditor should be at liberty to select
the most appropriate strategy while conducting an audit. It is he who will decide his
audit plan without being influenced by wish or direction of another person.

2. Investigate independence: It indicates that the auditor should be able to implement

his audit strategy in whatever manner he considers necessary. He should have
unlimited access to all company information. He must have right to get answers to
all queries he makes regarding company’s business and accounting treatment.
3. Reporting independence: This independence implies that auditors should have
ability to disclose any information relevant to the users for taking decisions.

Importance of Auditor’s Independence:

The stakeholders of the company take various economic decisions based on the
audited financial statements. But since 2000 a number of scams and accounting
scandals in many globally reputed companies like Enron, World Com etc. could not
be brought to light by auditors. In India the recent accounting scam in Satyam
Company is a glaring example of audit failure. So the perception of the people about
the integrity of audit profession is now gradually changing. It is being thought that
there is a wide-spread collusion between auditors and management which results
in drainage of public money.
In this background the question of auditor’s independence has assumed a special
significance. It is now being considered as the cornerstone of the auditing profession.
The auditor should carry out his work freely and in an objective manner. He should
express an unbiased opinion on the financial statements so that stakeholders can rely
on his opinion and can safeguard their interest. This will lead to economic development
of the country by bringing prosperity to business.

26. What do you mean by standards on auditing (SA)? Discuss

the importance/Purpose of standards on auditing.*******

Meaning:
Standards on auditing refer to a set of systematic guidelines used by auditors while
conducting audit of company’s accounts. These guidelines are generally prescribed by
the professional bodies of accountants based on collective deliberation and views of
different segments of society and interested groups such as regulators, industry and
academies. These standards provide principles and techniques of auditing which help
the auditors ensure performing his duties most efficiently and effectively. They are a set
of ideas which serves as a framework for auditing.
Importance/Purpose:
The importance of standards of auditing can be summarized as below:
1. Guidance for audits: Standards on auditing provide high quality auditing standards
and guidance for financial statement audits and other types of assurance services.
Thus, quality of audit is much improved.
2. Reducing audit risk: By rely on standards on auditing auditors can minimize the
probability of missing material information. So the extent of audit risk is reduced. The
 auditor can defend himself against allegation of negligence by establishing that he
has performed audit according to standards.
3. Prevention of scams and accounting scandals: The standards on auditing educate
the professional auditors about their role and responsibility in performing audit. So
they always remain careful and cautious while performing audit. This mindset of
auditors goes a long way towards detection of scams and accounting scandals.

4. Public confidence in the auditing profession: As standards on auditing enhance the

quality of audit, the public confidence on audit profession which has been shattered
due to recent wide spread scams and accounting scandals, will be strengthened.
5. Reduction of investor’s risk: If there is any discrepancy between what the audit report
states and the actual situation, it will have a disastrous impact on the risk
perception of the investors. The cost of capital will then rise and the firm will find it
difficult to raise finance. It is expected that standards on auditing can play a
significant role in reducing the risk perception of the investors as they can rely on
audit conducted in a fair and uniform manner.
 Unit II: (10 + 5 = 15 Marks)
Auditing Procedures and Techniques
Auditing Engagement-Audit Planning- Audit Programme (Concept)
Documentation: Audit Working Paper, Ownership and Custody of Working Papers-Audit file (Permanent and
Current) – Audit Note Book- Audit Memorandum.
Audit Evidence – Concept, Need, Procedures to obtain Audit Evidence
Routine Checking, Test Checking and Auditing in Depth
Concept of Analytical Procedure and Substantive Testing in Auditing.
Audit of Educational Institutions, Hospitals and Hotels

27. What do you mean by the term of audit engagement? Why

is it necessary to issue an engagement letter?**

Audit engagement
When a company has to go through the audit process, an auditor may use the term
"audit engagement." This can mean different things, so it is important that the auditor
clarify what he means when he uses the term. Regardless of which definition the
auditor follows, however, the auditor always follows specific procedures and guidelines
for handling the engagement.
Accepted Definitions
An audit engagement very loosely refers to an audit that an auditor performs. More
specifically, it refers onlyto the initial stage of an audit during which the auditor notifies
the client he has accepted the audit work and clarifies his understanding of the audit's
purpose and scope. Even more specifically, the term audit engagement can refer to
the written letter by which the auditor formally notifies the client he will engage in audit
services.
Full Engagements
When referring to the audit as a whole, audit engagements encompass several
distinct steps, which are organized into planning, testing of controls, substantiation or
fieldwork and exit or finalization.
The first is sending a letter to the client alerting him of the audit.
After this initial contact, the client and auditor meet to pinpoint further how, when and
why the audit will happen, as well as the resources the auditor will have at his disposal.
The auditor then conducts primary surveys to understand the company and the
controls in place.
The next step is testing the controls and gathering as much information as possible.
Based on the results, the auditor constructs a draft of the formal audit report, which he
shares with the client. Auditors complete the audit by following up with the client,
normally within six months.
Initial Audit Step
Viewed as only as the first step of the audit process, the intent of an audit engagement
is to get the client and the auditor on the same page. The client describes exactly what
he needs the auditor to do. This helps the auditor decide whether the audit is feasible
and how to approach it. The audit engagement by itself does not produce any viable
results or findings -- auditors do this during fieldwork -- but it allows the auditor to
know how, when and why to get those findings. During this initial stage of the audit, the
auditor is concerned with understanding the client and the risks that might produce
inaccurate audit results.
Why is it necessary to issue an engagement letter?
Auditors generally provide audit engagement letters as one of the final steps in the
audit planning stage. The letter summarizes all the information the auditor has gained
about the client, the client needs and audit objectives, as well as the scope of the audit
and what the client is responsible for doing. Additionally, audit engagement letters
clearly indicate the auditor assigned to the audit. They also may indicate additional
information the auditor will need during the audit,, the auditor's fees, people with
whom the auditor will need to speak and how much time the auditor has to finish his
work. Also sometimes included are relevant financial and accounting regulations to
which the auditors must adhere. A good audit engagement letter also recognizes that
not all clients are familiar with audit procedures and therefore outlines those
procedures for clarification. Audit engagement letters are very similar to work
contracts in the way they are constructed in that they define duties and relationships,
but based on their wording, they are not necessarily legally binding the way a formal
contract is.

28. What is audit planning? What are the benefits of Audit

Planning?***

Audit planning refers to establishing the overall audit strategy to conduct an

effective audit in an efficient and timely manner. As per SA 300 ‘Planning an audit of
Financial Statements’, audit planning involves following activities:
(i) Acquiring knowledge of the client’s accounting system, policies and internal control
procedures.
(ii) Establishing the desired degree of reliance that can be placed on internal control.
(iii) Setting the scope, timing and extent of audit procedures to be applied.
(iv) Deciding the analytical procedures to be applied.
(v) Obtaining a general understanding of the legal and regulatory framework
applicable to the entity andhow the entity is complying with that framework.
(vi) Determining the resources to be deployed for specific audit areas, such as the
use of appropriatelyexperienced team members for high risk areas or involving of
experts on complex matters.
(vii) Determining the amount of resources to be allocated to specific audit areas.
(viii) Deciding how such resources are managed, directed and supervised.
(ix) Setting of materiality levels for audit process SA300, “Planning an Audit of Financial
 Statements” states that audit planning is a continuous process that often begins
shortly after the completion of the previous audit and continues until the
completion of the current audit engagement.
Advantages of Audit Planning:
SA 300 points out the following benefits of audit planning:
(i) It helps the auditor to devote appropriate attention to important areas of the audit.
(ii) The potential problems can be identified and resolved on a timely basis.
(iii) The auditor can properly organize and manage the audit engagement so that it
can be performed in aneffective and efficient manner.
(iv) Audit planning can assist in the selection of engagement team members with
appropriate levels ofcapabilities and competence to respond to anticipated risks.
(v) It facilitates the direction and supervision of engagement team members and the review
of their work.
(vi) It assists, where applicable, in the co-ordination of work done by other auditors and
experts.
 29. What is audit programme? Discuss the advantages****
Before starting an audit, a programme of the work to be done on the audit, known as
audit programme, is generally drawn by the Chief Auditor. He outlines a programme
according to the requirement of each case asto what work is to be done by senior and
junior staff and the time by which the work is to be finished. While preparing the audit
programme of each audit, the auditor should keep in mind the nature of internal
control and its extent as well as the size and composition of the business.
According to Professor Meigs, "An Audit Programme is a detailed plan of the auditing
work to be performed, specifying the procedures to be followed in verification of each
item in the financial statements and giving the estimated time required."
Therefore an audit programme provides a guide in arranging and distributing the work
and in checking against the possibility of omissions.
Advantages of Audit Programme:
A pre-determined audit programme has the following advantages:
(a) Balanced distribution of work: With the help of audit programme, it will be possible
to distribute the work in an orderly way according to the qualification, experience
and efficiency of the assistants of the auditor.
(b) Consciousness about the work accomplishment: In view of allocating the work in a
scientific way among the staffs of the auditor, they are well conscious and alert
about their own duties. No one will show any grievance.
(c) Knowing the progress of the work: The auditor can know about the progress of the
work done by his assistants. As a result, the whole work can be completed timely,
methodically and honestly.
(d) Immediate start of the work: As the work can be planned and phased
beforehand with the help ofaudit programme, it will start immediately without any
loss of time.
(e) No work left unexamined: Since the programme takes into consideration all the
details involved in the work to be undertaken during the course of audit, no portion
of the work is left from checking. There is less chance of its being over – looked or
omitted.
(f) No possibility of dislocation of work: Division of work among the junior clerks is
done in such a way so that there will be minimum dislocation of work if any junior
goes on leave or leaves the work
(g) Specifying the responsibility: In case, any fraud or error remains undetected, the
responsibility for negligence or mistake on the part of a clerk can be easily located
as the work allotted to him is already fixed and he has to put his signature in the
 programme every day against the work performed by him.
(h) Proof of evidence: If charge is made against the auditor in future, he can produce it
as evidence and candefend himself that the work has been done with due course
and competence. Because, the programme will indicate what has been done by
him or his assistants.
(i) Maintenance of uniformity: It may result in uniformity in the work done if similar
programme is followed from time to time. Moreover, it serves as a ready check list
of the procedures to be applied andthe work already finished.
(j) Supervision and control of the work: Supervision and control of the work can be
undertaken easily and conveniently as the work is performed in a planned and
systematic manner.
(k) Facilitating the final review: Before signing his audit report, it is easily possible for
him to have a final review of the work done by him. At this juncture, it may be
explored whether every work has been completed or not.
(l) Basis for preparation of next audit programme: It may be considered as a useful
basis for planning the programmes for the years to come. Thus, it will save time
and labour.
 30. What is audit working papers? Discuss its objectives***
Audit Working Papers
Working papers are those papers which consist of details about accounts which are
under audit so that the auditor may not have again to go over the accounts of his
client if he wants to refer to them later on duringthe course of audit. Working papers
consist of working trial balances, adjusting entries, account analysis, schedules of
debtors and creditors, particulars of investment and of depreciation, copies of
correspondence between auditors and debtors, creditors, and banks etc. -previous
audit reports, important quarries with explanations completed audit programme etc.
According to SA 230 “Audit Documentation”, audit working papers are written records
of evidence obtained by the auditor in the course of audit. They also document
methods and procedures followed by the auditor and the conclusions he has arrived
at. The summary of important matters identified by the auditor which require exercise
of judgement together with the auditor’s conclusions are included in working papers.
Objects of working Papers :
(a) To show the extent to which accounting principles and auditing standards have been
followed.
(b) To support the audit report.
(c) To serve as an evidence in case of any suit against the auditors for negligence in
the performance ofhis duties.
(d) To enable the auditor to know the weaknesses of the internal control system and
give advise to hisclient to avoid such weaknesses.
(e) To serve as a means to provide training to the audit clerks about the ways of
summarising the workdone by them.
(f) To help the auditor to plan for the subsequent years.
(g) To enable the auditor to prepare the report to be issued without any dealy.
(h) To assign the unfinished work of one clerk to another without dislocation,
duplication and omission ofany work in case changes and transfer of staff are very
frequent.
Characteristics of good working papers
(a) They should be complete in all respects. In other words, they should contain all
the essentialinformation so that they may be of maximum utility.
(b) Working papers should be properly organised and arranged so that one may not
find any difficulty inlocating a particular matter.
(c) Paper used for working papers should be of good quality and of convenient and
 uniform size so that itmay not be damaged by frequent handling.
Protection and ownership or Working Papers
The working papers are highly confidential papers and therefore, must be kept in safe
custody. They are not to be shown to any party which might make misuse of them.
With regard to the ownership of these papers, there is a controversy as to whether
these papers belong to the client or to the auditor. The client claims that since the
auditor is his agent, he has no line on these papers. On the other hand, the auditor
claims these papers to be his property on the basis that he has collected the
information for the purpose of discharging his duties. Actually these papers come to
the help of the auditor in future in case the client files a suit against the auditor for
negligence etc. it is also argues that the outgoing auditor should hand over these
papers to incoming auditor but he should not do so if there is some kind of suspicion or
doubt in his mind. In many cases, it was held that these papers belonged to the
auditor and not to the client.
 31. What is Audit File? What are the contents of Audit
File?****
The File in which the auditor preserves audit papers is known as audit file. So it is the
archive of audit paperswhich are generated and obtained by the auditor in the cause
of audit. To the auditor, the importance of audit file is enormous. In the subsequent
audit of the same client, he can use it as reference. He can also use it as proof of
defence, if any charge of negligence is levelled against him in future. For the sake of
convenience, the audit file should be classified into permanent audit file and current
audit file.
(1) Permanent Audit File:
A permanent audit file normally includes
(a) Information concerning the legal and organisational structure of the entity. In the
case of a company,this includes the Memorandum and Articles of Association. In
the case of a statutory corporation, this includes the Act and Regulations under
which the corporation functions.
(b) Extracts or copies of important legal documents, agreements and minutes relevant to
the audit.
(c) A record of the study and evaluation of the internal controls related to the
accounting system. This might be in the form of narrative descriptions,
questionnaires or flow charts, or some combination thereof.
(d) Copies of audited financial statements for previous years.
(e) Analysis of significant ratios and trends.
(f) Copies of management letters issued by the auditor, if any.
(g) Record of communication with the retiring auditor, if any, before acceptance of
the appointment asauditor.
(h) Notes regarding significant accounting policies.
(i) Significant audit observations of earlier years.
(2) Current audit file.
The current file normally includes
(a) Correspondence relating to acceptance of annual reappointment.
(b) Extracts of important matters in the minutes of Board Meetings and General
Meetings, as are relevant tothe audit.
(c) Evidence of the planning process of the audit and audit programme.
(d) Analysis of transactions and balances.
(e) A record of the nature, timing and extent of auditing procedures performed,
 and the results of suchprocedures.
(f) Evidence that the work performed by assistants was supervised and reviewed.
(g) Copies of communications with other auditors, experts and other third parties.
(h) Copies of letters or notes concerning audit matters communicated to or
discussed with the client,including the terms of the engagement and material
weaknesses in relevant internal controls.
(i) Letters of representation or confirmation received from the client.
(j) Conclusions reached by the auditor concerning significant aspects of the audit,
including the manner in which exceptions and unusual matters, if any, disclosed
by the auditor’s procedures were resolved or treated.
(k) Copies of the financial information being reported on and the related audit reports.
 32. What is audit note book?****
Audit Note book:
Audit note book is a diary or register maintained by audit staff to note errors, doubtful
quarries and difficulties. The purpose is to note down the various points which need to
be either clarified with the client or the chief editor. The Audit note book is used for
recording important points to be included in the auditor’s report.
Contents of an Auditor’s Note Book:
(a) A list of books of accounts maintained.
(b) The names, duties and responsibilities of principal officers.
(c) The particulars of missing receipts and vouchers.
(d) Mistakes and errors detected.
(e) The points which need clarifications and explanations.
(f) The points deserving the attention of the auditor.
(g) Various totals and balances.
(h) The Points to be a part of auditor’s report.
Advantages of Audit Note book:
Some of the advantages of the audit note book are.
(a) It ensures the uniformity and helps in knowing the amount of work performed.
(b) Important matters relating to the audit work may be easily recalled.
(c) Facilities and preparation of the audit report.
(d) In case of the assistant in charge is changed, no difficulty is faced in continuing the
incomplete work.
(e) The responsibility of the errors undetected can be fixed on clerk concerned.
(f) The audit note book shows the extent of the interest and pain taken by the audit
staff. It helps in theirappraisal.
(g) It ensures that the audit programme has been sincerely followed. Deviations can be
noticed.
(h) It is reliable evidence in the court of law, If an auditor has to defend himself.

33. What is Audit Memorandum?****

An audit memorandum a Statement containing all useful information regarding the

business of the client. It indicates the method of operation, policies as to the different
aspects of the business. It should also contain all the conditions in respect of audit.
The object of preparing the memorandum is to record the general information of the
business which may be of real use to him while carrying on the work of audit.
If it is a first audit, it will have to be prepared thoroughly so that it covers the various
aspects of the concern. But where the audit work was carried out earlier, only changes,
if any, concerning various items should be noted. The term 'audit memorandum',
though not commonly used, covers different aspects, like audit manual, audit
programme, audit file and internal control questionnaire, etc.
The contents of audit memorandum as prescribed by Eric. L. Kohlar are as follows:
i. The plant and office location.
ii. Ownership and control and the nature of re-organization having taken place in
recent year.
iii. Adequacy of manufacturing facilities, various products manufactured and
their marketpotentiality.
iv. Sources of raw-material and their price trend.
v. Names of responsible officers and nature of their responsibility.
 vi. The adequacy of books of account maintained by the client.
vii. A brief resume of net worth of the firm.
viii. Types of subsidiary companies and how they are operated and controlled.
ix. Different policies of the company as to advertisement, costing methods,
effectiveness ofinternal control system.
x. Investment policy, adequacy of reserve and the purposes of contingency reserve.

34. Explain the concept of audit evidence.*****

Evidence in Auditing
Auditing is concerned with the verification and examination of accounting data. In this
process an auditor collects and evaluates evidence to establish facts and to draw
conclusions and inferences. It is an accepted standard of auditing that "sufficient
competent evidential matter is to be obtained through inspection observation,
inquiries and confirmation to afford a reasonable basis for an opinion regarding the
financial statements under examination". There an auditor should understand the
nature and type of evidence availablein various auditing situations. Further he should"
be able to evaluate the sufficiency which refers to adequacyof such evidence and the
competency which refers to the quality or reliability of evidence.

Concept of audit evidence

The concept of evidence is fundamental to auditing. All audit techniques and
procedures are derived from it. It helps the auditor in perceiving the types of evidence
available in an audit situation, collecting it throughthe various audit techniques and
evaluating its sufficiency and competency to support accounting data.
According to Mautz and Sharaf development of this concept contains the following steps :-
(a) Recognition of the Propositions to be Proved First of all, the auditor is to perceive
and recognise whathe is trying to prove. In other words, he must be clear about the
propositions in support of which evidence is required. The accounting statements,
which an auditor reviews, consist of a series of propositions. For example one of the
propositions in balance sheet is that the enterprise has fixed assets, debtors cash
etc.
(b) Evaluation of Propositions After the propositions behind accounting data being
identified they must be evaluated according to their significance or materiality. In
other words, various propositions may be classified into those which are very
significant, those which are moderately material, and those which are not so
 material. Materiality is a relative concept and depends upon the size and nature of
an item. It is natural that an auditor must collect quantitatively more compelling
evidence in case of significant propositions, than in case of propositions which are
not so material. Therefore, there is a direct link between the materiality of a
proposition and the quality of evidence required to support it.
(c) Collection of Evidence By applying various audit techniques an auditor collects
different types of evidence to support the propositions made in the accounting
data. The audit programme lists the manner in which such evidence is to be
collected within the constraints of time and cost.
(d) Evaluation of Audit Evidence After the evidence being collected the auditor must
evaluate it critically
with regard to its usefulness. Auditor, like historians and mathematicians must
develop professional standards to such an extent that they can be used to evaluate
audit evidence.
(e) Formation of judgement: The last steps is to form an opinion about the various
propositions by the
auditor after he has identified the propositions behind the accounting data,
evaluated them according to their significance, collected evidence through the
audit techniques, critically reviewed the evidence as regards, it validity. In forming
his judgemnt the auditor is not looking for absolute proof. He has to find evidence
which assures that the accounting data under report fairly represent the reality as
far as it can be determined.

35. What are the various methods of obtaining Audit

Evidence? Discuss the principles which are useful in
assessing the reliability of audit evidence ****
SA 500 has prescribed following methods of obtaining audit evidence:
1. Inspection: Inspection consists of examining records, documents or tangible assets.
Whether the inspection can be a reliable means of obtaining audit evidence will
depend upon the nature and source of documents and effectiveness of internal
control of their processing. Inspection of tangible assets is one of the methods to
obtain reliable evidence with respect to their existence but not necessarily as to
their ownership or value.
2. Observation: Observation consists of witnessing a process or procedure being
performed by others. For example, the auditor may observe the counting of
 inventories by client’s staff.
3. Inquiry: Inquiry consists of seeking appropriate information from knowledgeable
persons inside or outside the entity. It may range from formal written inquiries
addressed to third parties to informal inquiries addressed to client’s staff.
4. Confirmation: It refers to the substantiation by a knowledgeable third party, in
response to specific enquiry/request by the auditor.
5. Computation: Computation consists of checking the arithmetical accuracy of
source documents and accounting records or performing independent
calculations.
6. Analytical Review: Analytical review consists of studying significant ratios and
trends and investigating unusual variation in the amount of an item.
7. Reperformance: It involves the auditor’s independent execution of procedures or
controls that were originally performed as part of the entity’s internal control.
Reliability of Audit Evidence:
The reliability of audit evidence depends upon the source from which it is obtained.
However, followinggeneralization as per SA 500 may be useful in assessing the reliability of
audit evidence:
1. Evidence obtained from external source (e.g. confirmation of balance received from
a third party)
becomes usually more reliable than evidence obtained internally.
2. Internal evidence is more reliable when the related internal control is sound.
3. Evidence in the form of documents and written representations is usually more
reliable than oralrepresentations.
4. Evidence obtained directly by the auditor himself is more reliable than obtained
indirectly or byinterference.
5. Audit evidence provided by original documents is more reliable than audit
evidence provided byphotocopies or facsimiles or documents that have been
filmed or digitized.
 36. What is routine checking? Discuss the objectives of
routine checking?**
The checking of books which are carried on by the auditor as a matter of routine work
is known as routine checking. In other words, the work performed by auditor in order to
see whether the transactions recorded in the books of account are proper and whether
scientific method has been followed in recording the transactions, is called the routine
checking.
It involves the consideration of the following functions:
Following works are included in the scope of routine checking:
i. Whether correct amount has been recorded from voucher.
ii. Whether appropriate accounts have been debited and credited for each
transaction in the books oforiginal entry.
iii. To check the casting, sub-casting, carry forward, extension and other
calculations in the books oforiginal entry.
iv. To check the posting from the books of original entry to ledger.
v. To check the opening balances of all personal accounts and real accounts.
vi. To check the total and carry forward to next page of the ledger account.
vii. To check whether balancing in all accounts have been correctly done.
viii. To see that whether all balances have been transferred to appropriate column in the trial
balance.
ix. To check whether balances of all nominal accounts have been transferred to Income
Statements.
x. To see whether balances of all real and personal accounts have been properly
recorded in therespective site of Balance Sheet.

Objectives of Routine Checking

(a) Detection of errors and frauds : Detection of errors and frauds can be easily done.
They can be prevented with ease.
(b) Examining the correctness of figures : The correctness of the figures of transactions
which are recorded in the books of original entry are examined.
(c) Examination of posting to ledger accounts : It requires to examine whether the
transactions have beenposted to the respective ledger accounts from the books of
original entry.
(d) Examining the balances of different ledger accounts : It needs to examine whether
the balances of different ledger accounts have been properly drawn up.
(e) Verifying the ledger balances in trial balance : It certainly requires to verify whether
 the different ledger balances have been correctly shown in the trial balance and
examining the state of affairs, as revealed by the profit and loss account and the
balance sheet prepared from the trial balance.
(f) Not to alter the figures in the books : Provision should be made for not altering the
figures in the books of original entry and ledgers after once audited.

Advantages of Routine Checking

Advantages derived from routine checking are as follows:
1. Detection of error: Since all the aspects of recording transactions are
checked thoroughly,there is at least possibility of error being left undetected.
2. Detection of fraud: Fraud of minor nature committed by the accounting clerk
can be detectedby routine checking.
 3. Moral pressure: Since routine checking involves thorough checking, the
accounts clerk become more cautious and careful while recording transactions.
Their venture to commit fraudis also minimized.
4. Increasing reliability and fairness of financial statements: By keeping the books
of accounts free from errors and frauds as far as possible, it makes significant
contribution towards increasing the reliability and fairness of financial
statements.
5. Economy: Routine checking can be got done by ordinary clerks. So it is not much
expensive.

