AUDITING

UNIT I
INTRODUCTION:
The term audit is derived from the Latin word “audire” which literally means “to hear”. In the olden days
whenever the proprietor of a business enterprise suspected a fraud some independent persons were appointed
to hear verbal explanations from those responsible for keeping the books of accounts judge the facts.

Q. WHAT DO YOU MEANT BY AUDITING? (2 MARKS)

MEANING OF AUDIT
Auditing the checking of the transactions of the business with its books of accounts and evidence with a
view to find out the arithmetical accuracy of the accounts the correctness and truthfulness of the transactions
recorded in the books and of their results there on.

Q. DEFINE “AUDIT”. (2 MARKS)

DEFINITION OF AUDIT
According to Lawrence R Dicksee “An audit is an examination of accounting records undertaken with a
view to establishing whether they correctly and completely reflect the transactions to which they purport to
relate”.
According to A W Hanson “an audit is an examination of such records to establish their reliability of
statements drawn from them.

Q. WHAT ARE THE FEATURES OF AUDITING? (5 MARKS)

FEATURES OF AUDITING
1. Auditing is not merely restricted to accounting records but extents to areas such as managerial
Performance cost records etc.
2. An audit examination can only be made by a person who is duly competent for the purpose
3. An audit examination is to be made o the basis of evidential documents such as invoices money receipts
and other records.
4. The object of the audit examination is to enable the auditor to express his opinion as records the truth
and fairness of the financial statements prepared by his client.
5. Detection of errors and frauds is an integral part of auditing.

Q. WHAT IS THE NATURE OF AUDITING? (5 MARKS)

NATURE OF AUDITING
1. An audit is a systematic examination of books accounts documents an voucher of a business with a view
to determine the accuracy and reliability of accounting statements
2. Auditing is analytical critical and investigative.
3. An auditor is required to direct efforts towards proving and establishing the authenticity of the
transactions by vouching all the relevant documentary evidence at his disposal.
4. Auditing does not mean the preparation of accounts.
5. Auditing to verify the valuation of assets and liabilities.

Q. WHAT ARE THE FUNCTIONS OF AUDITING? (5 MARKS)

FUNCTIONS OF AUDITING
• Reviewing systems and procedures of business.
• Examine documentary evidence to establish the accuracy of recorded transaction.
• Reviewing the system of accounting and internal control.
• To verify the valuation of assets and liabilities.
• To examine the mathematical accuracy of accounting statements.
• To verify the distinction between capital and revenue items.
Q. WHAT IS THE PROCESS OF AUDITING? (5 MARKS)
PROCESS OF AUDITING
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 • Accounting statements have been prepared in accordance with the prescribed legal and other
requirements.
• All entries in the books of accounts are fully supported by relevant original documents as also other
evidence if any.
• Entries in the books of accounts have been made in accordance with the recognized principles and
policies of accounting.
• The accounting statements reveals in most clear and certain terms a true and fair view of the business
operations during the given period.
• Performing the audit work and reporting the findings.

Q. DISCUSS THE OBJECTS OF AUDIT. (10 MARKS)

OBJECTS OF AUDIT

I Primary objectives II Secondary objectives III Specific objectives

Detection and prevention Detection and prevention

Of errors and mistakes of frauds

1. Clerical errors: 1. Misappropriations and defalcations:

i) Embezzlement of cash
ii) Misappropriation of goods
• Errors of omission
• Errors of commission
• Compensating errors 2. Misrepresentation of accounts
• Errors of duplication
• Trial balance errors

2. Errors of principle
• In correct allocation
• Omission of outstanding assets and liabilities
• Incorrect valuation of assets

The objectives of an audit broadly are categorized as:

I Primary objectives
II Secondary objectives
III Specific objectives.

I Primary objectives:
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 Expression of independent opinion on accounts. In auditing accounting data the main concern is
with determining whether recorded information properly reflects the economic events that occurred during
the accounting period.
II Secondary objectives:
During the process of an examination of accounts certain errors and frauds may be discussed under
the following two heads:
a) Detection and prevention of errors and mistakes:
The term error in accounting refers to an unintentional misstatement of financial statements. Errors
and mistakes are of various kinds which are as follows
1. Clerical errors:
These errors arise because of mistakes committed by the clerical staff in ordinary course of
accounting work. These are of five types.
• Errors of omission
• Errors of commission
• Compensating errors
• Errors of duplication
• Trial balance errors.
These errors can be spotted during routine checking.
2. Errors of principle:
Errors of principle are those which result from misapplication of or overlooking accounting principles
by and large there are three types of errors generally considered to be errors of principle. These are
• In correct allocation
• Omission of outstanding assets and liabilities
• Incorrect valuation of assets
b) Detection and prevention of frauds:
The term fraud may be defined as internal irregularities aimed at cheating or causing loss to another.
Frauds are often committed by two or more persons acting in collusion with one another. The auditors’
responsibilities for recovering frauds deserve special mention. A fraud may take the following forms.
1. Misappropriations and defalcations:
i) Embezzlement of cash
ii) Misappropriation of goods
i) Embezzlement of cash:
Embezzlement of cash refers to falsification or misappropriation of cash which is very common
especially in case of big business concern as the proprietor has very little control over the receipts and payments
of cash. Cash may be misappropriation in a number of ways as follows
• By omitting to enter receipts
• By entering fictitious payment.
ii) Misappropriation of goods:
Further fraud may also be committed through misappropriation of goods. It is very difficult to detect
misappropriation of goods which is very common especially when goods are not bulky and are of higher value.
2. Misrepresentation of accounts:
Misappropriation of accounts refers fraudulent manipulation or falsification of accounts. This type of
fraud usually involves very large amount and cannot be detected easily by the auditors because it is committed
by those responsible persons who are in top management viz directors, managers, etc.
III. Specific objectives.
o Accordingly there would be specific objectives in respect of each type of such specified audit. For
example in cost audit which is concerned with verification of cost records and examination of cost
accounting procedures.
o The object of audit is to verify the truth accuracy and failures of costing data and to serve as an
effective tool of cost control.
o Similarly in a management audit the aim of audit is to promote the efficiency of managerial
functions and to enhance the operational efficiency besides identifying areas of weakness in
internal control.
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Q. WHAT IS THE SCOPE OF AUDIT? (5 MARKS)
SCOPE OF AUDIT
As per statement on Auditing and Assurance Standards (AAS2) the scope of audit is mentioned below:
The scope of audit is determined by the auditor having regard to
a) The terms of the engagement
b) The requirements of the relevant legislation and
c) The pronouncements of the Institute of Chartered Accounts of India.
The audit should be adequate cover all aspects of the enterprise which are relevant to the financial
statements under audit.
The reliability and sufficiency of the information will be assessed by
a) Study and evaluation of the accounting system and internal controls which are to be relied upon
as to decide the nature extent and timing of audit procedures and
b) Carrying out other necessary tests enquires and verification procedures.
The auditor with a view to form his opinion on the financial statements follows procedures so as to
satisfy himself that the financial statements reflect a true and fair view of the financial position and operating
results of the enterprise.

Q. DISTINGUISH BETWEEN AUDITING AND ACCOUNTING. (5/10 MARKS)

DIFFERENCE BETWEEN AUDITING AND ACCOUNTING
Auditing:
“Auditing begins where accounting ends”. The auditor has to determine whether the recorded information
properly reflects the economic events that occurred during the accounting period.
Accounting:
Accounting is the process of recording classifying and summarizing economic information in monetary
terms. Accounting aims at providing financial information for decision making. The person who performs this
function is called an “Accountant”.
The main point of difference between accounting and auditing may be summarized as below
1. Subject matter
2. Object
3. Hierarchy
4. Nature
5. Expertise required
6. Process.
1. Subject matter:
Accounting is concerned with collection classification and summarization of economic events in a logical
manner for the purpose of providing financial information for decision making.
Auditing on the other hand is concerned with examination or review of financial information so furnished.
2. Object:
The main object of accounting is to know the trading results or state of a business during the accounting
period. Where as the object of audit is to judge the correctness and reliability of financial statements prepared by
the internal staff of the business enterprise.
3. Hierarchy:
Auditing begins where accounting ends. There can be no auditing without the prior existence of accounting
data.
4. Nature:
Accounting is constructive in nature as it measures business events in terms of profit or loss and
communicates the financial condition of the business as depicted by financial statements.
Auditing on the other hand is referred as an analytical and critical aspect of accounting since it reviews the
measurement and communication of financial results and condition of business.
5. Expertise required:
An accountant may not comfortable with audit techniques and procedures but an auditor must be well
versed with the principles and techniques of accounting.
It is this expertise that distinguishes auditors from accountants.
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6. Process:
Accounting is a four step process that involves collection and record, classification, summarization and
communication of accounting information and results thereof.
Auditing on the other hand includes three principal steps viz, preliminary planning, performing the audit work
and reporting the findings. However separation of these steps is not always clear.

Q. DISTINCTION BETWEEN INVESTIGATION AND AUDITING. (5 MARKS)

INVESTIGATION vs. AUDITING
S No Investigation Auditing
1 The investigation of books of accounts Audit is compulsory in case of joint stock companies
and records is not legally compulsory.
2 Investigation is a through investigation In case of audit it is usually carried out in the form of test
of books of account for a particular checking
period
3 Investigation of books of records may Audit of books of accounts is for 6 months or for a full year.
cover 3 to 7 years.
4 The investigation report is prepared The audit report is prepared according to the Act
according to the necessity of situation.
5 It is not necessary that an investigator Auditing can be conducted by a practicing chartered
must be a chartered accountant accountant.
6 The results of investigation are The reports of auditing are widely used.
beneficial only to the client.

Q. DISTINCTION BETWEEN BOOK KEEPING AND AUDITING. (5 MARKS)

BOOK KEEPING vs. AUDITING
S No Book Keeping Auditing
1 Book keeping with recording business Auditing is concerned with examination of accounts.
transactions.
2 It is a routine work This is a difficult work
3 This is done by a clerk or junior This is done by an auditor.
accountant
4 This does not require specific skill This requires specific skill
5 This is done through out the year This is done at the end of the year.

Q. DISTINCTION BETWEEN CONTINUOUS AUDIT AND PERIODICAL AUDIT. (5 MARKS)

CONTINUOUS AUDIT vs. PERIODICAL AUDIT
S No Continuous Audit Periodical Audit
1 The auditor’s staff visit and checks the The Auditors staff visit the business only once in a year after
accounts frequently. the accounts are closed
2 The client staff becomes more efficient It may not be so because client staff known that audit work will
and regular. commence only after the close of financial year.
3 Continuous audit comes to an end with Periodical audit commences after the accounts are closed
close of accounts period
4 Immediately after transaction is Audit staff checks and verifies the transaction after it is
recorded audit staff checks and verify it recorded
5 It is very expensive. It is more economical then continuous audit

Q. DISTINCTION BETWEEN CONTINUOUS AUDIT AND BALANCE SHEET AUDIT. (5 MARKS)

CONTINUOUS AUDIT vs. BALANCE SHEET AUDIT
S No Continuous audit Balance sheet Audit
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 1 In continuous audit the auditor or his In balance sheet audit the auditor attends only at the end of
staff is constantly engaged in checking financial period.
the accounts during the whole period.
2 It is detailed and extensive checking of It is the audit the work is not done in so much detail.
accounts is done
3 Continuous audit work is done of big This type of audit is recommended for small business
business concern. concern.
4 Continuous audit involves more Balance sheet audit is comparatively cheap
expenses
5 Continuous audit creates more moral In balance sheet the normal check upon the client staff is
check upon the clients staff comparatively lesser.

Q. DISTINCTION BETWEEN CONTINUOUS AUDIT AND INTERIM AUDIT. (5 MARKS)

CONTINUOUS AUDIT vs. INTERIM AUDIT
S No Continuous audit Interim Audit
1 The object of continuous audit is not to The object of interim audit to ascertain and check the profit
ascertain the profit or loss of the or loss for a given period.
undertaking for the given period.
2 In the process of continuous audit the In interim audit accounting records up to a certain date only
accounting records one accounting or are checked.
financial year is examined.
3 In continuous audit detailed and In interim audit a detailed and extensive checking of books
extensive checking of books of of accounting is not done.
accounts is done.
4 In continuous audit the trial balance is In interim audit the trial balance must be prepared and
not prepared at intervals. checked at the time of such audit.
5 The auditors report is submitted at the The auditor report is submitted at the time of audit.
end of the financial year.

Q. DIFFERENCE BETWEEN COMPANY AUDIT AND PARTNERSHIP FIRM AUDIT. (5 MARKS)

COMPANY AUDIT vs. PARTNERSHIP FIRM AUDIT

S No Company audit Partnership firm audit.

1 The audit of company has been made compulsory The audit of partnership firm has not been made
by Indian Companies Act 1956. compulsory.

2 In case of company audit the auditor must be a In case of partnership audit the auditor need not
chartered accountant. to posses any professional qualification.

3 In case of the audit of accompany it is necessary to In case of the audit of a firm it is not necessary to
give full knowledge about MOA and AOA of the present the partnership deed between the
company to the auditors. auditors.

4 In case of the audit of a company the auditor has to In case of the audit of a firm the auditor has
report to members of the company. report to the partners of the concern.

5 In case of the company audit the liability of the The auditor of a firm is liable only for negligence
auditor become double one under common law and and not for misfeasance.
the other companies Act.

