Audit Notes 5th Semester CU
Audit Notes 5th Semester CU
Audit Notes 5th Semester CU
9883034569/8820696761
Auditing [5th Semester: Honours & Pass]
Contents:
S. No. Chapters Page Number
1. Syllabus 01 - 02
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4. Audit risk and internal control system ((10 marks) 47 - 54
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5. Vouching, verification and valuation (10 marks) 55 - 71
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6. Company audit (15 marks) (1 question of 15 marks) 72 - 92
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Price: ₹ 120/-
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UNIT – II AUDIT PROCEDURES AND TECHNIQUES (15 Marks) (5 + 10)
• Auditing Engagement-Audit Planning- Audit Programme (Concept)
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• Documentation: Audit Working Paper, Ownership and Custody of Working Papers-Audit file (Permanent
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and Current) – Audit Note Book- Audit Memorandum.
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• Audit Evidence – Concept, Need, Procedures to obtain Audit Evidence
• Routine Checking, Test Checking and Auditing in Depth
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• Concept of Analytical Procedure and Substantive Testing in Auditing.
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• Audit of Educational Institutions, Hospitals and Hotels
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(This unit should be studied with SA 210, SA 230, SA 300, SA 500, SA 520 and SA 530)
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UNIT – III AUDIT RISK AND INTERNAL CONTROL SYSTEM ((10 Marks)
• Audit Risk – Concept and Types only.
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• Internal Audit- Definition, Objectives, Regulatory Requirement, Reliance by Statutory Auditor on Internal
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Auditor’s Work
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(This unit should be studied with SA 700)
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UNIT – VII OTHER THRUST AREAS (10 Marks)
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• Cost Audit – Concepts, Objectives Relevant Provisions of Companies Act
• Management Audit - Concepts, Objectives, Advantages
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• Tax Audit – Concepts, Objectives, Legal Provisions 88
• Social Audit – Propriety Audit – Performance Audit – Environment Audit (Concepts only)
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Notes:
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1) The provisions of the Companies Act, 1956 which are still in force would form part of the syllabus till the
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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 the
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corresponding 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 the
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theoretical questions.
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UNIT – I [5 + 5 = 10 Marks]
CONCEPT, NEED AND PURPOSE OF AUDIT
Definition-Nature-Scope and Objectives of Independent Financial Audit-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
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1. Define auditing.
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Evolution of Auditing
The term audit is derived from the Latin term ‘audire,’ which means to hear. In early days a person used
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to listen to the accounts read over by an accountant in order to check them. He was known as auditor.
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MEANING OF AUDITING
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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
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mostly in a narrower sense. A few of such important definitions are given below for further discussion.
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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
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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
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of accounts and vouchers of a business as will enable the auditor to satisfy himself that the balance sheet
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is properly drawn up, so as to give a true and fair view of the state of affairs of the business and whether
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profit or loss account gives a true and fair view of the profit or loss for the financial period ,according to
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the best of the information and explanation given to him as shown by the books and if not ,to report in
what respect he is not satisfied.’ Similarly, R.K. Moutz defined auditing as being ‘concerned with the
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verification of accounting data, with determining the accuracy and reliability of accounting statements
and 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”
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i. Reliability and sufficiency of information: The auditor must satisfy himself that the financial
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statements have been prepared on the basis of reliable and sufficient information.
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In order to assess the reliability and sufficiency of the information contained in the underlying
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accounts and other source data, the auditor will undertake following audit procedures.
• Compliance Procedures: Compliance procedures refer to study and evaluations of accounting
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systems and internal control. Based on this evaluation, the auditor determines the nature, extend
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and timing of other auditing procedures.
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contained in the accounting records. It involves checking arithmetical accuracy, vouching of receipts
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relevant information have been properly disclosed in the financial statements in conformity with
statutory requirements.
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For ensuring disclosure of relevant information in the financial statements, the auditor will adopt
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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
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the sanctity of financial statements.
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iii. Determination of proportions: Audit starts with the determination of proportions to be examined
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for achieving the audit objective. Haphazard examination without a clear idea about propositions
leads the auditor nowhere.
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iv. Application of logic: The modern audit has its principal roots in logic and judgement. It is now
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analytical and investigative. The auditor now pushes pencil less and pushes brain more.
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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.
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vi. Formation of opinion: The audit requires the auditor to form an unbiased opinion on the assertions
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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.
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Advantages of Auditing:
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(i) Satisfaction of Owner: It is because of audit that the owner will be satisfied about the business
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(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
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(x) Loan Facility: Money can be borrowed easily on the basis of audited balance sheet from
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financial institutions. If accounts are audited the true picture will be visible to banks and it will
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be easy for them to issue loans as early as possible.
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5. Do you agree with the view that there are inherent 88
limitations of Audit?
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Besides having various benefits, there are some inherent limitations of auditing. These are as follows :
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(a) Higher Cost Burden: Due to Higher Cost Burden, the auditor limits his scope of work to selective
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(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.
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(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
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effectively. This time constraint may affect the amount of evidence that can be obtained
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concerning events and transactions after the balance sheet date that may have an effect on the
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financial statements. Moreover, there is a relatively short time period available for resolving
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(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.
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by persons who have adequate training, experience and competence in auditing.
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(d) Work performed by others: When the auditor delegates work to assistants or uses work performed by
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other auditors and experts he continues to be responsible for forming and expressing his opinion on the
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financial information.
(e) Planning: The auditor should plan his work to enable him to conduct an effective audit in an efficient and
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timely manner. Plans should be based on a knowledge of the client’s business.
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(f) Audit Evidence: The auditor should obtain sufficient appropriate audit evidence through the performance
of compliance and substantive procedures to enable him to draw reasonable conclusions therefrom on
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accounting system incorporating various internal controls to the extent appropriate to the size and nature of
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the 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.
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(h) Audit conclusions and reporting: On the basis of the audit evidence, he should review and assess the audit
conclusions. He should ascertain:
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b. Whether financial information complies with regulations and statutory requirements; and
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(a) Accounting data needs to be verified as to their reliability and accuracy.
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(b) Public funds invested in the private sector of economy need to thoroughly examined as to their proper
utilization.
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(c) Various social groups who are interested in affairs of a business entity need to be assured that the entity
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functions are discharged efficiently and to the best advantage of social will-being.
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(d) Absentee shareholders created out of widely dispersed ownership of management need to be provided
with sufficient assurance that the figures in the profit and loss account and balance sheet are fair
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representations of the financial conditions of a business.
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Thus, keeping in view the above, one can not say that auditing is luxury. Auditing is necessity of big
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organizations. Auditing is compulsory in case of Private Limited Companies, Limited Companies, Charitable
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Trusts, 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
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auditing and the money paid to the auditors looks very petty amount in comparison of the frauds detected.
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Auditing is not the wastage of time also. Normally, auditors do not disturb the accounting staff. The do their own
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work. Very few interference is done by them with the accounting staff. The findings or benefits of audit are more
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precious than wastage of little time of accounting staff. In my view, every business firm whether it is small or
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(v) Passing entries for rectification of errors and making adjustments.
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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
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supposed to submit his report after the completion of work.
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Auditing
It is said, "where accountancy ends, auditing begins." It is slightly said. An auditor has to verify the entries
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passed by the accountant and the final accounts prepared by him. Thus, auditing is the checking of the accounts
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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 as
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to whether the transactions entered into the books are accurate. An auditor is required to submit his report to the
effect whether or not the balance sheet is a true and fair representation of the existing state of affairs of a
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business concern.
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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
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satisfies himself completely with the proper recording of transactions. Thus, auditing is based on accountancy
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and not accountancy on auditing. An auditor must be well familiar with the principles and practical aspects of
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accountancy but it is not necessary for an accountant to be an expert in the audit work.
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The following table makes the distinction clear among book-keeping accountancy and Auditing.
(a) Book-keeping :
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(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)
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has now become control mechanism of all business activities. Accordingly the Institute of Chartered Accountants of
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India has recently defined auditing as "a systematic and independent examination of data, statement, records,
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operations and performances (financial or otherwise) of an enterprise for a stated purpose." So overall control and
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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,
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not parent and child"
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SA 200A on “Objective and Scope of Audit of Financial Statements” states that auditor’s opinion is not an
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assurance as to the future viability of the enterprise or the efficiency or effectiveness with which the
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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
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and fair picture. The ultimate responsibility is of the management. The audit of financial statements does not
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But According to Companies Act 2013: The financial statements shall give a true and fair view of the state of
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affairs of the company or companies as at the end of the financial year [Sec. 129(1) of 2013 Act]. The
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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.
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(v) When there is difference between the balance and the confirmation of the balance by the parties.
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(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.
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(viii) When there is a overwriting of some figures.
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(ix) When there is a contradiction in the explanation given by different parties.
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PROCEDURE TO BE FOLLOWED TO DETECT ERRORS.
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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.
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(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.
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(viii) Compare the various items from the trial balance with that of the previous year.
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(ix) Find out the amount of difference and see whether an item of half or such amount is entered
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wrongly.
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(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 the
original book has remained unposted.
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expressing opinion on their reliability and fairness. The auditor verifies the financial statements with help of
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relevant documentary evidence and explanation and information given to him. So auditing begins, where
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accounting ends. In other words, accounting is followed by auditing which confirms the accuracy and
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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
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useful for decision making. So auditing and accounting are closely related although they are district
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disciplines.
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(b) Object The object of accountancy is to show The object of audit is to verify the truth
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the financial position of the business on and fairness of financial position and of
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a specific date and to determine the the operating result of the concern and at
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operating result for the specific period the same time to discover errors and
of time. frauds if any, in accounts.
(c) Qualification There is no hard and first rule that an In order to acquire qualification, a
accountant should be a Chartered Ac- professional auditor must be a Chartered
countant. Accountant.
(d) Status The accountant is a paid employee of An auditor is not a paid employee of the
the concerned organisation and concern. The owners for a specific
performs his functions under the control purpose appoint an independent person
of management as an auditor.
(e) Tenure The accountant is the permanent An auditor may not be appointed for long
employee of the concern. time in the same concern.
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(j) Type of work The accountant takes the responsibility The auditor does not prepare account,
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of the preparation of accounts. As such,
but reviews and analyses the accounts
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its work is constructive in nature prepared by accountant. As such, his
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work is analytical in nature.
(k) Submission of report The accountant after completion of his
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The auditor after examining and
preparation of account need not submit
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reviewing the accounts must have to sub-
report to the owner or to management.
mit a report to the owner or to
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management.
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(c) Status of the Internal auditor has no independent status The statutory auditor is an independent and
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auditor as he is a paid employee of the under- impartial person, not a paid employee of the
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taking. company
(d) Removal of the The appointing authority i.e. the directors The shareholders in general meeting can
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auditor can remove the internal auditor remove the statutory auditor.
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(e) Remuneration The directors generally fix up the amount The shareholders in general meeting fix up
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of remuneration payable to the internal the remuneration payable to the statutory
auditor auditor.