Disadvantages of routine Checking

Disadvantages of routine checking are as follows:
1. Monotonous: Routine checking is a mechanical process of comparing entries
with vouchersand ticking the figures. So audit clerks may get bored with his job.
2. Inability to detect all types of errors and frauds: Errors of principle or
compensating errorsare unlikely to be detected by mere routine checking.
3. Inability to detect planned fraud: Routine checking cannot detect the planned

37. What is test checking? What are the Precautions to be

taken in Adopting Test Checking Techniques?**
Or
Test checking is based on presumption. What is that
presumption?**
fraudcommitted by the top management.
TEST CHECKING
Test checking refers to the process of selection and examination of a few sample
transaction out of large number of similar transaction. It is presumed that selected
transaction represent other transaction not considered for verification. It is selective
verification of transaction. An auditor can form his opinion on financial statement by
conducting verification of either cent percent transaction or only a few representative
transactions from each category. However, his opinion is unlikely to differ even if he
verifies only a few transactions provided his selection of transaction is judicious and
rational.
As per SA 530 “Audit Sampling”, the auditor should select sample item in such a way
that the sample can be expected to be representative of the population. It should be
ensured that all items in the population have an equal opportunity of being selected.
Test checking is adopted to avoid unnecessary exercise of going through each and
every transaction. Based on the result of verification of a few representative
transaction only, the auditor forms his opinion about the fairness of financial
statements.
Precautionary measures before the application of test checking
As the adoption of test checking is fully dependent on the judgement of the auditor, he
should be very carefulin this respect. The following are the precautionary measures to
be taken by the auditor before he applies test checking for audit.
(a) Covering every book of prime entry: Representative transactions should be so
selected as far as possible, as to cover the whole of the period under audit. It
should cover every book of prime entry and ledger.
(a) Clerks of organisation checked: The selection of transactions should be distributed
in such a way that the work of almost all the clerks of the organisation is checked.
(b) Reviewing the internal control system etc: The auditor must review the system of
internal check, internal control and internal audit thoroughly. If he views that the
prevalent internal control system is either defective or ineffective, he should not
apply it.
(c) Items be representative: The selection of the items should be made at random and
should be as far as possible be representative in character.
(d) No element of biasness: There should be no element of biasness or arbitrariness in
the selection of sample.
(e) Number of transactions pre-determined: The number of transactions to be
selected for each testcheck should be pre-determined.
(f) Transactions selected to be large number: The transactions selected for test
checking must include a fairly large number of transactions for the period.
(g) Entries for first and last months be checked: The entries pertaining to the first and
the last months of the year should be thoroughly checked as fraudulent
manipulations are usually made during these months.
(h) Test checking not to be applied for Cash Book and Pass Book: Test checking should
not be applied for Cash Book and Pass Book which are to be thoroughly checked.
(i) Review the results of test checking: The auditor must always review the results of
test checking for determining whether there is any further scope of checking
records. The nature of errors detected throughout test checks may reveal this if
they are reviewed carefully and thoroughly.
(j) Checking the different portions of the work: In case of selection of entries and
accounts for applying test checks, proper care should be taken to check the
different portions of the work at each audit
(k) No consultation with the staff of the client: No consultation should be made with
the staff of the clientas regards the selection of transactions for test checking. This
is absolutely his job and is to be treated with utmost secrecy.

38. What do you mean by auditing in depth?********

Meaning:
Audit in depth refers to the step by step examination of selected transactions from
their beginning to their conclusion. Under this technique the auditor reviews all
operational and accounting aspect of the representative transactions from origin to
end. Based on his findings of thorough examination of a few selected transactions of a
particular category he forms his opinion about the propriety and correctness of rest of
the transactions of that category. This technique is adopted by the auditor when the
number of transactions is numerous and it is not possible for him to check each and
every transactions. Therefore, he select a few representative transactions of a
particular category and starts checking vertically step by step
For example, audit in depth of purchase will involve following steps:
i. Selecting a few purchase invoices of material importance.
ii. Verifying that they are backed by purchases orders.
iii. Examining that purchase orders have been raised as per established procedure
and norms ofpropriety.
iv. Checking that invoices have supporting challans duly certified by receiving Deptt.
and stores Deptt.
v. Ensuring that purchases have been recorded correctly in the books.
vi. Seeing that payments have got the approval of competent authority and have
been correctlyrecorded in the book.
If the auditor is sure that there is no irregularity at any stage of those transactions, he can
presume that thereis also no irregularity in any stage of other transactions of this
category left unchecked.
One thing that should be carefully noted is that audit in depth is not the substitute of test
checking. Rather, itmakes the Test Checking more effective.

Advantages:
Following are the advantages of audit in depth:
i. Effectiveness of audit: Audit in depth makes the audit more effective. In fact in
depth review of some representative transactions provides the auditor with better
audit evidences than superficial examination of all transactions.
ii. Timely completion of Audit: It is possible to complete audit very quickly.
iii. Reduction of cost of Audit: Cost of Audit can be reduced as only a few
representative transactions ofeach category are thoroughly checked.
iv. Avoidance of monotony: The audit staff do not feel monotonous as they are to
check onlyrepresentative transactions of varied nature.
v. Creating moral pressure: There is moral pressure on accounts clerk, in as much as
any transaction maybe selected for in depth study.
vi. Assessment of propriety: This technique is very suitable for propriety study with
regard to transactionof material importance.
vii. Fair assessment of Position: Since only items of material importance are
selected for verification,there is least possibility off any error on the part of auditor
in assessing position of the company.
viii. Scope of development: Since audit in depth is conducted analytically, the
auditor finds scope todevelop new thoughts and techniques for future
improvement of audit.

Disadvantages:
Following are the disadvantages of audit in depth:
i. Risk: The auditor cannot avoid risk since all transactions are not considered for
in-depth examination.
ii. Chance of improper selection of Transactions: This technique will not be very
effective, if the transactions are not properly selected for verification.
iii. Inappropriate audit opinion: If some errors and frauds remain in transaction not
selected for examination, the financial statement will not reflect a true and fair
view. So, there will be inappropriate audit opinion.
iv. Chance of Brand: Since only items of material importance are selected, the
accounts clerk may become prone to commit fraud in less important
transactions the cumulative effect of which may be enormous.
 39. What is analytical procedure in the audit?****
Very often there may be some complex error or ingeniously made fraud in the books of
accounts which do not come to the notice of the auditor in the course of routine
checking or even carefully conducted vouching. This omission on the part of the
auditor may also occur due to sample based checking undertaken by him. To
eliminate or reduce the possibility of such omissions, the auditor is required to apply
certain other procedures. So, with the passage of time, analytical procedure has
assumed a lot of significance as a substantive audit procedure. Analytical procedure
means the study of the relationship among relevant financial and non-financial data,
observing the trend of data and inquiry into the reasons of some unusual fluctuation in
the amounts of some items which are not consistent with other relevant information or
which deviate from predicted amount.
As per SA520, ‘Analytical Procedures’, “analytical procedure means evaluations of
financial information through analysis of plausible relationships among both financial
and non-financial data. Analytical procedures also encompass such investigation as
is necessary of identified fluctuations or relationships that are inconsistent with other
relevant information or that differ from expected values by a significant amount.”

40. Discuss how the application of analytical procedure is

done in audit?***
Or
What are the methods of analytical procedure?***
Analytical procedure may be conducted in the following ways:
i. Comparison with last year data: Comparison of entity’s financial information
with comparable information of last year can enable the auditor to identify
some serious mistakes or frauds in accounts. For example, by inquiring into the
reasons of fall of gross profit ratio from that of last year, it may be possible to
detect pilferage of stock or overcharging of consumption of material or
misappropriate of a part of sale proceeds.
ii. Comparison with budgets: Comparison of actual results with anticipated results
such as budgets or forecasts. If the differences are found to be material, the
auditor will investigate the reason of the difference.
iii. Comparison with Industry average: Comparison of entity’s financial information
with that of the industry may help the auditor unearth fraud and error. For
example the investigation into the unusual difference of the entity’s ratio of sales
 to accounts receivables from that of entities of comparable size in the same
industry or industry average may probably enable the auditor to detect ‘paper’
book debt.
iv. Examination of relationship among data: The auditor may look into the
relationship among financial data that are expected to conform to a predictable
pattern based on the entity’s experience. The study of sales to raw material
consumption ratio may reveal under charging of raw-material consumption.
v. Study of relationship between financial and non-financial data: The study of
relationship between financial and non-financial information, such as
employment cost to number of employees may throw some light about the
veracity of the employment cost shown in the income statement.
 41. Discuss the Tools and Techniques of Analytical
procedure?**
As per SA 520 Analytical procedure can be conducted with the help of following tools and
techniques:
1. Trend Analysis: This technique is used for analyzing the fluctuations in the amounts
of importantaccounts over two or more years.
2. Testing of Reasonableness: Reasonableness testing is done by reviewing the
relationship of certainaccount balances to other balances. Examples of accounts
that may be reasonable tested are:
(a) Raw material consumption to production quantity.
(b) Interest expenses against interest bearing obligations.
(c) Wastage & scrap % against production and raw-material consumption (quantity)
(d) Work-in-progress based on material issued.
(e) Sales discounts and commission against sales volume.
(f) Rental revenues based on occupancy of premises.
3. Ratio Analysis: This technique is used for studying the relationship between
financial statementamounts. Commonly used ratios are:
(a) Income or loss as a percentage of sales
(b) Gross profit ratio
(c) Accounts receivable turnover
(d) Inventory turnover
(e) Leverage ratios
(f) Liquidity ratios
4. Sources of Information: Following sources of information may be used for analytical
review:
(a) Interim financial information
(b) Budgets
(c) Non-financial information e.g., employee morale, Government policy, threat
from other productsetc.
(d) Confirmation from bank, debtors and creditors
(e) VAT return
(f) Board minutes
5. Common size Analysis: Common size analysis which is done by expressing each
item of balance sheet as a percentage of total assets and each item of income
statement as a percentage of total sales is an useful tool of analytical procedure.
 42. Discuss the extent of reliance on analytical
procedures?***

Analytical procedures have now assumed a special significance as a method of

testing the validity of different data in the financial statements. It is applied by the
auditor with the expectation that relationships among data exist and will continue to
exist. By reviewing these relationships the audit can assess the completeness,
accuracy and validity of the data. However, the reliability of analytical procedures
depends upon several matters some of which, as per SA 520, are as follows:
1. Sources of information: Analytical procedures will be more reliable when it is applied to
information
obtained from independent sources outside the entity such as bank, Excise authority, etc.
2. Materiality of items: When the items, say inventory balances, are material, the
auditor should not relyon analytical procedure in forming conclusion. The test of
details should also be carried out.
3. Comparability of the information: Analytical review based on cross-sectional analysis
(comparing data
 with that of the industry or another firm) will be more reliable when the industry
data or data of competitors are comparable.
4. Nature and relevance of the information: For effective analytical review, the
benchmark used for comparison should be relevant and logical. For example,
budgets against which financial data are compared for analytical review must be
established as results to be expected rather than as goals to be achieved.
5. Predictability of data: When the financial data are expected to have a greater
degree of predictability, analytical review becomes more reliable. For example, the
auditor can expect greater consistency in comparing gross profit margins from one
period to another than in comparing discretionary expenses such as research or
advertising.
6. Control over preparation of data: When there is a strong control over preparation of
information, the auditor will have greater confidence in the reliability of the
information and, therefore, in the results of analytical procedures. For example,
controls over the preparation, review and maintenance of budgets.

43. What factors are to be considered in analytical procedures

for substantive testing?*****

Substantive testing refers to the test of the validity and propriety of the information
produced by the accounting system. This can be carried out either by test of details
(i.e., vouching and verification) or by analytical procedure or by both. Analytical
procedure means evaluations of financial information through analysis of plausible
relationships among both financial and non-financial data. While designing and
performing analytical procedure for substantive testing, the auditor should consider
the following matters in accordance with SA330 “The Auditors’ Responses to Assessed
Risks”
1. Suitability of the procedure: He should determine the suitability of particular
substantive analytical
procedures for given assertions. He should take into account the assessed risks
of material misstatement and the results of test of details, if conducted for these
assertions.
2. Reliability of data and information: He should evaluate the reliability of data and
information to be used for analytical procedure. For this the auditor is to take
into consideration the source, comparability, and nature and relevance of
information available and control over their preparation.
3. Development of expected values: The auditor shall develop an expectation of
recorded amounts of ratios. For developing expectation of recorded values, the
 auditor should consider the following:
i. The degree of accuracy with which the expected results of substantive
analytical procedures can be predicted. For example, the auditor may
expect greater consistency in comparing gross profit ratio from one year
to another than discretionary expenses like travelling or advertisement.
ii. The degree of which information can be disaggregated. For example,
substantive analytical procedure is more effective when applied to
segment information than composite information.
iii. The availability of the information both financial and non-financial. For
example, if financial information such as budgets and non-financial
information such as number of units produced or sold is available,
analytical procedure for substantive testing can be effectively designed.
4. Necessity of further investigation: The auditor will determine whether the
difference between recorded amounts and expected values is material enough
to warrant further investigation.
44. What special steps are involved in conducting the audit of
an Educational Institution?********
Educational institutions like school, colleges are usually run under the Societies
Registration Act, 1960 or Public Trust Act of the state, if any. The audit of accounts of an
educational institution is carried out according to the provisions of the Regulation or
Trust Deed or the Act governing the concerned educational institution. The audit
process of an education comprises of the following aspects:
A. Preliminary Matters
1. Study the Trust Deed or Regulations in the case of school or college and note all
the provisions concerning the accounts of the institution. In case of a university,
the Act of Legislature and the Regulation framed there under should be carefully
studied.
2. Evaluate the internal control system involving maintenance of records and
documents, safeguarding of assets, acquisition of assets, authorization of
transactions, segregation and rotationof duties etc.
3. Go through the minutes of the meetings of the managing committee or
governing body and note down resolutions concerning accounts. See that they
have been duly complied with.
B. Income
1. Check names entered in the Student’s Fee Register with respective class
registers and verify that there operates a system of internal check ensuring that
defaulting students are identified and served with notice in time.
2. Check fees received by comparing counterfoils of fees book with the collection
recorded in the Fee Register and trace the entries in the Cash book to confirm
that revenue under this head has been properly accounted for.
3. Examine whether all concessations have been granted as per rules.
4. See that arrear fees which are irrecoverable have been written off under the
sanction of appropriate authority.
5. Check admission fees with the admission forms duly signed by the head of the
institution or other authorized person and see that the amount has been
credited to Capital Fund unless the other decision is taken in this regard by the
Managing Committee or Governing Body.
6. Confirm that late fines have been either collected or waived under proper authority.
7. If the Institute is having hostel facility, then examine the statement
reconciling the total hostelcharges recoverable with the amounts actually
received.
8. Verify receipts of rent for premises let out by the institute with reference to
copies of agreementswith the relevant parties.
 9. Examine the entries in the cash book in respect of donations and legacies
with reference to thecounterfoils of receipts issued to doners.
10. Verify interest and dividends received during the year with reference to the
securities in whichinvestments have been made.
11. Verify the grants received with reference to the sanction letters and examine
whether conditionsspecified therein have been duly complied with.
C. Expenditure
1. Examine whether salaries and allowances paid are as per the terms and
conditions of appointment of each category of staff.
2. Check the computation of gross salary payable and deduction in respect of
provident fund, income tax etc. See that income tax and provident fund
deducted from salaries have been deposited with the authorities in time.
3. Vouch the payment of salaries with reference to acknowledgement from employees
and entries in
 the bank statement.
4. Examine that scholarships to students have been granted as per rules and
under proper authorization.
5. Vouch all capital expenditures confirming that established norms have been
followed in their incurrence and they have the sanction of competent authority.
6. Vouch in the usual manner all establishment expenses and enquire into any
heavy expenditure under any head.
7. Examine the payments on account of expenditure on hostel facilities including
those on repairs, maintenance, electricity, water charges etc. in the usual
manner. Similarly, examine the payment relating to purchase, consumption,
stock of food grains etc.
8. Examine payments made out of various grants received from
Government/U.G.C. with reference to supporting vouchers, entries in the cash
book, minutes of the Governing Body and utilizationcertificates, if any, furnished
to authorities.
D. Assets and Liabilities
1. Conduct physical verification of fixed assets as shown in the assets Register.
2. Examine whether adequate depreciation has been properly charged on fixed assets.
3. Carry out physical verification of investments.
4. Examine arrear student fees by reconciling total fees received during the year
and total feesreceivable as per the applicable fee structure.
5. Confirm that the refund of taxes deducted from the income from investment has
been duly claimedsince the institutions are generally exempted from payment
of income tax.
6. See all the liabilities in respect of purchase of assets, maintenance
expenses, food grains andprovisions have been duly provided.
E. Statement of accounts
The annual statements of accounts of an Educational Institution generally consist
of Income & Expenditure Account and Balance Sheet. Confirm that they have been
prepared as per generally accepted accounting principles. Also see that separate
statement of accounts have been prepared as regards Poor Boys Fund, Games
Fund, and Capital Fund etc.

45. Draft a suitable audit programme to conduct the audit of

an College Hostel.***
A college hostel provides boarding and lodging facilities to the students of college. It is
run by the college authority on no profit no loss or subsidised basis. Generally a cash
book is maintained to record daily receipts and disbursement of cash. At the end of
the year a Receipts and Payments statement is prepared and in case of a big hostel
an Income and Expenditure Account is also prepared to know the results of operation.
The programme of auditing the accounts of big College hostel will cover following
special points..
1. Study the rules and regulations of hostel.
2. Check the number of seats in the hostel and verify whether only eligible students
are. accommodatedin the hostel.
3. Vouch the receipt of hostel fees with the register of students.
4. See whether arrear hostel fees have been properly recorded and reflected in
Income and ExpenditureAccount.
5. See that advance hostel fees have been properly recorded and reflected in accounts.
6. Check that suitable action is taken against students who are regular defaulter in
payment of hostel fees.
 7. Check the system of internal control for procurement of foodstuff. If it is procured
through contractor, see that selection procedure is appropriate.
8. Vouch the payment against contractor's invoices. See that bill is duly certified by
the storekeeper and hostel superintendent.
9. Check the stock register of various main items of foodstuff like rice, wheat,
mustard oil etc. See that all entries of issue are supported by stores requisition
duly signed by head cook and authorised by hostel superintendent.
10. Vouch the petty expenses and see all vouchers are duly sanctioned by hostel
superintendent.
11. Check the asset register and see whether there is any discrepency in physical
verification.
12. See that adequate depreciation is being provided on all items of assets in the
Income and expenditure Account,

46. Draft a suitable audit programme to conduct the audit of

an Medical College.***

A medical College is run with the twin objectives of imparting medical education and
rendering medical services to general public. It is generally established by the
Government and run with budget allocation outof Government exchequer. Now a day,
however, Corporate bodies are also coming forward to establish Medical College with
the main object of earning profit. Whatever may be the nature of Medical College, the
auditor must consider the following points:
1. The rules, regulations and bye-laws of institution should be studied by the
auditor to acquaint himselfwith its functioning.
2. The internal control system for procurement of food, medicine etc. and their issue
should be studied todetermine its adequacy or otherwise.
3. The minute book containing resolutions of Governing Body should be studied.
4. The system of procurement of assets, medical equipment and other accessories
should be studied and itshould be examined whether the system as prescribed is
being duly complied with.
5. See that proper stock register is maintained and issue of medicine is based on
requisition dulyapproved by doctor. He should physically verify the stock of some
high value medicine to compare thesame with book balance.
6. Monthly fee from students should be vouched from fee register and carbon
 copies of receipt issued. If fee collection is entrusted with a bank, the same should
be confirmed from bank statement. He should note that —
(a) Fees received in advance is duly carried forward.
(b) Outstanding fees have been duly adjusted.
(c) Fee other than tution fee have been duly credited to respective heads.
7. Income from endowment if any should be vouched separately and the auditor
will see that income isused for the purpose for which the endowment is made.
8. Check the charges and collection received from patients with Register of
patients, copies of bills andcash book.
9. Check donation from public if any and see it is used for the purpose for which it is
received.
10. Vouch the payment of salaries in usual manner.
11. Grants from Governments, if any, should be properly verified. This should be
classified as capitalgrant, maintenance grant etc.
 12. See that expenditure have been properly classified as revenue and capital and
methods and rates ofdepreciation on capital assets are reasonable.
13. Ensure that wage payment system is sound and there is no loophole for defalcation.

47. Prepare an audit programme in respect of a Nursing

Home/Hospital.****

A hospital is established with the objective of providing service to the society. There
are some hospitals which are run and funded by Government or Local Authority. They
are usually non – profit seeking. Hospitals established and run by private bodies are
mostly profit seeking. Now a days many hospitals are found to be running on the basis
of public – private partnership. So, keeping in mind the nature of hospital to be audited,
the auditor will look into the following matters:
A. Preliminary Matters:
1. Enquiry about the nature of hospital: The auditor should first study the
relevant documents to ascertain its ownership pattern, nature i.e.,
whether profit seeking or not, capacity, different types of activities
performed etc.
2. Evaluation of internal control: The auditor will evaluate internal control
system involving maintenance of records and documents, safeguarding
of assets, purchase of assets, authorisation of transactions, division and
rotation of duties etc.
3. Study of the minute book: He should go through the minutes of meetings
of Board of Directors or the Managing Committee and note down
resolutions concerning financial matters such as acquisition of assets,
engagement of staff, investment, fees, expansion of facility for treatment
etc.
4. Study of accounting system: The accounting system maintained should
be studied and audit procedure to be followed should be decided.
B. Receipts:
1. Vouching of collection from patients: The auditor should check the
collection from patients as entered in the cash book with reference to
Patient Register, receipt counterfoils and other evidences. The auditor will
check the bill register to see whether all charges have been computed
correctly as per rate chart, period to stay of patient, category of bed,
medicine used, time taken by patient in the operation theatre, medical
 materials used etc.
2. Free bed facility: The auditor will see that free bed facility has been
provided to deserving patients as per rules and regulations.
3. Reimbursement from Insurance Company: The auditor will vouch the
reimbursement of medical expenses from the insurance company in
case of cash less admission health insurance. He will also vouch the
collection from patient over the limit sanctioned by TPA with reference to
necessary supporting documents.
4. Legacies and donations: All the legacies and donation will be vouched
with reference to letters, counterfoil of receipts etc. the auditor will also
see that donations received for some specific purposes have been
utilised accordingly.
5. Receipt of Grant: The auditor will verify grants received from Government
with reference to the sanction letters and examine whether conditions
specified therein have been duly complied with.
 6. Other incomes: The auditor should check collection of other income by
way of rent from properties, dividend, interest on securities etc. with
reference to agreements, Properties and Investment Register etc.
C. Expenditure:
1. Vouching of salaries: The auditor should vouch salaries and allowances
with references to terms and conditions of appointment of each category
of staff namely doctors, nurse, medical staff, administrative staff and
other categories of employees of the hospital.
2. Accounting of various deductions: The auditor will see that deductions
from salary towards provident fund, income tax, group insurance etc.
have been properly accounted and deposited with the concerned
authorities in time.
3. Capital Expenditure: Vouching of all capital expenditures should be done
confirming that established norms have been followed and they have the
sanctions of competent authority.
4. Established Expenses: He will vouch in the usual manner all
establishment expenses. Hewill compare the different heads of expenses
with budgets and figures of last year. Any unusual variation should be
enquired into.
5. Purchase of Provisions: Examine the payment relating to purchase of
medicines, foodstuff, and different medical items etc.
D. Assets and liabilities:
1. Verification of cash and investment: The auditor will carry out physical
verification of cash and various investments as laid down in the
investment register.
2. Verification of fixed assets: The auditor will conduct physical
verification of fixed assetsas shown in the assets register.
3. Depreciation: The auditor will see that depreciation at appropriate
rate has beenwritten off against all fixed assets.
4. Examination of stock: He will see whether the stock of medicine,
foodstuff and other materials are properly maintained. He will ensure
that any difference found in physical verification from stock records
has been properly adjusted.
5. Provisioning of liability: The auditor will ensure that all the liabilities in
respect of purchase of assets, medicines, maintenance expenses,
foodgrains etc. have been duly provided.
 6. Verification of capital: Capital introduced during the year by partners
or by shareholders by way of subscribing shares should by checked
based on various documents like agreement, board’s meeting etc.
E. Financial statement:
The auditor will see whether financial statements comprising of income and
expenditure account or statement of profit and loss, balance sheet and cash
flow statement have been prepared properly and according to the generally
accepted accounting principles.
F. Submission of audit report:
At the end, the auditor will submit his report expressing opinion about the
reliability and fairness of financial statements.
 48. Prepare an audit programme in respect of a Hotel***
An Auditor should consider the following points while conducting Audit of Hotels −
(A) Detail of Applicable Law
For audit of hotels, it is very crucial and important for an Auditor to go through the laws
normally applicable to the hotel industry .
The Companies Act, 2013 may also be applicable to hotels in case if the status of hotel
is like a company. Whereas, the Income Tax Act, 1961 will be levied in all the cases
irrespective of whatever the status of that hotel is.

(B) Preliminary Matters:

 An Auditor should determine the scope of his audit from his letter of appointment.
It should be seen whether he is asked to express his opinion on financial
statements only or some additional responsibility being assigned to him.
 An Auditor should obtain list of books of accounts, documents and registers maintained
by hotel.
 He should see whether relevant hotels have independent status or a part of chains of
hotels.
 An Auditor should study the Memorandum of Articles and the Memorandum of
Association.
 He should obtain the title deed and other related documents to verify the land and
building.
 He should also obtain Minutes of meeting of the Board of Directors to note
down the importantdecisions relating to accounts, finance and audit.

(C) Receipts:
In order to conduct audit of a hotel, an Auditor should study, verify and vouch books of
accounts, keeping in mind the different points of sale.
(a) Revenue from Room Rent
(b) Revenue from Food & Beverages (Restaurants)
(c) Revenue from Food & Beverages (Room Service)
(d) Food & Beverages Revenue from Minibar
(e) Revenue from Banquets
(f) Revenue from Business Centre
(g) Arcade Revenues
(h) Revenue from Car Hire
(i) Revenue from Telephone & Internet
(j) Revenue from Housekeeping
 (k) Revenue from Laundry
(l) Revenue from Beauty Parlors and Health Clubs
(m) Revenue from Sale of Scrap and Disposal of Empties

(D) Audit of Expenses

An Auditor needs to consider the following points and verify the Revenue from Expenses −
(a) An Auditor should verify the appointment letter, policy of increment, time
record, salary register,cash book and bank book to verify the salary payments
of employees.
(b) He should verify all purchases through requisition slip, quotations, purchase
order, inward register,quality control verification record and stock ledger.
 (c) Every purchase should be passed by appropriate authority in this regard.
(d) Vouching should be done properly and should be verified with documentary
evidences.
(e) At times, there may be a contract between a seller and a buyer (hotel) to sell a
particular product at the same rate for a specific period like a week or a month,
especially in case where the supply of material is done on daily basis like milk,
bakery products, fresh vegetables, etc. The Auditor should verify purchases on
the basis of such agreement.
(f) An Auditor should apply all other precautions and experience to audit the
expenses as he does in any other industries.
(g) Verification of purchases, consumption and stocking is very crucial in hotel
industry and it is a real challenge for an Auditor to verify all these very carefully.
An Auditor should apply all his experience and knowledge to do audit of it.