Q. DISTINCTION BETWEEN CONTINUOUS AUDIT AND INTERNAL AUDIT. (5 MARKS)

CONTINUOUS AUDIT vs. INTERNAL AUDIT
S No Continuous audit Internal Audit
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 1 The object of continuous audit is to The main of object of internal audit is to fulfill the needs of
present the correct and fair financial management
statement of the concern of the share
holders.
2 Continuous audit is an independent Internal audit is an integral part of existing internal control
examination of work. system in the concern.
3 It is done by an independent and Its done by the internal auditor is the employee of the
professional auditor. concern.
4 In continuous audit the auditor is In internal audit the auditor responsible to management.
responsible to share holders.

Q. EXPLAIN THE DIFFERENT KINDS/TYPES OF AUDIT. (10 MARKS)

KINDS/TYPES OF AUDIT
An audit examination can be broadly be classified on the following three bases:
I Classification on the basis of the Organizational structure.
II Classification based on timing and scope of audit procedures.
III Classification on the basis of specific objectives behind audit.
CLASSIFICATION OR KINDS / TYPES OF AUDIT
_______________________________________↓___________________________________
↓ ↓ ↓
On the basis of on the basis of on the basis of
Organizational structure timing and scope of specific objectives
↓ Audit procedures ↓
↓
1. Statutory Audit 1. Continuous Audit 1. Cost audit
2. Private Audit 2. Internal Audit 2. Special Audit
3. Government Audit 3. Interim audit 3. Tax Audit
4. Final or periodical audit 4. Management Audit
5. Balance sheet Audit 5. Operational Audit
6. Human Resources Audit.

I. Classification on the basis of the Organizational structure:

This type of classification is based on the organizational structure of business undertaking under audit.
The types of audits to be conducted for various organizations therefore should fall under the following categories.
1. Statutory audit:
Where undertakings are formed under the statute or laws, audit for such undertakings is made compulsory
under the statutes that govern them.
An audit undertaken under any statute or law is called statutory audit. A qualified external auditor can conduct a
statutory audit.
2. Private audit:
Private audit is one that is not mandatory under any statute or law. It is undertaken by the enterprises in
view of the several benefits resulting from it.
Various types of private audits are as follows:
a) Audit of sole proprietorship:
Audit of accounts of sole proprietary is optional. Such type of business is owned, managed and controlled
exclusively by an individual.
b) Audit of partnership firm:
The Partnership Act 1932 does not require a partnership firm to get their financial statements audited.
The auditor should draw attention on the following points and documents at the time of auditing the accounts of
a partnership firm:
• Partnership Act 1932
• Partnership deed which is the most important document
• Nature of business
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 • Name and address of the all partners
• Capital introduced
• Partners sharing profits ratios, salary, commission to partners to partners if any.
3. Government audit:
• The government offices, departments, undertakings registered as companies are also subject to
independent financial audit.
• Usually a statutory auditor appointed by the Central Government on the advice of the comptroller and
auditor general of India audits accounts of government companies.
Objectives of government audit:
The main objectives to conduct government audit are:
• To produce maximum results to the public from minimum input.
• To ensure that financial working of all government is in public interest.
• Finally to ensure that public funds are not misused.
II Classification based on timing and scope of audit procedures:
Under this classification important types of audit are as follows:
1. Continuous Audit:
A continuous audit is one where the auditor is required to examine the books of accounts of a business
concern at regular intervals say weekly fortnightly, quarterly or as per the requirement of the management and
quantum of work. He checks the books of account to date as far as possible. It is also known as “running audit”.
Advantages:
• Sufficient time at the dispose of auditor
• Easy rectification of errors
• Tools of moral check
• Ready reference
Disadvantages:
• Possibility of tampering with accounts by the clients staff
• More expensive
• Causes inconvenience
2. Internal Audit:
Internal audit as the term implies is an audit conducted with in the organization by an internal auditor
appointed by the management of an enterprise.
Internal auditors work assists the external auditor in fixing the extent of necessary tests.
Internal auditor has to report to the management.
3. Interim audit:
Interim audit is one that relates to an interim period and not to the full accounting year. It is conducted
between two regular audits. It lies between final audit and continuous audit.
Distinction between interim audit and internal audit:
The difference between interim audit and internal audit can be summarized as below
a) Interim audit is undertaken by an independent auditor whereas internal audit is normally
conducted by internal staff of the enterprise.
b) Interim audit can be initiated at any time during the financial year but internal audit is a part of
routine work.
4. Final audit or periodical audit:
• A final audit is one where the auditor undertakes the audit work at the end of the financial year.
• In such a case the audit work commences after all the account are closed and balance sheet and
trading and profit and loss account are prepared.

5. Balance sheet audit:

Balance sheet audit originated in United States implies a critical review of a balance sheet. It is a procedure
in which the figures as stated in the balance sheet are taken as a base and their authenticity is verified from the
records.It involves the checking of value of fixed assets, current assets, liabilities, balance of reserves and
provisions surplus etc.
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III Classification on the basis of specific objectives:
1. Cost audit:
Cost audit as the expression implies is an audit of cost accounting record. It has been defined in various
ways.The Chartered Institute of Management Accountant of UK defines it as “the verification of the cost accounts
and a check on adherence to the cost accounting plan’.
2. Special audit:
According to section 233 A of the companies Act 1956 the central government may at any time by
order direct that a special audit of a company accounts for such period or periods as may be specified in the order
shall be conducted. The company’s statutory auditor to conduct such special audit.
3. Tax audit:
The Income Tax Act 1961 provides for compulsory tax audit of the books of accounts of every person
carrying on business or profession with turn over or grosses receipts in respect of such business exceeding Rs 40
lakhs and incase of profession exceeding Rs 10 lakhs in any previous year.
4. Management Audit:
Management audit refers to critical and analytical examination of the performance of different
managerial functions in an organization.
It involves a critical review of all aspects of the process of management.
5. Operational audit:
Operational audit aims at improving the over all performance of a business undertaking by improving
future business operations carried out by the management.
6. Human Resource (HR) audit:
A human resources audit reviews an organizations policy, procedures and practices concerning human
resources.Its purpose are to examine the techniques and practical dimensions of the HR function and to create a
comprehensive system that adds value to the organization.

Q. DISCUSS IN BRIEF THE ADVANTAGES OF AUDITING. (5 MARKS)

ADVANTAGES OF AUDIT
Audit is useful for every business organization. Some of the important advantages are given below,
1. Detection and prevention of errors and frauds become easier:
Audit helps a business to detect and prevent the frauds and errors. Errors and frauds can be located and
rectified at an early and initial stage.
2. Acceptability by the authorities:
Audited accounts are readily acceptable by the Income Tax, Sales Tax, and other authorities.
3. Professional advice available:
Independent auditors also render services other than auditing. They do tax work act as management
consultant’s advice on internal control system in operation.
4. Speedy processing of loan:
Financial institutions consider audited accounts genuine and this helps them in speedy processing of
loan proposals.
5. Settlement of disputes:
In case of partnership firm disputes among the partners over such matters as profit sharing, settlement
of claims in case of retirement/death of a partner may be less likely to arise when accounts are duly audited. All
partners can easily trust audited accounts.

6. Facilities calculations of net worth and goodwill of business:

In case of sale or take over of business as a going concern by other party audited accounts carry greater
reliability to deciding out of net worth of the business and goodwill.
7. Settlement of Insurance claims:
Audited accounts are likely to have more credibility and this helps in early and easy settlement of
insurance claims in case of losses by fire, misappropriation, embezzlement or any other reason.
8. Useful to compare the financial performance:
Audited financial statements are considered more reliable to compare the financial performance of a
business concern over the years.
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9. Keeps accounts department vigilant:
A regular audit of account keeps the accounts department not only up to date but also careful and
vigilant.
10. Identifies the weak areas:
Audit reviews the internal control system of the audit and identifies the weak areas, which helps
management to get over the weaknesses and achieve their goal within stipulated time and reasonable cost.
Q. DISCUSS IN BRIEF THE LIMITATIONS OF AUDITING. (5 MARKS)
LIMITATIONS OF AUDIT
➢ Auditor may not be in a position to uncover all sorts of manipulations.
➢ As per the companies Act 1956 responsible officer must give true and correct information to auditor who
depends upon the information and explanation given by the company.
➢ Most of the time auditor has to take the information and explanation from the management ad its staff
such as details regarding the stock in hand including finished, semi finished, raw material, scrap etc. Such
information may be incorrect as valuation of stock may be less or more from the actual value.
➢ An auditor is subject to conflicting pressures and sometime he intentionally ignores the actual facts and
reports as desired by the management.
➢ An auditor is said to be a Watch Dog and not a blood hound and every auditor suffers from a per conceived
notion that he has been appointed to safeguard the interest of owners or shareholders instead to work as a
Financial Police Force to prevent the misuse of power and other financial irregularities.
Thus some times an auditor finds it very difficult to achieve the real goal of auditing. Hence in such state of
affairs there is no effective use of audit.
Q. WHAT DO YOU MEANT FOR AUDIT PROGRAMME? (2 MARKS)
MEANING
An audit Programme is nothing but a list of examination and verification steps to be applied set out in
such a way that the interrelationship of one step to another is clearly shown and designed on the basis of an
appraisal of the accounting records of the client.
Q. DEFINE “AUDIT PROGRAMME”. (2 MARKS)
DEFINITION
‘An audit Programme is flexibly planned procedure of examinations”. _ A.W.Holmes
“The Programme is an outline of a procedure to be followed in order to arrive at an opinion concerning
Client’s financial statements”. _ Howard Stettler.
Statement on standard auditing practices * (SAP-8) issued by the Institute of Chartered Accountants
of India in April 1989, suggests that the auditor should prepare a written audit Programme setting forth the
procedures that are need to implement the audit plan.
Q. LIST OUT CONTENTS OF AUDIT PROGRAMME. (5 MARKS)
CONTENTS OF AUDIT PROGRAMME
Generally the preparation for an audit Programme needs the following information:
1. Name of the Company.
2. Nature of operations of the company.
3. A review of the system of internal check.
4. Date of Commencement of audit.
5. Tentative period of audit exercise.
6. Accounting system followed by the company for recording its financial transactions.
7. Preparation of the audit report.
8. Instructions of point of caution as mentioned by previous year’s auditor in his audit report.
9. Schedule of checking of various subsidiary books including journal proper.
10. Schedule of checking of ledger accounts including profit and loss account items and balance sheet
items.
Q. WHAT ARE THE OBJECTIVES OF AUDIT PROGRAMME? (5 MARKS)
➢ To integrate and co ordinate the different parts of audit work.
➢ To ensure the uniformity in the performance of audit work and to avoid duplication of work.
➢ To have a fair allocation of audit job amongst audit staff.
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 ➢ To ensure the completion of audit work within a time frame.
➢ To fix the responsibilities of each member of the audit staff.
Q. WHAT DO YOU MEANT BY ‘AUDIT NOTE BOOK’? (2 MARKS)
MEANING
The audit note book is maintained by the audit clerk. He keeps therein a record of his observations during
the course of any audit work as also the points to be discussed with his senior clerk or the auditor. It is also a
written record of the queries made by him and the replies thereto.

Q. WHAT ARE THE MERITS/ ADVANTAGES OF AUDIT NOTE BOOK? (5 MARKS)

MERITS/ ADVANTAGES OF AUDIT NOTE BOOK
The main merits of an audit note book are as under:
➢ It records all the significant information affecting the audit.
➢ It ensures uniformity and assists in knowing the extent of work completed at a particular point of time.
➢ It serves as a source of information about the audit work and the points which deserve special attention.
➢ It facilitates smooth conduct of audit.
➢ It ensures that the audit Programme has been followed sincerely.
➢ Certain modifications are also possible in audit Programme in case audit staff faces certain
practical difficulties in following the audit Programme.
➢ It helps the auditor in judging the efficiency of his staff.
➢ It may also help the auditor to prove that he has not acted negligently

Q. WHAT ARE THE DEMERITS/ DISADVANTAGES OF AUDIT NOTE BOOK? (5 MARKS)

DEMERITS/ DISADVANTAGES OF AUDIT NOTE BOOK
There are, however certain disadvantages of audit note book, which are given below
➢ It develops a fault finding attitude in the minds of the staff of audit.
➢ It places too much reliance on the staff of the client for its preparation.
➢ If an audit note book is prepared negligently, the client can use it as an evidence of negligence in the
courts of law.
➢ Very often it creates misunderstanding between the staff of the client and the staff of audit.

Q. WHAT DO YOU MEANT BY AUDIT WORKING PAPERS? (2 MARKS)

MEANING
Audit working papers refer to all documents prepared or gathered by the auditor, relating to primarily to
set of accounts being audited and some basic information of continuing importance affecting the company or the
audit. Working papers are the connecting link between the client’s records and the audited accounts.

Q. DEFINE “AUDIT WORKING PAPERS”.

DEFINITION
1. According to the Institute of Chartered Accountants of India, Working papers must include audit
Programme, queries, explanation given for the queries, schedules of important items like depreciation,
inventories, confirmation from third parties, certificates issued by the management, banks etc.
2. According to A.W.Johnson “Audit working papers are the written private materials, which an auditor
prepares for each audit. They describe the accounting information which he received from his client the methods
of examinations used, his conclusions and the financial statements”.