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(f) Special right The internal auditor has no right to attend The statutory auditor has a right to attend the
the general meeting of the company. general meeting of the company
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(g) Reasons for audit Internal audit is carried out to satisfy the The statutory auditor is earned out for
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(h) Legal obligation There is no legal obligation for Statutory audit is compulsory for the Joint
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(i) Object of audit The main object of internal audit is to In case of statutory audit apart from detection
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detect the errors and frauds. of errors and frauds, certification of final
accounts of the concern is the main object.
(j) Pervasiveness of The internal auditor has to examine all The statutory auditor may examine the
work the transactions of the business transactions thoroughly or may adopt the test
thoroughly. checking.
(k) Report The internal auditor is not appointed by As the shareholders appoint the statutory
the shareholders. . So, he is not required auditor, so, he is required to submit the audit
to submit report to them. report to them
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(c) Nature of audit As it is carried on regularly at short At the close of the accounting year, the work
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work intervals, all the transactions can be of audit is taken up. So, all the transactions in
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verified thoroughly. case of large concerns cannot be examined
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thoroughly.
(d) Fairness & As all the transactions are verified At the end of the financial year, the work
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correctness of minutely, so if any error or fraud is crept begins. So, it will not be possible to verify
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accounts in account, that can be disclosed and them minutely. As such, errors or frauds may
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(e) Case of necessity In case of large concerns and where the Whatever may be the size of the concern and
number of transactions are numerous, the whatever may be the number of transactions,
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(f) Relationship of the Under this system of audit, a close Under this system of audit, no close
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auditor with the relationship is formed between the relationship is formed between the auditor
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ture : So, it cannot be applied to small expenditure and as such is applicable to all
concerns. types of concerns.
(h) Certification of Under this system, it requires less time to Under this system, it required much time to
accounts : prepare and submit the report relating to prepare and submit report concerning the
the certification of final accounts. certification of final accounts.
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report requires to submit his report. case of internal audit.
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(f) Purpose to be Interim audit is always subjected to the Internal audit is a part and parcel of the
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fulfilled need. That is, it is conducted whenever organisational and administrative
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there are interim purposes to be procedure of an undertaking.
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(i) Scope of work Here the audit work extends beginning Under this system examination begins from
from balance sheet to examination of books of prime entry and related vouchers
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books of prime entry and documents. and documents continuous audited balance
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sheet.
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(ii) Internal control The reliable internal control and In this case it is not compulsory to
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and Internal check internal check system are not introduce internal control and internal
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But in specific cases, the board of partnership firm, the partners appoint an
directors or the Central Government auditor.
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appoints an auditor.
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(iv) Role of Auditor Whoever may be the appointing The auditor represents himself for the
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authority, the auditor discharges his proprietor in case of sole-trading business
role as a representative of the and for the partners in case of partnership
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shareholders. firm.
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(v) Rights, Duties and The Companies Act lays down in The matters concerning qualification,
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Liabilities of Auditor different provisions relating to rights, duties and liabilities of auditor are
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liabilities of auditor. No interference the auditor and the owner or partners. The
can be made on such provisions. conditions may be increased or decreased.
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(vii) Power of Auditor According to the provisions of the The auditor is not entitled to enjoy
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Companies Act, the auditor is entitled abundant power. He has to perform his
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to enjoy enormous power. The share- functions subject to the conditions laid
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(ix) Submission of The auditor is required to submit his The auditor submits his report to the
report written report to the shareholder employer.
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(viii) In the event of admission, retirement or death interim audited accounting data is needed in the middle
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of the year.
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(ix) Where an investigation becomes necessary covering an interim period.
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(x) In the case of transfer, sale or change of ownership of a business, it becomes necessary to know the
true result of operation and the true financial position at the end of interim period.
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disadvantages?**
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Standard audit, according to Irish, an Australian author, is “a complete check and analysis of certain items
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and, contingent upon effective internal check, appropriate test checks on remaining items, the whole work
being in accordance with general auditing standards quite adequate to justify an unqualified opinion.”
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(i) Audit programme can be suitably designed based on standard audit principle.
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(ii) It influences the nature and extent of documents and evidences to be obtained through audit
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procedure.
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(iii) New auditing standards compatible with the changing socio-economic condition of the country can be
developed after the scrutiny of the existing auditing standard.
(iv) The criticism that collusion often exists between the management and the auditor leading to distortion
of 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 firms
under the same footing.
(ii) Application of standard audit may render some areas unaudited. So chance of undetected errors and
fraud 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.
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and Scope of the Audit of Financial Statements’, is to enable an auditor to express an opinion as to the
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truthfulness and fairness of financial statements.
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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.
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SA 200A has specifically pointed out that the user of the “financial statements should not assume that the
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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”.
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In pursuance of the role of the auditor in lending credibility to the financial statements the Companies Act,
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1956, has provided that he should be concerned about propriety of some specific transactions.
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Section 227(1A) of the Act requires the auditor to enquire into six specified matters and report by exception.
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This section has been inserted into the Act to ensure that the funds of the company have not been siphoned
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227 (4A) of the Companies Act, 1956, the company auditor is required to examine the financial propriety of
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some transactions.
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Further, SA 570, ‘Going concern’ requires the auditors to evaluate whether the going concern concept is
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applicable to the circumstances of the entity and whether it will continue for a foreseeable future i.e., a
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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
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1. Manipulation of sales: Very often to show more profit in particular accounting year, finished stock are
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shown as sold by preparing challans, gate passes and invoices before the last date of the accounting year.
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Again actual sales within the year may not be credited to sales account for suppressing profit.
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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.
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Again lack of consistency in the method of charging depreciation is another way of falsification of accounts.
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For example, if a Company following reducing balance method switches over to straight line method of
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charging depreciation without any valid ground and without disclosing the impact on the working results, it
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3. Stock valuation: It involves lot of calculation, approximations and estimation. For example there are
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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
A
subjectivity in stock valuation, it is very often manipulated by management for some ulterior motive.
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4. Sundry debtors: Sometimes old debtors are allowed to continue in accounts although there is no
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possibility of their realisation. Again to suppress profit, provisions for bad debt may made unnecessarily.
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Accordingly, actual profit and financial position of the business may be distorted.
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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.
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9)
Advantages:
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(i) The accounting procedure can be revised or designed according to the changing business environment.
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(ii) The users of financial statements are immensely benefited as the accounting system newly revised or
30
designed by this kind of audit can generate information useful to decision making.
(iii) The system does not allow opportunity to commit errors and fraud. 88
(iv) The profitability of the business is increased due to the introduction of system audit.
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(v) The system audit is dynamic in the sense that old concepts and systems are subject to review in the
light of changing demand of the society.
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Disadvantages:
(i) The introduction of system audit is likely to increase the overhead cost.
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(ii) The introduction of system audit may be resisted by the accounting staff who may be prone to
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orthodox ideas.
(iii) If the system fails to attain desired result, it will entail wastage of money, time and energy.
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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.
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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,
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of financial position and results of the ii. Earning capacity of the firm
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business. iii. Extent of fraud committed etc.
2. Scope It deals with entire area of books of As it is conducted for some specific
34
accounts. So the auditor has no alter – purpose, it involves thorough
30
native but to resort to test – checking or examination in some selected areas.
sample checking.
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3. Nature The auditor is required to express his The investigator proves into the matter
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opinion about generally reliability and and looks for substantive and conclusive
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4. Time Span Time span of audit is generally financial It has got no fixed time span. It is
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year which may extend to 15 months in undertaken covering any time period
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some special cases. It is a regular matter depending upon cases. It is not regular
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stock company.
5. Interested party Audit is conducted on behalf of the owners An investigation is done
or shareholders and in some cases for i. On behalf of owners;
Central Government. ii. On behalf of prospective buyers
or would be owners;
iii. On behalf of incoming partners;
iv. On behalf of Central Govt. at
the request of shareholders.
6. Adjustment of profit An auditor is not required to adjust the net The investigator may have to adjust the
profit as ascertained by accountant. net profit as calculated by accountant to
arrive at the actual profit earning
capacity.
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9)
25. What do you mean by auditor’s independence? Why is it
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so important?*
34
Auditor’s independence means ability of the auditor to express opinion on the financial statements without any
30
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
88
wishes of directors or other parties, more specifically company managers/directors or to his own self interest.
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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.
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There are two aspects of auditor’s independence – independence in fact (real independence) and independence
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in appearance (perceived independence). Together, both forms are essential to achieve to goals of
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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
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pressure from company directors. Independence in appearance, on the other hand, implies that the auditor
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It is essential that the auditor not only acts independently, but appears independent too. If an auditor is in fact
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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
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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.
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Meaning:
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Standards on auditing refer to a set of systematic guidelines used by auditors while conducting audit of
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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
30
regulators, industry and academies. These standards provide principles and techniques of auditing which help
88
the auditors ensure performing his duties most efficiently and effectively. They are a set of ideas which serves
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as a framework for auditing.
Importance/Purpose:
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1. Guidance for audits: Standards on auditing provide high quality auditing standards and guidance for
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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
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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.
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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
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cautious while performing audit. This mindset of auditors goes a long way towards detection of scams
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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.
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9)
is it necessary to issue an engagement letter?**
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Audit engagement
34
When a company has to go through the audit process, an auditor may use the term "audit engagement." This
30
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
88
and guidelines for handling the engagement.
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Accepted Definitions
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An audit engagement very loosely refers to an audit that an auditor performs. More specifically, it refers only
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to the initial stage of an audit during which the auditor notifies the client he has accepted the audit work and
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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
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audit services.
Full Engagements
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When referring to the audit as a whole, audit engagements encompass several distinct steps, which are
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organized into planning, testing of controls, substantiation or fieldwork and exit or finalization.
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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
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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.
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Planning?***
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Audit planning refers to establishing the overall audit strategy to conduct an effective audit in an efficient
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and timely manner. As per SA 300 ‘Planning an audit of Financial Statements’, audit planning involves
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following activities:
(i) Acquiring knowledge of the client’s accounting system, policies and internal control procedures.
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(ii) Establishing the desired degree of reliance that can be placed on internal control.
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(iii) Setting the scope, timing and extent of audit procedures to be applied.
(iv) Deciding the analytical procedures to be applied.
S
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(v) Obtaining a general understanding of the legal and regulatory framework applicable to the entity and
how the entity is complying with that framework.
AS
(vi) Determining the resources to be deployed for specific audit areas, such as the use of appropriately
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experienced 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.
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(viii) Deciding how such resources are managed, directed and supervised.
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(ix) Setting of materiality levels for audit process SA300, “Planning an Audit of Financial Statements” states
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that audit planning is a continuous process that often begins shortly after the completion of the
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previous audit and continues until the completion of the current audit engagement.
BH
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auditor.
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(b) Consciousness about the work accomplishment: In view of allocating the work in a scientific way
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among the staffs of the auditor, they are well conscious and alert about their own duties. No one will
show any grievance.
30
(c) Knowing the progress of the work: The auditor can know about the progress of the work done by his
88
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 of
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audit programme, it will start immediately without any loss of time.
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(e) No work left unexamined: Since the programme takes into consideration all the details involved in the
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work to be undertaken during the course of audit, no portion of the work is left from checking. There is
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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
A
negligence or mistake on the part of a clerk can be easily located as the work allotted to him is already
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fixed and he has to put his signature in the programme every day against the work performed by him.