(E) Assets and liabilities:

(a) Verification of cash and investment:
(b) Verification of fixed assets:
(c) Depreciation:
(d) Examination of stock:
(e) Provisioning of liability:
(f) Verification of capital:

(F) Financial statement:

The auditor will see whether financial statements comprising of income and
expenditure account or statement of profit and loss, balance sheet and cash flow
statement have been prepared properly and according to the generally accepted
accounting principles.

(G) Submission of audit report:

At the end, the auditor will submit his report expressing opinion about the reliability
and fairness of financialstatements.
 Unit III: (10 Marks)
AUDIT RISK & INTERNAL CONTROL SYSTEM
Audit Risk – Concept and
Types only. Internal Control-
Definition, Objectives Internal
Check-Definition, Objectives
Internal Audit- Definition, Objectives, Regulatory Requirement, Reliance by
Statutory Auditor on Internal
Auditor’s Work

49. What is Audit risk? What are its different types?****

What is Audit risk?
Risk is a fundamental concept when performing an audit. It forms the basis for how the
auditor will completethe audit engagement and drives the amount and type of work
that will be performed.
The definition of ‘audit risk’ is the risk that the auditor gives the wrong opinion on the
financial statementsand so, ultimately, this is what the auditor is trying to avoid.
To support this, audit risk should be reduced to an acceptably low level. To help actually
achieve this whencompleting an audit, we split audit risk into three components, as shown
below:
Audit Risk = Inherent Risk x Control Risk x
Detection RiskInherent Risk
Inherent risk is the susceptibility of a financial statement account to a material
misstatement, irrespective of related internal controls. Therefore, this risk is assessed
by understanding the entity and is the driver behind much of the work performed at
the acceptance and planning stages of the audit.
To effectively complete an audit, the auditor must thoroughly understand the entity
that they are to give an opinion on. This understanding will allow for the inherent risks
to be identified, which means the auditor can focus their attention towards areas more
likely to contain errors.
Control Risk
This is the risk that the entity’s controls will not prevent / detect and correct a material
misstatement in the financial statements on a timely basis.
In order to assess this risk, the auditor must understand the key business processes in
place at the client and whether the controls over these processes are designed
effectively, as well as assessing the overall control systems at the entity.
The auditor can then test the controls to assess whether they have operated effectively
during the year, and therefore, will reduce the likelihood of a misstatement occurring in
the financial statements.
This work will be completed after the planning work, as part of the systems and
controls analysis stage of theaudit.
Detection Risk
Detection risk is the risk that the auditor’s procedures will not detect a material
misstatement that exists in the financial statements. It is the only risk that can be
controlled by the auditor as it will depend on the level of procedures performed by the
auditor.
The level of detection risk will depend on the inherent risk and control risk that the
auditor has already assessed, and it will drive the amount of work that is performed at
the substantive testing stage of the audit.
50. What do you mean by internal check system? What are its
objectives?**
Meaning and Definition:
Internal check is the valuable part of the internal control. It is an arrangement of the
duties of members of staffin such a manner that the work performed one person is
automatically and independently checked by the other.Spicer and Pegler have
defined a system of internal check as "an arrangement of staff duties whereby no one
person is allowed to carry through and record every aspect of a transaction such that
without collusion between two or more persons., fraud is prevented and at the same
time possibilities of errors are reduced to a minimum".
Objectives
The objects of internal check system can be set forth as below:
(a) To exercise moral pressure over the staff.
(b) To ensure that the accounting system produces reliable and adequate information.
(c) To provide protection to the resources of the business against fraud, carelessness and in
efficiency.
(d) To distribute work in such a manner that no business is left unrecorded.
(e) To allocate duties and responsibilities of each clerk in such a way that he may
held responsible forparticular fraud or error.
(f) To increase the efficiency of clerks because the allocation of duties is based on the
principle of division of labour.
(g) To detect errors and frauds easily if it is committed, because in an efficient internal
check system, there is a provision for independent checking.
Advantages of Internal Check:
(a) Proper division of work: internal check entails a proper and rational distribution
of work among the members of staff of the enterprise keeping in view their
individual qualifications, experience and area of specialization.
(b) Detection of errors and frauds: since no individual worker is allowed to handle a
job completely from the beginning to the end, and the work of each clerk is
automatically checked by the other, this helps in the early detection and
discovery of errors and frauds.
(c) Increased efficiency coupled with economy: A good system of internal check
increases the efficiency ofwork among the staff and leads to overall economy.
(d) Convenience to auditor: where an organization is operating the system of internal
check, the statutory auditor may conveniently avoid detailed checking of the
 transactions. He may apply a few tests here and there and can relieve himself
from detailed checking.
(e) Accuracy of the accounts can be relied upon: If there is a good system of internal
check the owner of theconcern may rely upon the genuineness and accuracy of the
accounts.
(f) Increase in Profits: overall efficiency and economy in operations result in more
profits- thus ensuringlarger dividends for the owners or shareholders.
 51. What do you mean by internal control? What are its
objectives?***
Internal control
Internal control has been defined as being "not only internal check and internal audit
but the whole system of controls, financial and otherwise, established by the
management in order to carry on the business of thecompany in on orderly manner,
safeguard its assets and secure as far as possible the accuracy and reliability of its
records."
Therefore internal control is a broad term with a wide coverage. Its scope extends
beyond those matters which relate directly to the functions of accounting and
financial records. In its modern sense, audit control includestwo types of controls:
(a) Accounting Controls : These comprise primarily the plan of organization and the
procedures and records that are concerned with and directly related to the
safeguarding of assets and reliability of financial records. These include budgeting
control, standard costing, control accounts, bank reconciliation, self balancing ledgers
and internal auditing etc.
(b) Administrative Controls : These comprise the plan of organization that are
concerned mainly with operational efficiency. They may include controls, such as
time and motion studies, quality controls through inspection, performance reports
and statistical analysis.
Objectives of Internal Control :
(a) Providing reliable data: Business decisions require accurate information o run the
business efficiently. Examples of significant areas where management requires
reliable information are fixation of selling prices production directives depending
upon requirements etc. with the efficient internal control in place the accurate,
required and reliable information can be provided for taking the important
decisions andefficient performance of the activities.
(b) To promote operational Efficiency: the controls within an organization are
meant to prevent unnecessary duplication of efforts, protect against waste in all
aspects of business and discourage othertypes of inefficient use of resources so as
to promote the operational efficiency.
(c) To encourage adherence to the prescribed policies: the system of internal control
is meant to provide reasonable assurance that procedures and rules of various
institutes are followed by company personnel.
(d) Safeguarding assets and records: the physical assets of the company can be stolen,
misused or accidently destroyed if not properly protected by adequate controls.
The internal control helps to safeguard the physical assets and to secure the
accuracy and reliabilities of the records of the company.
 52. Distinguish between internal control system & internal
check system.******

Points of Distinction Internal Control Internal Audit

1. Meaning Internal control is the whole Internal audit is an
system of control instituted in
independent continuous and
the organization for the
purpose of running the critical appraisal and review of
business in an orderly accounting, financial and other
manner, safeguarding its
operations of the undertaking.
assets, increasing the
productivity and ensuring
reliability and fairness of
financial records.
2. Scope The coverage of internal Internal audit is an important
part of the internal control
control is vast. It is the
system. Its function is to see
accounting and that organization’s system of
administrative devices internal control is maintained
appropriately and
controlling allthe areas of the
management instructions and
organization so that the policies in relation to various
ultimate objective of the operations are being carried
organization is attained. out correctly.

3. Existence Internal control system exists To carry out internal audit, a

separate department is
in all the departments of the
formed. The internal auditor
organization. All the who heads this department is
employees of each responsible for continuous and
independent review of books of
department are responsible
accounts and appraisal and
for proper implementation of evaluation of effectiveness of
internal control system. other controls.
4. Responsibility To implement the internal To carry out internal audit is
control is the responsibility of
the responsibility of the internal
the management staff who
work according to auditor who works
established policies and independently.
procedures.
5. Nature Internal control system runs It does not work automatically.
automatically and It is undertaken after the
concurrently with the transactions take place.
 execution of transactions.

6. Reporting It involves regular reporting of The internal audit reports

system daily transactions and about the operational
operations of the department efficiency and reliability of
to the departmental financial records and reports
manager. are sent to the top
management.
 53. In a good system of Internal check, the work of one is
checked indirectly by the work of another" — Explain and
discuss the statement with examples.******
Internal Check
Internal check is a method of organising the accounts system of a business
concern or a factory where theduties of different clerks are arranged in such a way
that the work of one person is automatically checked by another and thus the
possibility of fraud, or error or irregularity is minimised unless there is collusion
between the clerks. For example, the receipt of cash is entered by the cashier on the
debit side of the cash book; this entry is carried to the ledger by another clerk; the
statement of account relating to this transaction is sent to the customer by a third
clerk and so on. Thus the same transaction has passed through three different hands
and the work of one is checked automatically by the other. It is a kind of division of
labour. This minimises the possibilities of frauds and errors unless all the three join
hands in defrauding their employer.
According to the special committee on Terminology, American Institute of Accountants,
1949 "Internal check-a system under which the accounting methods and details of an
establishment are so laid out that the accountsprocedures are not under the absolute
and independent control of any person - that, on the contrary, the work of one
employee is complementary of that of another, and that a continuous audit of the
business is made by theemployees."
The essential elements of an internal check are :
(a) Instituting of checks on day-to-day transactions.
(b) These checks operate continuously as a part of routine system.
(c) Work of each person is made complementary to the work of another.
The objective of such allocation of the duties is that no one has an exclusive control over any
transaction.
An example of internal check is the system of encashment of cheque in bank. When a
cheque is presented to bank for encashment, one person issues a token, then he
verifies the balance in the ledger book and makes entry. One officer then verifies the
signature and authorises payment. The cashier then makes payment. Thus the entire
system is so designed that no single person can verify record and make payment.
Sometimes to enhance the efficacy of Internal check system duties among staff
members are interchanged. They are also encouraged to go on leave so that in the
absence of an individual frauds and errors, if committed by him, can be brought to
light.
On the basis of the above, it may be concluded that the internal check means a
system by which the work is divided among the employees in such a manner that not
a single individual is allowed to carry on the whole function from the beginning to the
end and the work of an individual is automatically checked by another.
 54. What is meant by internal audit? State its objectives.****
INTERNAL AUDIT
Internal audit is the review of operations and records undertaken within a business by
specially assigned staff on a continuous basis. Internal audit has been defined as
"the independent appraisal of activity within an organization for the review of
accounting, financial and other business practices as a protective and constructive
arm of management. It is a type of control which functions by measuring and
evaluating the effectiveness ofother types of controls." Therefore it is clear that internal
audit not only includes the verifications of accountingmatters but also financial and
other matters.
Objects of Internal Audit
(a) To verify the correctness of the financial accounting and statistical records
presented to themanagement.
(b) To comment on the effectiveness of the internal control system and the internal
check system in forceand to suggest means to improve them.
(c) To facilitate the early detection and prevention of frauds.
(d) To ensure that the standard accounting practices to be followed by the organization are
strictly followed.
(e) To confirm that the liabilities have been incurred by the organization in respect of its
legitimate activities.
(f) To examine the protection provided to assets and the uses to which they are put.
(g) To undertake special investigation for the management.
(h) To identify the authorities responsible for purchasing assets and other item as well as
disposal of assets.

55. Can a statutory auditor rely upon the internal audit system
in carrying out the statutory audit? Give reasons for your
answer.*****
The relationship of the internal auditor and statutory auditor can be summed up as follows: -
1. comment upon the effectiveness and suitability of internal audit system: As per
manufacturing and other companies order 1988 issued under section 227 of the
companies act the statutory auditor has to comment upon the effectiveness and
suitability of internal audit system laid down by the management.
2. To discharge this responsibility: statutory auditor should evaluate the internal audit
system he should evaluate the strength of the internal audit staff, their qualification
and experience.
3. Evaluation of the actual work of internal auditor: After studying the internal audit
system and structure actual work of the internal auditor should also be evaluated.
Statutory auditor has to make useof the work of internal auditor. This he can do only
when he himself puts faith in the work of internal auditor.
4. Relying on the work of internal auditor: Statutory auditor has to decide that up to
what extant he can rely upon the work of the internal auditor. This will decide the
extent of his own checking. If he feels that internal auditor has properly done his
work he can reduce the extent of his checking.
5. No reduction in responsibility: “ Relying on work of internal auditor in no way reduces
the responsible for the discharge of his duties as statutory auditor.
Relying on the internal auditor can only reduce the burden of the statutory auditor. For
all his works statutory auditor would remain responsible.
 56. Internal audit can not replace internal check-Explain. ***
Or
Distinguish between internal check system & internal audit
system.***
Internal audit is an independent and continuous appraisal and review of accounting,
financial and otheroperations of the undertaking.
Internal check on the other hand is the division of work amongst various staff members in
such a way that workof one person is instantly and automatically checked by the work of
other
Points staffs. So, their differenceInternal
of Distinction can becheck
summarised
System as follows Internal audit System
(i) Nature It is an inbuilt system and once introduced It does not work automatically. It is under
it runs automatically and con- currently taken after the transaction takes place.
with the execution of transaction.

(ii) Function It is an arrangement of allocation of duties It is an independent and continuousreview

in such a way that work of one employee is of operations and records.
automatically checked by
the work of another employee.

(iii)Results It prevents occurrence of errors and frauds As it is undertaken after the work is
or if they are committed, it can detect them complete, it cannot prevent occurrenceof
almost instantaneously. error or fraud..

(iv) Formation To run the internal check system, no To carry out internal audit, a separate
separate set of staff is required. It only department is formed. This department
represents arrangement of duties among consists of people both of accounting
staff. and technical profession.

(v) Objective The objective of this system is prevention Detection of errors and frauds is the
and early detection of errors and frauds. secondary objective of internal audit,Its
thrust mainly is, on operational
efficiency.
(vi) Subject matter An internal check system is concernedwith It is concerned with the appraisal of work
carrying out work efficiently and done and ascertaining the reliability of
effectively. records and reports.

(vii) Reporting system It involves regular reporting of daily The internal audit report about the
transactions of the department to the operational efficiency and reliability of
departmental manager. financial records and report are sent to
the top management.
 57. Distinguish between internal Control & internal audit
system.***

Points of Distinction Internal Control Internal Audit

1. Meaning Internal control is the whole Internal audit is an
system of control instituted in the
independent continuous and
organization for the purpose of
running the business in an critical appraisal and review
orderly manner, safeguarding its of accounting, financial and
assets, increasing the
other operations of the
productivity and ensuring
reliability and fairness of undertaking.
financial records.
2. Scope The coverage of internal control Internal audit is an
important part of the internal
is vast. It is the accounting and
control system. Its function is
administrative devices to see that organization’s
controlling all the areas of the system of internal control is
maintained appropriately
organization so that the ultimate
and management
objective of the organization is instructions and policies in
attained. relation to various operations
are being carried out
correctly.
3. Existence Internal control system exists in To carry out internal audit, a
separate department is
all the departments of the
formed. The internal auditor
organization. All theemployees of who heads this department is
each department are responsible responsible for continuous
and independent review of
for proper implementation of
books of accounts and
internal control system. appraisal and evaluation of
effectiveness ofother controls.
4. Responsibility To implement the internal control To carry out internal audit is
is the responsibility of the
the responsibility of the
management staff who work
according to established policies internal auditor who works
and procedures. independently.
5. Nature Internal control system runs It does not work
automatically and concurrently automatically. It is
with the execution of undertaken after the
transactions. transactions take place.
6. Reporting It involves regular reporting of The internal audit reports
system about the operational
daily transactions and
efficiency and reliability of
operations of the department to financial records and reports
the departmental manager. are sent to the top
management.
 Unit IV (10 Marks):
VOUCHING, VERIFICATION & VALUATION
Vouching: Meaning, Objectives - Difference with Routine Checking – Factors to be Considered during Vouching -
Vouching of Following Items: i) Receipts: Cash Sale, Collection from Debtors, Interest and Dividend from
Investment, Sale of Fixed Assets. ii) Payments: Cash Purchase, Payment to Creditors, Payment of Wages and
Salaries, Advertisement Expenses, Travelling Expenses, Research and Development Expenditure, Prepaid Expenses.
Verification and Valuation: Concept, Objectives, Importance, Difference with Vouching, Difference between
Verification and Valuation, Verification of following items: i) Non- Current Assets: Goodwill, Patent and Copy
Right, Leasehold Land, Plant and Machinery, ii) Investments iii) Current Assets: Inventory, Loan and Advance,
Cash and Bank Balances iv) Non-current Liability: Secured Loan v) Current Liability: Trade Payables (Sundry
Creditors).

58. What is vouching? What are the objectives of vouching?*

Vouching is the act of authenticating a transaction recorded in the books of accounts

with reference to its documentary evidence. It is the essence of auditing and in fact, the
whole structure of auditing rests upon it. It is not routine checking. In other words, it is not
mere comparison of entries recorded in the books of accounts with relevant vouchers.
Rather, the auditor has to go beyond the books to substantiate propriety of transactions.
So, vouching requires intelligence and tactfulness on the part of the auditor. He will apply
professional skepticism i.e., alertness and judgement in his work. While conducting
vouching, he will collect evidence judiciously in support of transactions, evaluate
credibility and truthfulness of evidence and then form his judgement about the propriety
of transactions.
According to Spicer and Peglar, “Vouching may be defined as the examination by the
auditor of all documentary evidence which is available to support the authenticity of
transactions entered in the clients’ records”.
According to Dicksee, “vouching consists of comparing entries in books of account with
documentary evidencein support thereof”.
Objectives of Vouching
The objectives of vouching may be discussed in the following way:
(a) Correction of vouchers: The work of vouching involves correction of vouchers and related
evidences.
(b) Evaluation of evidences and voucher: Its involves the evaluation of collected evidences and
vouchers.
(c) Examination of vouchers: It is concerned with the examination of vouchers or
 documents in such a manner theauditor may satisfy himself as to the authenticity and
validity of the recording of transactions.
(d) Nothing unrecorded : It refers to finding out that nothing pertaining the business has been
left unrecorded,
(e) Finding out the transactions recorded: It involves finding out whether entries relating
to transactions havebeen properly recorded in the books of account or not.
(f) Recording of transactions not concerned with: It refers to finding out that no
transaction which is not concerned with the business has been recorded in the books
of account.
(g) Recording of transactions in the books: It is concerned with examining whether all the
transactions relating to the business have been recorded in the books and whether
those transactions are pertaining to the period under audit.
(h) Basis for final conclusion: It forms the basis for final conclusion to be drawn by the auditor.
 59. Vouching is the essence of audit – Discuss.*
Vouching is the process of examination of all available documentary evidences to verify
the genuineness, authority and authenticity of transactions entered in client’s books.
Vouching is the essential part of auditing. In fact, “it constitutes the foundation upon which
the superstructure of auditing is erected.”
The factors that make vouching the essence of auditing can be brought out as under:
1. Basic Evidence: Vouching is a substantive audit procedure designed to obtain
evidence to verify theaccuracy and validity of data produced by the accounting
system.
2. Assurances: Through couching, the auditor tries to obtain the reasonable
assurance on the followingassertions:
(a) The transaction is recorded in the proper account and revenue or expense is
properly allocated tothe accounting period;
(b) The transaction recorded pertains to the organization;
(c) All transactions which were actually taken place have been recorded;
(d) There is proper authorization for all transactions;
(e) Transactions have been classified and disclosed according to generally
accepted accountingprinciples.
3. Genuineness of transactions: The transactions do not take place in the presence of
auditor. So, the auditors, through vouching, try to establish the genuineness of
transactions.
4. Propriety of transactions: Through vouching, the auditor goes to the root of
transactions to substantiate their propriety. It helps him determine whether
transactions have been carried out in the best interest of the entity.
5. Substantial accuracy: Substantial accuracy as opposed to arithmetical accuracy of
transactions is determined by vouching. It is applied by the auditor to test the
authority, regularity and truthfulness of entries in the accounts.
6. Detection and prevention of frauds and errors: Vouching is an analytical exercise; it is
critical and investigates. It requires application of professional skepticism and
judgement on the part of the auditor. So complex error and ingeniously made fraud
can be detected by vouching.
7. Successful and logical completion of audit: The success of audit depends upon the
efficacy of vouching. A casual and careless conduct of vouching will expose the
auditor to legal action if he fails to detect material errors and fraud. In Armitage V.
Brewer and Knott (1932) case the auditor was held guilty of negligence for not
 conducting vouching properly.
8. Basis for verification: Vouching is also the basis of verification of assets and liabilities
stated in the balance sheet. For verification they are traced from underlying books of
accounts and relevant source documents. Examination of these source documents
constitutes vouching.
9. Basis of expression of opinion on financial statements: The auditor satisfies himself
about the accuracy, validity and authenticity of transactions recorded in the books of
accounts through the process of vouching. After being satisfied, he can emphatically
state that the financial statements reflect a true and fair view of the business. Thus,
vouching is the basic requirement to achieve the primary objective of audit.
10. Internal control cannot make Vouching redundant: In an organization with sound
internal control system, the auditor can rely on the internal control and can reduce the
extent of vouching. But under no circumstances the auditor can escape his
responsibility for not conducting vouching on the plea that he has relied on internal
control.
Hence, it is said that vouching is the backbone of audit. Without vouching, financial audit
remains incomplete.
 60. Are routine check and vouching complementary to each
other?*
Routine checking and vouching are not the same thing. They are not
complementary to each other. Theyhave different purposes and they vary in
approaches. Following points will justify this assertion:
i. Purpose: Routine checking is done for ascertaining the arithmetical accuracy
of books of
original entry and ledger. Vouching is done for determining the authenticity
and propriety of transactions.
ii. Checking compliance with GAAP: Routine checking cannot ensure the
compliances with generally accepted accounting principles. Proper
vouching ensures that all transactions have been recorded as per
accounting standards and generally accepted accounting principles.
iii. Importance: By conducting routine checking only, the auditor cannot report
on fairness of financial statements. It is only vouching by which the auditor
reports on the reliability and fairness of financial statements,
iv. Fraud detection: The auditor cannot detect irregularities and frauds by
conducting routine checking only. Proper vouching only enables the auditor
to detect and prevent frauds and irregularities.
So from the above discussion it is clear that routine checking and vouching are not
complementary to eachother.

61. How do you vouch the following items**********

(i) Director’s remuneration****

This refers to the amount paid to directors for their services rendered to the company and for
attending Boardmeeting. While checking this term of expense, the auditor should have the
following information:
i. Total number of Executive Directors and Non-executive Directors.
ii. Types of remunerations and perquisites to which directors are entitled and
other terms and conditions of their appointment.
iii. Whether directors are entitled to get fees for attending Board meeting and if
executive directors get any such fess, whether specific approval has been
taken from Department of company Affairs, Govt. of India.
iv. Whether director’s remuneration has been separately shown in the profit &
Loss A/c as required under the Companies act.
 v. Whether the net profit on which commission is paid or payable to Directors
has been computed in pursuance to sec. 309 of the Companies Act, 1956.
vi. Whether the ceiling of maximum managerial remuneration as stipulated
under section 198 of the Companies Act, 1956 has been adhered to.
vii. Whether any increase in remuneration is as per sec. 310 of the
Companies Act.Following documents should be examined for the above
information:
i. Articles of Association to know the details of remuneration payable to Directors.
ii. Agreement with directors or appointment letters,
iii. Directors’ minute book or attendance register to vouch the director fees.
iv. Statement showing details of calculation of commission.
v. Directors’ receipts etc.
(ii) Travelling Expenses****
For vouching of traveling expenses, the auditor should have following information:
i. business travel rules as formulated by management,
ii. Whether every tour has got approval of competent authority.
iii. Whether the tour expenses are within the prescribed limit.
iv. Whether personal A/cs of the employees taking business travel advance
have been correctly debited.
v. Whether debit balances of personal A/cs of employees have been duly
regularized through submission of travelling vouchers.
vi. Whether foreign travel has got Reserve Bank of India’s permission, if
necessary for withdrawing foreign exchange. The auditor should also check
whether the amount of foreign exchange spent has been separately
disclosed in the accounts as per requirement of Part I of Schedule VI to
Companies Act.
To satisfy himself with the above information, the auditor should go through following
documents:
i. Business Travel Rules of the company.
ii. Business Travel Vouchers as submitted by employees.
iii. Personal accounts of employees.
iv. Board’s Resolution etc.

(iii) Preliminary Expenses

Expenses incurred in connection with the promotion of a new company are known as
preliminary expenses. This expenditure includes stamp duties, registration fees, legal
cost, accountant’s fees, cost of printing, etc. while vouching these expenses, the
auditor should require following information:
i. Whether the expenses shown as preliminary expenses are actually
connected with the
formation of the company.
ii. Whether the expenses incurred have got due sanction from the competent
authority.
iii. Whether the amount of expenses is justified from propriety angle. In other
words, the auditor should enquire into the rightness of the amount of
expenses.
iv. Whether the amount of expenses is within the sanctioned limit. If it exceeds
the limit, the auditor should enquire into whether approval from shareholders
 has been obtained in this regard.
v. Whether preliminary expenses have been written off in the year in which they
are incurred as required under AS 26, Accounting for Intangible Assets.
In order to gather the above information, the auditor should go through following documents,
(a) Invoices, bills etc. to ensure that expenses pertain to formation of the company,
(b) Contracts, agreement, purchase order etc. to ensure authorisation of expenses.
(c) Correspondence with various suppliers, their quotations, price comparative statement
etc. to ensure Tightness ofexpenses,
(d) Board's Resolution, Prospectus etc. to see that amount is within limit,
(e) Agreement with promoters to see the terms and conditions of reimbursement of expenses to
them.
 (iv) Payment of dividend
The following points must be considered while vouching the payment of dividend in case
of a public company andprivate company which is a subsidiary of a public company –
(a) Examine special provisions, if any, in the Memorandum and Articles of Association
regarding payment ofdividends.
(b) See that in declaring dividends, provisions of the Companies (Transfer of Profits to
Reserves) Rules, 1975 have been complied with.
(c) Examine the Board’s minutes regarding rate of dividends.
(d) Examine the company’s procedure for payment of dividends including unclaimed
dividends and ensure that they are not paid without adequate safeguards as to
identification of the payee, checking of the payee’s claims etc. In this connection,
internal control of the company should be examined.
(e) Verify the shareholders’ register and ensure that the names of all shareholders who
are entitled to receive dividends have been included.
(f) Check the computation of dividends with reference to rate of dividends and number of shares
held.
(g) See counterfoils of cheques for amounts paid to shareholders.
(h) Examine, whether all the conditions for payment and source of dividend as specified
on section 205, 205A and 205B, have been complied with. It may be noted that the
Institute has issued a Guidance Note on Audit ofPayment of Dividends.