Q. WHAT ARE THE FEATURES OF AUDIT WORKING PAPERS? (5 MARKS)

FEATURES OF AUDIT WORKING PAPERS
➢ It should state a clear audit objective, usually in terms of an audit assertion.
➢ It should fully state the year/period end, so that the working paper is not confused with documentation
belonging to a different year/period.
➢ It should state the full extent of the test.
➢ This will enable the preparer and any subsequent reviewers, to determine the sufficiency of the audit
evidence provided by the working paper.
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 ➢ The working paper should clearly and objectively state the results of the test, without bias and based
on the facts documented.
➢ It should be signed by the person who prepares it so that queries can be directed to the appropriate
person.
Q. DESCRIBE THE VARIOUS TYPES OF WORKING PAPERS. (5/10 MARKS)
TYPES OF WORKING PAPERS
Working papers may normally be divided between the following two file.
1. Current file
2. Permanent file.
I. Contents of current file:
A current file contains information primarily related to the set of accounts under audit during the current
year. Following are some of the examples of audit working papers to be placed in a current file.
➢ Correspondence relating to acceptance of annual appointment.
➢ Evidence of the planning process of the audit and audit Programme.
➢ Analysis of transactions and balances.
➢ Copies of communication with other auditors, experts and third parties.
➢ Letters of representation or confirmation received from the client.
➢ The working trial balance, bank reconciliation statement.
There fore a current file document with all such information required for a single period audit.

II. Contents of Permanent file:

A permanent audit file normally includes:
➢ Information concerning the legal and organizational structure of the entity such as Memorandum and
Articles of Association.
➢ Extracts or copies of important legal documents, agreements and minutes.
➢ Analysis of significant ratios and trends.
➢ Note regarding significant and accounting policies
➢ A short description of the type of business carried on and the places of business.
Thus a permanent file contains papers and information which are of considerable use and importance for
the succeeding audits.
Q. WHAT ARE THE PURPOSE/ OBJECTIVES OF WORKING PAPERS? (5 MARKS)
PURPOSE/ OBJECTIVES OF WORKING PAPERS
The following are the important objects of working papers.
1. Planning, organization, control and review of audit work
2. Support for auditors opinion
3. Division of Labour
4. Use as permanent record
5. Basis for evaluation and training of audit staff
6. Basic for further work

1. Planning, organization, control and review of audit work:

Working papers provide a means of planning, organizing, controlling, administering and review of the
work. They are evidence that the audit was conducted as per the generally accepted auditing standards and
practices.

2. Support for auditors opinion:

Working papers provide the principal support for the report of the auditor. They also provide a proof that
generally accepted auditing standards and practices have been duly followed in the conduct of the work.
3. Division of Labour:
Working papers help in appropriate division of work among the audit staff, in the sense that different
working papers may be made the responsibility of different audit clerks under the supervision of a senior clerk or
the auditor himself.
4. Use as permanent record:
12
 Working papers constitute a permanent record of the auditing procedure employed, and the financial
records examined. The client can make use of altered or lost.
5. Basis for evaluation and training of audit staff:
Working papers provide a means to test whether the auditor and his staff have done their job as per the
required standards.
6. Basic for further work:
In the course of his examination the auditor may come across certain situation or conditions in the pattern
of management of the clients business which though not directly connected with his work and therefore being
outside the purview of his report may never the less be useful in future planning.

Q. LIST OUT CONTENTS or FORM OF WORKING PAPERS. (5 MARKS)

CONTENTS / FORM OF WORKING PAPERS
Auditing and Assurance Standards 3 (AAS3) ‘Documentation’ offers the following guidelines in this
regard:
1. Working papers should record the auditors planning, the nature, timing and extent of the auditing
procedures performed and the auditing procedures from the evidence obtained.
2. Working papers should be suffering completed and detailed to enable an auditor to obtain on overall
understandings of the audit.
3. All significant matters which require the exercise of judgment with the auditor’s conclusion there on
should be included in the working papers.
4. The form and content of working papers are affected by matters such as:
a. The nature of the engagement.
b. The form of the auditor report.
c. The nature of the clients business.
d. The nature and conditions of the client’s records.
5. Working papers should be designed and properly organized to meet the circumstances and the
Auditors need for each individual audit.

Q. WHAT ARE THE BENEFITS OR ADVANTAGES OF AUDIT WORKING PAPERS? (5 MARKS)

Some of the benefits or advantages of audit working papers may be listed as under.
1. Aid in planning and performance of the audit work.
2. Aid in supervision and review of audit work.
3. Provide evidence of the audit work performed to support the auditor’s opinion.
4. Facilitate delegation of work.
5. Maintain secrecy and safe custody of facts discovered during audit.
6. Identify point’s documents, policies or transactions which require particular attention in future.

======================UNIT I COMPLETED ====================

Reference Books:
Principles of Auditing – Ravindra Kumar , Virendra Sharma
Practical of Auditing – S. Sudharsanam, S.Sundharabahu
Auditing –D P Jain

UNIT II
INTERNAL CONTROL
Q. WHAT IS MEANT BY INTERNAL CONTROL? (2 MARKS)
MEANING
➢ Internal control implies the whole system of control employed by the management in order to carry on
the business of the enterprise in an orderly and efficient way by having an automatic check and balance
overall transactions.
➢ It includes internal check, internal audit, and other devices of control.
13
 ➢ Internal control system assures the management that the information it receives is both reliable and
accurate.
➢ The system also helps to ensure that assets are secure and management policy is being followed properly.

Q. DEFINE “INTERNAL CONTROL”. (2 MARKS)

DEFINITION
The American Institute of Certified Public Accountants (AICPA) has defined internal control as “the
plan of organization and all the co ordinate methods and measures adopted within a business to safeguard its
assets, check the accuracy and the reliability of its accounting data, promote operational efficiency and encourage
adherence to prescribed managerial policies. A system of internal control extends beyond those matters which
relate directly to the functions of the accounting and financial departments”.

Q. WHAT ARE THE OBJECTIVES OF INTERNAL CONTROL? (5 MARKS)

OBJECTIVES OF INTERNAL CONTROL
The clients internal control system aims at providing reasonable assurance that:
➢ Records are valid, complete and accurate
➢ Recorded transactions are duly authorized
➢ Transactions are properly classified and valued
➢ Transactions are recorded at proper time
➢ Transactions are properly posted to the ledger accounts and correctly summarized.

Q. WHAT ARE THE DIFFERENT TYPES OR FORMS OF INTERNAL CONTROL? (5 MARKS)

TYPES OR FORMS OF INTERNAL CONTROL
The definition of internal control given by the American Institute of Certified Public Accountants
(AICPA) mentioned earlier, indicates that internal control goes beyond the accounting functions of the
organization and incorporates both accounting and administrative controls
1. Accounting Controls:
Accounting control comprises the following
➢ Budgeting control
➢ Standard costing
➢ Internal check
➢ Internal audit
➢ Bank reconciliation
➢ Self balancing ledgers etc.
2. Administrative Control:
Administrative control comprises the following:
➢ Time studies
➢ Motion studies
➢ Quality control
➢ Performance appraisal
➢ Statistical analysis etc.
Q. WHAT ARE THE FEATURES OF INTERNAL CONTROL? (5 MARKS)
FEATURES OF INTERNAL CONTROL
➢ A clean plan of the organization establishing the line of authority and responsibility and proper division
of work.
➢ A well organized and adequate accounting structure with well laid down rules, procedures and policies.
➢ Men of ability and experience to execute the work well.
➢ Proper system of reporting and communication from lower level management to top management.

Q. EXPLAIN PRINCIPLES OR REQUISITES OF GOOD INTERNAL CONTROL. (5 MARKS)

PRINCIPLES OR REQUISITES OF GOOD INTERNAL CONTROL
➢ A well designed accounting system should be in operation
➢ Too much confidence should not be pinned in one individual
14
 ➢ Rotation principle relating to transfer of an employee from one job to another should be the inflexible
guiding rule.
➢ Mechanization of the work wherever feasible and practicable, should be resorted to
➢ The work should be so arranged that work done by one employee could be promptly checked by another
independent employee.
➢ Clear and well defined rules should be laid down and practically followed relating to dealing of the cash
ordering receiving and issuing goods etc.

Q. WHAT ARE THE ADVANTAGES OF INTERNAL CONTROL? (5 MARKS)

ADVANTAGES OF INTERNAL CONTROL
The following advantages of internal control system are
➢ Minimize occurrence frauds and errors or any other irregularity if not eliminates completely.
➢ Safeguards assets against any misuse.
➢ Promotes operational efficiency and prevents wastages
➢ Judges operating efficiency and highlights weaknesses
➢ Assures a high degree of accuracy.

Q. WHAT ARE THE LIMITATIONS OF INTERNAL CONTROL? (5 MARKS)

LIMITATIONS OF INTERNAL CONTROL
Internal control can offer only reasonable assurance that management objectives are reached. This is because of
certain inherent limitations laid down as under:
➢ A control must be cost effective. The cost of the control procedure cannot be loss due to fraud or error.
➢ Most of the controls are directed to anticipate usual type of transactions and not of unusual type. Therefore
transactions of unusual nature may not fall within the purview of internal control.
➢ The effectiveness of the system is always affected due misunderstanding of instructions. So mush so the
human weaknesses tone down the effectiveness of internal control system.
➢ The employee in collusion with others in the business unit or with third parties may fine out circumvention
of controls.
➢ The effectiveness of controls largely depends on the persons who implement them. If the persons
responsible for exercising controls abuse the responsibility the control system may not have any impact
on the normal working of the business.
➢ The changing circumstances in business environment may cause inadequate in procedural conduct of
business and thereby compliance with procedures may became difficult or deteriorate.
Subject to the above limitations the auditor must satisfy himself that the internal control procedures applied
in the business unit are effective for the needed purpose.

Q. WHAT IS THE SCOPE/AREA FOR INTERNAL CONTROL?

SCOPE/AREA FOR INTERNAL CONTROL
The scope of internal control extends beyond the accounting controls and includes all operational controls as
➢ Quality control
➢ Budgeting control
➢ Work standards
➢ Periodic reporting
➢ Internal check and
➢ Internal audit.

Q. WHAT ARE THE METHODS / TECHNIQUES FOR EVALUATION OF INTERNAL CONTROL

SYSTEM? (5 MARKS)
METHODS / TECHNIQUES FOR EVALUATION OF INTERNAL CONTROL SYSTEM
There are four techniques or methods of evaluating internal controls. These are briefly discussed below,
1. Oral Approach 3. Internal Control Questionnaire (ICQ)
2. Memorandum Approach 4. Flow Charts.
1. Oral Approach:
Oral discussion is held to identify strengths and weaknesses.
15
2. Memorandum Approach:
Full notes are taken during discussions governing evaluation of internal controls. Analysis of weaknesses
is undertaken and suggestions are offered through management letter for improvement.
3. Internal Control Questionnaire (ICQ):
An ICQ consists of questions in respect of each element of business. Answers are obtained as ‘yes’ or
‘no’ ‘not applicable’. Remarks column is used for raising questions and/or identifying weaknesses of the existing
internal controls with a view to removing these some firms use improved and expanded version of ICQ. This is
known as Descriptive System Questionnaire (DSQ).
4. Flow Charts:
Flow charts are a graphic representation of a system in use. It depicts the various operations control
measures and steps included in a system through graphic symbols.
INTERNAL CHECK
Q. WHAT IS MEANING FOR INTERNAL CHECK? (2 MARKS)
MEANING:
Internal check refers to such an arrangement of book keeping routine that errors and frauds are likely to
be prevented or discovered by the very operation of the book keeping itself.
Q. DEFINE “INTERNAL CHECK’. (2 MARKS)
DEFINITION
In the words of De Paula: an internal check means practically a continuous internal audit carried on by
the staff itself, by means of which the work of each individuals is independently checked by other members of
the staff.
Q. WHAT ARE THE OBJECTIVES OF INTERNAL CHECK? (5 MARKS)
OBJECTIVES OF INTERNAL CHECK
➢ To prevent or minimize the chance of errors, frauds or any sort of irregularity that may be perpetrated by any
staff member.
➢ To discover errors and frauds, if any easily by the very operation of the book keeping itself and rectify them
at an early stage.
➢ To ensure the accuracy and credibility of records of business transactions
➢ To keep the employees careful while performing their duties
➢ To improve overall efficiency of the staff by allocating duties on the basis of principles of division work.
Q. WHAT ARE FEATURES OF A GOOD INTERNAL CHECK SYSTEM? (5 MARKS)
FEATURES OF A GOOD INTERNAL CHECK SYSTEM
The following points should usually be included while installing the system of internal check.
➢ All cash received to be deposited in the bank daily. The cahier to have no control over any of the ledgers
➢ All payments other than petty cash payments to be made by cheque what ever the amount my be
➢ All cash and bank balances to be verified weekly or frequently and the facts recorded in a special balance
book.
➢ All ledgers to be rendered self balancing and all trade ledgers to be balanced monthly.
➢ An adequate system of stock amounts and cost accounts to be provided
➢ The calculations of all sales invoices to be checked before they are entered in the books.
➢ A definite system to be setup for dealing with the collection of overdue book debts.
➢ Every member of the staff should be required to take the holiday at least once a year.

Q. EXPLAIN THE MERITS OF INTERNAL CHECK? (5 MARKS)

MERITS OF INTERNAL CHECK
The main advantages or merits of internal check are listed below:
1. Moral influence on employees:
System of internal check puts moral check on members of staff and enables them to learn honesty, hard
work and straight forwardness.
2. Less possibility of frauds:
16
 There is a less possibility of frauds under the system of internal check because errors and frauds can be
detected at an early stage.
3. Increase in efficiency:
The system of internal check ensures greater efficiency and speed because the arrangement of internal
check is based on division of labour.
4. Auditing made easy:
The system of internal check facilitates the work of auditor to a great extent by enabling him to rely on
test checking.
5. Final accounts can be prepared:
In internal check system profit and loss account and balance sheet is prepared without any loss of time.
6. Test checking possibility:
If the auditor finds the system of internal check satisfactory then by taking into mind its defects or weak
points he can take the help of test checking.

