auditing

Auditing UNIT – I

VI Semester

1)       Define ‘Auditing’ Explain its Features and discuss it objects?

                           The word audit is derived From the Latin word, audire which means ‘to hear’ originally it was customary for persons responsible for maintenance of accounts to go to some impartial and experienced persons. Ordinarily judges who used to hear these accounts and express their opinion about their correctness or otherwise such persons were known as ‘auditors’

Definitions:-

                According to mautz defines auditing as being concerned with the verification of accounting data with determining the accuracy and reliability of Accounting statement and reports.

Features:

·         An intelligent and a critical examination of the books of accounts of a business.

·         Is done by an independent person or body of persons qualified in the job

·         With the help of vouchers, documents, information and explanations received from the authority of financial accounts prepare for a fired term and ultimately report that

i)                    The Balance sheet exhibits a true and fair view of the state of affairs of the concern

ii)                   The profit and loss Account reveals the true and fair view of the P& L for the financial period and

iii)                 The accounts have been prepared in conformity with the law.

OBJECTIVES of AUDITING:

                The principal objectives of auditing are changing with the advancement of business techniques. Earlier it was only to check the correctness of receipts and payments which was extended to detection of frauds. The methods of auditing of accounts have improved the detection of frauds is simply an incidental object. The main objective is not detection of frauds and errors unless the auditor is appointed for only this purpose.

                This main object of the audit is to find the reliability of financial position and profit and loss statements.

                “The purpose of the opinion is to assure others that current. objective standards of information and presentation have been observed. Standards to which both profession and public bodies have contributed for many years standard designed to provide ready of financial statements with useful information”kohler

Main objects of Audit:-

                The main objects of an audit is to verify and establish that at a given date balance sheet presents true & fair view of profit & loss for the accounting period. It is to be established that accounting statement satisfy certain degree of reliability

                To judge the accuracy of the books of accounts, the auditor must

1)      Assess the system of internal control

2)      Verify the accuracy of posting balancing etc

3)      Confirm the validity of transaction with supporting documents

4)      Ascertain whether distinction has been made between capital and revenue items

5)      Confirm existence of assets & liability

Secondary Objective:

a)      Detection & Prevention of Errors:

Errors are generally innocent but sometimes errors which might appear at first sight are found to be fraudulent manipulation therefore an auditor must pay attention to every error.

1)      Clerical Errors: These errors are committed in posting totaling and balancing.

i)                    Errors of omission: This error is one where a transaction has not been recorded in the books of accounts either usually or partially. Hen mistakes can be detected by careful observation.

ii)                   Error of commission: When a transaction has been recorded in the books but has been wrongly entered in the books of original entry or posted in the ledger errors of commission is said to have been made.

Eg: A purchase invoice for Rs. 1250 was entered in the purchases book as Rs. 1520.

2)      Errors of Principle: They arise when the entries are not recorded according to the fundamental principle of accountancy.

Eg: Wrong allocation of expenditure between capital and revenue ignoring the outstanding assets and liabilities valuation of assets against the principles of book keeping.

3)      Compensating error: This is one which is counter balanced by any other error or errors these errors are most dangerous and are difficult to guard against.

Eg: If A’s Accounts was to be debited for Rs. 100 but was debited for Rs.10 while B’s Account which was to be debited For Rs. 10 was debited for Rs. 100. This may or may not effect the profit & loss Accounts.

4)      Errors of Duplication: This arise when and entry in a book of original entry has been made twice and has also been posted twice. Errors can be located.

·         Check totals of the trial Balance

·         Compare names of the accounts in the ledger with names of the accounts as have been recorded in the trail balance

·         Total the lists of debtors and creditors and compare them with the balances of trail balance

·         Compare the items of trail balance of the present year with the previous year to see if any item has been omitted 

b)      Deduction & prevention of frands:

                   Frauds means false representation or entry made intentionally or without belief in its truth with a view to defraud somebody. Detection of fraud is one of the important duties of an auditor.

1)      Embezzlement of cash:- There is a greater possibility of defalcation of money in big business house than in a small business. In a big business house the system of receipt and payment of cash should be checked by two clerks. Such a system in auditing is known as “Internal check”. Cash may be misappropriated by

·          Omitting to enter any cash received

·         Entering less amount than actually received

·         Entering more amount than actually received

2)      Misappropriation of goods: This type of fraud is very difficult to discover or detect when the goods are less bulky and are of higher value. Proper methods of keeping accounts in regard to purchases and sales, stock taking periodical checking of stocks. Comparing percentage of gross profit to sale of two periods. Necessity for collusion will help to avoid misappropriation of goods.