(v) Interest & dividend received

The following points must be considered while vouching the receipt of interest & dividend in
case of a public company and private company which is a subsidiary of a public
company –
(a) The auditor should examine the separate ledger accounts kept for each investment or loan
given.
(b) The dates on which dividends or interest payments generally fall due should also be noted.
(c) The counterfoil of dividend warrants should be seen. These should be tallied with the records of
investment.
(d) Where investments are sold ex-dividend, it should be seen that the dividends are subsequently
received.
(e) Similarly when a purchase is on cum dividend basis, the receipt of dividend should be checked.
(f) In case of interest on deposit with banks, verification should be done by reference to the
bank’s statement and the agreed rate of interest.
(g) The receipts of dividends and interest should be addressed to the bank statement for
 encashment.
(h) It should be ensured that the interest and dividend received are credited to the
respective account in full i.e., before deduction of tax at source and the tax deducted at
source should be debited to an appropriate account.
(i) It should be further seen that the certificate for tax deducted at source exists in each case.
Documents to be verified:
(a) The documents to be verified for interest received are (a) Loan agreement (b)
Fixed deposit or debenturecertificate (c) Interest warrant for debenture (d) Mortgage
deed (e) Bank pass book etc.
(b) The documents to be verified in connection with dividend are (a) Dividend warrant (b)
Investment Register (c)Bank pass book. For checking the interest, the auditor should
 (vi) Rent received: -
The following points must be considered while vouching the rent received:
(a) Before proceeding to vouch rental receipts, copies of bills issued to tenants should be
test checked by reference to copies of tenancy agreements and bills of charges paid
by the landlord on behalf of the tenants, i.e., house tax,water tax, electricity consumed,
etc.
(b) The entries in the Rental Register in respect of rents accrued afterwards should be
verified by reference to copiesof rental bills.
(c) The amounts collected from tenants on account of rent should be checked by reference
to receipts issued to them. These afterwards should be traced into the Rental Register.
(d) At the end, the register should be scrutinized to find amount or rents which have not
been recovered and are considered bad or irrecoverable, for deciding whether these
should be written off or as provision against the sameshould be made.
(e) An overall check over rental receipts is also necessary. For this purpose, particulars of
total accommodation available for being let out, in different buildings, belonging to the
client, should be ascertained.
(f) It should be verified that every available accommodation has been let out and
rental income has been dulyaccounted for.
(g) If it is reported that one or more tenements have remained vacant a certificate in respect
thereof should be obtained from the client.

(vii) Vouching of cash sales

Fraud frequently occurs in the areas of cash sales. So the auditor should be very
careful while vouching cash sales. He will adopt following procedures for this purpose:
i. To check the internal check to assess its efficacy in preventing fraud.
ii. To verify each sale with copies of cash memos. If the number of transactions
is large, a cash sales summary book is maintained from which the daily total
of cash sales is recorded in the cash book. So cash memos will be traced in
cash sales summary book and daily totals of summary book are traced in
the cash book. He will see that dates of cash memos tally with the dates of
entry in the cash book.
iii. To verify the calculations of price of goods sold on selective basis and to
check the price with reference to the price list.
iv. To ensure that there is proper authorization of discount and rebate.
v. To see that cancelled cash memos have signature of responsible officer.
vi. To make sure that total cash sales of the day is deposited into bank next day.
Pay-in-slips should be verified in this respect.
vii. To see that proper sales tax declaration forms have been obtained from
customers for chargingsales tax at reduced rate.
62. “In vouching payments, the auditor doe not merely seek
proof that money has been paid away.”—Critically examine
the statement.*
Vouching is the act of authenticating a transaction recorded in books of accounts
with reference to its documentary evidence. Vouching is called the essence of
auditing. In fact, the whole structure ofauditing rests upon vouching. The correct
assessment of financial statements to determine their reliability and fairness
depends upon intelligent conduct of vouching on the part of an auditor. It is so
important in audit of accounts that some people have compared it with the
backbone of human structure. It is to be noted vouching should not be construed
as mere comparison of entries recorded in the books of accounts with the relevant
vouchers. If the auditor restricts his work to mere comparison, he is likely to be
deceived as the very document itself may be fake. So, the entire exercise of auditor
will be futile and the very purpose of audit i.e. ensuring fairness and reliability of
accounts will then be frustrated. Therefore, the auditor will have to go beyond near
comparison of entries with vouchers; rather, he will go to the source of transactions
to substantiate its propriety. For example, while vouching the payment against
suppliers invoice, he will not merely tick the entry in the Bought Ledger and Cash
Book with payment voucher but will also check that
i. The payment voucher is based on some purchase invoice. If the payment
voucher is for some
advance or ad hoc payment, approval of competent authority must exist.
ii. The invoice is supported by purchase order.
iii. The P.O. has been duly raised by the responsible purchase officer after
following theestablished purchased procedures.
iv. The invoice has been duly certified by the Receiving Deptt., Inspection Deptt., and
store Deptt.
v. The invoice has been duly checked by the accounts staff with reference to
purchase order andcertification of other departments as mentioned.
vi. Proper classification between capital expenditure and revenue expenditure has
been made.
vii. The payment has been sanctioned by the competent authority in the Accounts
Deptt.
viii. Proper acknowledgement of receipt of payment as given by the supplier
remains attached withpayment vouchers
The success of editor in vouching depends upon his intelligence and
tactfulness. He will select the audit technique and method very carefully and
methodically. He need not be thorough and meticulous in vouching all
transactions as audit will then be an endless job. After satisfying himself with
the internal control system existing in the organization, he will select only
those items which are of material importance. Circumstances of cases will
guide him to determine the materiality of item. He will then collect
evidences judiciously in support of those items, evaluates credibility and
truthfulness of evidences and then form his judgment about the propriety of
transactions. So vouching has ceased to be a mere comparison and ticking.
Clever fraud can only be detected by proper vouching. So the auditor should
be careful, cautious and very methodical while conducting vouching,
otherwise he will be held responsible for negligence as was held in the case
Armitage v. Brewer & Knott (1932).
63. What do you mean by Verification of Assets? Distinguish
between vouching & verification.*
MEANING OF VERIFIACTION OF ASSESS
According to Spicer and Pegler, verification of asses to an “enquiry into the value,
ownership and title, existence and possession and the presence of any charge on the
assets”.
Verification is a process by which an auditor satisfies himself about the accuracy of
the assets and liabilities appearing in the Balance Sheet by inspection of the
documentary evidence available. Verification means proving the truth, or confirmation
of the assets and liabilities appearing in the Balance Sheet.
Difference between Vouching and Verification
Points of distinction Vouching Verification
1. Meaning It refers to the Verification refers to the
examination of all examination of disclosure of
documentary evidences in assets and liabilities in the
support of transactions balance sheet.
recorded in the books of
accounts.
2. Objective Vouching is carried out Verification is done for
with the objective of confirming the ownership,
establishing the existence, possession and
authenticity, genuineness valuation of assets as
and correctness of stated in the balance sheet.
transactions recordedin the
primary books of accounts.
3. Level of Enterprise Vouching is usually done Verification is done by
by juniorlevel audit clerks senior level audit clerks or the
with sound knowledge in auditor himself as it requires
accounting principles. expertise not only in account-
ting principles but also in
various compliance and
substantive audit
procedures and statutory
requirements.
4. Point of Review Vouching involves Verification of assets and
examination oftransactions liabilities is carried out at the
 at their point of origin. Financial Statementsstage.

5. Nature of Items Vouching is concerned Verification is concerned

with all items of only withitems of Balance
Statement of Profit and Sheet.
Loss and with those
Balance sheet items
undergoing change during
theyear.
6. Aspects under Review Vouching verifies— For Assets: It involves enquiry
(i) Date of voucher; into the value, ownership,
(ii) Existence of existence, charge and
proper proper disclosure in
authorization of Financial Statements.
the For Liabilities: To see whether
transactions; they are truly owed by the
(iii) Supporting entity and disclosedat correct
evidence i.e., amounts.
Bill, challan,
inspection report,
etc.;
(iv) Propriety
oftransactions;
(v) Completeness;
(vi) Proper accounting
 64. Distinguish between verification & valuation of Assets?*
Verification
Verification means `proving the truth' or `confirmation'. One of the most important
duties of an auditor in connection with the audit of the accounts of a concern is to
verify the assets and liabilities appearing in the balance sheet.

Valuation
Valuation of assets means determining the fair value of the assets shown in the
Balance Sheet on the basis of generally accepted accounting principles.
The valuation of the assets is the primary duty of the officials of the company. The
auditor is required to verify whether the value ascertained is fair one or not. For this, he
may rely on the technical certificate issuedby the experts in the field.
Valuation of assets means not only checking value of the assets owned by an
organization as on Balance Sheet date, but also critical examination of the value of
these assets (comparative analysis of different assets).

Distinction between verification and valuation :

Point of Distinction Verification Valuation

(i) Meaning Apart from the examination Valuation means the
of determined value of examination of adequacy of
different assets, verification determined value of different
means the examination of assets and liabilities
the existence,
ownership and title etc. This
is awhole process.
(ii) Scope In such a case, the scope of Since valuation is a part
workis comparatively ofverification, its scope
extensive. of work is
comparatively little.
(iii) Performance of The work of verification The function of valuation is
performed generally by the
work isaccomplished by the
manager, director or
auditor. responsible employee or value
determiner.
(iv) Object The object of verification is
toverify the existence of the The scope of valuation is to justify
asset, its ownership, the propriety of the determined
valuation and to examine values of assets and liabilities.
the existence of liability and
proper valuation.
(v) Liability of an The auditor may beThe auditor can depend on the
auditor responsible for negligence in information of responsible
case of verification. employee for proper valuation. If
any mistake is crept on that
information, the auditor cannot
be
responsible
 65. “Verification includes valuation” - Comment**
Valuation of assets is an important part of their verification. The correct profits can not
be calculated unless the assets are properly valued. Only then the balance sheet will
reveal the true and fair position of the financial affairs of the business. The valuation as
such is to ensure the correct valuation of the assets while in verification, the auditor
has to verify the authority, and the existence of the property also besides its
valuation. Thus valuation means to test the exact value of an asset on the basis of its
utility. Normally, valuation is done after deducting the depreciation for the value of an
asset. If proper depreciation on assets is not provided for, the profits will be overstated
or understated which will have adverse effect on the company's solvency. The auditor
should consider the following points while valuing the assets:
(a) Original cost of the assets.
(b) Expected working life of the assets.
(c) Wear and tear of the assets.
(d) Break-up value of the assets.
(e) The chances of the assets becoming obsolete.

66. Do you think that verification of Assets and Liabilities is

necessary when vouching has been done properly? Discuss*
Verification means `proving the truth' or `confirmation'. One of the most important
duties of an auditor in connection with the audit of the accounts of a concern is to
verify the assets and liabilities appearing in the balance sheet. The fact that there is an
entry regarding the purchase of an asset and has been be correctly recorded, is not a
proof that the asset is in the possession of the concern at the date of the balance sheet.
It is possible that after purchase and passing the entries, the asset might have been
disposed of or pledged and no entry has been made concerning this before the
closing of these books. Therefore, he has to see whether a particular asset as recorded
in the balance sheet on the day of the closing of the books of account exists or not. If
he fails to verify the asset, he will be liable for any damage suffered by the client as it
was decided in the case of London Oil Storage Co. Ltd. Vs. Sear Haslock and Co. (1904).

Thus we can say that verification is a process by which the auditor satisfies himself not

only about the actual existence, possession, ownership and valuation but also ensures
that the assets are free from any charge or lien. The verification of assets involves the

following points :
(a) Comparing the ledger accounts on the date of the balance sheet.
(b) Verifying the existence of the assets on the date of the balance sheet.
(c) Satisfying that they are free from any charge of mortgage.
(d) Verifying their proper value.
(e) Assets were acquired for the business.
 67. How would you verify the following assets &
liabilities*******************
(a) Stock
As the correctness of the profit of a business depends to a great extent on the
accuracy of the valuation placed on the closing stock, it will be readily appreciated
that the verification of this asset forms one of the most important part of an auditor’s
duty. While verifying the stock-in-trade the auditor has the following duties –
(a) Ascertain the method of stock-taking and the basis of valuation.
(b) Ensure that the stock-sheets have been subjected to a good internal check, e.g.
they are certified as to have taken prices, extension and additions while
determining the stock and also generally approved as correct by managing
director.
(c)Check calculations and additions.
(d) Check a few of the important items with actual invoices as to prices.
(e)Examine some of the quantities in stock-sheets with those shown by the stock
books, if such stockbooks are kept.
(f) Ascertain that the stock is valued on the same basis as in the previous year.
(g) Ascertain that obsolete and unsalable stock is shown at fair market prices.
(h)Compare the percentage of gross profit on turnover with that of the previous
period and alsoenquire into the cause of any notable fluctuation.
(i) Ensure that the goods entered as sold and not delivered are not included.
(j) Ensure that the goods bought and not entered in the invoice book are included.
(k) (i) Ascertain that the value of unfinished goods is taken at actual cost and the
basis of valuation is the cost of the materials consumed and the wages spent
thereon upon the date of the Balance Sheet. Sometimes a percentage is added in
the above to cover the factory cost, such as foreman’s wages, fuel, power, lighting,
heating, depreciation of plant etc. (ii) In case of finished goods, a reasonable
percentage in respect of office cost has also to be added to the works cost.
(l) See that the goods sold on approval basis are properly included in closing stock.
(m) See that the stock held does not include goods held on consignment as an agent.
(n)Examine carefully the stock sheets and ensure that the stock includes only the
goods dealt with by the client and does not include any asset purchased.
(o)Confirm that stock has been valued at cost or market price, whichever is less.
(p) Obtain from a responsible officer of the organization a certificate regarding
the procedure followedin valuation of stock.
(q) Obtain a certificate from client certifying that :
 i. Physical verification of stock is done.
ii. All goods included in the stock are property of the company.
iii. Cut off procedure is properly followed. (Cut off is a transaction which
separates one accounting year from the next accounting year. Last
document nos. of goods 193 received notes, goods accepted notes, debit
and credit notes etc. should be obtained at the time of stocktaking).
iv. The basis of valuation is the same as was followed in the previous year.
(b) Investment
Investment may be a share certificate, government bond certificate, government loan
certificate, debenturecertificate, etc. For verification of such securities, the following
procedure is adopted.
(a) Obtain a schedule of investments in hand at the beginning of the audit period.
Obtain the details of
description of investments together with distinctive number of face value, date of
purchase, book value, market value, rate of interest, date of payment of interest or,
date around which dividend is declared, etc., with also the details of interest or
dividend received along with tax deducted at source.
(b) Add to the above list, purchase made during the year and delete the
investments sold during the year with all the above details.
(c)Balance this schedule and compare the balance with general ledger and Balance sheet.
(d) Check the market value of investments with reference to stock exchange
quotations or other suitablemethod, on Balance Sheet date and see that the
values are disclosed in the Balance sheet.
(e)Inspect the certificates or securities physically on the Balance Sheet date.
(f) Compare the income received with amount due and adjust the accrued income.
(g) Confirm the uncalled liability on partly paid shares held as investment shown
as contingent liability byway of a note to the Balance Sheet.
(h)See that adequate provision is made for any shortfall in the book value of
investment shown in theBalance Sheet.
(i) See that, regarding the investment in subsidiaries, disclosure requirement of the
Companies Act, 2013are complied with.
(j) For investment in the capital of partnership, the partnership deed and copy of
accounts of partnershipfirms, is to be verified. Also adjust the share of profit and
loss for the partnership period.
(k) Investments which stand in the name of persons other than that of the company
are to be confirmedwith appropriate sanction.
(l) For investment lodged with others as security or lying with banks or share brokers,
obtain a certificatefrom the parties concerned.
(m) In case of application money paid for shares which are still to be allotted,
that fact is to be speciallydisclosed in the Balance Sheet.
(c) Debtors:
Sundry Debtors represents the amount recoverable from the customers for sale of goods
or rendering ofservices.
(a) The under mentioned procedure should be applied for verification of `Book
Debts’ or `Sundry
Debtors’ after receiving a schedule or list of debtors from the client.
i. Direct confirmation of balances from debtors by sending confirmatory letters.
ii. Year-end Scrutiny of ledgers.
iii. Verification of the position of debts considered bad or doubt ful. (d)
Compliance with legal requirement or presentation.
(b) The auditor should arrange to send the letter of confirmation of balances by
the client as per client’s records and see that the reply of confirmation is
forwarded to his office directly. Usually this should be sent within 15 or 20 days
of close of the year under the supervision of the audit staff. After the reply is
received, the same should be tallied with the balances shown in the Debtors
Ledger and difference properly reconciled.
 (c)After the said procedure is carried out, he should carry out a thorough scrutiny
of the debtor’s individual accounts. Wherever the number of debtors is very
large, Test Checks can be applied.
(d) While scrutinizing the ledger, the auditor should focus the light on discounts,
returns, cash received, rebates allowed, goods returned etc.
(e)On ascertaining the balances of the debtors as genuine and correct, the auditor
has to verify the debtors to find out bad or doubtful debts to make a provision
for the same.
(f) After ascertaining the position of bad or doubtful debts, he should see that the
legal requirements of Schedule III to the Companies Act, 2013 are complied with.
For this purpose, the debtors are to be classified as : (a) Outstanding for a
period of more than six months ; and (b) Other debts.
(g) Over and above this, other requirements like debts considered as good and
which are fully secured, debts due from the officers, directors, managers of the
company, etc., are to be ascertained for disclosure.
(h)If the customers have purchased the goods on hire purchase system and some
of the instalments are not due, the same is not to be shown as `stock out on hire
purchase’.
(i) Likewise, if the goods are sold on `return or approval’ basis, such customer
cannot be shown as a debtor at the close of the year.
(j) Further, whenever there are credit balances in some debtors account, the same
are not to be deducted from other debtors debit balances and net balance is
not to be shown in the assets side, but former is to be shown as Sundry Creditors.

(d) Leasehold Property :

Normally the lease or right to use the property is granted for certain number of years.
At the expiry of the period of lease, the rights go back to the original lessor. Various
steps involved in the verification of leasehold rights are stated below.
(a) Inspect the lease agreement to ascertain the amount of premium paid, period of
lease, other terms
and conditions, like maintenance, insurance, etc.
(b) See that the lease is properly registered with the Registrar because a lease
for a period exceedingone year is not valid unless it has been granted by a
registered document.
(c)Ascertain those conditions, the failure of which might result in the forfeiture or
cancellation of lease,and see whether they have been properly complied with.
(d) See whether sub-lease is valid as per lease agreement, in case if it is
granted, by referring to sub-lease agreement.
(e)See that the premium paid and acquisition expenses of lease are being
amortised (written off) overthe period of lease adopting a suitable basis.
(f) In case, any provision is to be made under the dilapidation clause for payment
on the expiry of theterm of lease, see that the same is properly and continuously
provided.
(g) In case of leasehold land, if any building is constructed by the lessee, see the
position and ascertainthe correct method of presentation of such expenditure for
disclosure in the Balance Sheet
(e) Plant & Machinery****
(a) Now-a-days as per provision of the Companies Act, 2013 every company is
required to maintain a Fixed Asset Register showing full particulars including cost,
location, depreciation, details of purchase, expenses capitalised, etc. Therefore, the
auditor should ask for such a register maintained by the client and see that all
items of plant and machinery are recorded properly giving full details.
(b) As per the provision of the same section, all fixed assets are required to be
physically verified by the management. Therefore, the auditor should enquire
whether such physical verification was undertaken or not. If yes, he should ask for
necessary papers pertaining to the same. If there is any discrepancy, reasons for
the same should be asked.
(c)Any new purchase made during the year are to be verified with reference to
purchase invoice and other papers regarding installation of the same.
(d) Total value of plant and machinery as shown by Fixed Asset Register should
tally with ledger account maintained in the financial books.
(e)Where any item of plant and machinery is sold, scrapped or transferred the auditor
should check relevant entries for the same and verify that they are removed from
the Fixed Assets Register.
(f) The auditor should verify that adequate depreciation is provided on all items of
plant and machinery and method of depreciation is consistently followed from
year to year.
(g) Auditor should see that the entire plant and machinery stands in the name of
the client and are free from any charge or encumbrances. If plant and machinery
is mortgaged, then he has to verify that the documents are properly executed and
mention of mortgage is made in the Balance Sheet.
(h)He will ensure that plant & machinery have been disclosed under Non-Current
assets as Fixed Assetsas per Schedule III Companies Act, 2013.

(f) Goodwill*
The duty of an auditor regarding verification of goodwill is stated below:
(a) Whenever the company has purchased or acquired a running business and
has paid for it an amount, in excess of the book value of its net assets, the excess is
called `Goodwill’. It can be verified from the vendor’s agreement and the auditor
has to see whether there is a specific sum which is paid or whetherit is the excess of
price paid over the tangible assets and see that it is properly recorded.
(b) When the company has written up the values of all its assets on a revaluation
and has raised a Goodwill Account in the books, the Goodwill appears in the
Balance Sheet. In this case, the auditor has to see the basis of valuation and get
satisfied about the same. If he is not satisfied, the fact should be reported to the
shareholders.
(c)He has to see that such excess is credited to a Capital Reserve or Revaluation
Reserve and no dividendis being declared from it.
(d) He has also to see the disclosure requirement of Schedule VI and ensure that
the fact are disclosed for5 years subsequent to the date of revaluation.
(e)Sometimes, Goodwill which is written off earlier may be brought back in the books
of account to adjust the debit balance of Profit and Loss account. In this case, the
auditor should investigate the fact and satisfy in full before approving such method
of creating Goodwill. He should also refer to the board resolution. In case he is not
satisfied, the fact should be reported to the shareholders.
(f) If Goodwill has been created by any other means, the auditor should see that all
relevant facts are properly disclosed and are supported by documentary evidence.
(g) Patent and Trade Mark:**
(a) The ownership of patent rights is verified by inspection of certificate issued for grant
of patent, by the prescribed authority.
(b) If it has been purchased, the agreement surrendering it in favour of the client should be
examined.
(c) If there are a number of patents held by the client, obtain a schedule giving the full
details thereof or verify with reference to the register maintained by the client.
(d) It must be verified that patent rights are alive and legally enforceable and renewal
fees have been paid on due dates and charged to Revenue Account. The last
renewal receipt should be examined toascertain that the patent has not lapsed.
(e) See that the patents are properly registered in the name of the client only.
(f) See that the cost of patent is being written off over its useful period of life.
(g) In case the patent is acquired, cost paid for the same and all relevant expenses are to be
capitalized.
(h) If the patent is created by the client by the research experiments and laboratory
work, only the actual expenses incurred for it in the process are to be capitalised.

(h) Copyright:**
(a) The auditor has to examine the written agreement of assignment along with
the royalty paid to theauthors etc., for such copyrights.
(b) He has to see that such assignments are properly registered.
(c)If the client is the owner of many copyrights, the auditor should ask the client to
prepare a schedule ofcopyrights and get the detailed information to confirm that
the same is shown in the Balance Sheet.
(d) Regarding the value of copyrights, it should be remembered that this asset has
no value in the long run.Hence, value is determined on revaluation basis and period
of copyrights.
(e)If any copyrights does not command the sale of any books, then the same should
be written off in suchyear. The auditor has to verify the same in detail.

(i) Cash in hand :

(a) Special care is necessary with regard to verification of cash balances. There can
be no certainty that the cash produced for inspection was in fact held by the
custodian.
(b) For this reason, the cash should be checked not only on the last day of the year,
but also checked again sometime after the close of the year without giving notice
 of the auditor’s visit either to the client or to his staff.
(c) If there is more than one figure for cash balance e.g. when there is a cashier, a
petty cashier, a branch cashier and in addition, there are imprest balance with
employees, all of them should be checked simultaneously, as far as practicable, so
that the shortage in one balance is not made good by transfer of amount from the
other.
(d) It is desirable for the cashier to be present while cash is being counted and he
should be made to sign the statement prepared, containing details and the cash
balance counted. If he is absent at the time the cash is being verified, he may
subsequently refute the amount of actual cash on hand which may put the auditor
in an embarrassing position.
 (e) If the auditor is unable to check balance on the date of the Balance Sheet, he
should arrange with his client for all the balance to be banked and where this
cannot conveniently be done on the eve of the close of the financial year, it
should be deposited the following morning. The practice should also be adopted in
the case of balance at the factory, depot or branch where cash cannot be checked
at close of the year.
(f) Should this not be possible, the auditor should verify the receipts and payments of
cash upto the date he counts the cash. This should be done soon after the cash
balances have been counted. The cash book of the day on which the balance is
verified should be signed by the auditor to indicate the stage at which the cash
balance was checked.
(g) If any cheques, or drafts are included in cash balance the total there of should be
disclosed.
(h) If there is any rough Cash Book or detail of daily balance are separately kept, the
auditor should test entries from the rough Cash Book with those in the Cash Book,
to prove that, entries in the Cash Book are correct.
(i) If the auditor finds any slip, chit or I.O.U’s in respect of temporary advances paid to
the employees, included as part of the cash balance, he should have them
initialed by a responsible official and debited to appropriate accounts.

(j) Bank Balance:

(a) To verify cash at bank, the auditor should examine the bank pass book and
compare it with the balanceas shown by the bank column of the cash book.
(b) Check bank reconciliation statement with bank statement / pass book of subsequent
period.
(c) The auditor should get a certificate regarding the balance at the bank directly from the
bank.
(d) Ensure that the balance as shown by the cash book is brought into the balance
sheet as `Cash and Bank’ and not `Balance as shown by the pass book’.
(e) The auditor should also see that the `cheque outstanding’ and `cheques not yet
collected’ are genuineand not made up in order to conceal the deficiency. If some
of these cheques are more than six months old, he should make inquires, and have
them reversed in the books of accounts.
(f) Cash in Fixed deposits with the bank can be verified by examining the deposit
receipt, or getting a certificate from the banker.
 (g) If there are more than one bank account such as `Dividend Account’. “Interest
Account’ etc. all such accounts should be checked and the balances should be
verified upon the same date. Information regarding their balance should also be
obtained from the bank directly.
(h) If the bank account shows an adverse balance and the client has deposited any
security for the overdraft,the auditor should enquire from the bank the particulars
of the security and the amount of the interest charged.