Q. WHAT ARE THE DEMERITS OF INTERNAL CHECK? (5 MARKS)

DEMERITS OF INTERNAL CHECK
The defects or weak points of the system of internal check are listed below:
1. Expensive:
The system of internal check is more expensive and time consuming.
2. Slackness in the work:
This is also a serious defect of the system of internal check. The auditor may show slackness in the work.
3. Not suitable for small concern:
The system of internal check is not suitable for small concern as it may be uneconomical in small concern.
4. Grouping among employees:
If the employees of the concern join hands they may keep the employer in dark and may cause many
irregularities defying any detection thereof. This groupism amongst the employees may not be healthy.

Q. EXPLAIN THE POSITION OF AN AUDITOR IN RELATION TO INTERNAL CHECK.

(5 MARKS)
POSITION OF AN AUDITOR IN RELATION TO INTERNAL CHECK
The position of an auditor in relation to internal check can be made clear from the following points:
1. Duties
2. Dependence
3. Liability
4. Suggestions
1. Duties:
➢ No auditor can bind the business concern to adopt the system of internal check.
➢ He should consider carefully the system in force in the concern.

2. Dependence:
The extent to which an auditor may rely upon the system of internal check would depend upon the
effectiveness of the operation of the system and the size of the business.
3. Liability:
➢ An efficient system of internal check reduces the work of the auditor but does not reduce his liability.
➢ In real since the final liability is of the auditor.
➢ He cannot rid of the liability that the system of internal check is faulty.
➢ If the auditor finds that the system in force is not efficient then he should not depend upon test checking
the transactions.
4. Suggestions:
If the auditor finds that the system in force is not efficient then he can give suggestions to avoid the defects
and weak points.

Q. DESCRIBE PROCEDURE OR OPERATION OF INTERNAL CHECK. (10 MARKS)

17
 PROCEDURE OR OPERATION OF INTERNAL CHECK
Operation or conduct of internal check in respect of small and manufacturing concerns and other aspects
of business are explained below

Small Concerns:
1. Correspondence:
All incoming correspondence should be opened by a responsible official.
2. Payment authorization:
All payments should be sanctioned by responsible officials.
3. Wages and Salaries:
Wages and salary sheets/ books should be carefully checked and payments made in the presence of persons
who know the labourers and clerks.
4. Goods:
A complete record of all goods received and sent out should be maintained and physical court should be
carried out at regular intervals.
Manufacturing Concerns:
1. Correspondence:
All correspondence received should be daily opened by a responsible official.
2. Deposits:
All receipts should be banked daily or on the next day and a periodical bank reconciliation should be
prepared.
3. Cash sales:
Cash sales should be adequately supervised.
4. Payment authorizations:
As far as possible all payments should be made by crossed cheques marked ‘Accounts payee only”.
5. Wages:
Payment of wages should be carefully supervised.
6. Petty cash:
Petty cash book should be kept on the imprest system.
7. Purchases:
Purchases should be subject to proper control and all inward invoices should be checked.
8. Credit notes:
Credit notes for returns allowance and bad debts written of should be authorized by a responsible official.
9. Control Accounts:
Sundry creditors and debtors ledger should be checked by control accounts in the general ledger.
10. Stocks and stores:
Periodical physical check should be carried out by a responsible official.

Q. DISCUSS DISTINCTION BETWEEN INTERNAL CHECK AND INTERNAL AUDIT.

(5 MARKS) INTERNAL CHECK Vs INTERNAL AUDIT
S BASIS OF
INTERNAL CHECK INTERNAL AUDIT
NO DIFFERENCE
1. Object The object of internal check is to prevent The object of internal audit is to
errors and frauds. detect errors and frauds.
2. Nature of work In case of internal check the work of In case of internal audit only
recording and checking of entries is carried checking of the recorded entries is
on simultaneously with the help of made.
judicious allocation of duties amongst the
members of staff.
3. Time Internal check is done in operation during Internal audit starts after the records
the course of transaction have already been made in books of
accounts.
18
 4. Scope of Work The scope of internal check is very limited The scope of the internal audit is
comparatively broad.
5. Discovery In case of internal check error or fraud if In case of internal audit error or
any is discovered during the course of fraud if any is discovered after
work. completion or work.

Q. STATE THE PROCEDURE FOR INTERNAL CONTROL REGARDING CASH TRANSACTIONS.

(10 MARKS)
INTERNAL CONTROL REGARDING CASH
The following system of internal control may be adopted as regards cash transactions:
➢ Cash received must be deposited in the bank on the same day or the next day morning.
➢ All cash receipts must be properly acknowledged. That is when cash is received; the receipts should be
given to the customer after retaining the counterfoils.
➢ Receipt and counterfoil should not be detached.
➢ When payments are made receipts should be obtained numbered and filled in the order of date.
➢ BRS (Bank Reconciliation Statement) should be prepared at regular intervals.
➢ A detailed system of inter check should be adopted for recording cash sales.
➢ Petty cash payment should be made against the vouchers only.
1. Receipts:
Cash transactions relate to receipts and payments of cash the internal control suggested for the receipts are as
follows
➢ Acknowledgement for handling over these remittances to the cashier must be obtained in the register.
➢ The receiving cashier and the paying cashier must be different individuals.
➢ All cash received must remitted to the bank on the very day of receipt were possible.
➢ Some person other than the cashier should list all sums that are received daily and the cashier should have
no access to the books and accounts.
2. Cash sales:
Cash sales may consist of following sales at the counter:
➢ The salesman should show the memo books to any senior person who examines and verifies the details.
➢ Each sales man should be provided with a sales memo book with three sets of receipts consecutive
numbered.
➢ Two copies of the memo books to any senior person who examines and verifies the details.
➢ The cashier should put his initials on the copies of the receipts and the stamp of pained.
➢ The cashier should also indicate the number of memo in cash sales and ascertain the total sales of the day.
➢ Each salesman should prepare a summary sheet with the help of the copy of memo that remains with him.
➢ The cashier should enter the details of total sales of a day in cash sales sheet with the help of the memo
filed by him.
3. Sales by traveling agents:
➢ The offer should be kept informed about the balance which is overdue.
➢ The traveling agents should not be allowed to collect the sales amount from the customer directly.
➢ The office should also send reminder to the customers.
➢ The office should prepare a statement about the debtor.
➢ The area of traveling agents or sales man should be changed from time to time.

Q. EXPLAIN THE PROCEDURE OF INTERNAL CONTROL REGARDING PURCHASES AND

PURCHASE RETURNS. (5/10 MARKS)
INTERNAL CONTROL REGARDING PURCHASES
➢ All the orders sent out should be recorded in the purchase order book.
➢ When invoice is received it should be compared with the purchase order.
➢ When a departmental head is in need of a stock he must send a purchase requisition showing quantity,
quality and time by which the goods are required.
➢ The general managers should invite quotations,
➢ The purchasing official should contact the supplier and settle the prices and terms and conditions.
19
 ➢ Then the invoice is sent to the purchase department and a check enters the same in the purchase book.
➢ Payments for purchase must be properly authorized after checking the suppliers’ statement of accounts.
➢ Keeping the above stamps in view the following internal check is suggested with regard to purchase.
➢ All order should contain the seal of the office.
➢ There should be a separate purchase department.
➢ Purchase orders are to be issued only against indents received from the various department of the business
in writing.
➢ All the orders should be placed in writing in the form of written requisitions.
➢ There should be an inspection of goods received on basis of the order.
➢ The goods received are to be examined with delivery notes and supply invoices of the seller regarding
quantity quality and rates.
➢ All the packages of incoming foods on arrival are to be opened only in the presence of a responsible
official.
➢ The payment for purchases must be made only after the account department verifies the invoices goods
received niter and purchase order.
➢ The accounts department should impress a rubber stamp on invoices which are passed for payments.

Q. STATE THE PROCEDURES FOR INTERNAL CONTROL AS REGARDS PURCHASE

RETURNS. (5 MARKS)
➢ All goods returned should be entered in the goods outwards book.
➢ There should be a proper system of control in regarded to purchases return so that full credit may be
ensured for all goods returned.
➢ The store department for all goods returned should prepare the statement.
➢ The purchases department should further examine the advice not with original invoice and enter it if the
purchase return book.
➢ A credit note should be obtained from the supplier that is the creditor for each return of goods which
should be attached to the invoice if it is not yet paid.
➢ It should be remembered that if the system of internal check is not good a credit not so received may be
suppressed and the corresponding cash payment misappropriated.

Q. ENUMERATE THE PROCEDURE OF INTERNAL CONTROL REGARDING SALES AND SALES

RETURN. (5/10 MARKS)
INTERNAL CONTROL REGARDING SALES
The organization of the sales department depends on the system of selling and distribution of goods. Unless
the department is organized properly there are greater possibilities for suppression of sales and manipulation of
accounts. Goods can also be misappropriated. Hence a well efficient system of internal check is necessary that
may be in the following manner:
➢ A periodical statement of balance due by the customers shall be sent to them and their acceptance
obtained.
➢ Sales must be affected against order received from customers.
➢ All incoming orders shall be serially numbered and filed.
➢ A confirmation of the order received shall be sent to the customers.
➢ A separate record is to be maintained for the orders received orders under execution, executed orders and
orders refused.
➢ Sales shall be authorized by responsible official after scrutiny of possibility for supply for goods and the
terms and conditions of sales accepted by the customers.
➢ There shall be separate departments to deal with cash sales and credit sales.
➢ Regular notices and reminders for payment shall be issued to the customers reminding them of their dues.
➢ No amount due by the customer shall be written off as bad unless all methods of recovery are exhausted.
➢ Only a top official shall be entitled to treat a debt as bad.
➢ Sales invoices clerk shall have no access to physical stock or accounting records.
➢ A credit note shall be prepared for goods received back from the customer.

Q. EXPLAIN THE PROCEDURE FOR INTERNAL CONTROL AS REGARDS SALES RETURN.

20
 (5 MARKS)
➢ A credit note should be then prepared and shined by the responsible official before it is sent to customer.
➢ All goods returned by the customers should be recorded in a goods inward book.
➢ The statement of goods so returned when received should be sent to the dispatch department which should
be sent to the account department.
➢ The sales return book should be written up with the help of the copies of credit notes issued. The number
and date of credit notes should also be entered in this book.
➢ The object of such system is to prevent an improper credit being passed in the books of fictious and to
avoid fraud involved in misappropriating equivalent cash.

Q. STATE THE PROCEDURE FOR INTERNAL CONTROL REGARDING PAYMENT OF WAGES.

(5/10 MARKS) INTERNAL CONTROL REGARDING PAYMENT OF WAGES
Wages for very important item of expenditure. A suitable system of internal control for wages should be received
for the following objectives:
➢ Payment of wages for right work to the right worker.
➢ To avoid the inclusion of dummy workers in the lost.
➢ To record the deductions properly.
➢ To avoid the fraudulent manipulation of undistributed or unclaimed wages.
The system of internal control may be kept as given below.
1. Maintenance of wage records:
For the proper maintenance of wage recovers the following records are prepared and maintained
a) Time records
b) Piece work records
c) Overtime records
d) Pass out records.
2. Preparation of wage sheet:
The wages sheet should not be prepared by one clerk alone. A set of clerks should compose the records at
the gate and the wage office and inquire about the difference if any. For this the following points should be taken
into account.
a) Base:
The wages sheet should be prepared with the help of attendance register, overtime slip and pass out slip.
b) Separate sheets:
Time workers and piece workers should be dealt in separate wage sheets.
c) Checking:
The wages sheet should be checked by some responsible official of the concern.
d) Signature:
The wages sheet should be signed by those employees who participated in their preparation.
e) Approval:
Each and every wage sheet should be approved by factory manager or Managing Director.
3. Payment of wages:
a) Cash department:
Wage payment should be made by cash department not by other persons.
b) Analysis:
Payment of wages is done by the pay clerk or cashier who draws form the bank the amount with coins
required to cope with the wage.
c) Injunction:
Wage should boot be paid by a person who took part in the preparation of wage sheets.
d) Identification:
Each worker should be asked to receive his wages personally in the presence of his foreman to identify
him.
e) Care:
Care should be taken that no payment is made to some one of behalf a worker who is absent.
f) Payment to absentees:
Some special arrangement should be made for payment to the absentees.
21
Q. EXPLAIN THE PROCEDURE FOR INTERNAL CONTROL AS REGARDING STORES.
(5/10 MARKS) INTERNAL CONTROL REGARDING STORES
Receipt of store:
On receiving stores the stores department will prepare a goods received note in triplicate one of the
purchase department second for the accountant and the third for the store department itself. All details about
stores should be noted on the note. The store should be properly checked after their receipt.
Preservation of stores:
The stores should be properly preserved before they are issued. The following points may be noted in this
regard.
➢ The stores should frequently be counted and checked by a responsible official who should also compare
the bin cards with the stores ledger.
➢ A separate place should be earmarked for each type of stores.
➢ A system of proper numbering should be adopted for all stores and places where they are to be kept.
➢ Stock taking should be conducted at the end of a year or at regular intervals during the year, if necessary.
Issue of stores:
The procedure for issue of stores may be as follows:
➢ The requisition slips used by the department should be of different colors.
➢ After issue the requisition slip should be sent to the accounting that will make entries for the issue.
➢ Only the responsible clerk should have change of issue of stores so that in case of fraud may is held liable.
➢ The stores officer should be seated near the gate so all issues may be made under his supervision.
➢ Stores returned should be entered in the bin cards.
Recording:
➢ A separate accountant should maintain the records.
➢ The store record cards may be of different size and colour.
➢ The details in the stores record cards may be written up with the help of goods received notes requisition
slip goods returned notes etc.
➢ The bin cards should be checked and compared from time to time stores record cards.
======================UNIT IICOMPLETED ====================
Reference Books:
Principles of Auditing – Ravindra Kumar, Virendra Sharma
Practical of Auditing – S. Sudharsanam, S.Sundharabahu
Auditing –D P Jain
UNIT III

Q. WHAT DO YOU MEANT BY “VOUCHING”? (2 MARKS)

MEANING
Vouching is the very essence of auditing. It is considered as back bone of auditing. Vouching means and
includes the examination of every business transactions with its supporting documentary evidence, the checking
of which enables the auditor to satisfy himself that the transactions is in order that it has been correctly allocated
and entered in the book.