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(h) Proof of evidence: If charge is made against the auditor in future, he can produce it as evidence and can
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defend himself that the work has been done with due course and competence. Because, the programme
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(b) To support the audit report.
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(c) To serve as an evidence in case of any suit against the auditors for negligence in the performance of
34
his duties.
(d) To enable the auditor to know the weaknesses of the internal control system and give advise to his
30
client to avoid such weaknesses. 88
(e) To serve as a means to provide training to the audit clerks about the ways of summarising the work
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done by them.
(f) To help the auditor to plan for the subsequent years.
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(g) To enable the auditor to prepare the report to be issued without any dealy.
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(h) To assign the unfinished work of one clerk to another without dislocation, duplication and omission of
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any work in case changes and transfer of staff are very frequent.
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(b) Working papers should be properly organised and arranged so that one may not find any difficulty in
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(c) Paper used for working papers should be of good quality and of convenient and uniform size so that it
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9)
might be in the form of narrative descriptions, questionnaires or flow charts, or some combination
56
thereof.
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(d) Copies of audited financial statements for previous years.
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(e) Analysis of significant ratios and trends.
(f) Copies of management letters issued by the auditor, if any. 88
(g) Record of communication with the retiring auditor, if any, before acceptance of the appointment as
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auditor.
(h) Notes regarding significant accounting policies.
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the audit.
(c) Evidence of the planning process of the audit and audit programme.
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(e) A record of the nature, timing and extent of auditing procedures performed, and the results of such
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procedures.
(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.
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(h) The Points to be a part of auditor’s report.
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Advantages of Audit Note book:
34
Some of the advantages of the audit note book are.
(a) It ensures the uniformity and helps in knowing the amount of work performed.
30
(b) Important matters relating to the audit work may be easily recalled. 88
(c) Facilities and preparation of the audit report.
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(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.
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(f) The audit note book shows the extent of the interest and pain taken by the audit staff. It helps in their
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appraisal.
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(g) It ensures that the audit programme has been sincerely followed. Deviations can be noticed.
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(h) It is reliable evidence in the court of law, If an auditor has to defend himself.
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An audit memorandum a Statement containing all useful information regarding the business of the client. It
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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
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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 market
potentiality.
iv. Sources of raw-material and their price trend.
v. Names of responsible officers and nature of their responsibility.
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in various auditing situations. Further he should" be able to evaluate the sufficiency which refers to adequacy
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of such evidence and the competency which refers to the quality or reliability of evidence.
Concept of audit evidence
34
The concept of evidence is fundamental to auditing. All audit techniques and procedures are derived from it.
30
It helps the auditor in perceiving the types of evidence available in an audit situation, collecting it through
the various audit techniques and evaluating its sufficiency and competency to support accounting data.
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According to Mautz and Sharaf development of this concept contains the following steps :-
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(a) Recognition of the Propositions to be Proved First of all, the auditor is to perceive and recognise what
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he is trying to prove. In other words, he must be clear about the propositions in support of which evidence
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is required. The accounting statements, which an auditor reviews, consist of a series of propositions. For
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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
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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
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not so material. Materiality is a relative concept and depends upon the size and nature of an item. It is
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natural that an auditor must collect quantitatively more compelling evidence in case of significant
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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.
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(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.
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inquiries addressed to client’s staff.
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4. Confirmation: It refers to the substantiation by a knowledgeable third party, in response to specific
enquiry/request by the auditor.
34
5. Computation: Computation consists of checking the arithmetical accuracy of source documents and
30
accounting records or performing independent calculations.
88
6. Analytical Review: Analytical review consists of studying significant ratios and trends and investigating
unusual variation in the amount of an item.
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7. Reperformance: It involves the auditor’s independent execution of procedures or controls that were
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The reliability of audit evidence depends upon the source from which it is obtained. However, following
generalization as per SA 500 may be useful in assessing the reliability of audit evidence:
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1. Evidence obtained from external source (e.g. confirmation of balance received from a third party)
becomes usually more reliable than evidence obtained internally.
A
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2. Internal evidence is more reliable when the related internal control is sound.
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3. Evidence in the form of documents and written representations is usually more reliable than oral
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representations.
4. Evidence obtained directly by the auditor himself is more reliable than obtained indirectly or by
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interference.
5. Audit evidence provided by original documents is more reliable than audit evidence provided by
photocopies or facsimiles or documents that have been filmed or digitized.
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v. To check the opening balances of all personal accounts and real accounts.
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vi. To check the total and carry forward to next page of the ledger account.
34
vii. To check whether balancing in all accounts have been correctly done.
30
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.
88
x. To see whether balances of all real and personal accounts have been properly recorded in the
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respective site of Balance Sheet.
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(a) Detection of errors and frauds : Detection of errors and frauds can be easily done. They can be
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(b) Examining the correctness of figures : The correctness of the figures of transactions which are
recorded in the books of original entry are examined.
A
(c) Examination of posting to ledger accounts : It requires to examine whether the transactions have been
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posted to the respective ledger accounts from the books of original entry.
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(d) Examining the balances of different ledger accounts : It needs to examine whether the balances of
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(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.
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committed by the top management.
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37. What is test checking? What are the Precautions to be
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taken in Adopting Test Checking Techniques?**
30
Or 88
Test checking is based on presumption. What is that
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presumption?**
S
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TEST CHECKING
AS
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
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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
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transactions from each category. However, his opinion is unlikely to differ even if he verifies only a few
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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
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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 careful
in 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.
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(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.
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(i) Review the results of test checking: The auditor must always review the results of test checking for
34
determining whether there is any further scope of checking records. The nature of errors detected
30
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
88
test checks, proper care should be taken to check the different portions of the work at each audit
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(k) No consultation with the staff of the client: No consultation should be made with the staff of the client
S
as regards the selection of transactions for test checking. This is absolutely his job and is to be treated
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Meaning:
A
Audit in depth refers to the step by step examination of selected transactions from their beginning to their
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conclusion. Under this technique the auditor reviews all operational and accounting aspect of the
O
representative transactions from origin to end. Based on his findings of thorough examination of a few
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selected transactions of a particular category he forms his opinion about the propriety and correctness of rest
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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 of
propriety.
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 correctly
recorded in the book.
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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 of
each category are thoroughly checked.
iv. Avoidance of monotony: The audit staff do not feel monotonous as they are to check only
representative transactions of varied nature.
9)
v. Creating moral pressure: There is moral pressure on accounts clerk, in as much as any transaction may
56
be selected for in depth study.
34
vi. Assessment of propriety: This technique is very suitable for propriety study with regard to transaction
of material importance.
30
vii. Fair assessment of Position: Since only items of material importance are selected for verification,
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there is least possibility off any error on the part of auditor in assessing position of the company.
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viii. Scope of development: Since audit in depth is conducted analytically, the auditor finds scope to
develop new thoughts and techniques for future improvement of audit.
S
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Disadvantages:
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examination.
ii. Chance of improper selection of Transactions: This technique will not be very effective, if the
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iii. Inappropriate audit opinion: If some errors and frauds remain in transaction not selected for
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examination, the financial statement will not reflect a true and fair view. So, there will be
inappropriate audit opinion.
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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.
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9)
56
40. Discuss how the application of analytical procedure is
34
done in audit?***
30
Or 88
What are the methods of analytical procedure?***
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Analytical procedure may be conducted in the following ways:
i. Comparison with last year data: Comparison of entity’s financial information with comparable
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information of last year can enable the auditor to identify some serious mistakes or frauds in
SE
accounts. For example, by inquiring into the reasons of fall of gross profit ratio from that of last
AS
ii. Comparison with budgets: Comparison of actual results with anticipated results such as budgets or
A
forecasts. If the differences are found to be material, the auditor will investigate the reason of the
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difference.
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iii. Comparison with Industry average: Comparison of entity’s financial information with that of the
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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
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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.
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9)
(a) Income or loss as a percentage of sales
56
(b) Gross profit ratio
34
(c) Accounts receivable turnover
(d) Inventory turnover
30
(e) Leverage ratios 88
(f) Liquidity ratios
4. Sources of Information: Following sources of information may be used for analytical review:
(9
(a) Interim financial information
S
(b) Budgets
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(c) Non-financial information e.g., employee morale, Government policy, threat from other products
AS
etc.
(d) Confirmation from bank, debtors and creditors
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5. Common size Analysis: Common size analysis which is done by expressing each item of balance sheet
TI
as a percentage of total assets and each item of income statement as a percentage of total sales is an
O
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for substantive testing?*****
56
Substantive testing refers to the test of the validity and propriety of the information produced by the
34
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
30
analysis of plausible relationships among both financial and non-financial data. While designing and
88
performing analytical procedure for substantive testing, the auditor should consider the following matters in
accordance with SA330 “The Auditors’ Responses to Assessed Risks”
(9
1. Suitability of the procedure: He should determine the suitability of particular substantive analytical
S
procedures for given assertions. He should take into account the assessed risks of material
SE
misstatement and the results of test of details, if conducted for these assertions.
AS
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,
CL
comparability, and nature and relevance of information available and control over their
preparation.
A
3. Development of expected values: The auditor shall develop an expectation of recorded amounts of
TI
ratios. For developing expectation of recorded values, the auditor should consider the following:
O
i. The degree of accuracy with which the expected results of substantive analytical
AL
procedures can be predicted. For example, the auditor may expect greater consistency in
BH
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.
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9)
down resolutions concerning accounts. See that they have been duly complied with.
B. Income
56
1. Check names entered in the Student’s Fee Register with respective class registers and verify that
34
there operates a system of internal check ensuring that defaulting students are identified and
30
served with notice in time.
2. Check fees received by comparing counterfoils of fees book with the collection recorded in the Fee
88
Register and trace the entries in the Cash book to confirm that revenue under this head has been
(9
properly accounted for.
3. Examine whether all concessations have been granted as per rules.
S
4. See that arrear fees which are irrecoverable have been written off under the sanction of
SE
appropriate authority.
AS
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
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7. If the Institute is having hostel facility, then examine the statement reconciling the total hostel
charges recoverable with the amounts actually received.
O
AL
8. Verify receipts of rent for premises let out by the institute with reference to copies of agreements
with the relevant parties.
BH
9. Examine the entries in the cash book in respect of donations and legacies with reference to the
counterfoils of receipts issued to doners.
10. Verify interest and dividends received during the year with reference to the securities in which
investments have been made.
11. Verify the grants received with reference to the sanction letters and examine whether conditions
specified 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
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3. Carry out physical verification of investments.
56
4. Examine arrear student fees by reconciling total fees received during the year and total fees
34
receivable as per the applicable fee structure.
5. Confirm that the refund of taxes deducted from the income from investment has been duly claimed
30
since the institutions are generally exempted from payment of income tax.88
6. See all the liabilities in respect of purchase of assets, maintenance expenses, food grains and
provisions have been duly provided.
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E. Statement of accounts
S
The annual statements of accounts of an Educational Institution generally consist of Income &
SE
Expenditure Account and Balance Sheet. Confirm that they have been prepared as per generally
AS
accepted accounting principles. Also see that separate statement of accounts have been prepared as
regards Poor Boys Fund, Games Fund, and Capital Fund etc.