(k) Secured loan**

Verification of secured loan may be carried out by employing the following procedures:
i. The auditor should examine the Article of Association and Memorandum
of Association toknow the power of the company to raise loan and its limit.
ii. He is required to go through the minutes of Board to see whether there is
authorization ofraising loan.
iii. The auditor should enquire into the purpose of taking loan and whether the
amount of loan hasbeen utilized for that purpose.
 iv. The loan agreement entered into between the client and borrower should be
examined to know whether terms and conditions are in the interest of the
company.
v. The auditor will see whether there is fixed charge or floating charge on assets
for taking secured loan. In case of fixed charge, the particular asset placed
as security for loan should be clearly stated in the balance sheet.
vi. He will verify whether terms and conditions of taking loan have been duly complied
with.
vii. The auditor will obtain certificate from lenders to confirm the validity of the
amount of loan standing on the balance sheet data and any outstanding
interest thereon.
viii. He will see that secured loan has been properly disclosed in the balance
sheet as per Schedule III of the Companies Act, 2013.

(l) Creditors
(a) The auditor should ask for a schedule of creditors and check the same with the
purchase ledger as that isalready examined by him.
(b) He should ensure that all purchase made during the year especially at the end of
the year are included inthe accounts of the creditors.
(c) In case of suspicion about any creditors, the auditor with the consent of the client
can ask the statementof account to be sent and verify the same by scrutinizing
ledger accounts.
(d) He should see the various debits given for discount, goods returned etc, and
confirm that the same aregenuine.
(e) The auditor should ask for the reason for not paying any overdue creditors.

(m) Contingent liability:**

Contingent liabilities are those liabilities which may or may not arise in the future for
payment. The auditor’sduty is to see that all known and unknown liabilities have been
brought into the accounts at the date of the Balance Sheet and have been shown in
the Balance Sheet separately as such.
Examples:
(a) Liabilities on Bills Receivable discounted and not matured
(b) Liabilities for calls on partly paid shares :
(c)Liability under a guarantee :
(d) Liability for cases against the company not acknowledged as debts :
(e)Liability in respect of arrears of Dividend on Cumulative preference Shares :
Auditor’s duty :
(a) The auditor should very carefully check the various contingent liabilities named
above. There may be some such liabilities for which no provision has been made in
the books but merely a note has been made at the foot of the Balance Sheet, e.g.
Bills Receivable which have been discounted and which have not matured at the
date of the Balance Sheet, arrears of fixed cumulative dividends, etc.
(b) For liabilities in respect of which provision has to be made in the Balance Sheet, viz
a suit, etc., the auditor should examine such cases and ascertain the amount to be
specifically reserved for thepurpose.
(c) The auditor should examine the Director’s Minute Book, correspondence made with
the legal advisers and the information obtained from the officials of the business.
(d) He has to ensure that proper provision has been made for all such liabilities and if
he is not satisfied,he should mention the fact in his report.
(e) It is to be remembered that the requirements of the Companies Act regarding the
contingent liability should be complied with in the Balance Sheet on the liabilities
side.
 Unit V:
Company Audit (Marks 15):
Qualification, Disqualification, Appointment and Rotation, Removal and Resignation, Remuneration, Rights, Duties
and Liabilities of Company Auditor
Branch Audit and Joint Audit
Depreciation – Concept and Provisions of the Companies Act
Divisible Profit and Dividend (Final, Interim and Unclaimed/Unpaid): Provisions of the Act, Legal Decisions and
Auditor’s Responsibility

68. What are the qualifications & disqualifications of an

auditor?*

Qualification
(a) According to Provisions of Section 141(1) of the Companies Act, 2013 “a person
shall be eligible for appointment as an auditor of a company only if he is a
chartered accountant within the meaning of Chartered Accountants Act, 1949
and holds a valid Certificate of Practice.
(b) It has been further provided that the firm shall also considered to appointed by
its firm name whereof majority of partners practising in India are qualified for
appointment as auditor of a company.
(c) According to Provisions of Section 141(2) of the Companies Act, 2013, a firm
including limited liability partnership who are chartered accountants shall be
authorised to act as auditor and sign on behalf of the such limited liability
partnership or firm.
Disqualification
As per section 141(3), following persons shall not be eligible for appointment as an auditor of
a company:
1. A body corporate other than a limited liability partnership registered under
the Limited LiabilityPartnership Act, 2008;
2. An officer or employee of the company;
3. A person who is a partner, or who is the employment, of an officer or
employee of thecompany;
4. A person who, or his relative or partner—
i. Is holding any security of or interest in the company or its subsidiary,
or if its holding or associate company or a subsidiary of such holding
 company, of face value exceeding rupees one lakh;
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 provided any security in connection with the
indebtedness of any third person to the company, or its subsidiary, or
its holding or associate company or a subsidiary of such holding
company, in excess of rupees one lakh;
5. a person or a firm who, whether directly or indirectly, has business
relationship with the company, or its subsidiary, or its holding or associate
company or subsidiary of such holding company or associate company of
such nature as may be prescribed;
 6. a person whose relative is a director or is in the employment of the company
as a director or key managerial personnel;
7. a person who is in full time employment elsewhere;
8. a person or a partner of a firm who holds appointment as auditor of more
than twentycompanies;
9. 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;
10. a person whose subsidiary or associate company or any form of entity is
engaged on the date of appointment in consulting and specialized services

69. State the provisions of the companies act regarding the

appointment of an auditor? [Section 139]****
as provided in section 144 of the 2013 Act.
(1) Appointment of 1st auditors [Section 139]:
Subject to the provisions of this Chapter, 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 annual general
meeting and thereafter till the conclusion of every sixth meeting andthe manner and
procedure of selection of auditors by the members of the company at such meeting
shall be such as may be prescribed:
(a)Provided that the company shall place the matter relating to such appointment for
ratification by
members at every annual general meeting:
(b)Provided further that before such appointment is made, the written consent of
the auditor to such appointment, and a certificate from him or it that the
appointment, if made, shall be in accordance with the conditions as may be
prescribed, shall be obtained from the auditor:
(c)Provided also that the certificate shall also indicate whether the auditor
satisfies the criteria provided in section 141:
(d)Provided also that the company shall inform the auditor concerned of his or its
appointment, and also file a notice of such appointment with the Registrar
within fifteen days of the meeting in which the auditor is appointed.

(2) Reappointment of auditors

No listed company or a company belonging to such class or classes of companies as
may be prescribed, shall appoint or re-appoint—
(a) an individual as auditor for more than one term of five consecutive years; and
(b) an audit firm as auditor for more than two terms of five
consecutive years:Provided that—
(a) an individual auditor who has completed his term under clause (a) shall not be
eligible for re-
appointment as auditor in the same company for five years from the completion of his
term;
(b) an audit firm which has completed its term under clause (b), shall not be
eligible for re- appointment as auditor in the same company for five years from
the completion of such term:
(c) Provided further that as on the date of appointment no audit firm having a
common partner or partners to the other audit firm, whose tenure has expired in
a company immediately preceding the financial year, shall be appointed as
auditor of the same company for a period of five years:
 (d) Provided also that every company, existing on or before the commencement of
this Act which is required to comply with provisions of this sub-section, shall
comply with the requirements of this sub-section within three years from the
date of commencement of this Act:
(e) Provided also that, nothing contained in this sub-section shall prejudice the
right of the company to remove an auditor or the right of the auditor to resign
from such office of the company.

(3) Casual vacancy:

Any casual vacancy in the office of an auditor shall—
in the case of a company other than a company whose accounts are subject to audit
by an auditor appointed by the Comptroller and Auditor-General of India, be filled by
the Board of Directors within thirty days, but ifsuch casual vacancy is as a result of the
resignation of an auditor, such appointment shall also be approvedby the company
at a general meeting convened within three months of the recommendation of the
Board and he shall hold the office till the conclusion of the next annual general
meeting;

70. State the provisions under companies act 2013 regarding

removal of an auditor****

Removal of auditor before expiry of term as per Companies Act, 2013 [sec. 140(1)]
An auditor appointed under section 139 may be removed from his office before the expiry
of his term iffollowing conditions are fulfilled:
i. An application to the Central Government for removal of auditor shall be made;
ii. The application shall be made to the Central Government within thirty days
of the resolutionpassed by the board;
iii. The company shall hold the general meeting within sixty days of receipt
of approval of theCentral Government for passing the special resolution;
iv. The auditor must be given a reasonable opportunity of being heard.

Appointing a new auditor in place of the retiring auditor as per companies act, 2013
[sec.140(4)] Section 140(4) of the Companies Act, 2013 has laid down following
provisions for appointment of newauditor in place of retiring auditor at an annual
general meeting:
i. Special Notice: A special notice has to be given for a resolution at the annual
general meeting
 for appointing as auditor a person other than a retiring auditor or
providing expressly that aretiring auditor shall not be reappointed.
This provision is not obviously applicable where the retiring auditor has
completed aconsecutive tenure of five years or ten years as the case may
be.
ii. Intimation to auditor: On receipt of such notice, the company shall forthwith
send a copythereof to the retiring auditor.
iii. Representation by the auditor: The retiring auditor proposed to be replaced
by a new auditorhas right to make a representation to the company against
his removal.
The representation shall be in writing with a reasonable length. He may
request the companyto circulate the representation to the members of the
company.
Removal of auditor by tribunal [sec.140 (5)]
i. Removal for Fraud: The Tribunal may, either suo motu or on an application
made to it by the Central Government or by any person concerned, directs
the company to change its auditors if it is convinced that the auditor has
acted fraudulently.
ii. Appointment of New Auditor by Central Government: If the application is
made by the Central Government and the Tribunal makes an order
removing the existing auditor for fraud, the Central Government may
appoint another auditor in his place.
iii. Liability of the Auditor being removed: An auditor, whether individual or firm,
against whom final order has been passed by the Tribunal under this
section, shall not be eligible not be appointed as an auditor of any
company for a period of five years from the date of passing of the order
and the auditor shall also be liable for action under section 447.

71. How is the remuneration of a company auditor

determined?**
Remuneration of auditors [Section 142]—
1. The remuneration of the auditor of a company shall be fixed in its general
meeting or in such manneras may be determined therein:
Provided that the Board may fix remuneration of the first auditor appointed by it.
2. The remuneration under sub-section (1) shall, in addition to the fee payable to
an auditor, includethe 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 service rendered by him at the
request of the company.

72. What are the right (Power) and duties of an auditor under
the companies act?**
Rights of an Auditor
1. Right of access to books and vouchers: Section 143(1) of the Companies Act, 2013
states that an auditor of a company has a right of access at all times to the
books, account and vouchers of the company whether kept at the head office or
anywhere else. The term ‘vouchers’ include any document supporting the
transactions in the financial statements. Similarly ‘books’ means financial,
costing, statutory and statistical books.
 The right of access ‘at all times’ implies that the auditor can inspect the books
and accounts and vouchers at any time during the tenure of his appointment
and during normal business hours. The proviso to sub-section(1) of section 143
has also, given right to the auditor of a holding company to have access to the
records of all its subsidiaries in connection with consolidation of its financial
statements.
2. Right to obtain information and explanations: As per section 143(1) of the
Companies Act, 2013, the auditor can ask for any information and explanation
which he consider necessary for the performance of his duties as auditor.
3. Right to get a report on branch accounts: According to section 143(8) of the
Companies Act, 2013, the branch auditor shall send a report on the account of
the branch of the Company’s auditor who shall deal with it in his report in such a
manner as he considers fit.
 4. Right to receive notices and to attend General Meeting: Section 146 of the Act,
2013 has given rightto the auditor to have notice of and to attend every general
meeting. He has also right to be heard in the meeting on matters concerning
himself.
5. Right to have audit report read at AGM: As per section 143 of 2013 Act, the auditor
has the right to have the audit report read before the company in the General
Meeting and the same shall be open to inspection by any member of the
company.
6. Right to be indemnified: The auditor has right to be indemnified for any expenses
incurred by him indefending himself while the Court’s judgement goes.
7. Right to take legal and technical advice: According to judgement in London and
General Bank (1895) case, an auditor can take legal, expert or technical advice
while conducting audit. However, he must always give his own opinion in the
report.
8. Right to remuneration: On completion of the job he is assigned with, the auditor
has right to get his agreed remuneration. If his service is terminated by the client
before the expiry of the term, he will be entitled to remuneration of the full term.
9. Right to sign the audit report: Under Section 145 of Companies Act, 2013 the
auditor has right to sign the audit report and the balance sheet and profit & loss
account including the documents annexed.
10. Right to attend the meetings of Audit Committee: The auditor shall have the right
to attend the meetings of the Audit Committee and right to be heard in the
meeting when the Committee considers the Auditor’s report. But he shall not
have right to vote [Sec. 177(7)]

Duties of An Auditor
According to Companies act, 2013, the duties of an auditor may be described as below:
1. Duty to make report on financial statements: According to Sec. 143(2) of the
Companies Act, 2013 the statutory auditor is required to submit a report on
the accounts audited by him to the shareholders of the company. It is to be
noted that he might have been appointed by directors. But he is always
required to submit his report to shareholders and not to the directors.
2. Duty to make enquiry: The auditor shall also inquire, under section 143(1), into
various matters such as:
i. Whether loans and advances made by the company are properly
secured and whetherthe terms of loans and advances are against the
 interest of the company.
ii. Whether the transactions which are merely represented by book
entries are prejudicialto the interest of the company.
iii. Whether shares, debentures and other securities have been sold of a
price less than costprice.
iv. Whether personal expenses have been charged to the revenue A/c.
v. Whether loans and advances made by the company have been shown as
deposits.
vi. Whether cash has actually been received in respect of shares allotted
for cash as stated in the books and if no cash has actually been so
received, whether the position as stated in the account books and
balance sheet is correct, regular and not misleading.
3. Matters to be stated in the report: According to Sec. 143(3), of Companies Act,
2013 he has to clearly state in his report that
 i. Whether he has sought and obtained all the information and
explanations relating to the accounts which to the best of his
knowledge and belief were necessary for the purpose of audit.
ii. Whether proper books of account as required by law have been
kept by the company.
iii. Whether proper returns have been received from the branch not visited
by him.
iv. Whether the report on the accounts of any branch office of the
company audited by the branch auditor has been sent to him and
the manner in which he has dealt with it in preparing his report.
v. Whether the Company’s balance sheet and profit and loss account
dealt within the report are in agreement with the books of account
and returns.
vi. Whether applicable accounting standards have been followed in
the preparation and presentation of financial statements.
vii. Observation or comments on financial transactions or matters
which have any adverse effect on the functioning of the company.
viii. Whether any director is disqualified from being appointed as a
direction under sub-section (2) of section 164.
ix. Any qualification, reservation or adverse remark relating to the
maintenance of accounts and other matters connected therewith.
x. Whether the company has adequate internal financial controls
system and whetherit is effective in operation.
4. Reasons for negative remark/Qualification: In case of negative remark or
qualification in any
reporting matters, the auditor should state the reasons therefore in his report.
5. Compliance with C & AG direction: In case of a Government Company, the
auditor’ report include:
 The direction, if any issued by the C & AG regarding manner of audit of
accounts;
 The action taken on such direction and the impact thereof on the
company’s financial statements=0. [Sec. 143(5)]
6. Duty to intimate the Central Govt. about fraud: If the auditor, in course of audit,
comes across any fraud involving such amount as may be prescribed, he
shall immediately report the matter to the Central Government within such
time and in such manner as may be prescribed. In case of fraud involving
lesser than the specified amount, the auditor shall report the matter to the
Audit Committee or the Board within such time and in such manner as may
 be prescribed. [Sec.143 (12)] as amended by Section 13 of the Companies
(Amendment) Act, 2015. Section 13 of the Amendment Act has not been
notified till 31.07.2015.
7. Duty of cost accountant and company secretary: The provisions of section
also apply to the costauditor conducting cost audit under section 148 of 2013
Act and the Company secretary conducting secretarial audit under section
204 of 2013 Act. [Sec. 143 (14)]
8. Duty to pay penalty: If the auditor fails in his duty to report any fraud he shall
be punishable with fine which shall not be less than one lakh rupees but
which may extend to twenty-five lakh rupees. [Sec.143(15)]
9. Mandatory Compliance with auditing standard: It is the duty of the company
auditor to comply with auditing standards in course of audit. [Sec. 143(9)]
10. Duty to make comments as sought by Audit Committee: It is obligatory on the
part of the auditor to make comments about internal systems, the scope of
audit, including his observation and review of financial statements, if sought
by the Audit Committee. [Section 177(5)].
 73. Discuss the status of an auditor in a company.*
STATUS OF AUDITOR
A company auditor is viewed by different persons in different ways. Shareholders may
think him as their agent while to many others he is an officer of the company. Again
many are inclined to consider him as the employee of the company. Now let us
discuss how far it will be justified to treat him as agent of shareholdersor an officer or
even an employee of the company.
(A) As an agent of the shareholders:
The auditor is appointed by shareholders barring in few cases when he may be appointed
by the Board of Directors or Central Government. Who ever appoints him, his main
objective is to protect the interest of shareholders in the company. The auditor will see
whether the company is being managed by the Board on behalf of the shareholders
efficiently and effectively and whether accounts as prepared by the management reflect
the actual financial position and operating results of the business. Moreover his audit
report is always meant for shareholders. Because of' thisrole, the auditor is treated by the
shareholders as their agent.
However, according to law of Contract, an agent is required to submit accounts to his
principle 'On demand'. Inactual practice no such accounts are submitted by auditor as
he is not entrusted with the task of maintaining anyproperty. What the company auditor
is required to do is to submit, whether demanded or not, his report on accounts as
prepared by the management to the shareholders.
Again according to the Law of Agency "he who does through another does by himself." It
means that any act of agent will be purported to be the act of principal. But this
relationship does not exist between shareholders andauditors. If the auditor distorts any
fact in collusion with directors, this must not be taken as an act of shareholders.Under the
same law, the knowledge of an agent regarding a matter is also taken as the knowledge
of the principal. But so far as company auditor is concerned he is not supposed to
intimate the shareholders any information other than the actual results and financial
position through financial statements.
Therefore, a company auditor can not be treated as an agent of shareholders. He can
be at best treated as representative of shareholders under certain circumstances.
(B) As an officer of the company:
There are many legal decisions where a company auditor has been termed as an
officer of the company : For example, the London and General Bank case it was held by
Lord Justice Lindley that it seems impossible to denythat for some purposes, and to some
extent, an auditor is an officer of a company. In the famous Kingston CottonMills Co. Ltd.
case, it was also held that "auditors are officers of the company."
But an officer is an employee of the company who is entrusted with the task of
implementing the plans and policiesof the management. He is bound by the service rules
of the company and is required to work as per directions givento him. Even the may have
to surrender to boss wishes and whims which may be against the interest of the company.
But independence in the work of auditor is a well established principle. He needs to be
independent of management in order to make his report reliable to shareholders and other
interested parties like bankers, creditors, employees etc. Therefore, the auditor must work
according to his own judgement and independent thought even though that maynot suit
the desire of management and may render his assignment ceased. So to treat the auditor
as an officer of thecompany is contrary to the basic philosophy of audit.
(C) As a servant of the company:
Sometimes an auditor is treated as a servant of the company as he is paid for. But if
payment to auditor by thecompany makes him a servant of the company, it will create lot of
confusion.
Then the doctor who is paid by the patient is to be treated as servant of the client. So it
would not be logical to treatauditor as servant of the company.
An auditor is an independent person rendering professional service to the company in
return of fees. He can neitherbe an agent of the shareholders nor be an officer of the
company, nor is he a servant of company.
74. What are the liabilities of an auditor under the companies
act?**
A. Civil Liability
1. Liability for negligence in relation to prospectus: As per corresponding
section 35 of 2013 Act regarding civil liability for misstatement in prospectus,
the auditor will be held liable if he as an “expert” gives written consent to the
issue of prospectus which is misleading and where a person has sustained
any loss or damage by subscribing for securities of the company acting on
such prospectus.
2. Liability for misfeasance: As per corresponding section 340 of 2013 Act,
Misfeasance means breach of trust or willful negligence in the performance
of duty. The company auditor may be charged with misfeasance only at the
time of liquidation if it appears that he has
 Misapplied or retrained or become liable or accountable for any money or
property of
the company, or
 Been guilty of any misfeasance or breach of trust in relation to the company.
B. Criminal Liability
The circumstances in which an auditor may be criminally prosecuted under the
Companies Act are:
1. Misstatement in Prospectus [Sec. 34]: As per section 34 of 2013 Act
relating to the criminal liability for misstatement in prospectus, the
responsible person shall be liable under section447 which stipulates that
any person who is found to be guilty of fraud, shall be punishable with
imprisonment for a term which shall not be less than six months but
which may extend to ten years and shall also be liable to fine which shall
not be less than the amount involved in the fraud but which may extend
to three times the amount involved in the fraud. The auditor can escape
liability under this section if he proves
 The statement was immaterial;
 He had reasonable grounds to believe that the statement was true.
 He had not authorised the issuance of the prospectus.
2. Fraud and Deception [Sec. 336]: If an auditor destroys, mutilates, alters,
falsifies, secretes or is privy to any manipulation in books of accounts or
documents of a company under winding up, he shall be punishable with
an imprisonment for a term which shall not be less than three years but
 which may extend to five years and with fine which shall not be less than
one lakh rupees but which extend to three lakh rupees.
3. Penalty for non compliance by auditor any of the provisions of sections
139, 143, 144 and 145 [Section 147]:
a) If the auditor makes any falsification in connection with his
appointment u/s 139, default in discharging powers and duties as
imposed u/s 143, renders certain servicesas prohibited u/s 144 or fails
to sign the audit report or certify any other documents as required u/s
145, he shall be punishable with a fine which shall not be less that Rs.
25,000 and which may extend to Rs. 5 lakh.
b) If the contravention is willful with the intention to deceive the company
or its shareholders or creditors or tax authorities, he shall be
punishable with imprisonment for a term which may extend to one
year and with fine which shall not be less than one lakh rupees but
which may extend to twenty five lakh rupees.
 c) The convicted auditor has to refund remuneration to the company
and pay for damages to the company, statutory bodies or
authorities or to any other person forloss suffered due to misleading
audit report.
4. Refusal or failure to produce document [Sec. 217]: In case of refusal or
failure to produce documents or evidence as sought by the inspector
appointed by the Central Government to investigate the affairs of the
company, the auditor shall be punishable with an imprisonment for a
term which may extend to six months and shall be liable to fine which
shall not be less than twenty-five thousand rupees but which may extend
to one lakh rupees and also with a further fine which may extend to Rs.
2000 for every day during which the failure continues.
5. False statement [Sec. 448]: If any person, including auditor, deliberately
makes a statement in any return, report, certificate, balance sheet,
prospectus, statement or other documents which is false in any material
respect or deliberately omits any material fact, he shall be punishable
with imprisonment for a term which shall not be less than six months but
which may extend to ten years and shall be liable to fine which shall not
be less than the amount involved in the fraud but which may extend to
three times the amount involved in the fraud.

75. State the provisions of companies act 2013 regarding

declaration & payment of dividend.***
The important provisions of company law pertaining to dividend are described below:
1. Source of Dividend: As per section 123(1), dividend can be paid out of following sources:
i. Current profit after providing for depreciation;
ii. Past reserves created out of profits of credit balance in the profit and loss
account broughtforward after providing for depreciation.
iii. Money provided by the Central Government or a State Government.
2. Mode of payment: Section 123(5) has expressly allowed a company to make
payment of dividend through electronic mode along with the conventional
mode of payment by cheque or dividend warrant as usual.
3. Provision for Depreciation: Section 123(1) has also made it mandatory for the
company to make provision for depreciation before declaration of dividend out
of profit.
However, unlike 1956 Act, the new Act has not given any power to the Central
 Government to permit declaration of dividend without providing for depreciation.
4. Arrear of Depreciation: The Companies (Declaration and Payment of Dividend)
Amendment Rules, 2014 has stipulated that no company shall declare dividend
out of profit unless depreciation not provided in previous years or years are set
off against profit of the company of the current year.
5. Setting the past loss: The Company is required to set off the entire amount of
accumulated loss against the current profit before declaration of dividend as
per the Companies (Declaration and Payment of Dividend) Amendment Rules,
2014.
6. Transfer of profit to Reserve: The Company may before declaration of dividend
in any financial year, transfer such percentage of profit as it may consider
appropriate to the reserve of thecompany.
7. Use of the past Reserve: As per the second proviso to subsection (1) of Section
123 in the event of inadequacy or absence of profit in any year, a company may
declare dividend out o free reserves subject to fulfillment of prescribed
conditions.
i. Restriction on rate: The rate of dividend shall not exceed the average of
the rates at which dividend was declared by the company in the three
preceding years.
The rule has further stated that it will not be applicable to the company
which has not declared any dividend in each of the three preceding
financial year.
ii. Restriction on amount: The total amount to be drawn from the past
reserve shall not exceed one-tenth of the sum of its paid-up share capital
and free reserve.
iii. First utilization of amount drawn: The amount drawn from the past
reserve shall first be utilized to set off the loss incurred in the financial
year before declaration of dividend on equity shares for that year.
iv. Maintenance of minimum reserve: The balance of reserves after such
withdrawal shall not fall below fifteen percent of paid up share capital.
8. Debenture Redemption Reserve: The Companies (Share Capital and Debentures)
Rules, 2014 requires a company which has issued debentures to create a
Debenture Redemption Reserve out ofprofit available for dividend for an amount
not less than 25% of the value of debentures issued.
9. Failure to comply with provisions of acceptance or repayment of deposits: As
per Section 123(6) of 2013 Act, if accompany fails to comply with provisions of
sections 73 and 74 regarding acceptance and repayment of deposits, it shall
not declare any dividend on equity shares so long such failure continues.
10. Unclaimed dividend: Section 124(6) of 2013 Act states that all shares in respect
of which unpaid or unclaimed dividend has been transferred to the Investor
Education and Protection Fund shall also be transferred by the company to the
fund along with a statement with certain specified details.
11. Deposit in a separate account in a Scheduled Bank: Subsection 4 of section 123
has mandated thatthe company shall deposit the amount of dividend including

76. Can dividend be paid out of Capital? Justify***

interim dividend in a separate account in any schedule bank within five days
from the date of declaration of such dividend.
Payment of dividend out of capital means return of capital to shareholders in disguise.
In other words, a partof the capital invested by the shareholders is paid back to them
in the form of dividend.
The legality of payment of dividend out of capital can be discussed under the following
heads:
1. Judicial Announcement: It was decided in the case of Verner Vs. General and
Commercial Investments Trust Ltd. (1894) that dividend cannot be paid out of
capital. If the Memorandum of Articles of Association gives such power, it should
be considered as invalid and ultravires. Consequences of payment of dividend
out of capital as upheld in various cases are:
i. The directors who pay dividend knowing fully well that such dividends are
paid out of capital shall be personally liable to make good the losses
arising from such payments – London and General Bank, (1895).
ii. If the members receive dividends knowing fully well that such dividends
are being paid out of capital, they have to indemnify the company to the
extent of the amount of dividend received by them – Moxham V. Grant
(1900).
 iii. Liability of the directors for payment of dividend out of capital ceases,
when the capital having been eroded for such payment gets replenished
out of subsequent profit – Boaler Vs. The Watchmaker’s Aliance and Others
(1903).
2. Provisions of Companies Act 2013: The Companies Act has not given any
mandate that the capital of a company should remain intact. But the Act has
also not permitted a company to return capital to the shareholders in the form
of dividend, Section 123 (1) of the Act has specified following sources for
payment of dividend:
i. Current profits,
ii. Past profits i.e., credit balance in the profit and loss account brought forward,
iii. Fund provided by the Government for the purpose of dividend payment.
iv. Free reserve of the company after fulfilling some conditions as stipulated
in the Companies(Declaration and Payment of Dividend) Rules, 2014.
Accordingly, dividend cannot be paid out of any source other than the above as
specified by the law. If dividend is paid out of capital, the directors would
commit an offence under the Act and shall be liable to make good the amount
so paid as dividend to the company.
3. Conclusion: Payment of dividend out of capital leads to reduction of capital. But
reduction of share capital cannot be done without observing some legal
formalities as per section 66 of the CompaniesAct, 2013.
Payment of dividend out of capital has not been made legally permissible for
protecting theinterest of creditors who should have priority over shareholders in
respect of getting back capital. Moreover, allowing that practice would not have
been in the interest of growth and survival of the company.