Q. DEFINE “VOUCHING”. (2 MARKS)

“Vouching consists in comparing entries in the books of account with documentary evidence in support
thereof”.
- Lawrence R Dicksee
“By vouching is meant the verification of the accuracy and authenticity of transactions as recorded in the
books of account”. – B. Bose.

Q. WHAT ARE THE OBJECTIVES OF VOUCHING? (2/5 MARKS)

OBJECTIVES OF VOUCHING
➢ To examine the accounting entries recorded in the books of account with reference to documentary
evidence in support thereof.
➢ To judge the accuracy, adequacy and credibility of such documentary evidence.
22
 ➢ To examine the authenticity of the transactions recorded.
➢ To ensure that no transaction remains unrecorded in the books of account.

Q. WHAT DO YOU MEANT BY “VOUCHER”? (2 MARKS)

A voucher is a documentary evidence which proves the accuracy or otherwise of a transaction appearing
in the books of account. All vouchers relevant to the business transactions should be carefully filed and
preserved to enable the auditor carry out vouching.

Q. WHAT ARE THE DIFFERENT TYPES OF VOUCHER? (5/10 MARKS)

All the vouchers can be classified into two broad categories from the point of view of their nature.
1) Primary Voucher
2) Collateral Voucher
1) Primary Voucher:
It is an original voucher, which is produced in support of a transaction such as purchase order, Original
invoices, goods received note etc.
2) Collateral Voucher:
It is a subsidiary voucher which is produced in support of a transaction in the absence of an original
voucher such as carbon copies of cash memo, copies of purchase order etc. Some of the examples of various
types of vouchers to be produced to the auditor for checking business transactions are as under:
1) Cash receipt:
Carbon copies of the receipts issued cash memo, correspondence etc.
2) Cash paid:
Original receipts of the payees supported by relevant documents
Example invoices, wage book, contracts, correspondence etc.
3) Purchases:
Copies of the purchase order original invoices goods received notes, correspondence etc.
4) Sales:
Order received carbon copies of the invoices copies of goods out slips, correspondence etc.
5) Purchase return:
Credit notes received, copies of the goods sent out slips correspondence etc.
6) Sales return:
Debit notes received from customers, goods received notes and correspondence etc.

7) Journal entries:
Previous years balance sheet and other available relevant documentary evidence.

Q. WHAT ARE THE COMMON FEATURES OF GOOD VOUCHER? (5 MARKS)

FEATURES OF GOOD VOUCHER
➢ The voucher must be written in the name of the client or the business.
➢ All the vouchers should be properly filed.
➢ The voucher must be duly authorized.
➢ The voucher should bear the signature of payee.
➢ The voucher should be free from any apparent error.
➢ Voucher over Rs 5000 should bear a revenue stamp worth Re.1 as per the Indian Stamp Act.
➢ A voucher used previously must not be used for another transaction.
➢ Any change made in the voucher must bear the signature of a responsible official.

Examination of Vouchers:
An auditor should bear in mine the following points while examing a voucher:
➢ The voucher is addressed to the party at its normal business address.
➢ The voucher is properly dated corresponding to the date of the relevant transaction and the period under
audit.
➢ The voucher is duly authorized by the responsible official empowered in this behalf.
➢ The voucher is signed by the payee.
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 ➢ Voucher of over rupees five hundred bear one rupee stamp as per the Indian Stamp Act 1899.
➢ The auditor should never take the help of client’s staff in the scrutinizing and checking of vouchers.

Q. WHAT ARE THE PROCEDURES OF VOUCHING? (5 MARKS)

PROCEDURES OF VOUCHING
➢ In practice two persons do the job of vouching.
➢ A junior member of the audit staff calls out the particulars in respect of each of the entries appearing in
the books such as date, particular, accounts, debited credited and amount.
➢ The senior member compares the details called out with the documentary evidence produced to him to
satisfy himself as to the genuineness of the transaction.
➢ In practice either of the following procedures is followed for identifying the act of vouching on the
voucher.

1) The senior puts his initials on the voucher or

2) The rubber stamp is upon the voucher and its supporting documents.
The object of cancelling the documents by above manners is to ensure that the same documents are not
produced again in support of other items.

Q. WHAT ARE THE POINTS TO BE CONSIDERED AT THE TIME OF CONDUCTING THE

VOUCHING? (5 MARKS)
Points to be considered at the time of conducting the vouching:
At the time of conducting the vouching the following points must be borne in mind:
➢ The auditor must satisfy himself that the dates given on the vouchers which are recorded in the books fall
in the year under review.
➢ Satisfaction must be made in respect or credited from the available documentary evidence.
➢ Attention should also be paid to the point whether the voucher bears proper revenue stamp if the amount
exceeds Rs 5000.
➢ Attention should also be paid to the amount to ensure that it agrees both in words and figures.
➢ Any alterations particularly in respect of the figures on the receipts, and vouchers etc must be fully
inquired into.

Q. DISCUSS IMPORTANCE OF VOUCHING. (5 MARKS)

IMPORTANCE OF VOUCHING
Vouching has a larger and vital aspect. It is an examination and verification of the accuracy and authenticity
of transactions as recorded in the books of account and a voucher is a documentary proof supporting the
transaction. It is the vouching on the basis of which an auditor satisfies himself that.
➢ The documentary and other evidence of sufficient validity are available in order.
➢ The transaction did in reality take place as stated.
➢ A competent official has duly authorized it
➢ It has been wholly and exclusively related to the business and
➢ Its effect has been properly recorded in the books in conformity with accepted principles of accountancy.

Q. “VOUCHING IS THE BACKBONE OF AUDITING”- EXPLAIN. (5/10 MARKS)

VOUCHING IS THE BACKBONE OF AUDITING
1. Verification of Accuracy:
Vouching is useful to verify the accuracy of the amount recorded thus by verifying the accuracy of the
transactions vouching enables an auditor to accomplish his objects.
2. Detection of errors:
Voucher is useful to detect various kinds of errors. The auditor will find it easier to detect errors of various
kinds during the normal course of vouching.
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3. Ascertaining fairness of transaction:
Vouching is much useful in ascertaining the fairness of all the transactions. It enables the auditor to know
the genuineness of transactions have actually taken place and whether or not the transactions are related to the
business.
4. Detection of fraud:
It is much useful in the detection of various kinds of fraud. It vouching is done with care and caution the
auditor can very easily detect all kinds of fraud, even if they are committed cleverly.
5. Verification of assets and liabilities:
Vouching is very much useful in verifying the assets and liabilities it enables the auditor to certify whether
or not the balance sheet exhibits a true and fair view as to the existence of all the assets and liabilities.
6. Certifying the state of affairs:
An auditor has to verify whether or not profit and loss account and the balance sheet exhibit a true and
fair view of the state of affairs of the business.
Thus vouching fulfills the object of auditing that is why it is remarket that “Vouching is the essence of
Auditing” “Vouching is the back bone of auditing”. The work of vouching is very hard. In real sense vouching is
not only the backbone or essence of auditing but also is its soul.

Q. WHAT DO YOU MEANT FOR VOUCHING OF CASH TRANSACTIONS? (2 MARKS)

VOUCHING OF CASH TRANSACTIONS - MEANING
Cash is the most liquid and therefore potentially the most attractive to defalcators. Before of its high
liquidity, the cash account should always receive the auditor’s careful attention.

Q. WHAT ARE THE OBJECTIVES OF VOUCHING OF CASH TRANSACTIONS? (5 MARKS)

OBJECTIVES OF VOUCHING OF CASH TRANSACTIONS
➢ To ensure that all receipts are accounted for
➢ To know that all receipts and payments have been properly entered in the cash book.
➢ To ensure that no fraudulent payments have been made.
➢ To ensure that payment has been made to the right person.
➢ To ensure that the payments made are true payments.
➢ To verify the cash in hand.
➢ To verify the cash at bank.

VOUCHING OF CASH BOOK (DR SIDE) (10 MARKS)

Before an auditor caries out the inspection of cash book debit side and examines the transactions he should
investigate into the internal control system of his client.
Points to be kept in mine by an auditor while vouching cash receipts:
At the time of vouching any cash receipt item an auditor should ensure that-
➢ A reliable system of internal check is in operation.
➢ All the receipts noted in rough cash book or diary are promptly and properly entered in cash book-
➢ Discount if any is allowed at a uniform rate.
➢ All cash receipts are deposited in the bank on daily basis and supported by a proper voucher ie pay in slip.

Vouching of the important cash receipt is discussed here:

1. Opening balance:
It should be checked with the balance shown in the audited balance sheet of the previous year.
2. Cash sales:
Cash sales should be examined very carefully as they offer a vast scope for commission of various types
of frauds. The required evidence for vouching the cash sales would depend upon the procedure for recording the
cash sales in the book.
3. Receipts from debtors:
The counter foil receipts or carbon copy receipts in support of the entries appearing in the receipt (debit)
side of the cash book should be examined. The method of allowing the discount to a customer against prompt
payment should also be inquired into.
4. Income from interest:
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 Interest received on account of fixed deposits in the bank should be checked with the bank advice and the
arithmetical accuracy of its calculation should also be verified.
5. Dividend:
Dividend received should be vouched with the counterfoil or the upper portion of the dividend warrant
and with the letters with which the cheques for amount of the dividend had been received.
6. Commission:
Commission is a sort of allowance or remuneration for rendering service or labour in discharge of certain
duties. It is usually payable as fixed percentage of the price of business transacted.
7. Subscriptions:
A subscription is simply a contribution towards a fund maintained by a society, club etc. Subscription
received should be checked with the counterfoil receipt or the carbon copy receipt with the register of subscribers.
8. Sale of investments:
Sale of investments should be vouched with broker’s advice. The fact that the sale is ex dividend or cum
dividend should carefully be examined.
9. Bills receivable:
The amount received against the bills receivable should be vouched with reference to the bills receivable
book.
10. Sale of fixed assets:
Cash receipts from sale of fixed assets should be vouched with the correspondence auction notes
agreement of sale and any other evidence supporting the sales transaction.

VOUCHING OF CASH BOOK (CR SIDE) (10 MARKS)

The following points should be carefully considered while examing the evidence of payments:
➢ That the name of client is stated as the payer
➢ That the payees name is correctly stated in the cash book
➢ That the allocation in respect of the head of account is correctly done
➢ That it bears a proper revenue stamp.

Vouching of the important cash payments items has been discussed as under:

1. Cash purchases:
Payments for cash purchases should be vouched with cash memos of the suppliers.
2. Cash paid to creditors:
An enquiry should be made to ensure checked that invoices have been internally checked and initialed by
the authorized officials and payments are authorized. Payees’ acknowledgements should be checked.
3. Wages:
Before vouching the amount of wages paid, an enquiry should be made in respect of the system of
preparation of time keeping and pay roll records and the procedures of making payments and the adequacy or
otherwise of the system of internal control in operation.
4. Investment made:
Investment may be in the form of shares, debentures or government bonds. If the investments are
purchased through a broker, broker’s sold note showing the exact amount payable should be checked.
5. Bills Payable:
A good internal control system requires that all bills paid should be cancelled immediately to avoid the
possibility of fraud. Vouching these should be carried out by checking payments made in respect of bills payable
with the actual bills returned and duly cancelled.

VOUCHING OF PETTY CASH BOOK ITEMS

Petty cash book is usually kept on the imprest system. The auditor should ascertain that the system of
petty cash is maintained on the imprest system.

The following procedures should be followed for vouching the petty cash book:
➢ Check the amounts drawn for petty cash with reference to the cash book or bank statement
➢ Check the casts, cross casts and carry forwards of the petty cash book
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 ➢ It should be been that cashier has signed the petty cash book at the end of the month.
➢ Posting should be checked into the general ledger.
➢ Allocation of expenditure should be properly verified.

VERIFICATION OF ASSETS AND LIABILITIES

Q. WHAT DO YOU MEANT FOR VERIFICATION? (2 MARKS)

VERIFICATION- MEANING
The term verification implies proving the existence or confirmation concerning something. To verify
means to ascertain whether the actual facts are in conformity with those reported or asserted.