CL
an College Hostel.***
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A college hostel provides boarding and lodging facilities to the students of college. It is run by the college
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authority on no profit no loss or subsidised basis. Generally a cash book is maintained to record daily
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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. accommodated
in 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 Expenditure
Account.
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.
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A medical College is run with the twin objectives of imparting medical education and rendering medical
56
services to general public. It is generally established by the Government and run with budget allocation out
34
of 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
30
auditor must consider the following points: 88
1. The rules, regulations and bye-laws of institution should be studied by the auditor to acquaint himself
(9
with its functioning.
2. The internal control system for procurement of food, medicine etc. and their issue should be studied to
S
SE
4. The system of procurement of assets, medical equipment and other accessories should be studied and it
CL
should 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 duly
A
approved by doctor. He should physically verify the stock of some high value medicine to compare the
TI
6. Monthly fee from students should be vouched from fee register and carbon copies of receipt issued. If
AL
fee collection is entrusted with a bank, the same should be confirmed from bank statement. He should
BH
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 is
used 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 and
cash 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 capital
grant, maintenance grant etc.
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9)
capacity, different types of activities performed etc.
56
2. Evaluation of internal control: The auditor will evaluate internal control system involving
34
maintenance of records and documents, safeguarding of assets, purchase of assets,
authorisation of transactions, division and rotation of duties etc.
30
3. Study of the minute book: He should go through the minutes of meetings of Board of
88
Directors or the Managing Committee and note down resolutions concerning financial
(9
matters such as acquisition of assets, engagement of staff, investment, fees, expansion of
facility for treatment etc.
S
SE
4. Study of accounting system: The accounting system maintained should be studied and
audit procedure to be followed should be decided.
AS
B. Receipts:
CL
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
A
and other evidences. The auditor will check the bill register to see whether all charges have
TI
been computed correctly as per rate chart, period to stay of patient, category of bed,
O
medicine used, time taken by patient in the operation theatre, medical materials used etc.
AL
2. Free bed facility: The auditor will see that free bed facility has been provided to deserving
BH
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9)
unusual variation should be enquired into.
56
5. Purchase of Provisions: Examine the payment relating to purchase of medicines, foodstuff,
34
and different medical items etc.
30
D. Assets and liabilities:
1. Verification of cash and investment: The auditor will carry out physical verification of
88
cash and various investments as laid down in the investment register.
(9
2. Verification of fixed assets: The auditor will conduct physical verification of fixed assets
S
3. Depreciation: The auditor will see that depreciation at appropriate rate has been
AS
materials are properly maintained. He will ensure that any difference found in physical
verification from stock records has been properly adjusted.
A
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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
O
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provided.
6. Verification of capital: Capital introduced during the year by partners or by
BH
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9)
• He should see whether relevant hotels have independent status or a part of chains of hotels.
56
• 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.
34
• He should also obtain Minutes of meeting of the Board of Directors to note down the important
30
decisions relating to accounts, finance and audit.
88
(C) Receipts:
(9
In order to conduct audit of a hotel, an Auditor should study, verify and vouch books of accounts, keeping in
S
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9)
(c) Depreciation:
56
(d) Examination of stock:
34
(e) Provisioning of liability:
(f) Verification of capital:
30
88
(F) Financial statement:
(9
The auditor will see whether financial statements comprising of income and expenditure account or
S
statement of profit and loss, balance sheet and cash flow statement have been prepared properly and
SE
At the end, the auditor will submit his report expressing opinion about the reliability and fairness of financial
A
statements.
TI
O
AL
BH
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9)
The definition of ‘audit risk’ is the risk that the auditor gives the wrong opinion on the financial statements
56
and so, ultimately, this is what the auditor is trying to avoid.
34
To support this, audit risk should be reduced to an acceptably low level. To help actually achieve this when
completing an audit, we split audit risk into three components, as shown below:
30
Audit Risk = Inherent Risk x Control Risk x Detection Risk 88
Inherent Risk
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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
S
SE
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
AS
opinion on. This understanding will allow for the inherent risks to be identified, which means the auditor can
CL
This is the risk that the entity’s controls will not prevent / detect and correct a material misstatement in the
TI
In order to assess this risk, the auditor must understand the key business processes in place at the client and
AL
whether the controls over these processes are designed effectively, as well as assessing the overall control
BH
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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 staff
in 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.
9)
(e) To allocate duties and responsibilities of each clerk in such a way that he may held responsible for
56
particular fraud or error.
34
(f) To increase the efficiency of clerks because the allocation of duties is based on the principle of division of
30
labour.
(g) To detect errors and frauds easily if it is committed, because in an efficient internal check system, there is
88
a provision for independent checking.
(9
Advantages of Internal Check:
(a) Proper division of work: internal check entails a proper and rational distribution of work among the
S
SE
members of staff of the enterprise keeping in view their individual qualifications, experience and area of
specialization.
AS
(b) Detection of errors and frauds: since no individual worker is allowed to handle a job completely from
CL
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.
A
TI
(c) Increased efficiency coupled with economy: A good system of internal check increases the efficiency of
work among the staff and leads to overall economy.
O
(d) Convenience to auditor: where an organization is operating the system of internal check, the statutory
AL
auditor may conveniently avoid detailed checking of the transactions. He may apply a few tests here and
BH
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9)
(b) Administrative Controls : These comprise the plan of organization that are concerned mainly with
56
operational efficiency. They may include controls, such as time and motion studies, quality controls through
34
inspection, performance reports and statistical analysis.
Objectives of Internal Control :
30
(a) Providing reliable data: Business decisions require accurate information o run the business efficiently.
88
Examples of significant areas where management requires reliable information are fixation of selling
(9
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 and
S
SE
unnecessary duplication of efforts, protect against waste in all aspects of business and discourage other
CL
reasonable assurance that procedures and rules of various institutes are followed by company personnel.
TI
(d) Safeguarding assets and records: the physical assets of the company can be stolen, misused or accidently
O
destroyed if not properly protected by adequate controls. The internal control helps to safeguard the
AL
physical assets and to secure the accuracy and reliabilities of the records of the company.
BH
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9)
administrative devices controlling all is to see that organization’s system of
56
the areas of the organization so that internal control is maintained
34
the ultimate objective of the appropriately and management
30
organization is attained. instructions and policies in relation to
88various operations are being carried
out correctly.
(9
3. Existence Internal control system exists in all To carry out internal audit, a separate
the departments of the organization. department is formed. The internal
S
SE
4. Responsibility
TI
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9)
a system under which the accounting methods and details of an establishment are so laid out that the accounts
56
procedures are not under the absolute and independent control of any person - that, on the contrary, the work of
34
one employee is complementary of that of another, and that a continuous audit of the business is made by the
30
employees."
The essential elements of an internal check are : 88
(a) Instituting of checks on day-to-day transactions.
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(b) These checks operate continuously as a part of routine system.
S
The objective of such allocation of the duties is that no one has an exclusive control over any transaction.
AS
An example of internal check is the system of encashment of cheque in bank. When a cheque is
CL
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
A
payment. Thus the entire system is so designed that no single person can verify record and make payment.
TI
Sometimes to enhance the efficacy of Internal check system duties among staff members are
O
interchanged. They are also encouraged to go on leave so that in the absence of an individual frauds and
AL
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.
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(d) To ensure that the standard accounting practices to be followed by the organization are strictly followed.
56
(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.
34
(g) To undertake special investigation for the management.
30
(h) To identify the authorities responsible for purchasing assets and other item as well as disposal of assets.
88
55. Can a statutory auditor rely upon the internal audit system
(9
answer.*****
AS
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
CL
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.
A
TI
2. To discharge this responsibility: statutory auditor should evaluate the internal audit system he should
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evaluate the strength of the internal audit staff, their qualification and experience.
AL
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 use
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of 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.
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9)
transaction.
56
(ii) Function It is an arrangement of allocation of It is an independent and continuous
duties in such a way that work of one review of operations and records.
34
employee is automatically checked by
30
the work of another employee.
(iii) Results It prevents occurrence of errors and 88As it is undertaken after the work is
frauds or if they are committed, it can complete, it cannot prevent occurrence
(9
detect them almost instantaneously. of error or fraud..
(iv) Formation To run the internal check system, no To carry out internal audit, a separate
S
(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,
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efficiency.
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(vi) Subject matter An internal check system is concerned It is concerned with the appraisal of
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with carrying out work efficiently and work done and ascertaining the reli-
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(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.
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9)
devices controlling all the areas of the function is to see that
organization so that the ultimate organization’s system of internal
56
objective of the organization is attained. control is maintained appropriately
34
and management instructions and
30
policies in relation to various
88 operations are being carried out
correctly.
(9
3. Existence Internal control system exists in all the To carry out internal audit, a
S
other controls.
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4. Responsibility To implement the internal control is the To carry out internal audit is the
AL
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9)
58. What is vouching? What are the objectives of vouching?*
56
Vouching is the act of authenticating a transaction recorded in the books of accounts with reference to its
34
documentary evidence. It is the essence of auditing and in fact, the whole structure of auditing rests upon it. It
30
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
88
transactions. So, vouching requires intelligence and tactfulness on the part of the auditor. He will apply
(9
professional skepticism i.e., alertness and judgement in his work. While conducting vouching, he will collect
S
evidence judiciously in support of transactions, evaluate credibility and truthfulness of evidence and then form
SE
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’
CL
records”.
According to Dicksee, “vouching consists of comparing entries in books of account with documentary evidence
A
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in support thereof”.
Objectives of Vouching
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(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 the
auditor 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 have
been 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.
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9)
(e) Transactions have been classified and disclosed according to generally accepted accounting
56
principles.
34
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.
30
4. Propriety of transactions: Through vouching, the auditor goes to the root of transactions to substantiate
88
their propriety. It helps him determine whether transactions have been carried out in the best interest of
(9
the entity.
5. Substantial accuracy: Substantial accuracy as opposed to arithmetical accuracy of transactions is
S
determined by vouching. It is applied by the auditor to test the authority, regularity and truthfulness of
SE
6. Detection and prevention of frauds and errors: Vouching is an analytical exercise; it is critical and
CL
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.
A
7. Successful and logical completion of audit: The success of audit depends upon the efficacy of vouching. A
TI
casual and careless conduct of vouching will expose the auditor to legal action if he fails to detect material
O
errors and fraud. In Armitage V. Brewer and Knott (1932) case the auditor was held guilty of negligence for
AL
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.
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9)
checking only. Proper vouching only enables the auditor to detect and prevent frauds and
56
irregularities.
34
So from the above discussion it is clear that routine checking and vouching are not complementary to each
30
other.
88
61. How do you vouch the following items**********
(9
This refers to the amount paid to directors for their services rendered to the company and for attending Board
meeting. While checking this term of expense, the auditor should have the following information:
AS
ii. Types of remunerations and perquisites to which directors are entitled and other terms and
conditions of their appointment.