77. What is capital profit? Give example. Can dividend be

paid out of Capital Profit? ****
Payment of dividend out of capital profits
The profit earned by a company may generally be classified into two categories
namely (a) revenue profit and (b) capital profit.
The profit which is earned in the normal course of business is called revenue profit. This
profit arises out of regular business activities in every year.
On the other hand, the profit which does not arise in the normal course of the business
is called capital profit.This profit arises out of some event which does not come under
the regular activity of the business. Transactions of capital nature generally result in
such profit. This income is not regular income and arises only occasionally. The
examples of the income are (a) profit on revaluation of fixed assets (b) profit on issue
of shares at a premium (c) profit on redemption of debenture at a discount (d) profit
on re – issue of forfeited shares (e) profit prior to incorporation, etc.
Now whether capital profit can be distributed as dividend may be considered from
three different angles, these are:
1. Legal aspect: According to Section 123(1) of the Companies Act, 2013, dividend can
be paid out of
‘profit’. But it is stated nowhere in the Companies Act whether capital profit is
available for distribution of dividend. The capital profit does also belong to the
company. So, there is no legal constraint for payment of dividend out of capital
profit. However, the following points may be noted in this regard.
 i. The capital profit which arises due to issue of shares at the premium
cannot be distributed as dividend as per Sec. 52 of the Companies Act,
2013. In this Section the different uses to which this profit may be applied
have been categorically mentioned.
ii. The profit arising on re – issue of forfeited shares has to be transferred to capital
Reserve.
iii. Similarly, the profit earned prior to incorporation cannot be considered as
distributable profit as the company has not been in existence during this
period and hence no dividend can be paid out of the same.
2. Legal Decisions: The issue of payment of dividend out of capital profit was
dealt with in two noteworthy cases i.e. Lubbock V. British Bank of South America
(1892) and, Foster V. New Trinidad Lake Asphalt Co. (1901).
The following conditions are, based on those judgements, required to be
fulfilled before distribution of capital profit as dividend:
 The Articles of Association must authorise such distribution.
 This profit must be realised in cash on actual sale of fixed assets. The
profit arising out ofmere revaluation of fixed assets is not available for
dividend purpose.
 The capital profit must exist as surplus after revaluation of all assets and
liabilities.
 Other capital loss, if any, must be compensated and payment of dividend
out of capital profitmust not render the company unable to meet outside
liability.
 It must be ensured that payment of dividend does not lead to capital
erosion of the businessin any way.
3. Commercial Expediency: The earning of capital profit does not reflect the
actual profitability of the company. It is a kind of windfall gain and is not
expected to recur. So, it would not be very prudent to pay dividend out of
capital profit. Rather, this profit should be kept in the business for adjusting
future capital loss, setting off loss on issue of shares and debenture of simply
for strengthening working capital position.

78. Can dividend be paid out of current revenue profit before

writing of depreciation?*****
Payment of dividend out of profit without writing off depreciation on fixed assets
Fixed assets are those assets which are intended to be used in the business over a
long period of time. They are not meant for resale. Now the question whether dividend
can be paid out of profit without providing for depreciation can be discussed under the
following heads.
1. Judicial Pronouncements: That depreciation is a charge against profit and should
be provided
before declaration of dividend was not recognized by court earlier. Thus, in
Wilmer Vs. Mcnamara& Co. Ltd (1895) case, it was held that making provision
for depreciation should be necessarily be a precondition for declaration of
dividend out of current profit. In Crabtree Vs. Crabtree(1912) case, the learned
Judge declared that depreciation must be provided on plant and machinery
only when the manufacturing business is intended to be carried on for an
indefinite period of time. Thus, it implies that depreciation need not be provided
on fixed assets like building or furniture before declaration of dividend out of
current profit.
2. Provision of the Companies Act: The section 123(1) of the Act, 2013 has also
made it compulsory to make provision for depreciation before declaration of
dividend.
 3. Commercial Prudence: Fixed assets are used in the process of revenue
generation. The service potentiality of the fixed assets is not everlasting, rather it
gradually declines while in use. So proportionate cost of fixed asset
corresponding to the service used up in the revenue generation should be
treated as expense to be matched against that revenue for income
determination. Unless the expired cost of fixed asset is considered as
depreciation, the profit will be inflated and the true worth of the business cannot
be comprehended from the balance sheet as the fixed assets will remain
overvalued. So, the purpose of financial statements will be defeated. The most
dangerous consequence of non-provisioning of depreciation is the possibility of

79. Can dividend be paid out of current revenue profit before

writing of past capital/revenue losses?****
capital erosion of the business through payment of dividend out of inflated
profit. This is nothing but return of capital to shareholders unnoticed. The
continuity of business is, therefore, threatened. So, it is always prudent to make
provision for depreciation regardless of the fact whether dividend is declared or
not.
Whether dividend can be paid out of current profit without setting off past losses can be
discussed under thefollowing three heads.
1. Judicial decisions: The question was dealt in various legal cases long back. But in
those cases,
somewhat lenient view was taken by the learned Judges. They did not make the
writing off past losses as the precondition for payment of dividend out of profit
of current year. Thus, in the case Ammonia Soda Company Ltd. Vs. Arthur
Chamberlian and other, (1918), it was held by the court that the company might
right up its assets as a result of a bonafide revaluation and might divide current
profits without making good past losses. The same view was expressed by the
learned Judge during the course of his judgment in Stapley Vs. Read Bros. Ltd
(1924)
2. Provisions of the Companies Act: As per fourth proviso of sub – section (1) of
section 123 of the Companies Act, 2013 as inserted by Sec. 10 of the Companies
(Amendment) Act, 2015 notified on 29th May, 2015, no company shall declare
dividend unless carried over previous losses and depreciation not provided in
the previous year or years are set off against profit of the company for the
current year.
3. Business prudence: The existence of debit balance in the profit and loss account
means that capital of the business has already eroded by that extent. So, if a
company which suffers from instability in profit earning distributes its current
year’s profit regularly without setting off past losses completely, the chance of
wiping out of net-worth and consequently liquidation of the business cannot be
ruled out. Therefore, it is advisable to set off the entire amount of past loss and
not just the loss caused by depreciation before distribution of dividend out of
current year’s profit.
80. What are the duties of an auditor relating to the payment
of dividend by a company?
The auditor of a company has a proper duty as regards declaration and payment of
dividend. The following
are the important duties in this regard:
(a) Verification of the sources of dividend: The auditor is required to verify the sources
of dividend available for distribution. In this respect, Sections 205 and 350 of the
Companies Act, 1956 and as amended in 1960, 1974 and 1988 states that properly
determined profits of the company or the amount drawn from past reserves or any
money received as guarantee for payment of dividend either from Central
Government or State Government will be available for this purpose.
(b) Examination of various documents: He should examine the documents of the
company to ascertain the rights and privileges of the various categories of
shareholders and should see that the rates of dividend are in accordance with
those rights.
(c) Review of the Minute Books: He should review the Minute Books of the Directors
as well as of shareholders to know the decisions taken at the respective
meetings relating to declaration of dividend.He should confirm that the rates of
dividend do not exceed the limits fixed by statute. Moreover, he should examine
the recommendations made by the shareholders in respect of rate of dividend
and subsequent approval of shareholders in general meeting.
(d) Verification of the rate of dividend: He should examine whether the account
showing total amountpayable as dividend has been correctly shown calculated
on the basis of paid-up capital and the rate of dividend has been correctly
determined.
(e) Determination of net dividend payable: If the dividend is not tax-free, then
different types of taxes are to be deducted at source. So before payment of
dividend, income tax and other taxes payable on the account should be
deducted. The auditor should confirm that these are duly complied with.
(f) Verification of Dividend Register: He should check the Dividend List with the help
of Register of Members in order to ascertain that the total amount of dividend
payable has been correctly calculated.
(g) Examination of Bank Account: If a separate Bank Account is opened for the
purpose of dividend payment, then the auditor has to verify whether an adequate
amount of money has been transferred fromGeneral Bank Account to this Specific
Bank Account. Then, he should check the Bank Pass Book of theDividend Account
with the Dividend warrants which have been returned and duly cancelled.
(h) Examination of Dividend Payment: He must ensure that dividend has been paid
 or the dividend warrant has been posted within 42 days from the date of
declaration.
(i) Verification of Unclaimed Dividend : He should ensure that dividend remaining
unpaid has been duly transferred to a special account known as 'unpaid
dividend account' within seven days after expiry of forty-two days as is
required by Section 205(A) of the Act. He should also confirm that the
unclaimed dividend has been shown as a liability in the Balance Sheet.
(j) Examination of the Unpaid Dividend Account: The amount of dividend not
claimed by the shareholders should be verified with the amount remaining
unpaid in the bank account.
(k) Verification of the Payment to Real Claimant: After opening an unpaid dividend
account if a shareholder claims for payment of dividend, the auditor should
ensure that payment out of unclaimeddividend account has been made to the
right person.
(l) Examination of Deposit into General Revenue Account: Where any amount remains
unpaid or unclaimed for a period of 3 years after transfer to Unpaid Dividend
Account, such amount has to be finally transferred to the General Revenue
Account of the Central Government. Such transfer should be verified with the list
submitted to Government and the receipt of the Reserve Bank for the amount.
(m) Verification of compliance of the rules contained in Table A: the company does not
have its own Articles of Association, it should follow the different clauses contained
in Table-A of Schedule I to the Act and the auditor should ensure that the rules
have been duly complied with.
 81. What is meant by interim dividend? What could be the
duty of an auditor in connection with such dividend?**
The dividend which is paid by the company before the accounts for the year is
prepared, audited and adopted in the annual general meeting is called interim
dividend. It is paid in between two annual general meeting.As per Sub – section (35)
of Section 2 of the Companies Act, 2013, interim dividend is part of dividend and
accordingly all provisions relating to ‘dividends’ is now applicable to interim dividend
also. Hence, the depreciation for the full year has to be provided before declaring
interim dividend. Moreover, the provisions relating to transfer of profit to reserve, also
apply to interim dividend. The decision to pay interim dividend is taken by the Board
subject to authorisation of Articles when it becomes sure about the adequacy of profit
for the whole year.
It is to be noted that the interim dividend, being part of dividend as per the Companies
Act, will be considered as debt and thus ‘not revocable’ except when its distribution
would amount to capital reduction.
The amount of interim dividend must be deposited in separate bank accounts within
five days from the date of its declaration.
Section 123(3) of the Companies Act, 2013 has permitted the Board of Directors of a
company to declare interim dividend during any financial year out of the surplus in the
profit and loss account and out of the profits of the financial year in which such interim
dividend is sought to be declared.
The proviso to subsection 3 specifically states that in case the company has incurred
loss during the current financial year, up to the end of the last quarter before the date
of declaration of the interim dividend, then the rate of interim dividend shall not
exceed the average rate of dividends declared by the company during the last three
financial years.
Factors to be considered in a decision on interim Dividend
Interim dividend is declared and paid before the end of accounting year. The
management is then yet toknow the results of operations of the business. Therefore, a
great deal of care and caution should be taken by the management before taking
such decision. It has to be ensured that payment of such dividend does not go against
the interest of the company. So following points are to be considered in this connection:
i. Whether profit earned till date from the beginning of accounting year is sufficient
to justify the
 payment of interim dividend. For this purpose up – to date interim accounts,
should be prepared and got audited by the auditor. It should be noted that in
pursuance of Sec. 123(1), depreciation for the full year should be charged and
some percentage of profit as deemed necessary should be transferred to
reserve before distributing dividend.
ii. What is the expected amount of profit to be earned during the rest of the
accounting year? Anypossible occurrence of events affecting the future
profitability should be considered.
iii. Whether all contingent liabilities have been duly considered.
iv. Whether any asset is required to be revalued.
v. Whether the payment of interim dividend will have any adverse effect on
the working capitalposition. For this the project cash flow should be prepared
for the year.
vi. What were the rates of interim dividend and final dividend during the last few years?
vii. What is shareholders’ expectation from the management regarding rate of
interim dividend andwhat will be the possible effect on the share price, if their
expectation is not fulfilled?
viii. What should be the final rate of dividend? This point should be considered
because rate of interimdividend should always be kept lower than final rate of
dividend.
82. What is meant by unclaimed/unpaid dividend? What could
be the duty of an auditor in connection with such dividend?*
Unclaimed dividend means any dividend the warrant in respect thereof has not been
encashed or which has otherwise not been claimed. Once dividend is declared by the
company, it becomes the liability of the company and the dividend warrant should be
dispatched by it within thirty days of such declaration. But veryoften the shareholders
fail to encash the warrant on time after receiving the same. Such dividend yet to be
claims by the shareholders is known as unclaimed dividend.
Unclaimed dividend needs to be distinguished from unpaid dividend. Unpaid dividend
is the dividend in respect of which dividend warrant has not been dispatched by the
company within 30 days from the date of declaration of the dividend.
AUDITOR’S DUTY REGARDING UNPAID/UNCLAIMED DIVIDEND
The duties of auditor regarding unpaid/unclaimed dividend are as follows:
1. Enquiry: If the dividend remains unpaid due to default of the company to
dispatch cheque or dividend warrant, he will enquire into the reasons of such
failure.
2. Obtaining list: The auditor will obtain a statement from the company showing
the names ofshareholders, number of shares held by each and the amount of
unpaid or unclaimed dividend tobe paid to each person.
3. Examination of amount: The amount shown as unpaid dividend should be
vouched with reference to members’ register, dividend register, bank pass book,
returned cheque or dividend warrant, etc. he will ensure that amount shown in
unpaid dividend account has been correctly ascertained.
4. Deposit in a scheduled bank: The auditor will see whether the amount of unpaid
or unclaimed dividend has been transferred to a special account in any
schedule bank called “Unpaid Dividend Account” within seven days after the
expiry of thirty days from the date of declaration of dividend. He will apprise the
management of the consequence of failure to make such deposit.
5. Examination of interest and fine: If the company fails to transfer the unpaid
dividend to a special account in a scheduled bank, he will see whether correct
amount of interest and fine have been paid by the company. If they are not yet
paid, the auditor will see whether they have been providedin accounts.
6. Disclosure: The auditor will ensure that unpaid dividend has been disclosed in
the balance sheet under the head “Other current Liabilities” or “Other Non-
current Liabilities” depending upon whether they have remained unpaid for a
 period up to one year or more.
7. Transfer to Government fund: The auditor will see whether the money
transferred to Unpaid Dividend Account and remaining unpaid or unclaimed for
a period of seven years from the date of such transfer, has been deposited
along with interest accrued into investment. Education and Protection Fund set
up by the Central Government. Simultaneously, he will ensure that Unpaid
Dividend Account has been debited in the book of the company.
 83. “Information and means of information are by no means
equivalent terms”:-Explain
The above remark is a part of the judgement given by Mr. L. J. Lindley as regards the
liability of auditor in thecase of London and General Bank Ltd. The learned judge made
his comments that a person whose duty is to convey information to others does not
discharge that duty by simply giving them so much information as is calculated to
induce them or some of them to ask for more. Information and means of information
are by no means equivalent terms.
An auditor conducts his work as an agent of the shareholders of a joint stock company.
Hence, if any suspicion arises in his mind as regards accounts and if he does not get
adequate explanation from the officers of the company in order to remove the suspicion,
then the auditor must bring this fact to the shareholders. It would not be enough for him
to inform his suspicion to the directors and officers of the company since he is not
regarded as an agent of the directors. Therefore, it is the duty of the auditor to inform
the shareholders clearly of the necessary information.
As per provisions of the Companies Act, the auditor has a duty to present information
correctly to the owners about the financial position of the business. The facts or
information are to be presented in the report in unambiguous language so that nobody
will face any difficulty to make it out. He should never present such an information to the
shareholders that will arouse inquiry. As such, if it is found that the auditor mentions
such information in his report that the readers, in order to understand its significance,
are required to get more information, then it appears that the auditor does not
discharge his duties properly. In other words, he cannot discharge his duty by supplying
the source of information. If he does so, he will do at his peril and runs the very serious
risk of being held judiciously.
The fact of the case was that the Bank had advanced large sums to the customers by
way of loans and overdrafts on current accounts but the security lodged for them was
quite insufficient. The interest on loans was duly brought into credit in the books but as
a matter of fact, the interests were never realised. This resultedinto heavy losses to the
bank and its consequent liquidation. The auditor of the Bank was fully aware of the
insufficiency of proper security and that adequate provisions were not made in respect
of doubtful debts. The auditor, however, had brought this fact to the notice of directors
who refused to alter the accounts. In his reporthe merely stated, "The value of the assets
shown by the Balance Sheet is dependent upon realisation." From such type of remark
nothing can be known properly in respect of the assets of the business. It can only
arouse curiosity to know more information. In fact, the auditor should have to mention in
his report clearly as to whether that specific asset could be realised at all or not.
So, the auditor was held guilty for misfeasance for not disclosing the material fact to the
shareholders that he was not satisfied with the accounts of the company.
As regards the liability of an auditor, there is no difference of opinion between the legal
experts and professional experts. There is no doubt that the auditor should be cautious
and careful in respect of his duty. He must state in his report all material facts and
information relating to accounts. If any suspicion arises and difference of opinion is
found between him and the officers in respect of information as disclosed in accounts,
he will never hesitate to state unambiguously the fact in his report.
 84. "The auditor of a limited company is always liable to any
person who relies on his report and suffers any loss thereby."
— Do you agree with the statement? Discuss fully with
reference to two case laws.*
A question arises as to whether the auditor can be held liable to any third party who
relies on his report and suffers any loss thereby. It is argued that there is no privity of
contract between the auditor and the third party and so, the auditor has no duty to such
a third party and hence he cannot be held liable. This question may be taken up from
two points — (i) whether he has any liability to a third party for negligence of duty and
(ii) whether he has any liability for committing fraud.
(a) Liability for negligence: The auditor has a contractual relationship with his client. A
contract is made between the auditor and his client to perform a specific function. The
auditor should perform this function with reasonable care, skill and honesty. But while
performing his duty, if he shows any negligence and his client suffers thereby, the
auditor can be held liable. And as he has no contract with the third party, he owes no
duty to such third party and so, he
Again, if a misleading statement had been made in the Prospectus issued by a
company and if the auditor had authorised the issue of such a prospectus, he can be
held liable for damages to third party which had purchased shares of the company on
the basis of such a misleading statement even though there might not have been
privity of contract between the two. The Institute of Chartered Accountants in England
and Wales also feels that the auditor may be held liable to third parties in limited sense.
(b) Liability for frauds: The third parties can, however, hold liable in case there has been
any fraud on the part of the auditor. Even if there is no contractual obligation between
the auditor and die third parties, the latter can sue the auditor if his report is of such a
nature as amounts to fraud. Though the action for negligence cannot be brought
against him, but sometimes the negligence may amount to fraud and he may be
sued forthat.
Lastly, it may be pointed out that though he has no liability to the third party, he cannot
deny that he has a moral responsibility. As such, considering the concern of the third
parties, the auditor has a duty to perform his function in respect of examination of
accounts with reasonable care and skill.
(i) London Oil Storage Co. Ltd. vs. Seear Hasluck & Co. (1904): From the facts of the
case, it is knownthat in view of not verifying petty cash in hand an action was brought
against the auditor. It was held that if theauditor fails to verify the various assets shown
in the Balance Sheet, he shall be held liable for negligence of duty. The auditor shall be
responsible for the loss suffered by the company.
(ii) Arthur E. Green & Co. vs. The Central Advance and Discount Corporation Ltd. (1920): It
was found in the case that unrealised debt has been shown as asset in the Balance
Sheet. No proper provision was made for such unrealised debts. The auditor did not
verify this and report to the shareholders. The position of unrealised debt was such that
for verification of Sundry Debtors Account, an intense probe was required. Without doing
it, he accepted the statement given by the directors. For this, he showed his negligence
to the company and its shareholders.
In view of the above discussions, it can be concluded that it is the fundamental duty of
an auditor to verity thoroughly the different accounts with reasonable care and skill.
After thorough verification by means of vouchers, documents, statements, etc. with
reasonable care and skill, if any fraud remains undetected, the auditor could not be
held liable. Otherwise, it can be certainly said that he would be held liable.
 85. "An auditor has no liability for negligence in the conduct
of an honorary audit". Comment*
Whenever an auditor enters into an agreement with his client for conducting audit
of accounts, he owes aduty to him to exercise reasonable skill and care in his work. If
he fails in his duty, he will be held liable for damage caused to his client for such failure.
The situation will not change even if the auditor undertakes his assignment without
any fees. He is supposed to exercise the same degree of professional skill and care as
is expected of him under the given circumstances. The fact that he is an honorary
auditor will not permit him to be careless and negligent in his work. He is as much
responsible for negligence or misfeasance as a paid auditor. Even he can not escape
his liability on the plea that the contract is null and void as there is no consideration
received by him from the client. If he desires to be free from liability, he should not
undertake the job. But once a job is under-taken and audit report is submitted, the
honorary auditor will be as much responsible as the paid auditor. This was held in the
case Fairdeal Corporation Vs. K. Gopalkrishan Rao (1957).