Q. DEFINE “VERIFICATION”. (2 MARKS)

DEFINITION
“Verification of assets means an inquiry into the value, ownership and title existence and possession, the
presence of any charge on the assets”.
Verification means a careful checking of the value, ownership and the title of assets.

Q. WHAT ARE THE OBJECTIVES OF VERIFICATION? (2/5 MARKS)

OBJECTIVES OF VERIFICATION
The objectives of verification are as follows:
➢ To establish the existence of actual items of assets and liabilities.
➢ To examine the title or ownership of assets
➢ To examine possession of assets
➢ To establish proper classification of assets and liabilities
➢ To substantiate the expert opinion.

Q. WHAT IS MEANT FOR VERIFICATION OF ASSETS? (2/5 MARKS)

VERIFICATION OF ASSETS
Verification of assets simply implies proving the truth or confirmation of assets as on date of balance sheet.
The verification is a process of physical examination of assets which involves the following:
➢ Verification of the existence of the assets on the balance sheet date.
➢ Examination of ownership and title of assets
➢ Verification as to assets were acquired for the business
➢ Enquiry into proper value of assets
➢ Assurances as to assets are free from any charge or mortgage.

Q. WHAT ARE THE OBJECTIVES OF VERIFICATION OF ASSETS? (2/5 MARKS)

OBJECTIVES OF VERIFICATION OF ASSETS
The auditors objective in regard to verification of assets generally is to certify that they,
a) Exist
b) Belong to the client
c) Are in possession of the client or persons authorized by him
d) Are recorded in the accounts.

Q. EXPLAIN THE VERIFICATION OF SPECIFIC ASSETS. (10 MARKS)

Verification of assets is an important segment of auditing. The verification of specific assets may be
divided in the following categories.
1. Good will:
Good will is an intangible asset, which represents the earning capacity of the business. Good will is to be
verified in the following manner:
➢ Ascertain that the company is justified in creating good will in its books of account.
➢ Ascertain the amount of good will from the purchase agreement or partnership agreement and verify the
amount.
2. Free hold property:
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 A free hold property possesses two attributes example immobility and indeterminate duration. The auditor
should take the following steps for verification of free hold properly.
➢ Examine title deeds indicating the name of client as the owner.
➢ Note the area covered by it.
➢ Ensure that proper depreciation has been provided for the property.
3. Lease holds property:
The auditor should take the following steps for verification of lease hold property.
➢ See that the provision for depreciation is made in accounts according to the life of the lease.
➢ Ensure that lease hold property appears in the balance sheet with the required details.
4. Plant and Machinery:
The manufacturing concern often needs a set of plant and machinery for the production process. The auditor
should take the following steps for verification of this item of balance sheet.
➢ Get a schedule of plant and machinery in existence at difference sites.
➢ Verify the costs of the schedule
➢ See that all repairs to plant and machinery are charged to revenue and not capitalized.
5. Furniture and fixture:
An auditor should take the following steps for verification and valuation of furniture and fixtures.
➢ Check that a stock register is maintained containing the details of the various items purchased
➢ Check that repair to furniture if any during the current year is debited to profit and loss account.
6. Patents:
➢ Examine the actual certificates issued by the patent office in respect of patents granted
➢ See that all renewal fees have been paid or provided in accounts and amount charged to revenue.
7. Trade mark:
➢ Examine the certificates of registration issued by the register.
➢ Check the amount of provision for depreciation.

8. Copy rights:
The verification of this item will be on the lines similar to those described under patents.
➢ If the copy right was acquired by the client see the agreement under which it has been assigned.
Verification of Investments:
Investments refer to utilization of surplus resources. A company makes investments in securities Example:
Shares, Debentures, bonds etc. To perform this major task effectively he should take the following steps:
➢ Study the memorandum of association as an authority for investments
➢ Then compare the schedule of investment so obtained with relevant ledger accounts with a view to spot
any discrepancy.
Verification of Inventories:
The entire job of verification of inventories involves the following three steps.
➢ Examination of stock taking procedure
➢ Examination of valuation process
➢ Evaluation of accounting system and internal control over stock.
Verification of other current assets:
1. Cash in hand:
The auditor has to be very careful while verifying cash in hand as defalcation or embezzlement of cash has
become a very common technique of perpetrating fraud. The auditor should therefore.
➢ Count the cash in hand at one setting and compare it with the cash book balance
➢ Discourage the practice of keeping large balances of cash from the view point of internal control.
2. Cash at Bank:
For the purpose of verification of cash at bank the auditor should:
➢ Compare the balances as shown in the pass book with that shown in the bank column of the cash book.
➢ Obtain a certificate of balance in clients account as on the balance sheet date from the bankers.
➢ Take note of blocked accounts if any
3. Debtors:
For verification of debtors or book debts an auditor should:
➢ Get a list of debtors duly certified by some responsible officer of the company.
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 ➢ Check whether the debit balance of the sales ledger is in agreement with the control account or not.
4. Bills Receivable:
In the process of verification of bills receivable the auditor should take the following steps:
➢ Check the total of the schedule with reference to bills receivable account
➢ Examine the proceeds received on account of bills discounted
➢ Physically verify the dishonored bills.
Verification of Fictitious Assets:
1. Preliminary expenses:
The board details of amounts constituting preliminary expenses are:
➢ Legal cost of registering the company
➢ Stamp duty and fees paid on the authorized capital
➢ Cost of preparing and printing memorandum and articles of association.
2. Underwriting Commission:
It will be verified as given in the following steps:
➢ It should be seen that the limits laid down by the controller of capital issues in respect of underwriting
commission are not exceeded
➢ The amount paid should be separately shown in the balance sheet until written off.
Q. DISCUSS VERIFICATION OF LIABILITIES. (10 MARKS)
VERIFICATION OF LIABILITIES
The term liability in its usual and ordinary sense refers to a state of being under legal obligation. The
process of verification of different items of liabilities appearing in the balance sheet.
1. Share Capital:
The steps to be taken for verifying the share capital of the company covering several phases have been
enumerated as below:
➢ Check the authorized share capital with the relevant clause of the Memorandum of Association.
➢ Obtain a list of share holders’ check with the register of members and verify the capital account.
2. Debentures:
A copy of debentures creating and evidencing the charge should be inspected and the receipts of money
should be duly vouched.
3. Trade Creditors:
Specific audit work in respect of trade creditors will include the following procedure:
➢ Ensure that goods purchased were actually received. Inspect the good inward book for this purpose.
➢ Check any outstanding dues to the company and compare them with the schedule of creditors.
4. Loans:
To verify loans an auditor should examine the following:
➢ Confirm the borrowing powers with reference to the memorandum and articles of association.
➢ See board resolution for the approval of exercising the borrowing powers.
5. Bills Payable:
The method of verification of bills payable should include the following steps:
➢ Obtain a schedule of bills payable. Check it with bills payable book
➢ Check casts of the schedule
➢ Verify the calculation of the interest accrued on bills payable.
6. Provision of Taxation:
Ascertain by discussion and study of tax files the stage up to which the assessments have been completed.
Check the computation of taxable income and tax liability bearing in mind the nature of the organization.
7. Proposed dividend:
Examine special provisions in the memorandum or articles of association in respect of payment of
dividends. Ascertain that it does not include unpaid dividends which must be excluded from it and shown
separately.
Q. DISCUSS DISTINCTION BETWEEN VOUCHING AND VERIFICATION. (5 MARKS)
VOUCHING Vs VERIFICATION
S Basis of Vouching Verification
No Distinction
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1 Meaning Vouching is an act of comparing entries in the Verification on the other hand is the process of
books of account with documentary evidence physical examination of terms appearing in the
in support thereof balance sheet
2 Process The process of vouching is tended to Verification substantiates expert opinion and all
substantiate an accounting entry by providing such assertions which have already party been
authority, ownership, existence and accuracy. established by vouching. In other words
vouching is followed by verification
3 Object The main object of vouching is to examine the The aim of verification is to enable the auditor
adequacy, reliability of the transactions to satisfy himself as regards the existence,
recorded in the books of accounts with the help ownership and possession of items of balance
of certain documentary evidence. sheet through their physical examination
4 Significance Vouching is the essence or backbone of Verifying the items appearing in the balance
auditing sheet is one of the most important aspects of
auditing.
5 Scope The area of operation of vouching is very wide. Verification is confined to physical examination
Vouching in its true sense means judging the or confirmation of items appearing in the
correctness of all the entries made in the books balance sheet. It is an integral part of balance
of account sheet audit.

Q. WHAT IS MEANT FOR “VALUATION”? (2 MARKS)

VALUATION-MEANING
Valuation implies critical examination and the testing of determined values of assets by the auditor based
on generally accepted accounting principles and conventions. The accuracy of the balance sheet and profit and
loss account depends upon the correct valuation of the assets and liabilities.
Q. DEFINE “VALUATION”. (2 MARKS)
VALUATION-DEFINITION
According to Lancaster “the valuation of the asset is therefore an attempt to ensure the equitable
distribution of the original outlay on the period of assets usefulness”.
Q. WHAT IS BASIS OF VALUATION? (5 MARKS)
BASIS OF VALUATION
In the process of valuation of assets the auditor must keep in mind the following points;
➢ Original cost of asset
➢ Expected working life of the assets
➢ Wear and tear of the assets
➢ Break up value or the scrap value of the asset
➢ The chances of the assets becoming obsolete.
Auditor is expected to ensure that the bases of valuation are correct and reliable and a provision has been
made for all contingencies. Fixed Assets should be valued at the cost less depreciation to date where as current
assets should be valued at the cost or the market price which ever less.
Q. WHAT ARE THE DIFFERENT METHODS OF VALUATION? (5 MARKS)
METHODS OF VALUATION
1. Cost price
2. Replacement value
3. Market value
4. Realizable value
5. Break up or Scrap value
1. Cost price:
It is the price paid for acquisition of an asset. As the matter of practice the expenses incurred in the
purchases of asset and its installation are included in the cost price of the asset.
2. Replacement Value:
It is the price at which a particular asset can be replaced.
3. Market Value:
If the asset has a market a value which it will bring when sold in the market is called market value.
30
4. Realizable value:
It means estimated selling price in the ordinary course business less predictable cost of completion and
disposal.
5. Break up or Scrap value:
It is the price which an asset might be expected to realize if sold as scrap being unserviceable.
Q. DISCUSS DIFFERENCE BETWEEN VERIFICATION AND VALUATION. (5 MARKS)
VERIFICATION Vs VALUATION
Verification Valuation
1. It implies the process by which the auditor It implies critical examination and the testing of
satisfies the accuracy of the assets and liabilities determined values of assets by the auditor based on
appearing in the balance sheet by the inspection of generally accepted conventions and accounting
documentary evidence available. principles.
2. It is done by the auditor himself or by his any It is made by the managers of the concern
senior assistant
3. The auditor does himself the work of verification The auditor may seek assistance and opinion of the
of assets technical personnel if necessary for ascertaining the
value of any particular asset
4. It is based on physical inspection as well as For valuation very few direct evidence are
documentary evidence. available. The auditor has to depend upon the
estimates of managers to a large extent.
5. The auditor is entirely responsible for the For the accuracy of valuation of assets the auditor
verification of assets does not give any guarantee.
6. Verification has a broader implication and in fact Valuation is a part of verification
it includes valuation.

======================== UNIT III COMPLETED =======================

UNIT IV

Q. WHAT IS MEAN BY “AUDITOR”? (2 MARKS)

AUDITOR-MEANING
The audit is a statutory requirement under the companies Act 1956. Therefore provisions regarding
appointment of auditor his qualifications, disqualifications, powers, duties etc are also governed by the Act.
Primary object of appointment of auditor in a company is to safeguard the interest of the share holders and
investors.

Q. WHAT ARE THE QUALITIES OF AN AUDITOR? (5 MARKS)

QUALITIES OF AN AUDITOR
Besides professional or statutory qualification on auditor must posses certain general qualities

1. Knowledge of Accountancy:
An auditor should know completely and thoroughly the principles of accountancy and book keeping as he
is required basically to check and verify the accounts kept under different systems of book keeping in different
business.
2. Knowledge of Commercial Laws:
The auditor should have considerable knowledge or the companies act and offer commercial laws related
to the functioning of the company. It undertakings is governed by special statute its knowledge will be necessary.
3. Tactfulness:
In case where some technical information has not been disclosed the auditor should tactfully extract that
information from his clients so that he is in a position to criticize and present the true facts before those to whom
he is responsible.
4. Honest:
31
 The auditor should possess high moral standards. In the words of lord Justice Lindley “An Auditor must
be honest – that is he must not certify what he does not believe to be true and he must take reasonable care and
skill before he believes that what he certifies is true.
5. Impartiality:
An auditor should be impartial and must not be influenced by others in the discharge of his responsibilities.
He must have the courage to carry out his duties most cheerfully and conscientiously.
6. Patience:
An auditor should carry out his work patiently and in any cause he should not sign any document, in a
hurry, with out any evidences to that effect or on an express or implied promise to provide evidences in meantime.
7. Vigilance:
The auditor must be vigilant as his function is to detect the errors and frauds of others. He would not be
able to perform these duties properly unless he remains vigilant and alert.
8. Communication:
An auditor should be able to communicate effectively both orally and in writing, particularly in the matter
of report writing. He should be able to convey his message clearly, concisely and precisely.
9. Responsibility:
Public confidence in the auditing profession comes from high standards of performance and a high sense
of responsibility to the public interest. In both action and behavior the auditor should display a great sense of
responsibility.