A
iii. Whether directors are entitled to get fees for attending Board meeting and if executive
TI
directors get any such fess, whether specific approval has been taken from Department of
O
iv. Whether director’s remuneration has been separately shown in the profit & Loss A/c as
BH
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9)
i. Business Travel Rules of the company.
56
ii. Business Travel Vouchers as submitted by employees.
iii. Personal accounts of employees.
34
iv. Board’s Resolution etc.
30
88
(iii) Preliminary Expenses
(9
Expenses incurred in connection with the promotion of a new company are known as preliminary expenses.
S
This expenditure includes stamp duties, registration fees, legal cost, accountant’s fees, cost of printing, etc.
SE
while vouching these expenses, the auditor should require following information:
AS
i. Whether the expenses shown as preliminary expenses are actually connected with the
formation of the company.
CL
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
A
TI
iv. Whether the amount of expenses is within the sanctioned limit. If it exceeds the limit, the
AL
auditor should enquire into whether approval from shareholders has been obtained in this
regard.
BH
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 of
expenses,
(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.
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9)
(g) See counterfoils of cheques for amounts paid to shareholders.
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(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 of
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Payment of Dividends.
30
(v) Interest & dividend received
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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 –
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SE
(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.
AS
(c) The counterfoil of dividend warrants should be seen. These should be tallied with the records of investment.
CL
(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.
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(f) In case of interest on deposit with banks, verification should be done by reference to the bank’s statement and the
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(g) The receipts of dividends and interest should be addressed to the bank statement for encashment.
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(h) It should be ensured that the interest and dividend received are credited to the respective account in full i.e., before
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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 debenture
certificate (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
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(f) It should be verified that every available accommodation has been let out and rental income has been duly
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accounted for.
(g) If it is reported that one or more tenements have remained vacant a certificate in respect thereof should be obtained
34
from the client.
30
(vii) Vouching of cash sales
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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:
S
SE
sales summary book is maintained from which the daily total of cash sales is recorded in the
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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
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iii. To verify the calculations of price of goods sold on selective basis and to check the price with
O
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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 of
auditing 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
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source of transactions to substantiate its propriety. For example, while vouching the payment against
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suppliers invoice, he will not merely tick the entry in the Bought Ledger and Cash Book with payment
voucher but will also check that
34
i. The payment voucher is based on some purchase invoice. If the payment voucher is for some
30
advance or ad hoc payment, approval of competent authority must exist.
ii. The invoice is supported by purchase order.
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iii. The P.O. has been duly raised by the responsible purchase officer after following the
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established purchased procedures.
S
iv. The invoice has been duly certified by the Receiving Deptt., Inspection Deptt., and store Deptt.
SE
v. The invoice has been duly checked by the accounts staff with reference to purchase order and
AS
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 with
A
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payment vouchers
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The success of editor in vouching depends upon his intelligence and tactfulness. He will select
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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
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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).
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2. Objective Vouching is carried out with the Verification is done for confirming the
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objective of establishing the ownership, existence, possession and
authenticity, genuineness and valuation of assets as stated in the
34
correctness of transactions recorded balance sheet.
30
in the primary books of accounts.
3. Level of Enterprise Vouching is usually done by junior Verification is done by senior level
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level audit clerks with sound audit clerks or the auditor himself as it
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knowledge in accounting principles. requires expertise not only in account-
ting principles but also in various
S
SE
5. Nature of Items Vouching is concerned with all Verification is concerned only with
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year.
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6. Aspects under Review Vouching verifies— For Assets: It involves enquiry into the
(i) Date of voucher; value, ownership, existence, charge
(ii) Existence of proper and proper disclosure in Financial
authorization of the Statements.
transactions; For Liabilities: To see whether they are
(iii) Supporting evidence truly owed by the entity and disclosed
i.e., Bill, challan, at correct amounts.
inspection report, etc.;
(iv) Propriety of
transactions;
(v) Completeness;
(vi) Proper accounting
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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 issued
by 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
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assets).
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34
Distinction between verification and valuation :
30
Point of Distinction Verification 88 Valuation
(i) Meaning Apart from the examination of Valuation means the examination of
determined value of different adequacy of determined value of
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whole process.
(ii) Scope In such a case, the scope of work
Since valuation is a part of
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value determiner.
(iv) Object The object of verification is to The scope of valuation is to justify the
BH
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66. Do you think that verification of Assets and Liabilities is
34
necessary when vouching has been done properly? Discuss*
30
Verification means `proving the truth' or `confirmation'. One of the most important duties of an auditor in
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connection with the audit of the accounts of a concern is to verify the assets and liabilities appearing in the
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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
S
SE
possible that after purchase and passing the entries, the asset might have been disposed of or pledged and no
AS
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
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not. If he fails to verify the asset, he will be liable for any damage suffered by the client as it was decided in
A
the case of London Oil Storage Co. Ltd. Vs. Sear Haslock and Co. (1904).
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Thus we can say that verification is a process by which the auditor satisfies himself not only about the actual
O
existence, possession, ownership and valuation but also ensures that the assets are free from any charge or
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(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.
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(e) Examine some of the quantities in stock-sheets with those shown by the stock books, if such stock
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books are kept.
(f) Ascertain that the stock is valued on the same basis as in the previous year.
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(g) Ascertain that obsolete and unsalable stock is shown at fair market prices.
30
(h) Compare the percentage of gross profit on turnover with that of the previous period and also
enquire into the cause of any notable fluctuation.
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(i) Ensure that the goods entered as sold and not delivered are not included.
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(j) Ensure that the goods bought and not entered in the invoice book are included.
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(k) (i) Ascertain that the value of unfinished goods is taken at actual cost and the basis of valuation is the
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cost of the materials consumed and the wages spent thereon upon the date of the Balance Sheet.
AS
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
CL
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.
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(m) See that the stock held does not include goods held on consignment as an agent.
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(n) Examine carefully the stock sheets and ensure that the stock includes only the goods dealt with by
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(p) Obtain from a responsible officer of the organization a certificate regarding the procedure followed
in 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.
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(b) Investment
Investment may be a share certificate, government bond certificate, government loan certificate, debenture
certificate, 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 suitable
method, 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.
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(g) Confirm the uncalled liability on partly paid shares held as investment shown as contingent liability by
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way 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 the
34
Balance Sheet.
30
(i) See that, regarding the investment in subsidiaries, disclosure requirement of the Companies Act, 2013
are complied with.
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(j) For investment in the capital of partnership, the partnership deed and copy of accounts of partnership
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firms, is to be verified. Also adjust the share of profit and loss for the partnership period.
S
(k) Investments which stand in the name of persons other than that of the company are to be confirmed
SE
(l) For investment lodged with others as security or lying with banks or share brokers, obtain a certificate
from the parties concerned.
CL
(m) In case of application money paid for shares which are still to be allotted, that fact is to be specially
A
(c) Debtors:
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Sundry Debtors represents the amount recoverable from the customers for sale of goods or rendering of
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services.
BH
(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.
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9)
debtor at the close of the year.
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(j) Further, whenever there are credit balances in some debtors account, the same are not to be
34
deducted from other debtors debit balances and net balance is not to be shown in the assets side,
30
but former is to be shown as Sundry Creditors.
88
(d) Leasehold Property :
(9
Normally the lease or right to use the property is granted for certain number of years. At the expiry of the
S
period of lease, the rights go back to the original lessor. Various steps involved in the verification of
SE
(a) Inspect the lease agreement to ascertain the amount of premium paid, period of lease, other terms
and conditions, like maintenance, insurance, etc.
CL
(b) See that the lease is properly registered with the Registrar because a lease for a period exceeding
A
one year is not valid unless it has been granted by a registered document.
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(c) Ascertain those conditions, the failure of which might result in the forfeiture or cancellation of lease,
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(d) See whether sub-lease is valid as per lease agreement, in case if it is granted, by referring to sub-
lease agreement.
BH
(e) See that the premium paid and acquisition expenses of lease are being amortised (written off) over
the 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 the
term 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 ascertain
the correct method of presentation of such expenditure for disclosure in the Balance Sheet
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9)
relevant entries for the same and verify that they are removed from the Fixed Assets Register.
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(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.
34
(g) Auditor should see that the entire plant and machinery stands in the name of the client and are free
30
from any charge or encumbrances. If plant and machinery is mortgaged, then he has to verify that the
88
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 Assets
(9
as per Schedule III Companies Act, 2013.
S
SE
(f) Goodwill*
AS
(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
A
vendor’s agreement and the auditor has to see whether there is a specific sum which is paid or whether
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it is the excess of price paid over the tangible assets and see that it is properly recorded.
O
(b) When the company has written up the values of all its assets on a revaluation and has raised a Goodwill
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Account in the books, the Goodwill appears in the Balance Sheet. In this case, the auditor has to see the
BH
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 dividend
is being declared from it.
(d) He has also to see the disclosure requirement of Schedule VI and ensure that the fact are disclosed for
5 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.
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9)
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(h) Copyright:**
34
(a) The auditor has to examine the written agreement of assignment along with the royalty paid to the
authors etc., for such copyrights.
30
(b) He has to see that such assignments are properly registered. 88
(c) If the client is the owner of many copyrights, the auditor should ask the client to prepare a schedule of
(9
copyrights 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.
S
SE
(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.
O
AL
(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
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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.
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included as part of the cash balance, he should have them initialed by a responsible official and debited
to appropriate accounts.
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34
(j) Bank Balance:
30
(a) To verify cash at bank, the auditor should examine the bank pass book and compare it with the balance
as shown by the bank column of the cash book.
88
(b) Check bank reconciliation statement with bank statement / pass book of subsequent period.
(9
(c) The auditor should get a certificate regarding the balance at the bank directly from the bank.
S
(d) Ensure that the balance as shown by the cash book is brought into the balance sheet as `Cash and Bank’
SE
and not made up in order to conceal the deficiency. If some of these cheques are more than six months
CL
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
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(g) If there are more than one bank account such as `Dividend Account’. “Interest Account’ etc. all such
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accounts should be checked and the balances should be verified upon the same date. Information
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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,
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the auditor should enquire from the bank the particulars of the security and the amount of the interest
charged.
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(l) Creditors
(a) The auditor should ask for a schedule of creditors and check the same with the purchase ledger as that is
already examined by him.
(b) He should ensure that all purchase made during the year especially at the end of the year are included in
9)
the accounts of the creditors.
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(c) In case of suspicion about any creditors, the auditor with the consent of the client can ask the statement
of account to be sent and verify the same by scrutinizing ledger accounts.
34
(d) He should see the various debits given for discount, goods returned etc, and confirm that the same are
30
genuine.
(e) The auditor should ask for the reason for not paying any overdue creditors. 88
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(m) Contingent liability:**
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Contingent liabilities are those liabilities which may or may not arise in the future for payment. The auditor’s
SE
duty 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.
AS
Examples:
CL
(d) Liability for cases against the company not acknowledged as debts :
O
Auditor’s duty :
(a) The auditor should very carefully check the various contingent liabilities named above. There may be
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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 the
purpose.
(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.
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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
9)
Qualification
56
(a) According to Provisions of Section 141(1) of the Companies Act, 2013 “a person shall be eligible for
34
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.