86. Outline the provisions of the Companies Act relating to

branch audit.***
Section 228 governs the audit of branch offices. Provisions of this section are as follows:
1. Appointment [Sec. 228(1)]: The following persons are eligible for appointment as branch
auditors –
In case of local branches:
(a) The company’s Auditor u/s 224, or
(b) A person qualified for appointment as an auditor u/s 226.
In case of Foreign Branches:
(a) Apart from persons eligible to audit local branches, an accountant duly
qualified to act as an auditor in accordance with the laws of the foreign country
in which the branch office is situated canconduct audit.
In the 2013 Act, no separate section has been introduced for audit accounts of
branch office. Section 143 which deals with powers and duties of auditors and
auditing standards also covers branch audit. Subsection 8 of the section 143 has
made no change in the requirement of appointment of branch auditor. Thus, the
company auditor appointed u/s 139 or any other person qualified for appointment
under section141 can be appointed as branch auditor.
2. Appointment of persons other than company auditor as Branch Auditor [Sec. 228(3) (a) ]:
(a) General Meeting: The decision to appoint any person other than the
 Company Auditor as BranchAuditor should be taken at a General Meeting.
(b) Authorization to Board: The General Meeting may authorize the Board of
Directors to appoint suchan auditor in consultation with Company’s Auditor.
Subsection 8 of section 143 of the 2013 Act requires that the branch auditor not being
the company auditor will be appointed in the same way as company auditor is
appointed u/s 139. Thus, the new Act has not made any provision for authorization to
Board for appointment of branch auditor.
3. Rights, Powers and Duties of Branch Auditor [Sec. 228(3)]:
(a) Auditor’s Powers: He will exercise the same powers and duties in respect of
branch office audit asenjoyed by the company’s statutory auditor in respect of
the company’s audit.
(b) Reporting: He will prepare a report on the accounts of branch examined by
him and forward the same to the company’s Auditor who shall deal with it in
the manner required to prepare or finalisehis report.
 (c)Remuneration: He is entitled to receive such remuneration as the company in
General Meeting orthe Board may fix.
As per the Companies (Audit and Auditors) Rules, 2014, the branch auditor will have
same rights and duties as applicable to statutory auditor under subsections (1) to (4)
of Sec. 143 of 2013 Act. Additionally, the branch auditor, as per this Rules, shall be
responsible for reporting of fraud to the Central Government tothe extent it relates to
the concerned branch.
4. Rights of Company Auditor [Sec. 228(2)]:
The Company Auditor shall have the following rights when the Branch accounts
are audited by anotherauditor:
(a) To visit Branch office, if deemed necessary for the performance of his duties, and
(b) To have access at all time to the books, accounts and vouchers maintained at the
Branch Office.
(c)To have access to such copies of and extracts from the books and accounts of
foreign branches ofbanking companies as have been transmitted to the head
office in India.
Neither section 143(8) of the Act, 2013 nor the Companies (Audit and Auditors) Rules,
2014 has given the Company auditor the right to visit the Branch office and to have
access to the books, accounts and vouchers maintained at the branch office. As per
section 143(8), the company auditor shall deal with the report sent by the branch
auditor in such manner as he considers necessary.
5. Exemption from audit of branch [Sec. 228(4)]:
The Central Government is empowered to make rules to exempt Branch offices
from audit. The Companies (Branch Audit Exemption) Rule, 1961 provides that a
branch office is exempted from audit ifit satisfies the following conditions –
(a) The company carries on any manufacturing, processing or trading activity;
(b) The Branch office should have an “average quantum of activity” that does not
exceed the higher ofthe following two
1. Rs. 2, 00,000
2. 2% of the average of the total turnover of the company;

87. What is Joint Audit? Discuss in brief.**

When more than one Firm/Individual are appointed to conduct a statutory audit, it is
called Joint Audit. In other words joint audit implies statutory audit of a firm
conducted by more than one statutory auditor. It is the usual practice of big
companies and corporations with divergent and widespread activities to appoint
several Chartered Accountants as joint auditors. Joint audit ensures pooling together
the resources and expertise of more than one firm of auditors in conducting audit
which is otherwise very difficult or impracticable for a single firm. The Companies Act,
1956, is silent about joint audit. However, SA 299, “Responsibility of Joint Auditors”, has
laid down principles in respect of joint audit.
Advantages of Joint Audit:
1. Joint audit ensures pooling and sharing of expertise of two or more auditors.
2. The quality of performance in joint audit becomes much better.
3. The joint auditors can mutually consult in respect of critical issues in the course of
audit. So, the auditbecomes more effective.
4. It reduces workload of the auditors.
5. The client is assured of the improved performance from joint auditors.
6. In respect of multi-national companies, the audit work can be spread using the
expertise of local firmswhich are in a better position to deal with detailed work and
the local laws and regulations.
7. The audit can be carried out with much lower costs.
8. A sense of healthy competition is developed among joint auditors for better performance.
Disadvantages of Joint Audit:
1. There may arise co-ordination problems between auditors in conduct of work.
2. Joint audit may lead to psychological problem when firms of different standing are
involved.
3. The superiority complexes of some auditors may invite problems in the conduct of audit.
4. There may be lack of clear definition of responsibility in joint audit.
5. Areas of common concern may be neglected.
6. Uncertainty about the liability for the work done may crop up.
7. The fees are to be shared by the joint auditors.
8. Difference of opinion among the joint auditor may cause delay in submission of audit
report.
Principles to be followed in joint audit
The SA299, “Responsibility of Joint Auditors”, as issued by ICAI has laid down
following principles inrespect of joint audit:
A. Division of work among the joint auditors
1. Manner of division: The joint auditor should, by mutual discussion, divide the
work among themselves.
2. Common areas: Certain areas which cannot be logically divided would be
covered by all joint auditors.
3. Documentation: The division of work among Joint Auditors as well as the
areas of work to be covered by all of them should be properly documented
and preferably communicated to the entity.
B. Co-ordination
When a Joint auditor comes across matters which are relevant to the areas of
responsibility of other joint auditors and should deserve their attention, he should
communicate the same to all other joint auditors in writing.
C. Responsibility of the Joint Auditor
i. In respect of audit work divided among the joint auditors, each joint
auditor is responsibleonly for the work allocated to him.
ii. Proper execution of audit procedure is the separate and specific
responsibility of the jointauditor concerned.
iii. When the audit work is not divided among the joint auditors and is
carried out by all, thejoint auditors are jointly and severally responsible.
iv. When some decision in respect of audit is taken by all the joint auditors,
they will be alljointly and severally responsible for the appropriateness of
that decision.
v. All the joint auditors are jointly and severally responsible for examining
that the financialstatements of the entity comply with the disclosure
 requirements of the relevant statute.
D. Reliance on other joint auditor’s work
Each joint auditor is entitle to rely upon the other joint auditors for bringing to his
notice any departure from generally accepted accounting principles or any
material error notice in the course of audit.
E. Reporting Responsibilities
Normally, the joint auditors are able to submit one audit report agreed and
signed by all. Where the joint auditors are in disagreement with regard to any
matters to be covered by the report, each one of them should express his own
opinion through a separate report. A joint auditor is not boundby majority view.
 Unit VI:
Audit Report and Certificate ((Marks 10)
Definition – Distinction between Report and Certificate- Different Types of Report
Contents of Audit Report (As per Companies Act and Standards on Auditing)
True and Fair View – Concept
Materiality – Concept and Relevance

88. Define auditor’s report & auditor’s certificate.*

Auditor’s Report
The audit report is a document through which the auditor conveys his opinion on the
financial statements of the entity. It provides the auditor’s evaluation about accounts
maintained in the organization and lets the members know his opinion on the
reliability and fairness of financial statements.
The audit report is the end product of audit work. After completing the audit of
organization’s financial statements, the auditor prepares his report where he
expresses his opinion about the validity and reliability of financial statements. The
audit report should be clear, unambiguous and specific. As it was held by Lord Justice
Lindley in London and General Bank case (1895) an auditor who gives the shareholders
“the means of information” and not information does so at his peril and runs the
serious risk of being held judicially to have failed to discharge his duty. Thus, the audit
report must state categorically whether financial statements have been prepared in
accordance with an acceptable financial reporting framework applicable to the entity
and in compliance with the relevant statutory requirements and whether they
reflect a true and fair viewabout the entity.
The auditor can also express any reservation or give additional information that he
thinks necessary to give in his report. For example, if the auditor disagrees with the
organization about the valuation of an asset andhe believe that this has a substantial
impact on the financial statements, he should state that in his report.
While preparing the audit report, the auditor should keep in mind what information it
should contain. SA 700, Forming an opinion and Reporting on Financial Statements
issued by the Institute of Chartered Accountants of India has stipulated some basic
elements to be included in the auditor’s report. So, the auditormust prepare his report
in this standard framework.

Auditor's Certificate
The document through which the auditor confirms certain facts or vouchsafes the
accuracy of certain figures is called auditor’s certificate. It does not contain any
opinion of the auditor. Rather, it gives guarantee of absolute accuracy and correctness
of the information contained in it. For example, an auditor may certify the daily
circulation figure of a newspaper or consumption quantity imported steel. In order to
certify the factshe goes through all the documentary evidence made available to him.
After minutely examining the documents when he becomes certain about the
correctness of the figures or information, he certifies it.
 89. Distinguish between ‘Auditor’s report’ and ‘Auditor’s
certificate’.*********

Point of Distinction Audit Report Audit Certificate

1. Meaning An audit report is an A certificate is a written
expression of opinion made confirmation of the
by the auditor on the “true accuracy of the facts
and fair view” of financial stated therein and does
statements. not involve any estimate or
opinion. It vouch safes
certain
facts or matters.
2. Scope The audit report covers the The certificate is sought for
entire financial matters of the some specific matters like
entity for a particular raw-material consumption,
accounting period. The scope stock valuation, value of
of audit report is statutorily import, work load
determined and vast. distribution etc. The
certificate
may not be made for an
accounting period.
Nature Audit report is an In certification the auditor
independent and unbiased has to verify certain exact
opinion expressed by the facts. As he is concerned
auditor on the reliability and primarily with arithmetical
fairness of financial accuracy, there is very
statements. He has to limited scope to apply logic
consider numerous and judgement.
professional pronouncements
and apply logic and
judgement on several
subjective issues concerning
economic matters
of the entity to arrive at his
conclusion.
3. Responsibility The auditor may not be held Certification gives
responsible for what has guarantee about the
been opined by him in his correctness or otherwise of
exercised reasonable skill and the statement. The auditor
care in his auditwork. will be held responsible if
 there is any mistake in the
certification.

4. Parties Concerned Audit report is meant for all Certificate is usually

the stakeholders of the entity sought by external parties
namely shareholders, namely Government and
management, bankers, loan providers.
creditors, Government etc.
5. Criticism The audit report may contain In certification, the auditor
criticisms as well as has to state categorically
suggestions of the auditor. whether the statement is
true or false. Here, neither
any suggestion nor
criticism is made.
6. Time of Generally, audit report is A certificate is submitted
Submission submitted by the auditor after
the expiry of financial year. as andwhen required.
 90. What are the characteristics of a good audit report?
A good audit report should have following characteristics:
(a) Simplicity: Simplicity is considered as one of the characteristics of an audit report.
The language used in the report should be clear and understandable so that
concerned parties cannot face any difficulty to comprehend it.
(b) Information based: The audit report should be based on factual information and
not on any guesswork or presumption. If any information is not available to him, he
will state the fact clearly.
(c) Firmness: The scope of the work i.e. types of work done by the auditor should be
clearly mentioned in the report. Moreover, the auditor should clearly state whether
the books of account exhibit a true and fair view of the state of affairs of the
business.
(d) Unambiguous: The report should be clear-cut and precise. It should always avoid
any word with double-meaning.
(e) Unbiased: The opinion expressed by the auditor in the audit report should be free
from influence of any quarter.
(f) Logic based : His assertion regarding any matter should be based on logic and not on
mere hypothesis
(g) Objectivity: It is needless to say that the report should be based on objective
evidence. Opinions formed on the basis of information and evidence not
measurable in terms of money should not be placedin the audit report.
(h) Relevant: The report should disclose all relevant informations which are supposed
to be known by the users but are not contained in the financial statements
disclosures.
(i) Consistency: Consistency in presenting accounting information should be observed. An
audit report will
be considered good if it takes into consideration as to the consistency in
adopting the method of valuation of assets.
(j) Mention of condition: If the report is a qualified one, the reasons for qualifications
should be clearlyexpressed in the audit report.
(k) Accepted principles: The audit report should be based upon the facts and
figures that are kept in accordance with generally accepted principles of
accounting.
(l) Pointing mistakes: The report should highlight all material misstatements
appearing in the financial statements,
(m) Brief: The audit report should be brief and to the point. However, conciseness
should not be at the cost of clarity.
(n) Critical and not reprimanding : The auditor should critically refer to the weak areas
of the organisation, but such criticism should be always constructive and not
reprimanding in tone,
(o) Addressee: The report should address the person or persons who appointed him to
conduct the audit. In case of company, however, the report should always be
addressed to shareholders even when he might be appointed by Board of
Directors.
(p) Signature, address and date: The report should be signed by the auditor with date
stating the location of his office.
 91. What are the different types of audit report?*******
Based on the opinion expressed by the auditor, the auditor’s may be of two types namely:
i. Clean or unmodified audit report, and
ii. Modified audit report
Modified audit report may be of following types—
 Qualified audit report
 Adverse audit report
 Disclaimer of opinion report
 Audit report with an ‘Emphasis of matter’ paragraph and ‘other matter’ paragraph.
There is another type of audit report namely partial or piecemeal audit report
which is, however,very uncommon.

1. Clean or Unqualified Report:

When an auditor gives his positive opinion in his report about the reliability and
fairness of financial statements without any reservation, his report is called clean or
unqualified report. It is generally written as ‘in our opinion and to the best of our
information and according to the explanations given to us, the balance sheet, profit
and loss account and cash flow statement give a true and fair view of the state of
affairs, working results and cash flows…’ An auditor makes a clean or unqualified report
when he is satisfied with various matters such as,
i. He has got reasonable evidence in support of all material transactions;
ii. All entries have been passed according to generally accepted accounting
principles andrelevant accounting standard;
iii. The financial statements correspond to the books of accounts;
iv. The accounting estimates made by management are reasonable;
v. The information presented in the financial statements is relevant, reliable,
comparable andunderstandable;
vi. All relevant information have been disclosed.

2. Qualified Audit Report:

When an auditor expresses is opinion in his audit report subject to some reservations
he is said to have qualified his report. In other words, his assertions in the qualified
report regarding fairness of financial statements depend upon some conditions. As for
example, if the auditor does not agree with his client regarding treatment of an item
such as subsidy or gratuity, he may qualify the report stating ‘subject to the above, we
report balance sheet shows a true and fair view…’While qualifying his report, the
auditor should keep in mind the materiality of the matter. Unless the amount is
significant, the auditor need not qualify his report. The reason of qualification should
always be clearly stated in the report under the heading “Basis for Qualified opinion”.
When the auditor gives qualified opinion, he should use the heading “Qualified
opinion” for the opinion paragraph. “Basis for Qualified opinon’ and “Qualified opinion”
paragraphs should be in italics under Sec. 227(3)(e) of the Companies Act.
|3. Adverse Report:
An adverse report is the report in which the auditor categorically states that profit and
loss account and balance sheet do not exhibit a true and fair view of the state of
affairs and working results of the company. Generally extreme cases like non-
provision or under provision of depreciation, taking fictitious sales etc. compel the
auditor to give negative or adverse report. An adverse report should be given by the
auditor, only
when he has strong and convincing evidence to support his conclusion. He should
disclose all the reasons of adverse report.
4. Report with Disclaimer:
Very often it may not be possible for a statutory auditor to collect all informations
which are necessary for expressing an opinion on the financial statements. This
situation may arise because of incomplete accounts submitted by the client or
reluctance of client to furnish requisite informations or explanations as sought by him.
When the auditor is to submit such inconclusive audit report because of reasons
beyond his control,such report is called a report with disclaimer. When the auditor is to
submit a report with disclaimer he should give the justification for such disclaimer in
his report.
5. Compartmental or Piecemeal Opinion or Report:
When the auditors fails to report on the working results and the state of affairs of the
entity in totality and consequently restricts his opinion to certain matters only, it is
called piecemeal audit report. For example, an auditor may be unable to give an
opinion on whether the accounts of the entire concern are true and fair, but he may be
able to give an opinion that the branch accounts are true and fair on the basis of the
branch audit reports. The reason of giving such partial report should be indicated in
the audit report.

92. Discuss the elements of auditor’s report as specified by

Standard on Auditing.**

According to SA 700 (revised), “Forming an opinion on the Financial Statements”, the

auditor’s report shallbe in writing. It has mentioned the following elements of Audit
Report.
1. Title: The auditor’s report shall have a title that clearly indicates that it is the
report of an
independent auditor.
2. Addressee: The auditor’s report shall be addressed as required by the
circumstances of theengagement.
3. Introductory paragraph: The introductory paragraph in the auditor’s report shall:
i. Identify the entity whose financial statements have been audited;
ii. State that the financial statements have been audited;
iii. Identify the title of each statement but comprises the financial statements;
iv. Refer to the summary of significant accounting policies and other
 explanatory information;and
v. Specify the date or period covered by each financial statement
comprising the financialstatements.
4. Management’s responsibility for the financial statements: This section of
auditor’s report describes the responsibility of the management for the
preparation of the financial statements in accordance with the applicable
financial reporting framework.
5. Auditor’s responsibility: The auditor’s report shall state that responsibility of the
auditor is to express opinion on the financial statements based on the audit.
6. Auditor’s opinion: When expressing an unmodified opinion on financial
statements, the auditor’s opinion shall state that the financial statement give a
true and fair view.
7. Signature of the auditor: The auditor’s report is signed by the auditor in his
personal name mentioning the membership number assigned by ICAI. Where
the firm is appointed as the auditor, the report is signed in the personal name of
the auditor and in the name of the audit firm stating the registration number of
the firm.
 8. Date of the Auditor’s Report: Auditor’s report shall be dated. It informs the users
of the auditor’s report that the auditor has considered the effect of events and
transactions of which the auditor become aware and that occurred up to that
date.
9. Place: The report shall name a specific location, which is generally the city
where the audit report issigned.

93. Discuss the content of auditor’s report as specified by

companies act.****
Every limited company is under obligation to get their accounts audited by a qualified
auditor as per Companies Act, 2013. The auditor, after examining the books of
accounts prepares his audit report which is submitted in the Annual General Meeting
for perusal and consideration of shareholders. Sec. 143 of the Act has stipulated in
details the matters required to be stated by the auditor in his report. These provisions
are as follows:
1. True and Fair View of Financial Statements [Sec. 143(2)]: Section 143 (2) requires the
auditor to
state in his report whether in his opinion and to the best of his information and
according to theexplanation given to him, the accounts give a true and fair view:
i. In the case of balance sheet, of the state of affairs of the company as at the end of the
year;
ii. In the case of Profit and Loss Account, of the profit or loss for the year;
iii. In the case of the cash flow statement, of the cash flow for the year.
2. Information and Explanation [Sec. 143 (3)(a)]: The auditor’s report shall state
whether he has sought and obtained all the information and explanations which
to the best of his knowledge and belief were necessary for the purpose of his
audit and if not, the details and the effect of such information on the financial
statements.
3. Proper Books of Account [Sec. 143(3)(b)]: The auditor’s report shall state
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 adult have been received
from branches not visited by him.
4. Branch Auditors Report [Sec. 143(3)(c)]: The auditor’s report shall state whether
the report on the accounts of any branch office audited by a person other than
the company’s auditor has been forwarded to him and how he has dealt with
the same in preparing his audit report.
5. Books and Financial Statements [Sec. 227(3) (d)]: The auditor’s report shall
state whether the company’s balance sheet and profit and loss account dealt
with in the report are in agreement withthe books of account and returns.
6. Compliance with Accounting Standards [Sec. 143(3)(e)]: Whether in his opinion,
financial statements comply with the accounting standards.
7. Adverse comments [Sec. 143(3)(f)]: The auditor’s report shall state, the
observations or comments of the auditor, which have any adverse effect on the
company’s functioning.
8. Director’s Disqualification [Sec. 143(3)(g)]: The auditor’s report shall state
whether any Director is disqualified from being appointed as Director u/s 164(2).
9. Adverse remark on maintenance of accounts [Sec. 143(3)(h)]: The auditor shall
state in his report any disqualification, reservation or adverse remark relating to
the maintenance of accounts and other matters connected therewith.
 10. Comment on the inadequacy of financial control system [Sec. 143(3)(i)]: The
auditor’s report will state whether the company has adequate internal financial
controls system and comment on the operating effectiveness of such system.
As per Notification dated 14th October, 2014, issued by Ministry of Corporate
Affairs, this requirement will be applicable for the financial years commencing
on or after 1st April, 2015. However, the auditor of a company may voluntarily
include this statement in his report for the year commencing on or after 1st April,
2014 and ending on or before 31st March, 2015.
11. Reasons of negative reply [Sec. 143(4)]: If any of the matter referred to in Sec.
143(2) & 143(3) are answered in negative or with qualifications he must mention
the reasons in his report.
12. Compliance with C & AG direction [Sec. 143(5)]: In case of a Government
company, the auditor’s report shall include:
i. The direction, if any, issued by the C & AG regarding the manner of audit of
accounts;
ii. The action taken on such direction and the impact thereof on the company’s
financial statements.
13. CARO Matters [Sec. 141(11)]: The auditor’s report shall include a statement on the
matters prescribed under the Companies (Auditor’s Report) Order (CARO) 2015.
14. Other matters to be included in the auditor’s report: As per Rule 11 of the
Companies (Audit and Auditors) Rules, 2014, the auditor’s report shall also
include the auditor’s views and comments on the following matters, namely.
i. Whether the company has disclosed the impact, if any, of pending
litigations on its financialposition in its financial statement;
ii. Whether the company has made provision, as required under any law or
accounting standards,for foreseeable losses, if any, on long term contracts
including derivative contracts;
iii. Whether there has been any delay in transferring the required amounts to
the investorEducation and Protection Fund by the Company.

94. Explain the concept of true & fair view.*****

Section 129(1) of the Companies act, 2013 requires that Balance sheet and profit & Loss
A/c of a company should reflect a true and fair view of the state of affairs and profit &
Loss of the company respectively. However, the term “True and fair view” has not been
defined in the Act. It is supposed that Financial Statements will reflect a true and fair
view when they are prepared according to generally accepted accounting principles
and they are disclose all relevant information as required by Schedule III of the
Companies Act, 2013. It is to be noted that disclosure requirement as per Schedule III is
minimum. The objective of Financial Statements is to cater to the information needs of
various groups of people. So, if any information seems vital and is likely to influence
the judgement and decision of the user of the Financial Statements, it should be
disclosed in the Financial Statements though it may not be legally required to do so.
Therefore, what will constitute “True and Fair view” will depend upon circumstances of
cases.
In this connection it may be mentioned that the phrase ‘true and fair’ was inserted in
the Act by replacing thephrase “true and correct”. The term ‘true and correct’ was used
to mean that Financial Statements should be only arithmetically correct and they
should correspond to figures in the books of accounts. Thus, the auditor could without
dispute accept the fact of over depreciation or under – depreciation if they were
correctly recorded in the books and Financial Statements were prepared accordingly.
So the auditor would be spared even though the Financial Statements did not give a
true and fair view in this case.
Another extreme view was that “true and correct” indicated exactitude or precision of
figures. This was, however, untenable as some items of the Balance Sheet is based on
estimates e.g., the amount of depreciationis based on estimates only. To do away with
this incongruity, the amount of depreciation is based on estimates only. To do away
with this incongruity, the phrase “True and Correct” was justifiably replaced by “True
and Fair”. It is now the duty of auditor to go beyond the mere verification of
arithmetical accuracy.

Factors determining “True and Fair” view

i. Financial Statements of the company have been drawn up in conformity with
the requirements of Companies Act.
ii. Relevant information have been properly disclosed.
iii. Financial Statements disclose fairly the actual financial position and working
results, i.e. there is neither a overstatements nor a understatement; there is
neither window – dressing of balance sheet, nor secret reserve in the balance
sheet.
iv. All unusual, exceptional and non – recurring items have been clearly disclosed.
v. Financial Statements have been prepared and presented in conformity with
generally acceptedaccounting principles.
vi. Accounting principles and procedures which were followed in the previous
years have also beenfollowed in the current year.
vii. Events occurring after the balance sheet date but before submission of audit
report have been dulyconsidered in financial statements when they are likely to
influence the decision of users.
viii. Financial Statements are conveying information unambiguously. As has been
held in many legalcases Financial Statements should give information and not
means of information.

o, the phrase “True and Fair View” has extended the duty of an auditor to a great extent.
He will not conduct mere mechanical comparison of items in the financial statements
with the entries in the books of account. Rather, he should conduct audit more
analytical to ensure that Financial Statements as prepared by management can really
cater to the information needs of outside users sincerely and fairly.

95. Explain the concept of Materiality.****

The concept of materiality plays a very significant role in the entries process of
accounting. It is considered in all stages from recording to classification and
presentation of financial information. AS – 1 defines material items as relatively
important and relevant items i.e., the items the knowledge of which would influence
the decisions of users of financial statements. Whether or not the knowledge of an item
would influence the decisions of users of financial statement depends upon the
circumstances of each case.
SA – 320 on “Materiality in Planning and performing on Audit” requires an auditor to
consider the conceptof materiality both in planning and performing audit. If an item is
considered material, the auditor has to depend on more reliable evidence to assess its
validity. He has also to ensure that such items are properly and distinctly disclosed in
the financial statements.Guiding factors in determining the materiality of items
The concept of materiality is a relative term. What may be material in one
circumstance may not be material in another. So it is not possible to lay down
precisely, either in terms of specific items or in terms of amounts, what could be
material in all circumstances.
The following general considerations may be useful while determining the materiality of an
item.
1. Relative Context: Materiality of an item can be judged in a relative context. For
example, legal expenses of Rs. 1 lakh may be a material item in a small firm but
it may not be considered material in a large firm.
2. Percentage Criterion: Percentage criterion may be applied in determining the
materiality of an item. As for example, Part – II of Revised Schedule VI to the
Companies Act, 1956 requires that any expenses exceeding one percent of total
revenue of the company or Rs. 1,00,000 whichever is higher, shall be shown as a
separate and distinct item under an appropriate account head in the statement
profit and loss and shall not be combined with any other item to be shown
under miscellaneous expenses.
3. Effect on Profit and Loss: An item may be considered material if it has a
significant impact on the profit or loss of the firm. Even an item of small value
will become material if its wrong treatment converts a small loss into a profit or
vice – versa.
4. Position in Relation to the Group: Materiality of an item should be judged in
relation to the group to which it belongs, for example for any item of current
asset in relation to total current assets and any item of current liability in
relation to total current liabilities.
5. Comparison with Previous year’s figure: Very often comparison with previous
year’s corresponding figure throws light about the materiality of an item. For
example, other income of Rs. 1.0 lakh this year may appear material when
compared with previous year’s other income of Rs. 10 lakhs.
6. Any Deviation from Statutory Requirement: Any deviation from statutory
requirement, however minor it may be, is likely to render an item material. For
example, a payment of Rs. 100 to directors as remuneration in excess of
statutory limits may be material. Similarly, a small inaccuracy may be
considered material if it creates or eliminates a prescribed solvency margin.
7. Nature of Transaction: Transaction of abnormal or non – recurring nature may
be considered material even though the amount involved is not very significant.
8. Cumulative effect of small and insignificant items: Individual non – material
items might have a significant cumulative effect. For example, a minor
leniency in compliance with travelling rule of the company in individual cases
may have a material impact on total travelling expenses.
9. Estimation error in determinable amounts: If the amount of an item can be
determined precisely and objectively, even a small error in the same may be
considered material. On the other hand, if the amount of an item is subject to
estimation and judgement, a minor difference from the estimate made by the
auditor may not be considered material.
Thus, several factors have to be kept in mind by the auditor to judge whether an
item is material or not in giving or distorting the true and fair view of the
financial statements. An erroneous judgement will lead to inappropriate opinion
on financial statements. He has to ensure that all material items have been
properly and correctly recorded in the accounts and disclosed separately and
distinctly in the financial statements.
 Unit 7:
Other Trust Areas (Marks 10)
Cost Audit – Concepts,Objectives RelevantProvisions of Companies Act
ManagementAudit-Concepts,Objectives,Advantages
Tax Audit – Concepts, Objectives, Legal Provisions
Social Audit – Propriety Audit – Performance Audit – Environment Audit (Concepts only)

96. What is cost audit? Describe the objectives.*********

Cost audit is the independent verification of cost records maintained in manufacturing

and mining industries. It is conducted with a view to ascertaining whether cost records
of the company are being maintained as per cost accounting principles, plans and
procedures. The cost auditor verifies cost statements to report on true and fair view of
cost of production and to highlight areas of inefficiency and wastage, extent of
underutilization of capacity and causes of production bottlenecks.