3)      Fraudulent Manipulation of Accounts: This type of fraud is more difficult to discover as it is committed by director or managers with the objects of

à Showing more profit than what actually they are :

·         To get commission more on profits

·         Showing share holders their service to maintain confidence

·         To attract subscribers for sale of shares of the company etc.

è Showing less profit than what actually they are :

·         To purchase shares in the market at low price

·         To reduce payment of income tax

·         To give wrong impression about success of the business to the competitors etc.

2)      What are the Importance or Advantages and disadvantages of an auditors?

A)                   Importance of Auditing can be judged from the fact that even those organization which are not covered by companies act, get their financial statements auditing. It has become a necessity for every commercial and even non commercial organization. People are interested to know the true facts about their business which are helpful to them for future planning and improvement in operations.

Advantages /Importance

1)      For owners of business and share holders

2)      For the management

3)      For the creditors

4)      For the Governments Bodies

5)      For others

1)      For owners of Business and share holders:

·         In case of share holders he can depend on the audited accounts for the purpose of sales of business for admitting a new partner

·         In partnership firms, audited accounts is useful in valuing good will and business an admission & retirements of a partner

·         Share holders can judge the performance of management from audited accounts.

2)      For the management:

·         It helps management in detecting and preventing errors and frauds

·         It helps accountant and staff while preparing books and records, that all the accounts are to be audited

·         Claims due to fire, theft and accident can be estimated from it

·         Management gets advise on financial affairs from the experts (auditors)

·         Helps in comparison between two years

3)      For the creditors:

It helps long-term and short-term creditors to grant credit to business houses

4)      For the Government Bodies:

·         It helps taxation authorities in assessing the It, sales tax and wealth tax liabilities of the business

·         It is a good evidence which can be produced in the court

·         It is useful for the Government while granting subsidies.

5)      For others:

·         It can be used by insurance companies to settle the claims arising an account of loss by fire

·         In case of amalgamation and absorption. The purchasing company calculate purchase consideration

Disadvantages of auditing:

·         The audit may not give complete picture, if any, fraud is committed in the preparation of accounts

·         The auditor has to depend on info from staff and client which may or may not be correct or complete

·         Under law, share holder’s appoint an auditor but in fact directors appoint him, so he may not be an independent auditor

·         Auditors has to get opinion of experts on certain matters an which he has less knowledge

·         Auditing is a post mortem examination which means finding from what already has happened

3)      “An Auditor is a watch Dog and Not a Blood – hound”

                 Auditing refers to inspection and examination of financial books of an organization in a systematic manner to ascertain whether the financial statement present a true and fair view of the concern

                 In observing the above the auditor is required to make a report to the members on the account examined by him and on every balance sheet, P&L account and on every other document annexed there to which would be laid before. The general meeting during his tenure of office. The report must state whether in his opinion and to best of his info and according to the explanation given to his the said accounts give the information in the manner required by this act and give a true and fair view in the case of the balance – sheet, of the state of company’s affairs as at the end of its financials years in the case of the P&L accounts of the P&L for its financial year.

                 Auditor is responsible for protecting the interest of those who appointed him but the auditor will presume that servants of the company are honest and will rely on their statement the auditor should invest gate thoroughly but he is also not expected to be of suspicious mind.

                  Justice lops in case of kingston cotton mill quoted “Auditor is a watch dog not a blood hound ”A watchdog is defined by the American Heritage dictionary as “ one who serves as a guardian or protector against waste, loss or illegal practices “ A blood hound is defined informally by the same dictionary as” A relentless pursuers”

                Watch dogs keep watch and protect against waste and abuse. They remain aware of their surroundings, act up on suspicious behavior or activity and may defer to the blood hound when a relentless pursuit is necessary Blood hounds Fixate on the scent of the animal and follow the trail through water, rain sleet and show until they detect the animal or collapse of fatigue.

               The auditor’s job is merely to provide a check an management by expressing an opinion as to whether the financial statements present a true & fair view of a company’s affairs. Simply put, they have to ensure that the financial statements are prepared in accordance with the relevant accounting standards do not contain material misstatement.

3.     Distinguish between Book-Keeping, Accountancy & Auditing

Ans) Introduction: In the earlier days Book –Keeping Accountancy and Auditing were considered as the three aspects of the term Accountancy. But with the increase in trade, commerce & industrial activities. Book-Keeping and accountancy have become separate Functions.