30
(b) It has been further provided that the firm shall also considered to appointed by its firm name
88
whereof majority of partners practising in India are qualified for appointment as auditor of a
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company.
(c) According to Provisions of Section 141(2) of the Companies Act, 2013, a firm including limited
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liability partnership who are chartered accountants shall be authorised to act as auditor and sign on
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Disqualification
CL
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 Liability
A
company;
BH
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9)
Subject to the provisions of this Chapter, every company shall, at the first annual general meeting, appoint an
56
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 and
34
the manner and procedure of selection of auditors by the members of the company at such meeting shall be
30
such as may be prescribed:
88
(a) Provided that the company shall place the matter relating to such appointment for ratification by
members at every annual general meeting:
(9
(b) Provided further that before such appointment is made, the written consent of the auditor to
S
such appointment, and a certificate from him or it that the appointment, if made, shall be in
SE
accordance with the conditions as may be prescribed, shall be obtained from the auditor:
AS
(c) Provided also that the certificate shall also indicate whether the auditor satisfies the criteria
provided in section 141:
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(d) Provided also that the company shall inform the auditor concerned of his or its appointment, and
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also file a notice of such appointment with the Registrar within fifteen days of the meeting in
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9)
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removal of an auditor****
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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 if
30
following conditions are fulfilled: 88
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 resolution
(9
iii. The company shall hold the general meeting within sixty days of receipt of approval of the
SE
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 new
A
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for appointing as auditor a person other than a retiring auditor or providing expressly that a
retiring auditor shall not be reappointed.
BH
This provision is not obviously applicable where the retiring auditor has completed a
consecutive 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 copy
thereof to the retiring auditor.
iii. Representation by the auditor: The retiring auditor proposed to be replaced by a new auditor
has 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 company
to circulate the representation to the members of the company.
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9)
Remuneration of auditors [Section 142]—
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1. The remuneration of the auditor of a company shall be fixed in its general meeting or in such manner
as may be determined therein:
34
Provided that the Board may fix remuneration of the first auditor appointed by it.
30
2. The remuneration under sub-section (1) shall, in addition to the fee payable to an auditor, include
88
the expenses, if any, incurred by the auditor in connection with the audit of the company and any
facility extended to him but does not include any remuneration paid to him for any other service
(9
72. What are the right (Power) and duties of an auditor under
AS
Rights of an Auditor
1. Right of access to books and vouchers: Section 143(1) of the Companies Act, 2013 states that an
A
auditor of a company has a right of access at all times to the books, account and vouchers of the
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company whether kept at the head office or anywhere else. The term ‘vouchers’ include any
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document supporting the transactions in the financial statements. Similarly ‘books’ means financial,
AL
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.
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sign the audit report and the balance sheet and profit & loss account including the documents
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annexed.
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10. Right to attend the meetings of Audit Committee: The auditor shall have the right to attend the
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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)]
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Duties of An Auditor
According to Companies act, 2013, the duties of an auditor may be described as below:
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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
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shareholders of the company. It is to be noted that he might have been appointed by directors.
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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
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such as:
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i. Whether loans and advances made by the company are properly secured and whether
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the terms of loans and advances are against the interest of the company.
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ii. Whether the transactions which are merely represented by book entries are prejudicial
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viii. Whether any director is disqualified from being appointed as a direction under sub-
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section (2) of section 164.
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ix. Any qualification, reservation or adverse remark relating to the maintenance of
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accounts and other matters connected therewith.
x. Whether the company has adequate internal financial controls system and whether
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it is effective in operation.
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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.
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5. Compliance with C & AG direction: In case of a Government Company, the auditor’ report
include:
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• 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
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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
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of fraud involving lesser than the specified amount, the auditor shall report the matter to the
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Audit Committee or the Board within such time and in such manner as may be prescribed.
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[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 cost
auditor 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)].
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property. What the company auditor is required to do is to submit, whether demanded or not, his report on accounts
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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
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agent will be purported to be the act of principal. But this relationship does not exist between shareholders and
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auditors. 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.
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But so far as company auditor is concerned he is not supposed to intimate the shareholders any information other
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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
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There are many legal decisions where a company auditor has been termed as an officer of the company : For
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example, the London and General Bank case it was held by Lord Justice Lindley that it seems impossible to deny
that for some purposes, and to some extent, an auditor is an officer of a company. In the famous Kingston Cotton
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Mills Co. Ltd. case, it was also held that "auditors are officers of the company."
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But an officer is an employee of the company who is entrusted with the task of implementing the plans and policies
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of the management. He is bound by the service rules of the company and is required to work as per directions given
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to 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
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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 may
not suit the desire of management and may render his assignment ceased. So to treat the auditor as an officer of the
company 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 the
company 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 treat
auditor as servant of the company.
An auditor is an independent person rendering professional service to the company in return of fees. He can neither
be an agent of the shareholders nor be an officer of the company, nor is he a servant of company.
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B. Criminal Liability
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The circumstances in which an auditor may be criminally prosecuted under the Companies Act are:
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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 section
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447 which stipulates that any person who is found to be guilty of fraud, shall be punishable
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with imprisonment for a term which shall not be less than six months but which may
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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
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fraud. The auditor can escape liability under this section if he proves
• The statement was immaterial;
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winding up, he shall be punishable with an imprisonment for a term which shall not be less
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than three years but which may extend to five years and with fine which shall not be less
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than one lakh rupees but which extend to three lakh rupees.
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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 services
as 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.
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the amount involved in the fraud but which may extend to three times the amount
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involved in the fraud.
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75. State the provisions of companies act 2013 regarding
declaration & payment of dividend.***
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The important provisions of company law pertaining to dividend are described below:
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1. Source of Dividend: As per section 123(1), dividend can be paid out of following sources:
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ii. Past reserves created out of profits of credit balance in the profit and loss account brought
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through electronic mode along with the conventional mode of payment by cheque or dividend
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warrant as usual.
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3. Provision for Depreciation: Section 123(1) has also made it mandatory for the company to make
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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 the
company.
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requires a company which has issued debentures to create a Debenture Redemption Reserve out of
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profit available for dividend for an amount not less than 25% of the value of debentures issued.
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9. Failure to comply with provisions of acceptance or repayment of deposits: As per Section 123(6)
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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
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such failure continues.
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10. Unclaimed dividend: Section 124(6) of 2013 Act states that all shares in respect of which unpaid or
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unclaimed dividend has been transferred to the Investor Education and Protection Fund shall also
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be transferred by the company to the fund along with a statement with certain specified details.
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11. Deposit in a separate account in a Scheduled Bank: Subsection 4 of section 123 has mandated that
the company shall deposit the amount of dividend including interim dividend in a separate account
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in any schedule bank within five days from the date of declaration of such dividend.
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Payment of dividend out of capital means return of capital to shareholders in disguise. In other words, a part
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of 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:
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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).
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3. Conclusion: Payment of dividend out of capital leads to reduction of capital. But reduction of share
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capital cannot be done without observing some legal formalities as per section 66 of the Companies
34
Act, 2013.
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Payment of dividend out of capital has not been made legally permissible for protecting the
interest of creditors who should have priority over shareholders in respect of getting back capital.
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Moreover, allowing that practice would not have been in the interest of growth and survival of the
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company.
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The profit which is earned in the normal course of business is called revenue profit. This profit arises out of
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On the other hand, the profit which does not arise in the normal course of the business is called capital profit.
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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.
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• The capital profit must exist as surplus after revaluation of all assets and liabilities.
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• Other capital loss, if any, must be compensated and payment of dividend out of capital profit
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must 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 business
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in any way. 88
3. Commercial Expediency: The earning of capital profit does not reflect the actual profitability of
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the company. It is a kind of windfall gain and is not expected to recur. So, it would not be very
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prudent to pay dividend out of capital profit. Rather, this profit should be kept in the business for
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adjusting future capital loss, setting off loss on issue of shares and debenture of simply for
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Payment of dividend out of profit without writing off depreciation on fixed assets
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Fixed assets are those assets which are intended to be used in the business over a long period of time. They
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are not meant for resale. Now the question whether dividend can be paid out of profit without providing for
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Whether dividend can be paid out of current profit without setting off past losses can be discussed under the
following three heads.
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1. Judicial decisions: The question was dealt in various legal cases long back. But in those cases,
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somewhat lenient view was taken by the learned Judges. They did not make the writing off past
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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
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that the company might right up its assets as a result of a bonafide revaluation and might divide
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current profits without making good past losses. The same view was expressed by the learned
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Judge during the course of his judgment in Stapley Vs. Read Bros. Ltd (1924)
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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
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29th May, 2015, no company shall declare dividend unless carried over previous losses and
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depreciation not provided in the previous year or years are set off against profit of the company for
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3. Business prudence: The existence of debit balance in the profit and loss account means that capital
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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
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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.
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should examine the recommendations made by the shareholders in respect of rate of dividend and
subsequent approval of shareholders in general meeting.
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(d) Verification of the rate of dividend: He should examine whether the account showing total amount
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payable as dividend has been correctly shown calculated on the basis of paid-up capital and the rate of
dividend has been correctly determined.
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(e) Determination of net dividend payable: If the dividend is not tax-free, then different types of
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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.
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(f) Verification of Dividend Register: He should check the Dividend List with the help of Register of
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Members in order to ascertain that the total amount of dividend payable has been correctly calculated.
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(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 from
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General Bank Account to this Specific Bank Account. Then, he should check the Bank Pass Book of the
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Dividend 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
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warrant has been posted within 42 days from the date of declaration.
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(i) Verification of Unclaimed Dividend : He should ensure that dividend remaining unpaid has been
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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
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(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 unclaimed
dividend 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.
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Section 123(3) of the Companies Act, 2013 has permitted the Board of Directors of a company to declare
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interim dividend during any financial year out of the surplus in the profit and loss account and out of the
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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
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financial year, up to the end of the last quarter before the date of declaration of the interim dividend, then the
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rate of interim dividend shall not exceed the average rate of dividends declared by the company during the
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last three financial years.
Factors to be considered in a decision on interim Dividend
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Interim dividend is declared and paid before the end of accounting year. The management is then yet to
know the results of operations of the business. Therefore, a great deal of care and caution should be taken by
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the management before taking such decision. It has to be ensured that payment of such dividend does not go
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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
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payment of interim dividend. For this purpose up – to date interim accounts, should be prepared
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and got audited by the auditor. It should be noted that in pursuance of Sec. 123(1), depreciation for
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the full year should be charged and some percentage of profit as deemed necessary should be
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ii. What is the expected amount of profit to be earned during the rest of the accounting year? Any
possible 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 capital
position. 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 and
what 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 interim
dividend should always be kept lower than final rate of dividend.
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2. Obtaining list: The auditor will obtain a statement from the company showing the names of
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shareholders, number of shares held by each and the amount of unpaid or unclaimed dividend to
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be paid to each person.
3. Examination of amount: The amount shown as unpaid dividend should be vouched with reference
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to members’ register, dividend register, bank pass book, returned cheque or dividend warrant, etc.
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he will ensure that amount shown in unpaid dividend account has been correctly ascertained.
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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
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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.
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5. Examination of interest and fine: If the company fails to transfer the unpaid dividend to a special
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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 provided
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in accounts.