Objectives of Cost Audit:

The objects of cost audit are two folds which have been discussed as follows:
A. General objects:
i. To see whether there is any error of principle of cost accountancy and
frauds committed incost accounts.
ii. To verify the correctness and propriety of recorded events and
transactions in the costrecords.
iii. To see that value of closing finished stock and work in progress
have been correctlyascertained.
iv. To ensure that total costs of each product, process and operation
have been correctlyascertained.
v. To help the management by bringing their notice to inefficiencies and
wastages in the useof man, money, materials and machines.
vi. To see that data and information furnished to various Government
Agencies are authenticand reliable.
vii. To see whether actual costs incurred are within budget or standard and
to exercise controlover costs by analyzing the reasons of adverse
variances.
viii. To see whether any undesirable practice has been adopted by the
 management.
ix. To provide the Government with necessary cost data and information.
x. To render suggestions to management for improvement in performance.
B. Social objects
i. Increasing national income: To enhance national income of the
country by providingnecessary counseling for increasing
productivity.
ii. Price fixation and price control: To enable the Government to
exercise control overproduct price by providing necessary cost
data.
iii. Better utilization scarce resources: To ensure optimum utilization of
scarce resources ofthe country by suggesting change in product mix.
 iv. Guard against evasion of tax: To enhance the tax revenue of the
Government by preventing the tendency of undervaluing work-in-
progress and stock-in-trade and includingartificial costs in the
computation of cost of production.
v. Cost consciousness: To create cost consciousness in the minds of
all members of the society engaged in the various activities of
nation whether in public or private sector.
vi. Benefits of customers: To benefits the customers by helping the
Governments as well asindustry to reduce price.
vii. Foreign Exchange Earning: To help in the earning of foreign
exchange by enablingindustries to penetrate in foreign market
with goods at reduced price.
viii. Employment generation: To create new employment opportunities by
ensuring investmentof surplus fund.

97. Discuss the advantages/need/Importance of Cost Audit

from the view point of the Management.****
The need for audit of cost accounts is now being growingly felt in industry. It has got
vast potentiality particularly in the context of wastage and inefficiency, under –
utilization of capacity, low productivity, corporate sickness, rising price and slow pace
of economic development. In fact, the thought that the cost audit is superfluous when
financial audit is conducted in an organization, is not at all justified. While financial
audit has great role to play in its respective field, cost audits acts as an effective tool
of control in the hands of management. It also renders invaluable services to
shareholders, customers, government and to the society at large. The need for audit of
cost accounts can be understood from the following services rendered by it:
i. Increasing productivity: Cost audit highlights wastage and inefficiency in the
manufacturing
operation of the business. It also emphasizes on the optimum capacity
utilization. This leads to an improvement in the productivity level of the
business.
ii. Decision making: Cost audits provides vital data based on which
management can take various policy decisions such as make or buy,
selection of product mix, pricing policy, etc. So managerial efficiency is
enhanced by cost audit.
iii. Utilization of resources in alternative channels: By showing the best
 alternative avenues for channeling resources, cost audit increases
shareholders return.
iv. Setting of standard: The audited costs can be used by associations of various
industries for compiling standard cost of the product against which the
individual firm may compare their actual cost.
v. Customer’s benefit: By ensuring efficient and effective utilization of resources,
cost audit enhances value added on input. This added value can be enjoyed
by all and definitely some portion of it can be passed on to customers by way
of reduced price of product.
vi. Arresting corporate sickness: By creating cost consciousness in the minds of
all employees, cost audit can definitely go a long way reducing the
magnitude of industrial sickness, now plaguing our economy.
vii. Extending tariff protection: The government can take decisions regarding
extension or abolition of tariff protection based on audited cost structure of
various companies.
 viii. Control over monopolistic price: Very often it is seen that a monopoly firm
fixes price of its product at its whims ignoring customer’s interest altogether.
This tendency can be curbed by the government based on the audited cost
structure of that company.
ix. Earning foreign exchange: Home industry cannot penetrate into foreign
market without quality goods at reduced prices. Cost audit, by ensuring
optimum utilization of resources, can help the industry in this regard.
x. Creation of employment opportunities: By eliminating wastage and thereby
generating additional fund, cost audit helps to make new investment which is
the crying need of the country for solving the present unemployment
problem.
Cost audit has now passed its embryonic stage. Its importance is now being
gradually understood by the captains of industries and also by the
Government. That is why, government of our country has been gradually
brining important manufacturing as well as servicing industries under the
purview of cost audit.

98. Discuss the provisions of the companies act, 2013

regarding cost audit.**
Provisions of the companies act, 2013 regarding cost audit:
The Companies Act, 2013 has made following provisions relating to cost audit.
1. Maintenance of Cost Records: As empowered by Subsection (1) of Section 148
of the CompaniesAct, 2013, the Ministry of Corporate Affairs issued Companies
(Cost Records and Audit) Rules, 2014which was effective from 1.4.2014. But
these Rules were very complicated and difficult toimplement in many large
companies because of providing for a stringent threshold in terms of networth
or turnover of companies. So, in order to do away with this situation, the
Ministry hassubsequently issued Companies (Cost Record and Audit)
Amendment Rules, 2014 on 31.12.2014 The amendment has required companies
engaged in the production of goods and services asmentioned below to
maintain cost records for such goods and services provided their overall
turnover from the products and services is rupees thirty five crores or more
during the immediatelypreceding financial year:
2. Applicability of cost audit
i. Every company under regulated sector shall get its cost records audited if
the overall annual turnover of the company from all its products and
 services during the immediately preceding financial year is rupees fifty
crore or more and the aggregate turnover of the individual product or
services for which cost records are required to be maintained is rupees
twenty five crore or more.
ii. Every company under non-regulated sector shall gets its cost records
audited if the overall annual turnover from all its products and services
during the immediately preceding financial year rupees one hundred
crore or more and the aggregate turnover of the individual product or
service for which records are required to be maintained is rupees thirty
five crore or more.
3. Cost Auditor: As per sub-section (3) of section 148, only a cost accountant in
practice is eligible to conduct cost audit. This subsection also requires him to
comply with ‘Cost Auditing Standards’ issued by the Institute of Cost
Accountants of India.
4. Disqualification: Following persons are not eligible to become cost auditors:
i. Persons as mentioned under section 141(3)
ii. Auditor of the company appointed u/s 139 i.e. the company auditor cannot be
cost auditor.
5. How to maintain cost records: Rule 5 has stipulated the
i. Companies required to maintain cost records will maintain such records
in form CRA-1 in respect of each of its financial year commencing on or
after 1.4.2014.
ii. The cost records shall be maintained on a regular basis in such a manner
as to facilitate calculated of unit cost of production of operations, cost of
sales and margin for each of its products and activities on monthly or
quarterly or half yearly or annual basis.
iii. The cost records shall be maintained in such a manner as to enable the
company toexercise control over various operations and costs to achieve
economies in utilization of resources.
6. Appointment of cost auditor: Rule 6 has required that
i. Every company which is to get its cost record audited as per this order,
shall appoint a cost auditor within one hundred eighty days of the
commencement of every financial year.
ii. The company shall inform the cost auditor of his or its appointment
and file a notice ofsuch appointment with the Central Government within
a period of thirty days of the Board meeting in which such appointment is
made or within period of 180 days from the commencement of a financial
year, whichever is earlier, through electronic modede in formCRA-2.
iii. The cost auditor shall continue in such capacity till the expiry of 180 days
from the closure of the financial year or till he submits his cost audit
report.
7. Duties and Powers: The rights and duties of the cost auditor are same as
enjoyed by the statutory auditor u/s 143.
8. Submission of cost audit report: The rule 6 of the order has provided that
i. The cost auditor shall submit his report to the Board of Directors along
with his or its reservations or qualifications or observations or suggestion,
if any in form CRA-3 within 180days from the closure of the financial year.
ii. The company covered under these rules shall within a period of 30 days
from the date receipt of cost audit report, furnish the Central Government
with such report along with full information and explanation on every
 reservation or qualification contained therein in form CRA-4.

As per subsection (7) of section 148, the Central Government may ask the
company to furnishfurther information and explanation within a specific
period if it thinks it necessary.
9. Company’s Duty: The duty of the company shall be to give all assistance and
facilities to the cost
auditor for auditing the cost records of the company.
10. Casual vacancy: The sub-rule (3A) of Rule 6, as incorporated in the Amendment,
has stipulated that any causal vacancy in the office of a cost auditor, whether
due to resignation, death or removal, shall be filled by the board of directors
within thirty days of occurrence of such vacancy and the company shall inform
the central government in form CRA-2 within thirty days of such appointments
of cost auditor.
11. Liability for default: As per Section 148 (8) if any default in complying with the
provisions of this section takes place
 i. On the part of the company, the company shall be punishable with the
fine from Rs. 25000 to Rs 500000 and every officer who is in default shall
be punishable with imprisonment for the term upto one year or with
fine from Rs. 10000 to Rs. 100000 orwith both.
ii. On the part of the cost auditor, he will be punishable with fine from Rs.
25,000 to Rs 5,00,000. He is also liable to refund the remuneration
already received by him and pay for damages to the company or any
third party adversely affected by his report.
12. Exemption in certain cases: The requirement of cost audit shall not be applicable to
company.
i. Whose revenue from expects, in foreign exchange, exceeds seventy five
percent of its total revenue or
ii. This is operating from a special economic zone.

99. What do you mean by Management audit? What are its

objectives?**
Management audit
Management audit can be defined as constructive and comprehensive appraisal and
review of management plans, policies and procedures. Management audit is
concerned with the assessment of efficacy and soundness of management to lead the
business to its goals. It critically reviews all aspects of management performances
and prescribes ways and means for its improvements. Sometimes managementaudit
has been described as Board level audit so as to distinguish it from below Board level
audit which is called operation audit.
objectives
The main objectives of management audit are:
To review the plans and policies as formulated by management
To assist the management in running the administration most
efficiency and effectively. To make the management cautious and
careful in the decision making process.
To make recommendations for carrying out necessary changes in plans
and policies so thatobjective of the business can be achieved
To pinpoint the problems causing ailment of the company and to
recommend how to overcomethem.
To assist the management in better corporate governance practices so that
shareholder’s wealthremains protected
To bring in creativity and farsightedness in the management.
To see whether there is any conflict between various plans and policies
and to bring aboutharmonization between them.
 100. Distinguish between Cost Audit & Management
Audit?*******

Points of distinction Cost Audit Management Audit

Definition Cost audit is the verification of Management audit is
constructive and
the correctness of cost records
comprehensive appraisal
and adherence to the cost and examination of
accounting principles plans and organization structure of
procedures concern, its plans, means of
operation and use of
resources.
Auditors The cost Auditors as per Management auditor need
Companies Act 1956 must be a not necessarily be a qualified
Qualification
Cost Accountant under the accountant. A person with
meaning of Cost and Works special ability and
Accountant Act 1959, and in case knowledge can conduct
of non-availability of cost management audit.
accountant, must be a chartered
Accountant.
Objective Its main objective is to The objective of management
ascertain the reliability and audit is to see whether the
fairness of cost records andcost company is being run
statements. efficiently or inefficiently,
prudently or imprudently
and to show ways and
means of improvement of
performance.
Periodicity Cost audit, if ordered by the Management audit is not
Central Government is to be done for anysuch fixed period.
conducted for the particular It may cover from one to three
year specified in the order. or four years.
Statutory provision Cost audit, is conducted as per There is no such provision of
section 233 management audit in the
(B) of the companies Act in a Companies Act, it is done as
manufacturing, mining or per requirement of
processing industry if management.
specifically ordered by Central
Government.
Reporting Since cost audit is conducted as As management audits is
per order of Central Government, conducted at the behest of
its report is submitted to the management, its report is
central government with a submitted to the
 copy to management for their
management. perusal and taking corrective
actions
Coverage Cost audit is mainly concerned Management audit may
cover all important areas of
withproduction or service function
the organization namely
production function,
Administrative function,
marketing etc.
 101. Write a short note on tax audit****
Concept of Tax Audit
Statutory audit is done primarily keeping in view the information requirements of
shareholders. But there are also other stakeholders who are interested in the financial
information of the entity. One such stakeholder is Tax Authority who wants to know the
correct income of the assessee from tax-point of view. With this objective the Income
Tax Act, 1961 has contained a number of provisions requiring tax audit of an entity.
Tax audit can be defined as “an examination of financial records to assess correctness
of calculation of taxable profit, to ensure compliance with provisions of the Income Tax
Act and also ensure fulfillments of conditions for claiming deductions under the
income Tax Act.”
Types of Tax Audit
Tax audit under the Income Tax Act can be broadly summarized under the following three
heads:
i. Compulsory tax audit under section 44AB
ii. Tax audit for various deductions and exemptions
iii. Selective tax audit under section 142(2A)

Provision of Income Tax Act, 1961 for Tax Audit u/s 44AB
The provisions for compulsory tax audit u/s 44AB are as follows:
1. Applicability: Tax audit is compulsory for the following categories of assessee:
i. Assessee carrying on any business whose total sales turnover or
gross receipts exceedRs.1.00 crores in the previous year
ii. Assessee carrying on profession where gross receipts in the previous
year exceed Rs. 25lakhs
iii. Assessee carrying on business referred to u/s 44D, 44AE, 44AF, 44BB,
44BBB, and declaringlower income than prescribed under those sections.
2. Qualification to conduct tax audit: The audit shall be conducted by an
‘Accountant’ as explainedu/s 288 of the Income Tax Act, 1961. This Section
defines accountant as follows:
i. A Chartered Accountant within the meaning of the Chartered
Accountants Act, 1949 holding certificate of practice
ii. Auditor of a company under section 226(2) of the Companies Act. It is to
be noted that by the virtue of a resolution of the council of the Institute of
Chartered Accountant of India, with effect from 1.4.2005, a member in
 part-time practice is not entitled to perform tax audit.
3. Disqualification of Tax auditor:
i. A Chartered Accountant who has written the books of the assessee
ii. A Chartered Accountant who is an employee of the assessee or of a
concern under thesame management
iii. Internal auditor who is an employee of the company.
4. Removal of Tax Auditor: There is no specific procedure for removal of tax
auditor u/s 44AB of theIT Act. However he can be removed by the management
for valid ground e.g. delay in submission ofreport.
5. Filling of Tax audit report: The tax audit report along with return of income must
be furnished to income-tax authority by the specified date i.e. 31st October of
relevant assessment year.
6. Penalty for non-compliance: In case of failure of an assessee to get his
accounts audited as per Section 44B or to furnish the tax audit report with
return of income, a penalty equal to 0.5% of
 total sales or gross receipts as the case may be, or Rs. 1.00 lakh, whichever is
lower, shall beimposed u/s 271B of the Income tax Act.
7. Ceiling on the number of audits:
i. A Chartered Accountant shall not accept more than 45 tax audit
assignment in a financialyear.
ii. In case of partnership firm, the specified number of forty five tax audit
assignment shall becounted for every partner of the firm.
8. Form of Report: the audit report shall be submitted in the following forms.
Nature of person Audit report Statement
particulars
A. In case of a person who carries Form No. 3CA Form No. 3CD
business profession and who is
requir by or under any law to
get his accounaudited
B. In case of a person who carries Form No.3CB Form No. 3CD
business or profession but not
being
person referred to above

102. What is social audit? What are its objectives?*******

The functioning of a firm in the society involves social costs. There are some social
costs or detriments to society for which it has to make payments, e.g. cost of material,
energy, labour etc. Again there are some social costs for which it is not required to
make any payment. Examples of this category of social costs are pollution of
environment, spread of diseases, dislocation of inhabitants of a locality etc. So it is but
natural to expect that firm should spend a portion of its revenue for the benefit of
society. The service to society should be commensurate with costs or detriments
which it causes to the society. If the firm ignores this duty, its existence in the society
will not be justified. In the backdrop of this development, the concept of social audit
has emerged. Social audit can be defined as the assessment of the social
performance of a firm in the society to which it belongs. It verifies whether a firm is
discharging its social obligations commensurate with social costs or detriments to the
society caused by its operation. The National Association of Accountant’s (NAA)
Committee on Accounting for Corporate Social Performance has identified four major
areas of socialperformance on which the auditor should compile data and information
for assessment:
(a) Community Development: Activities that are undertaken for the benefit of general public
e.g., housing,
health service, eradication of illiteracy, food programmes etc.
(b) Human Resources: Activities undertaken for the well-being of the employees e.g.,
training programme,improvement of work conditions, education for staff children
etc.
(c) Physical Resources and Environmental Contribution: Activities directed towards
prevention ofenvironmental pollution, spread of diseases, depletion of scarce
natural resources etc.
(d) Product or service contribution: Activities such as consumer protection, product
safety, warrantyprovision and product quality.
Objectives of Social Audit:
Objectives of social audit are:
1. To ensure that investment of shareholders is safe and secured and they get a
adequate return on theirinvestment.
2. To see that the company has taken reasonable steps to control pollution and to
reduce environmentalhazard.
3. To see that scarce natural resources are being judiciously and optimally used in the firm.
4. To verify that Government is being properly compensated in the form of various
types of taxes againstvarious infrastructural facilities like road, police, fire service
etc.
5. To see whether the company is in continuous search of reducing the costs of
production and improvingthe quality of products.
6. To see that interest of consumers is duly protected.
7. To verify whether the interest of creditors and investors have been duly protected by the
firm.
8. To see that safety of workers has been duly ensured and necessary arrangements
have been made fortheir welfare, education and training.
9. To see that employer and employee relationship is good and congenial.
10. To ensure that the company is not adopting any unfair trade practices.
11. To see that adequate compensation has been paid to the inhabitants displaced
due o the establishmentof units by the company.
12. To verify whether adequate measures for community development have been taken by
the entity.

103. What are the advantages of Social Audit?**

Advantages of Social Audit:

Following are the advantages of social audit:
1. Assessment of social performance: Social audit assesses the contribution made by a
firm to the society. It is possible to determine by means of social audit whether a firm is
adequately compensating the society against the costs or detriments suffered by the
society due to its operation.
2. Social awareness: Very often the adverse impact on society of the operation of the firm
e.g. air, water and noise pollution or spread of diseases etc. remain hidden. It is the
social audit which brings these facts to light and compel the firm to take necessary
measures for prevention of environmental degradation. So social audit creates social
awareness among the businessmen.
3. Prevention of unfair trade practice: The unfair trade practices, if committed by a
 business, will be revealed by social audit. So, the magnitude of unfair trade practices
which is so rampant in our society can be significantly reduced by the introduction of
social audit.
4. Establishing justifiability of a business: With the help of social audit, the justification of
continuance of a firm in the society can be established. If it is found that a firm is
generating net social deficit i.e., its social cost is more than its social benefits, it should
not be allowed to function from macroeconomic point of view.
5. Allocation of scarce resources: To ensure effective allocation of scarce resources,
evaluation of projects should be done from the view point of their social costs and
social benefits.
 104. What do you mean by Environmental Audit? What are its
objectives? Discuss the advantages.******
The concept of audit has undergone a sea change. It is not merely confined to
accounting and finance. It has been extended to other areas of social sciences. One
such area where audit is now playing an important role is related to environment.
Environment refers to external conditions and surrounding in which people, animals or
plant live. But now this external surrounding is getting polluted day by day. Different
types of pollution which are now damaging environment are (a) Air pollution, (b)
Water pollution, (c) Soil pollution and (d) Sound pollution. Many industries are directly
responsible for pollution of air, water, soil and sound. Specially, industries like pesticide
industry, tannery industry, petro-chemical industry, thermal power generation,
cement industry, Foundry industry etc. cause havoc damage to the environment. This
damage, although not completely avoidable, can be restricted to a great extent if
proper measures are taken. For this purpose, Governments of many countries have
passed several environment related legislations.
Objectives of environment audit:
The main objectives of environment audit are
(i) To ensure the introduction of eco-friendly technologies.
(ii) To see whether the social costs incurred due to manufacturing process of the firm
is more than offsetby the social benefits rendered by it.
(iii) To check that costs incurred for environmental protection are not mere wastage
of money but arehelping to keep the environment clean and pollution free.
(iv) To see that natural resources are not being extracted and consumed in the way
detrimental to thesociety.
(v) To control the costs incurred on procuring the natural resources and ensure
that they have beenproperly classified.
(vi) To check the compliance of existing environmental related legislation.
(vii) To ensure that standard environmental practices are being followed by the firm.
Following are the advantages that can be derived from the application of environment audit:
(1) Developing Environmental Consciousness: Environment audit keeps the
management alert about the possible hazards associated with the manufacturing
process. It compels them to take necessary precautions so that the company’s
operation cannot cause damage to environment beyond an acceptable limit.
(2) Maintenance of Ecological Balance: Very often industrial activities lead to extinction
of many living things. This is happening due to ecological disbalance caused by
industrial pollution. Bhopal gas leak, Chernobyl disaster, Oil spill off the British South
Coast etc. are the examples which destroyed many living creatures including
 human beings. Proper environment audit can prevent recurrence of such disasters
and ensure betterment of life.
(3) Optimum utilization of scarce resources: Very often natural resources are
consumed recklessly ignoring the interest of next generation. Environment audit
can ensure proper utilization of natural resources.
(4) Preparation of environment cost budget: It can help to prepare environment cost
budget by providing necessary information required for pollution free environment.
(5) Cost effective measures: It ensures that measures taken for environment protection
are cost effective and they are not causing drainage of money from company’s
exchequer.
(6) Recording and reporting of environment cost: Environment audit can ensure proper
recording and reporting of environment cost incurred by the firm. This can help the
Government to frame suitable policy regarding environment protection.
 105. Define ‘Propriety Audit’. What are its objectives and
importance?**
The term ‘propriety’ denotes appropriateness or rightness. So propriety audit can be
defined as assessment ofrightness of managerial decisions in connection with various
financial events or transactions of the business. It verifies whether all transactions are
being executed in the best interest of the company or not. Propriety audit sees whether
all employees exercise same degree of skill, care and caution in executing business
transactions as they are supposed to do in case of their personal transactions.
In other words, in the propriety audit it is seen whether all transactions are fair,
compatible with the interestof the company and conducted with the expected level of
efficiency. It sees that no transaction results in any personal gain for an employee.
According to Eric Kohler “Propriety audit is an audit in which various actions and
decisions are examined to find out whether they agree in public interest and whether
they meet the standards of the conduct.”
Objective of Propriety Audit:
The objectives of Propriety Audit are as follows:
(i) To see that all expenditures have been incurred in the best interest of the company.
(ii) To ensure that an expenditure is not prima-facie more than what it should be
under the given circumstances.
(iii) To look into whether the important business decisions taken by the management
are in conformity with generally accepted customs and standard of conduct. In
other words, propriety audit verifies whether any executive is directly or indirectly
benefitted from a business decision taken by him.
(iv) To see that no allowance such as travelling allowances or medical allowance is
being used as a sourceof profit by an executive.
(v) To see whether any alternative plan of action can bring in improvement or better result.
(vi) To see whether all transactions are fair, justified and able to safeguard the public interest.
(vii) To ensure that transactions can protect the capital of the entity and do not result in
wastage of resources.
Importance of Propriety Audit:
The importance of propriety audit need not be over-emphasized. The present business
world is characterized by separation between management and ownership. Now the
persons entrusted with the responsibility of the management of the business come for
a short period of time. After the expiry of the contractual period, they leave the
organization without taking any responsibility for their past decisions. So it is not
uncommon that top executives get involved with various types of scam for personal
gains. Under this circumstance, proprietyaudit renders following services:
(i) It acts as a deterrent to undertaking any transactions for the personal benefit of an
executive.
(ii) It protects the assets of the business from misutilisation.
(iii) It ensures that all major decisions of the business are taken keeping in view the interest of
the business.
(iv) It develops that habit in all employees to take business activities with same skill,
care and sincerity asthey take in respect of their personal activities.
(v) By ensuring honesty and sincerity in business activities, it improves productivity
and profitability of thebusiness.
Because of these invaluable services rendered by it, propriety audit cannot be
dispensed with. That is why Companies Act 1956 has been amended to incorporate
provisions whereby the statutory auditor is required to comment on the propriety of
transactions of some particular nature.
 106. Define Performance Audit? What are its objectives and
importance?**
Performance audit can be defined as a systematic and independent appraisal or
evaluation of the performance of the business in its various key areas like manpower
planning, work load distribution, productivity and profitability, Job performance, cost
monitoring etc. So performance audit is not concerned with verification of books of
accounts of the business. The auditor conducting performance audit is not required to
report on reliability and fairness of financial statements. Rather his objective is to
enable the management to improve the performance of the business in different key
areas. By appraising performance of business in various key areas, the auditor tries to
go to the roots of inefficiency and advises management accordingly for necessary
remedial measures. In order to improve the quality of work the standard of
performance and expected level of efficiency in different key areas should be set
beforehand. The management should arrange for reaching those targets. The task of
the auditor is to judge the success or failure of the management in reaching these
targets. So, it can be said that performance audit is to review whether an entity has
been able to reach its targets and achieves its standard level of performance. While
conducting performance audit, the auditor will see whether:
(i) Staff partners are balanced i.e. there is neither overstaffing nor understaffing.
(ii) Right persons have been placed at right jobs.
(iii) Incentive scheme is linked with efficiency.
(iv) Overtime is within acceptable limit.
(v) Accumulation of work is due to any bottleneck or non-availability of resources.
(vi) Productivity is monitored by management regularly and necessary steps are
taken by management forimprovement of productivity.
(vii) Quality of jobs is as per customers requirement. This can be verified with
reference to customerscomplains, number of rejections etc.
(viii) Various profitability ratios are consistent with standard.
By examining the above areas, performance audit brings to light various inefficiencies
and loopholes in the performance of the business.
The objectives of performance audit can be summarized as follows:
(i) To ensure proper manpower planning and work load distribution.
(ii) To review the performance of key personnel of the organization.
(iii) To identify those areas responsible for low productivity and profitability.
(iv) To see that quality of product is as per requirement of the market.
(v) To see that assets of business are being properly utilized.
(vi) To improve profitability of the business.