Q. WHAT ARE THE QUALIFICATIONS OF AN AUDITOR? (5 MARKS)

QUALIFICATIONS OF AN AUDITOR
To be appointed as a company auditor a person posses prescribed qualifications and must be free from the
disqualification and must be free from the disqualifications laid down by the companies Act 1956 under section
226. The qualifications of an auditor are as follows:
➢ He is a Chartered Accountant with in the meaning of the Chartered Accountants Act 1949 and has
obtained the certificates of Practice.
➢ Apart from a practicing chartered Accountant a person who holds a certificate under the Registered
Auditors certificate (Part B States) Rules 1956 shall be entitled to be appointed and to act as an auditor of
companies such persons are called “Certified Auditors”.
➢ Hence certified auditors are always subject to the rules made by the Central Government in this regard
(Section 226(2)).
Hence the auditor of a company must either be:
➢ A practicing Chartered Accountant or a firm of practicing chartered accountants or
➢ The holders of a certificate granted to him under the Registered Auditors Certificate Rules 1956.

Q. DISCUSS APPOINTMENT OF AUDITOR. (Section 224) (5/10 MARKS)

APPOINTMENT OF AUDITOR
1) Appointment of first auditors: (Section 224(5))
➢ The first auditors of a company shall be appointed by the Board of Directors of the company.
➢ The appointment is to be made within one month of the date of registration of the company.
2) Appointment of subsequent auditors: (Section 224 (1))
Section 224 (1A) “every auditor appointed under sub section (1) shall within 30 days of the receipt from
the company of the intimation of his appointment inform the register in writing that he has accepted or refused to
accept the appointment”.
3) Reappointment of Auditors: (Section 224 (2))
Retiring auditors are often re appointed but a resolution is required to be passed to this effect. The retiring
auditors cannot be deemed to be reappointed automatically at the annual general meeting. Therefore it is necessary
to pays a resolution to re appoint the retiring auditors.
4) Appointment by the Central Government: (Section 224 (3))
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 ➢ It is the duty of the company to give a notice of the facts that no auditor was appointed or re appointed
within 7 days of the annual general meeting to the Central government.
➢ If a company fails to give such notice the company and every officer in default shall be punishable with
fine which may extend to Rs. 5000.
5) Appointment in a causal vacancy: (Section 224(6))
The term causal vacancy has not been defined in the Act. The Causal vacancy in its natural connection
implies a vacancy in the office of auditors resulting from accidental or fortuitous circumstances such as death,
resignation, and disqualification of the existing auditor.
6) Appointment by special resolution: (Section 224 (A))
Section 224 (A) of the companies Act 1956 provides that appointment or re appointment of auditors shall be
made at the annual general meeting by special resolution in the case of a company in which not less than 25% of
the subscribed capital is held by
➢ A public financial institution or a government company or the central government or any state
government.
➢ A nationalized bank or an insurance company carrying a general insurance business.
➢ Any combination of the above categories.

7) Appointment of auditors of government companies: (Section 619)

A government company may be defined as any company in which not less than 51% of the paid up share
capital is held by the central government or by any state government or government or partly by one or more state
governments and includes a company which is a subsidiary of a government company as thus defined (Section
617). The auditor of a government company shall be appointed or re appointed by the central government on the
advice of the Comptroller and Auditor General in India.

Q. WHAT ARE THE DISQUALIFICATIONS OF AN AUDITOR? (5 MARKS)

DISQUALIFICATIONS OF AN AUDITOR
Further Section 226 (3) of the companies Act 1956 provides that none of the following persons shall be
qualified for appointment as independent auditors of a company.
➢ A body corporate
➢ An officer or employee of the company.
➢ A person who is a partner or who is in the employment of an officer or employee of the company
➢ A person who is indebted to the company for an amount exceeding Rs 1000 or who has given any
guarantee or provided any security in connection with the indebtedness of any third person to the company
for an amount exceeding Rs 1000.
➢ A person holding any security of the company carrying voting rights after a period of one year from
December 13, 2000 ie the date of commencement of the Companies (Amendment) Act 2000.
The above disqualifications extend to company’s subsidiary of that holding company.

Q. DISCUSS REMOVAL OF AN AUDITOR. (5 MARKS)

REMOVAL OF AN AUDITOR
Removal of an Auditor (Section 224 and 225)
The company Act 1956 prescribes specific procedure for removal of auditors before and after the expiry
of their term of office.
Procedure for removal of an auditor is as follows:
1. Removal before expiry of tenure: (Section 224)
➢ The first auditors of the company are appointed by the board of directors prior to the first annual general
meeting.
➢ Such auditors may be removed before the expiry of their tenure of office by the company in general
meeting by an ordinary resolution of which a special notice is to be given to the members at least 14 days
before the date of the meeting.
2. Removal after expiry of tenure: (Section 225)
➢ An auditor can be removed after the expiry of his tenure of office. According to section 225 as regards
removal of a retiring auditor or appointing another person in his place the following procedures must be
33
 followed. Special notice under section 190 of the intention to move such resolution must be given to the
company by a member not less than 14 clear days before the date of the annual general meeting.
➢ On receipt of such notice a company shall forth with send a copy there of to the retiring auditor.
3. Unjustified removal of Auditors:
In 1980 the Institute of Chartered Accountants of India (ICAI) constituted a Committee for dealing with cases
of unjustified removal of auditors as an additional moral safeguard to ensure the independence of auditors. The
procedure of the committee is as follows
➢ The committee on a review of the communication referred to in Para’s 1 and 2 above may call for such
further information as it may deem fit from the incoming auditor the outgoing auditor and the company.

Q. WHAT ARE THE DUTIES OF AUDITOR? (5/10 MARKS)

DUTIES OF AUDITOR
Section 227 (3) prescribes the duties of the auditors. The duties of an auditor can be broadly classified
into four categories.
1. Statutory duties
2. Duties arising out of common law
3. Duties arising out of professional ethics and etiquette
4. General duties
1. Statutory duties:
a) To certify statutory report: (Section 165)
Section 165 (4) of the Act provides that the auditor of a public ltd. Company must certify the accuracy of
the contents of the statutory report.
b) To report to the members of the company: (Section 227)
The Principal duty of an auditor as defined in section 227 (2) of the Act is to make a report to the members
of the company on the books of account examined by him.
c) To enquire into specific matters: (Section 227(1A))
The auditor should specifically enquire into the following matters:
➢ Whether loans and advances made by the company have been shown as deposits.
➢ Whether any personal expenses have been charged to the revenue account of the company.
d) To certify director’s declaration of solvency: (Section 488)
In case of members voluntary winding up of the company declaration is to be given about solvency of the
company by the directors.
2. Duties arising out of common law:
An auditor is required to render all those services which he has expressly or impliedly with his appointing
authority. Normally other duties arising out of common law which an auditor may be required to perform can be
summarized as follows:
➢ To guide assist and represent the company on taxation matters
➢ To offer his advice on company law matters
➢ To conduct internal or any other non- statutory audit
➢ To perform any managerial activity.
3. Duties arising out of professional ethics:
Auditors are expressed to come up to a certain standard of professional conduct while carrying out the job
of audit.
a) Responsibilities:
In carrying out their responsibilities as professionals auditors should exercise sensitive professional and
moral judgements in all their activities.
b) Integrity:
To maintain and broader public confidence, auditors should perform all professional responsibilities with
the highest sense of integrity.
c) Objectivity and independence:
An auditor should maintain objectivity and be free of conflicts of interest in discharging professional
responsibilities.
d) Scope and nature of services:
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 As per AAS 2 an auditor in public practice should observe the following in determining the scope and nature
of services to be provided:
➢ Terms of the engagement
➢ The requirements of he relevant legislation
➢ The pronouncements of the Institute of Chartered Accountants of India.
4. General Duties:
Auditor’s general duties are the outcome of legal decision and pronouncements of learned judges in
several case laws.

Q. WHAT ARE THE RIGHTS & POWERS OF AUDITOR? (5/10 MARKS)

RIGHTS & POWERS OF AUDITOR
The auditor derives his powers from the specific provisions of the companies Act 1956. Such powers are
very essential for proper performance of his duties. The Act confers the following rights on the auditors of a
company.
1. Right of access to the books, accounts and vouchers: (Section 227(1))
Section 227 (1) of the Act provides that an auditor of a company has a right of access at all times to the
books and accounts and vouchers of the company whether kept at the head office of the company or elsewhere.

2. Right to obtain information and explanation: (Section 227 (1))

The company auditor is entitled to obtain all such information and explanations from the officers of the
company which he thinks necessary for performing his duties as auditor.
3. Right to receive notices and attend the general meeting: (Section 231)
According to section 231 of the companies Act 1956 the auditor has a right:
➢ To receive all notices and communications relating to a general meeting to which may member of the
company is entitled: or
➢ To attend any general meeting of the company.
4. Right to report to the members: (Section 227(2))
It is the right as well as duty of the auditor to make a report to the members of the company on the financial
statements examined by him.
5. Right to sign audit report: (Section 229)
Only the persons appointed as auditors of the company may sign the auditors report or sign or authenticate
any other document of the company required by law to be signed or authenticated by the auditor.
6. Right to receive remuneration: (Section 224 (8))
The auditor has the right to receive remuneration for the services rendered by him to the company.
However the right accrues only after he has completed the work ie accounts have been audited and report
thereupon has been submitted to the company by him.
7. Right of lien on working papers:
The working papers contain the information of confidential nature. This information is gathered by the
auditor from the books of account and through explanations from the company’s officers which the auditor thinks
necessary for the performance of his audit work.

Q. WHAT ARE THE LIABILITIES OF AN AUDITOR? (5/10 MARKS)

LIABILITIES OF AN AUDITOR
The liabilities of the company auditors may be classified and studied under the following four heads:
1. Statutory liabilities
2. Contractual liabilities
3. Liabilities under common law
4. Other liabilities
1. Statutory Liabilities:
A statutory liability refers to liabilities of auditors under statute. These liabilities can further be classified
under the following categories with a view to have better understanding thereof
a) Civil Liabilities
b) Criminal Liabilities
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a) Civil Liabilities:
Civil liability is one which arises out of civil wrong for which action for losses/ damages can be initiated
against the auditor in a civil court. Civil liability can further be classified into two
i) Liability for negligence
ii) Liability for misfeasance
i) Liability for negligence:
Negligence means breach of duty to take care. An auditor to a limited company is an agent of the
shareholders. He is appointed to perform certain duties.
ii) Liability for misfeasance:
After a company has gone into liquidation misfeasance proceeding can be instituted against the auditor by
The Liquidator or
The Creditor or
A Contributory of the Company.
The term misfeasance means breach of trust or duty involving the company in a loss.
b) Criminal Liabilities:
➢ Crime means any offence punishable by law. Criminal liability of an auditor arises out of an illegal act
resorted to crime.
➢ Criminal liability of an auditor basically arises because of offences against the statutory provisions
specifically laid down.
➢ If an auditor is held guilty of criminal misconduct he shall be punishable with fine or imprisonment or
both as might be provided in the relevant Act.
2. Contractual Liabilities:
➢ Contractual liabilities refer to liabilities of an auditor for breach of contract.
➢ The contractual liability of an auditor arises because of his failure to fulfill a contractual obligation.
3. Liabilities under common law:
➢ Liabilities under common law denote the liabilities of an auditor under unwritten law for negligence and
fraud.
➢ Common law is the ancient unwritten law of the nation binding on the whole community.
4. Other Liabilities:
a) Liabilities to the third parties
b) Liabilities for libel
a) Liabilities to the third parties:
Another aspect of studying the concept of liability in relation to auditor is whether he can be held liable
for damages to third parities if they have suffered any loss by relying upon any balance sheet or any statements
signed by him.
b) Liability for libel:
The audit report is considered as a privileged document. It is not likely to result in liability for libel
provided the following ingredients are in it.
i) It does not misstate facts
ii) It is not actuated by malice
iii) It does not go beyond what is relevant to its subject
iv) The statement made is bona fide.

Q. EXPLAIN REMUNERATION OF AN AUDITOR. (5 MARKS)

REMUNERATION OF AN AUDITOR
➢ The remuneration of an auditor is fixed by the appointing authority as per section 224 (8) of the companies
Act 1956.
➢ According to section 224 (8) (aa) in the case of an auditor who is appointed under section 619 by the
Comptroller and Auditor General of India, his remuneration shall be fixed by the company in general
meeting Example Power of fixing the remuneration may be delegated to the Board of Directors.
➢ It can therefore be concluded that the auditor’s remuneration is determined by those who have the
authority to appoint him.
➢ The council of the Institute of Chartered Accountants of India (ICAI) has stated that the remuneration for
other services (other than the audit work) rendered by the auditor should be under the following categories:
36
 i) Taxation matters
ii) Company Law matters
iii) Management services
iv) Internal auditing
v) Other services
It should also be noted that any sum paid by the company in respect of the auditors out of pocket expenses
for carrying out his duties shall be deemed to be included in the expression “Remuneration”.

========================== UNIT IV COMPLETED ============================

Reference Books:
Auditing Principles and Practice- Ravinder Kumar, Virender Sharma
Auditing – P.S Raman
Fundamentals of Auditing – Kamal Gupta, Ashock Arora
Auditing – The Institute of Chartered Accountants of India.
Principles of Auditing – Ravindra Kumar, Virendra Sharma
Practical of Auditing – S. Sudharsanam, S.Sundharabahu
Auditing –D P Jain

UNIT V

Q. WHAT IS MEANT BY SPECIALIZED AUDIT? (2 MARKS)

SPECIALIZED AUDIT- MEANING
➢ In one sense every audit is special since every audit has its unique features.
➢ The specialized undertakings calling for special knowledge from the auditor or for which there is special
accounting or auditing requirements.
➢ In this chapter certain specialized audits, which require peculiar audit treatment would be dealt with.