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6. Disclosure: The auditor will ensure that unpaid dividend has been disclosed in the balance sheet
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under the head “Other current Liabilities” or “Other Non-current Liabilities” depending upon
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whether they have remained unpaid for a period up to one year or more.
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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.
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about the financial position of the business. The facts or information are to be presented in the report in
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unambiguous language so that nobody will face any difficulty to make it out. He should never present such an
34
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
30
information, then it appears that the auditor does not discharge his duties properly. In other words, he cannot
88
discharge his duty by supplying the source of information. If he does so, he will do at his peril and runs the
(9
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
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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 resulted
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into heavy losses to the bank and its consequent liquidation. The auditor of the Bank was fully aware of the
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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 report
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he merely stated, "The value of the assets shown by the Balance Sheet is dependent upon realisation." From
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such type of remark nothing can be known properly in respect of the assets of the business. It can only arouse
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curiosity to know more information. In fact, the auditor should have to mention in his report clearly as to
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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.
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to such third party and so, he
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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
34
shares of the company on the basis of such a misleading statement even though there might not have been
30
privity of contract between the two. The Institute of Chartered Accountants in England and Wales also feels
88
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
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part of the auditor. Even if there is no contractual obligation between the auditor and die third parties, the latter
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can sue the auditor if his report is of such a nature as amounts to fraud. Though the action for negligence
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cannot be brought against him, but sometimes the negligence may amount to fraud and he may be sued for
AS
that.
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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
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(i) London Oil Storage Co. Ltd. vs. Seear Hasluck & Co. (1904): From the facts of the case, it is known
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that in view of not verifying petty cash in hand an action was brought against the auditor. It was held that if the
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auditor fails to verify the various assets shown in the Balance Sheet, he shall be held liable for negligence of
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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.
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86. Outline the provisions of the Companies Act relating to
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branch audit.***
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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 –
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In case of local branches: 88
(a) The company’s Auditor u/s 224, or
(b) A person qualified for appointment as an auditor u/s 226.
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(a) Apart from persons eligible to audit local branches, an accountant duly qualified to act as an
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auditor in accordance with the laws of the foreign country in which the branch office is situated can
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conduct audit.
In the 2013 Act, no separate section has been introduced for audit accounts of branch office. Section 143
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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.
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Thus, the company auditor appointed u/s 139 or any other person qualified for appointment under section
141 can be appointed as branch auditor.
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2. Appointment of persons other than company auditor as Branch Auditor [Sec. 228(3) (a) ]:
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(a) General Meeting: The decision to appoint any person other than the Company Auditor as Branch
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by the branch auditor in such manner as he considers necessary.
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5. Exemption from audit of branch [Sec. 228(4)]:
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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 if
30
it satisfies the following conditions – 88
(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 of
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1. Rs. 2, 00,000
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When more than one Firm/Individual are appointed to conduct a statutory audit, it is called Joint Audit. In
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other words joint audit implies statutory audit of a firm conducted by more than one statutory auditor. It is
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the usual practice of big companies and corporations with divergent and widespread activities to appoint
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several Chartered Accountants as joint auditors. Joint audit ensures pooling together the resources and
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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,
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“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 audit
becomes 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 firms
which 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.
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auditors.
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3. Documentation: The division of work among Joint Auditors as well as the areas of work to be
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covered by all of them should be properly documented and preferably communicated to the
entity.
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B. Co-ordination 88
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
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writing.
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i. In respect of audit work divided among the joint auditors, each joint auditor is responsible
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auditor concerned.
iii. When the audit work is not divided among the joint auditors and is carried out by all, the
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v. All the joint auditors are jointly and severally responsible for examining that the financial
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statements 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 bound
by majority view.
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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
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members know his opinion on the reliability and fairness of financial statements.
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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
34
financial statements. The audit report should be clear, unambiguous and specific. As it was held by Lord
30
Justice Lindley in London and General Bank case (1895) an auditor who gives the shareholders “the means
88
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
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have been prepared in accordance with an acceptable financial reporting framework applicable to the entity
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and in compliance with the relevant statutory requirements and whether they reflect a true and fair view
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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 and
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he believe that this has a substantial impact on the financial statements, he should state that in his report.
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While preparing the audit report, the auditor should keep in mind what information it should contain. SA
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700, Forming an opinion and Reporting on Financial Statements issued by the Institute of Chartered
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Accountants of India has stipulated some basic elements to be included in the auditor’s report. So, the auditor
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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 facts
he 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.
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may not be made for an
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accounting period.
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Nature Audit report is an independent and In certification the auditor has to
unbiased opinion expressed by the verify certain exact facts. As he
30
auditor on the reliability and fairness is concerned primarily with
of financial statements. He has to 88 arithmetical accuracy, there is
consider numerous professional very limited scope to apply logic
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pronouncements and apply logic and and judgement.
judgement on several subjective
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conclusion.
3. Responsibility The auditor may not be held Certification gives guarantee
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reasonable skill and care in his audit auditor will be held responsible if
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certification.
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4. Parties Concerned Audit report is meant for all the Certificate is usually sought by
stakeholders of the entity namely external parties namely
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(f) Logic based : His assertion regarding any matter should be based on logic and not on mere hypothesis
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(g) Objectivity: It is needless to say that the report should be based on objective evidence. Opinions
34
formed on the basis of information and evidence not measurable in terms of money should not be placed
in the audit report.
30
(h) Relevant: The report should disclose all relevant informations which are supposed to be known by the
88
users but are not contained in the financial statements disclosures.
(i) Consistency: Consistency in presenting accounting information should be observed. An audit report will
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be considered good if it takes into consideration as to the consistency in adopting the method of
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valuation of assets.
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(j) Mention of condition: If the report is a qualified one, the reasons for qualifications should be clearly
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(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.
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(l) Pointing mistakes: The report should highlight all material misstatements appearing in the financial
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statements,
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(m) Brief: The audit report should be brief and to the point. However, conciseness should not be at the cost
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of clarity.
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(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.
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statements without any reservation, his report is called clean or unqualified report. It is generally written as
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‘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,
34
working results and cash flows…’ An auditor makes a clean or unqualified report when he is satisfied with
30
various matters such as,
i. He has got reasonable evidence in support of all material transactions;
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ii. All entries have been passed according to generally accepted accounting principles and
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relevant accounting standard;
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v. The information presented in the financial statements is relevant, reliable, comparable and
understandable;
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When an auditor expresses is opinion in his audit report subject to some reservations he is said to have
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qualified his report. In other words, his assertions in the qualified report regarding fairness of financial
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statements depend upon some conditions. As for example, if the auditor does not agree with his client
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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
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reports. The reason of giving such partial report should be indicated in the audit report.
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92. Discuss the elements of auditor’s report as specified by
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Standard on Auditing.**
30
According to SA 700 (revised), “Forming an opinion on the Financial Statements”, the auditor’s report shall
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be in writing. It has mentioned the following elements of Audit Report.
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1. Title: The auditor’s report shall have a title that clearly indicates that it is the report of an
independent auditor.
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2. Addressee: The auditor’s report shall be addressed as required by the circumstances of the
engagement.
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iii. Identify the title of each statement but comprises the financial statements;
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iv. Refer to the summary of significant accounting policies and other explanatory information;
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and
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v. Specify the date or period covered by each financial statement comprising the financial
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statements.
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.
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state in his report whether in his opinion and to the best of his information and according to the
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explanation 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;
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ii. In the case of Profit and Loss Account, of the profit or loss for the year;
30
iii. In the case of the cash flow statement, of the cash flow for the year.
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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
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belief were necessary for the purpose of his audit and if not, the details and the effect of such
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3. Proper Books of Account [Sec. 143(3)(b)]: The auditor’s report shall state whether, in his opinion,
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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
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4. Branch Auditors Report [Sec. 143(3)(c)]: The auditor’s report shall state whether the report on the
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accounts of any branch office audited by a person other than the company’s auditor has been
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forwarded to him and how he has dealt with the same in preparing his audit report.
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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 with
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prescribed under the Companies (Auditor’s Report) Order (CARO) 2015.
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14. Other matters to be included in the auditor’s report: As per Rule 11 of the Companies (Audit and
34
Auditors) Rules, 2014, the auditor’s report shall also include the auditor’s views and comments on
30
the following matters, namely.
i. Whether the company has disclosed the impact, if any, of pending litigations on its financial
88
position in its financial statement;
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ii. Whether the company has made provision, as required under any law or accounting standards,
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for foreseeable losses, if any, on long term contracts including derivative contracts;
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iii. Whether there has been any delay in transferring the required amounts to the investor
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should reflect a true and fair view of the state of affairs and profit & Loss of the company respectively.
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However, the term “True and fair view” has not been defined in the Act. It is supposed that Financial
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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
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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 the
phrase “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.
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accounting principles.
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vi. Accounting principles and procedures which were followed in the previous years have also been
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followed in the current year.
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vii. Events occurring after the balance sheet date but before submission of audit report have been duly
considered in financial statements when they are likely to influence the decision of users.
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viii. Financial Statements are conveying information unambiguously. As has been held in many legal
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cases Financial Statements should give information and not means of information.
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So, 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
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account. Rather, he should conduct audit more analytical to ensure that Financial Statements as prepared by
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management can really cater to the information needs of outside users sincerely and fairly.
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The concept of materiality plays a very significant role in the entries process of accounting. It is considered
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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
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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 concept
of 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.
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5. Comparison with Previous year’s figure: Very often comparison with previous year’s corresponding
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figure throws light about the materiality of an item. For example, other income of Rs. 1.0 lakh this
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year may appear material when compared with previous year’s other income of Rs. 10 lakhs.
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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
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as remuneration in excess of statutory limits may be material. Similarly, a small inaccuracy may be
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considered material if it creates or eliminates a prescribed solvency margin.
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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
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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
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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
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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.
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Unit 7:
Other Trust Areas (Marks 10)
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)
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statements to report on true and fair view of cost of production and to highlight areas of inefficiency and
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wastage, extent of underutilization of capacity and causes of production bottlenecks.
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Objectives of Cost Audit:
30
The objects of cost audit are two folds which have been discussed as follows:
A. General objects: 88
i. To see whether there is any error of principle of cost accountancy and frauds committed in
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cost accounts.
ii. To verify the correctness and propriety of recorded events and transactions in the cost
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records.
iii. To see that value of closing finished stock and work in progress have been correctly
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ascertained.
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iv. To ensure that total costs of each product, process and operation have been correctly
ascertained.
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v. To help the management by bringing their notice to inefficiencies and wastages in the use
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vi. To see that data and information furnished to various Government Agencies are authentic
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and reliable.
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vii. To see whether actual costs incurred are within budget or standard and to exercise control
over 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 providing
necessary counseling for increasing productivity.
ii. Price fixation and price control: To enable the Government to exercise control over
product price by providing necessary cost data.
iii. Better utilization scarce resources: To ensure optimum utilization of scarce resources of
the country by suggesting change in product mix.
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The need for audit of cost accounts is now being growingly felt in industry. It has got vast potentiality
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particularly in the context of wastage and inefficiency, under – utilization of capacity, low productivity,
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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
30
financial audit has great role to play in its respective field, cost audits acts as an effective tool of control in
88
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
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rendered by it:
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i. Increasing productivity: Cost audit highlights wastage and inefficiency in the manufacturing
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operation of the business. It also emphasizes on the optimum capacity utilization. This leads to
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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
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iii. Utilization of resources in alternative channels: By showing the best alternative avenues for
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iv. Setting of standard: The audited costs can be used by associations of various industries for
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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.
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regarding cost audit.**
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Provisions of the companies act, 2013 regarding cost audit:
The Companies Act, 2013 has made following provisions relating to cost audit.
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1. Maintenance of Cost Records: As empowered by Subsection (1) of Section 148 of the Companies
88
Act, 2013, the Ministry of Corporate Affairs issued Companies (Cost Records and Audit) Rules, 2014
which was effective from 1.4.2014. But these Rules were very complicated and difficult to
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implement in many large companies because of providing for a stringent threshold in terms of net
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worth or turnover of companies. So, in order to do away with this situation, the Ministry has
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subsequently issued Companies (Cost Record and Audit) Amendment Rules, 2014 on 31.12.2014
AS
The amendment has required companies engaged in the production of goods and services as
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mentioned 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 immediately
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i. Every company under regulated sector shall get its cost records audited if the overall
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annual turnover of the company from all its products and services during the immediately
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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.
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ii. The company shall inform the cost auditor of his or its appointment and file a notice of
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such appointment with the Central Government within a period of thirty days of the Board
34
meeting in which such appointment is made or within period of 180 days from the
30
commencement of a financial year, whichever is earlier, through electronic modede in form
CRA-2. 88
iii. The cost auditor shall continue in such capacity till the expiry of 180 days from the closure
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of the financial year or till he submits his cost audit report.
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7. Duties and Powers: The rights and duties of the cost auditor are same as enjoyed by the statutory
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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
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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
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As per subsection (7) of section 148, the Central Government may ask the company to furnish
further 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
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Management audit
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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
34
efficacy and soundness of management to lead the business to its goals. It critically reviews all aspects of
30
management performances and prescribes ways and means for its improvements. Sometimes management
88
audit has been described as Board level audit so as to distinguish it from below Board level audit which is
called operation audit.
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objectives
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To assist the management in running the administration most efficiency and effectively.
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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 that
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To pinpoint the problems causing ailment of the company and to recommend how to overcome
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them.
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To assist the management in better corporate governance practices so that shareholder’s wealth
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remains 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 about
harmonization between them.
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reliability and fairness of cost records and see whether the company is being run
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cost statements. efficiently or inefficiently, prudently or
34
imprudently and to show ways and
means of improvement of performance.
30
Periodicity Cost audit, if ordered by the Central Management audit is not done for any
Government is to be conducted for the
88 such fixed period. It may cover from one
particular year specified in the order. to three or four years.
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Statutory provision Cost audit, is conducted as per section 233 There is no such provision of
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Government.
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Reporting Since cost audit is conducted as per order of As management audits is conducted at
Central Government, its report is submitted the behest of management, its report is
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to the central government with a copy to submitted to the management for their
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Coverage Cost audit is mainly concerned with Management audit may cover all
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Provision of Income Tax Act, 1961 for Tax Audit u/s 44AB
The provisions for compulsory tax audit u/s 44AB are as follows:
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1. Applicability: Tax audit is compulsory for the following categories of assessee:
30
i. Assessee carrying on any business whose total sales turnover or gross receipts exceed
Rs.1.00 crores in the previous year 88
ii. Assessee carrying on profession where gross receipts in the previous year exceed Rs. 25
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lakhs
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iii. Assessee carrying on business referred to u/s 44D, 44AE, 44AF, 44BB, 44BBB, and declaring
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2. Qualification to conduct tax audit: The audit shall be conducted by an ‘Accountant’ as explained
u/s 288 of the Income Tax Act, 1961. This Section defines accountant as follows:
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i. A Chartered Accountant within the meaning of the Chartered Accountants Act, 1949
holding certificate of practice
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ii. Auditor of a company under section 226(2) of the Companies Act. It is to be noted that by
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the virtue of a resolution of the council of the Institute of Chartered Accountant of India,
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with effect from 1.4.2005, a member in part-time practice is not entitled to perform tax
audit.
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A. In case of a person who carries o Form No. 3CA Form No. 3CD
business profession and who is require
by or under any law to get his accoun
audited
B. In case of a person who carries o Form No.3CB Form No. 3CD
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business or profession but not being
56
person referred to above
34
30
102. What is social audit? What are its objectives?******* 88
The functioning of a firm in the society involves social costs. There are some social costs or detriments to
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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
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pollution of environment, spread of diseases, dislocation of inhabitants of a locality etc. So it is but natural to
AS
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
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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
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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)
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Committee on Accounting for Corporate Social Performance has identified four major areas of social
performance on which the auditor should compile data and information for assessment:
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(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 of
environmental pollution, spread of diseases, depletion of scarce natural resources etc.
(d) Product or service contribution: Activities such as consumer protection, product safety, warranty
provision and product quality.
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9. To see that employer and employee relationship is good and congenial.
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10. To ensure that the company is not adopting any unfair trade practices.
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11. To see that adequate compensation has been paid to the inhabitants displaced due o the establishment
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of units by the company.
12. To verify whether adequate measures for community development have been taken by the entity.
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103. What are the advantages of Social Audit?**
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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
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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
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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
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3. Prevention of unfair trade practice: The unfair trade practices, if committed by a business, will be revealed
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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.
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9)
(ii) To see whether the social costs incurred due to manufacturing process of the firm is more than offset
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by the social benefits rendered by it.
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(iii) To check that costs incurred for environmental protection are not mere wastage of money but are
helping to keep the environment clean and pollution free.
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(iv) To see that natural resources are not being extracted and consumed in the way detrimental to the
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society.
(v) To control the costs incurred on procuring the natural resources and ensure that they have been
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properly classified.
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(vii) To ensure that standard environmental practices are being followed by the firm.
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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
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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
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acceptable limit.
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(2) Maintenance of Ecological Balance: Very often industrial activities lead to extinction of many living
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things. This is happening due to ecological disbalance caused by industrial pollution. Bhopal gas leak,
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Chernobyl disaster, Oil spill off the British South Coast etc. are the examples which destroyed many
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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.
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9)
(i) To see that all expenditures have been incurred in the best interest of the company.
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(ii) To ensure that an expenditure is not prima-facie more than what it should be under the given
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circumstances.
(iii) To look into whether the important business decisions taken by the management are in conformity
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with generally accepted customs and standard of conduct. In other words, propriety audit verifies
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whether any executive is directly or indirectly benefitted from a business decision taken by him.
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(iv) To see that no allowance such as travelling allowances or medical allowance is being used as a source
of profit by an executive.
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(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.
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(vii) To ensure that transactions can protect the capital of the entity and do not result in wastage of
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resources.
Importance of Propriety Audit:
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The importance of propriety audit need not be over-emphasized. The present business world is characterized
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by separation between management and ownership. Now the persons entrusted with the responsibility of the
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management of the business come for a short period of time. After the expiry of the contractual period, they
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leave the organization without taking any responsibility for their past decisions. So it is not uncommon that
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top executives get involved with various types of scam for personal gains. Under this circumstance, propriety
audit 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 as
they take in respect of their personal activities.
(v) By ensuring honesty and sincerity in business activities, it improves productivity and profitability of the
business.
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.
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9)
see whether:
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(i) Staff partners are balanced i.e. there is neither overstaffing nor understaffing.
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(ii) Right persons have been placed at right jobs.
(iii) Incentive scheme is linked with efficiency.
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(iv) Overtime is within acceptable limit. 88
(v) Accumulation of work is due to any bottleneck or non-availability of resources.
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(vi) Productivity is monitored by management regularly and necessary steps are taken by management for
improvement of productivity.
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(vii) Quality of jobs is as per customers requirement. This can be verified with reference to customers
complains, number of rejections etc.
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By examining the above areas, performance audit brings to light various inefficiencies and loopholes in the
performance of the business.
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(iii) To identify those areas responsible for low productivity and profitability.
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9)
Group – B
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4. (a) What do you mean by audit evidence?
(b) Discuss its importance.
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(c) What are the various procedures of obtaining audit evidence?
30
Or
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What essential steps are involved in conducting the audit of a hospital?
5. (a) What is internal audit?
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(c) State with references to the relevant SA to what extent should a statutory auditors rely upon
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internal audit.
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(c) Debtors
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Or
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9)
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34
30
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Group – A
1. What is an Audit? State the objectives of an Audit
Or
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Explain Auditor’s duty regarding prevention of errors and frauds.
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2. Distinguish between continuous audit and periodical audit.
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Or
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What is Interim Audit? State its advantages. 88
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3. Define Audit Working Papers. Who is owner of Audit working Paper?
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Group – B
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Or
What do you mean by Audit Evidence? What are the sources of Audit Evidence? How are Audit
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Evidence collected?
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Or
Define Internal Audit. Distinguish between internal check system and Internal audit.
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8. What do you mean by Audit Report? What are the different types of audit report?
Group – C
9. Discuss the qualification and disqualification of a company auditor as per the companies act,
2013.
Or
Explain the provisions of the companies Act, 2013 for declaration and payment of dividend.
9)
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34
30
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AS
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2020
AUDITING AND ASSURANCE — HONOURS
Paper : CC-5.1 Ch
Full Marks : 80
Group - A
9)
Answer any four questions.
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1. Define auditing. State objectives of independent financial audit. 4+6
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2. Distinguish between audit and investigations. 10
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3. What is audit programme? Discuss the advantages of conducting an audit according to a
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predetermined audit programme. 4+6
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4. What are Audit Working papers? What do you mean by ownership of working papers
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5. ‘Vouching is the essence of auditing.’ Do you agree with this statement? Justify your view. 10
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(a) Goodwill
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(b) Investment
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7. What special steps are involved in conducting the audit of an Educational Institution? 10
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9)
(a) Out of capital profit?
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(b) Out of current profit without making good past losses? 10+10
34
30
11. Discuss the significance of the term ‘True and Fair View’ under the Companies Act, 2013.
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Discuss howfar auditor’s duties have increased as its consequences. 10+10
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12. Define Internal Control. State its objectives. Distinguish between Internal Control and
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Internal Audit.
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2020
AUDITING AND ASSURANCE — GENERAL
Paper : CC-5.1 Cg
Full Marks : 80
Group - A
Answer any four questions.
9)
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1. (a) What do you mean by Auditor’s Independence?
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(b) State the purposes of standards on auditing.
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2. (a) Distinguish between Vouching of transactions and Verification of assets and liabilities.
(b) How would you vouch Travelling expenses?
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3. State the provisions of the Companies Act, 2013 in respect of appointment and removal of
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an auditor.
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6. What is an Audit File? How many types of Audit Files are there? What are the documents
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10. State the contents of an Audit Report as per Companies Act, 2013 and the relevant
standards on Auditing.
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(ii) Tax audit.
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12. Prepare an Audit Programme of a hospital.
34
30
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