Q. DISCUSS AUDIT OF CHARITABLE INSTITUTIONS. (10 MARKS)

AUDIT OF CHARITABLE INSTITUTIONS
In the case of a charitable institution auditor should consider the following points for efficient conduct
of audit.
1. General Consideration:
a) Constitution:
The auditor should carefully examine the constitution under which the charitable institution has been
brought out. In case of a company auditor should check the Memorandum and Articles of Association.
b) Internal Check System:
The auditor should examine the reliability and efficiency of internal check system in connection with
amount collected by the institution.
2. Receipts:
a) Verification of collection:
The auditor should verify that all income have been taken into consideration and deposited regularly and
promptly in the bank. He should also check the bank reconciliation statement.
b) Subscriptions and Donations:
Subscription and donations are the major sources of income of a charitable institution. Auditor should
vouch receipts from subscription and donation with reference to the counterfoils of the receipt book.
c) Income from investment:
The auditor should vouch the dividend received on shares, interest on debentures and government
securities etc from the counterfoils of dividend/ interest warrant.
d) Rental income:
If the institution has some rental income, auditor should examine the tenancy agreements and should
vouch the amount of rent realized from receipt roll and counterfoils of receipts besides cash book entries.
3. Payments:
a) Proper distinction between capital and revenue expenditure:
The auditor should see that the proper distinction is made between capital and revenue expenditure.
37
b) Vouching of day to day expenses:
The auditor should vouch day to day and normal expenditure with supporting documents and check
whether the person authorized for this purpose has signed all vouchers.
c) Purchase of investment and assets:
The auditor should vouch any investment or assets purchased by the institution properly. Auditor should
conduct physical examination of assets purchased or investment held.
4. Assets and Liabilities:
a) Verification of Cash and bank balances:
Finding auditor should verify the cash and bank balances from the cash book and pass book along with
bank reconciliation statement.
b) Investment:
The auditor should do verification of the investment held by the charitable institution physically.
c) Liabilities:
All real liabilities should appear at their true values in the balance sheet.

Q. DISCUSS AUDIT OF CLUBS. (10 MARKS)

AUDIT OF CLUBS
The steps involved in the audit of a club are stated below
1. General consideration:
a) Constitution:
Generally a club is constituted as a company limited by guarantee. Therefore various provisions of the
companies Act 1956 pertaining to the audit of companies are equally applicable to the audit of a club.
b) Minute Book:
The auditor should examine the minute book of the club and the financial powers of the secretary.
c) Internal Check system:
He should examine the internal check system of the club in respect of the following:
➢ Foods and drinks provided to members have been properly charged.
2. Receipts:
a) Vouching of entrance fee:
Auditor should vouch the collections on account of entrance fee from the members with the counterfoils
of receipts issued to them.
b) Vouching of subscriptions received:
Auditor should vouch the collection on this head with the counterfoils on this head with the counterfoils
of receipts issued to them and check with members register.
c) Other receipts:
The auditor should carefully vouch any special donation or grant if received by the club and see that it
has been properly utilized for a particular purpose in view.
3. Expenditure:
The auditor should vouch the expenditure of the club as follows
a) Vouching of purchase of sports items:
In case of a sports club he should check whether the committee for purchase of has made proper
authorization particular sports items or not.
b) Vouching of Purchase of consumable stores:
The auditor should vouch the payments made on account of purchase of food stuffs, cigar, cigarette,
wine, beer, soft drink etc and the check entries made in relevant stock register.
c) Proper allocation between capital and revenue expenditure:
The auditor should ensure that expenditure is properly allocated between capital and revenue.
4. Assets and Liabilities:
a) Physical verification of assets and closing stock:
The auditor should see that all the assets of the club duly accounted for and appear at their true values in
the balance sheet. The auditor should carefully check the stock of sports material furniture and other assets
physically.
b) Liabilities:
All real liabilities should appear at their true values in the balance sheet.
38
Q. DISCUSS AUDIT OF CINEMA THEATRE. (10 MARKS)
AUDIT OF CINEMA THEATRE
The important steps involved in the audit of cinema are as follows:
1. General Consideration:
a) Constitution:
The auditor should ascertain the legal status of the cinema ie whether it is proprietorship or a corporate
entity.
b) Evaluation of Internal control system:
The auditor should evaluate the internal control system followed by the cinema in respect of the
following matters:
i) Sale of tickets
ii) Unsold tickets
iii) Advance booking of tickets
iv) Payments made by the cinema.

2. Receipts:
a) Vouching of Tickets:
The auditor should verify that the entry of people in cinema hall is allowed through proper tickets which
should be serially numbered.
b) Daily collection report:
The auditor should ensure that at the end of each show a collection report is prepared for tickets sold for
different classes.
c) Verify the collection with the entries made in the cash book:
The auditor should verify that the collection of each show is properly recorded into cash book on daily
basis.
d) Verification of entertainment and show taxes:
Auditor should verify that amount of entertainment tax collected is shown in a separate report prepared
for the purpose and reconciled with the cash collection from the sale of tickets.
e) Other receipts:
The auditor should vouch the amount collected from the canteen. If the canteen is let out the rent
agreement should be checked.
3. Payments:
a) Film hiring charges:
The auditor should examine the agreement with the distributor and see whether
i) Agreement is based on theatre hire or
ii) Agreement is based on minimum guaranteed amount or
iii) Agreement is based on fixed hire or
iv) Agreement is based on percentage of the taking
The auditor should check the hire issued by the distributor and examine the agreement.
b) Expenses on Publicity:
The auditor should examine whether the agreement with the distributor includes publicity expenses or a
certain amount is sanctioned by the distributor to be incurred on publicity on his behalf.
c) Usual expenses:
The auditor should check that the expenditure incurred on repair, maintenance, renovation, up gradation
had been approved by the appropriate authority and the same has been recorded properly.
d) Proper distinction between capital and revenue:
Proper distinction should be made between capital and revenue expenses and they should be charged
accordingly.
4. Assets and Liabilities:
a) Depreciation:
39
 The auditor should examine whether depreciation on plant and machinery including projector, generator
etc.
b) Examine the unadjusted advances:
The auditor should examine if at the end of the year any advance remains unadjusted.
c) Physical verification:
The management of the cinema conducts physical verification of assets and sports and all the facts are
recorded.
d) Liabilities;
All real liabilities should appear at their true values in the balance sheet.

Q. DISCUSS AUDIT OF EDUCATIONAL INSTITUTIONS. (10 MARKS)

AUDIT OF EDUCATIONAL INSTITUTIONS
The steps involved in the audit of an educational institution are as follows
1. General Consideration:
a) Constitution:
In order to ascertain the legal status of the institutions auditor should examine the constitution trust deed
or chapter in case of school or colleges.

b) Inspection of minute book:

Auditor should go through the minutes of the meetings of the managing committee or governing body or
executive council and finance committee.
c) Operation of bank books:
From the minute book auditor should also see the decisions under regarding the operation of bank
account and check that the account is operated by authorized persons.
d) Internal check system:
He should examine the internal check system in operation and judge its adequacy and efficacy.
2. Receipts:
a) Receipts from admission fees:
Auditor should check the fees received on account of admission and should compare the same against
admission forms duty signed by the head of the institution.
b) Recovery of fines:
Auditor should ascertain the system of recovery of fines and penalty imposed on account of late
payments fees, absence, deposits of examination forms and fees etc.
c) Hostel dues:
Auditor should confirm that all hostel dues have been recovered from the students before their accounts
were closed.
d) Vouching of documents:
Auditor should verify the amount of donation received with the list of donors published in annual report.
3. Payments:
a) Salary:
Auditor should vouch the payment of salaries to staff with reference to the salary/ wages register.
Auditor should pay special attention on increment earned by the staff after verify whether the competent
authority has sanctioned increments.
b) Provident fund:
Auditor should see that the provident fund has been deducted properly from the salaries of the staff and
deposited in government account.
c) Capital expenditure:
If the institution has incurred any capital expenditure, auditor should vouch that proper authority had
sanctioned the said expenditure.
d) Fee concession to students;
Auditor should check that any concession in fee granted to some of the student is authorized by proper
authority.
e) Scholarship paid to students:
40
 The auditor should vouch the payment made on account of scholarship to the students with scholarship
register.
4. Assets and Liabilities:
a) Physical verification of assets and equipments:
The auditor should physically verify the stock of laboratory equipments sports goods, stationery and
library books and should see whether proper stock register or records have been maintained in this respect.
b) Depreciation:
He should check that depreciation is provided on all depreciable assets adequately.
c) Liabilities:
The auditor should see that the liabilities appear at their true values in the balance sheet.

Q. DISCUSS AUDIT OF HOSPITALS. (10 MARKS)

AUDIT OF HOSPITALS
The main points considered in the audit of a hospital are as follows:
1. General Considerations;
a) Constitution:
The auditor should carefully examine the trust deed or constitution under which the hospital has been set
up and note down the provisions pertaining to the accounts and their audit.

b) Internal check system:

The auditor should also examine the internal check system, in operation. In this regard he should:
➢ Vouch the patients register with the counter foil or second copy of his issued to them
➢ Verify that amount of all bills have realized from the patient.
2. Receipts:
a) Vouch the cash collection:
The auditor should vouch the cash book check whether the cash collected has been duly entered in the
cash book. For this he should vouch the receipts issued to patients.
b) Vouch the collection of subscriptions and donation:
Auditor should check all collections of subscriptions and donations from the respective register.
c) Other incomes:
From the investment and properly registers auditor should check whether all interest/ dividend rent of
properties let out have been collected and properly recorded in the books of account.
3. Payments:
a) Vouching of expenses and purchases:
He should verify that all expenses have been recorded fairly and signed by the person authorized for that
all payments.
b) Capital expenditure:
An Auditor should verify that all capital expenditure had been incurred with prior approval of managing
committee or executive body.
4. Assets and Liabilities:
a) Verification of assets and closing stock:
The auditor should see that all the assets of the hospitals duly accounted for and appear at their true
values in the balance sheet. He should ascertain the inventories of unconsumed stores at the end of the year.
b) Depreciation:
Auditor must see that all adequate provisions for depreciation have been made against all depreciable
assets namely apparatus, beds and bedding etc.
c) Liabilities:
All real liabilities should appear at their true values in the balance sheet.

Q. DISCUSS AUDIT OF HOTELS. (10 MARKS)

AUDIT OF HOTELS
To conduct the audit of a hotel is a challenging job because most of the transactions are in cash.
Therefore an auditor has to consider certain important points while auditing the accounts of a hotel.
1. General consideration:
41
a) Constitution:
To ascertain the legal status of hotel the auditor should check the constitution of the hotel whether it is a
proprietary concern or a partnership firm or a corporate entity.
b) List of records maintained:
Auditor should obtain the list of books of account and records maintained by the concern.
c) Evaluation of internal control system:
In particular he should examine the internal control system of the hotel in respect of the following:
➢ Billing system
➢ Credit allowed to the customers
➢ Cash or cheques or drafts collected from customers, payments received through credit cards.
2. Receipts;
a) Bills raised to customers:
The auditor should check whether the hotel has maintained any fixed tariff structure. He should also see
that accounts of customers are properly debited for the services rendered to them.
b) Room sales:
He should also check the room charge in the bill and compare the same with standard tariff rate of the
occupied rooms.

c) Income from bar:

The auditor should examine the bills raised by par departments for bear, wine or liquor consumed by the
guest. He should also check the entries passed in cash book.
d) Collection of taxes:
In hotel business various type of taxes Eg. Luxury tax, Service tax, etc. are charged from the customers.
3. Payments:
a) Purchase:
The auditor should carefully examine the purchases of raw material, consumable stores etc. In this
regard auditor should check the bills for all purchases.
b) Proper distinction between capital and revenue expenditure:
The auditor should check that the expenses incurred by the hotel are supported by proper vouchers.
c) Payment of account of salaries and wages:
In this regard an auditor should examine the following:
➢ Appointment letters issued to staff
➢ Salary and wages register maintained by the hotel
➢ Calculation of salary and wages.
d) Others:
The auditor should examine the cost of renovation and decoration from supporting vouchers. All such
cost should be treated as of deferred revenue nature and should be written off against the profit and loss
accounts of coming years.
4. Assets and Liabilities:
The auditor should see that all the assets and liabilities of the hotel are duly accounted for and appear at
their true values in the balance sheet. In this regard he should examine the following:
a) Depreciation Policy:
The auditor should review the depreciation policy followed by the hotel as this is also an important part
of audit.
b) Physical verification:
The management of the hotel conducts physical verification of assets and stores and all the facts are recorded.
c) Liabilities:
All real liabilities should appear at their true values in the balance sheet.

========================== UNIT V COMPLETED ============================

Reference Books:
42
Auditing Principles and Practice- Ravinder Kumar, Virender Sharma

Auditing – P.S Raman

Fundamentals of Auditing – Kamal Gupta, Ashock Arora

Auditing – The Institute of Chartered Accountants of India.

Principles of Auditing – Ravindra Kumar, Virendra Sharma

Practical of Auditing – S. Sudharsanam, S.Sundharabahu

Auditing –D P Jain

43