Meaning: Book – keeping is the art of recording day to day transactions systematically in the books of accounts

                     “Accountancy begins where Book-keeping end”

                     “Auditing begins where accountancy ends”

Steps showing the distinction:

1)      Book – keeping:-

·         Journalizing

·         Posting to ledger

·         Totaling of various accounts in ledger

·         Balancing of ledger accounts

2)      Accountancy:(Summary & Analysis)

·         Rectification of errors

·         Preparing Trial Balance

·         Preparing Trading & Profit & loss accounts

·         Preparing Balance sheet

3)      Auditing:(Verification of records)

                  Checking & verification of work done by Accountant

Accountancy	Auditing
Nature: Constructive Nature	Nature: Analytical in nature
Scope: Restricted to preparation of financial statement and their interpretation	Scope: Determined by the agreement between auditor and his client
Concerned with: Compilation of  accounting information for preparing P&L a/c and Balance sheet	Concerned with: Checking and verification of financial statement
Qualification: Not necessary	Qualification: Qualified chartered account
Commencement: Starts where Book – keeping end	Commencement: Starts where Accountancy ends.
Object: To find out operating results and financial position of business	Object: To ascertain truth and fairness of financial statements and comment these on
Commencement: Starts where Book – keeping ends	Commencement: Starts where accountancy end
Reporting: Not necessary	Reporting: Necessary
Remuneration: Accountant is paid monthly salary	Remuneration: Auditor gets as per agreement with his client
Appointment: Employee of Business	Appointment: An independent outsider appointer an contractual basis for a year
Level of Knowledge: Need not have knowledge of audit technique and procedures	Level of knowledge: Must have knowledge of accounting as well as audit techniques and procedures
Duration: Throughout the year	Duration: Throughout or at the end of the year

4)      Discuss about auditing as a vigil mechanism?

     Ans)               The meaning of the term vigil is purposeful surveillance to guard or observe. Companies Act 2013 has introduced new provisions relating to setting up by specified companies a mechanism known as vigil ‘mechanism’ for directors and employees to report genuine concern (sec 177(9).

                           Following provisions need to be complied with:

·         Every listed company and unlisted public company required to constitute audit committee. Shall establish vigil mechanism

·         There should be adequate safe guar against the victimization of person who use such mechanism

·         There should be provision for direct access to chair person of audit committee in appropriate or exceptional cases

·         Disclosure of vigil mechanism establishment on company’s website and in board report

Establishment of vigil mechanism:

          Every listed company and the companies belonging to the following class or classes, as prescribed under rule 7 of companies (meeting of Board and its powers)Rule 2014 shall establish a vigil mechanism for their directors and employees to report their genuine concerns or grievances.

·         Companies which accept deposits from the public

·         Companies which have borrowed money from banks and PFI in excess of Rs. 50 crores

Mandatory companies	Other companies
The companies which are required to constitute an audit committee shall operate the vigil mechanism through the audit committee and if any of the members of the committee have a conflict of interest in a given case, they should recluse themselves and the others on the committee would deal with the matter on hand.	The Board of directors shall nominate a director to play the role of audit committee for the purpose of vigil mechanism to whom other director and employees may report their concerns.

                    The existence of the mechanism may be appropriately communicated with in the organization. The details of establishment of vigil mechanism shall be disclosed by the company in the website, if any, and in the Board’s Report.

Safe guard to employees and directors:

                   The vigil mechanism shall provide adequate safe guards against victimization of employees and directors who avail of the vigil mechanism and also provide for direct access to the chair person of the audit committee or director nominated to play the role of audit committee, as the case may be, in exceptional classes.

Action against frivolours complaints:

                     In case of repeated frivolous complaints being filed by a director or an employee. The audit committee or the director nominated to play the role of audit committee may take suitable action against the concerned director or employee including reprimand penalty:

Company              Fine of Rs. 1 lakh to Rs. 5 lakhs

Officer                   in imprisonment up to 1 year or fine of

Default                  Rs. 25000/- to Rs. 100000 or Both

UNIT-II

TYPES of AUDIT

1)      What are the different classification or types of Audit?

Ans)             An audit can be classified into 3 types, namely

·         Based on ownership

·         Based on time and

·         Based on objectives

I.                    Based on owner ship:

1)      Sole proprietorship Audit:-In case of proprietor concerns the Owner himself takes the decision to get the accounts audited. Sole trader will decide about the scope of audit and appointment of auditor the auditing work will depend up on the agreement of audit and specific instructions given by the proprietor, in writing

2)      Partnership firms Audit: To avoid any Misunderstanding audit of financial statement partnership deed on mutual agreement between partners may provide audit of final statement auditor’s appointment, rights, duties and liabilities are defined by mutual agreement of all the partner.

3)      Audit of companies: Under companies Act 1956, audit of accounts of companies in India is compulsory independent CA who is professionally qualified is required for audit of accounts of companies. A number of amendments have been made by this Act regarding appointment duties qualification, powers, liabilities of a qualified auditor

4)      Audit of Trust: Trusts are created for the benefits of some institutions, windows, minors, etc. The beneficiaries of the trust. May not have access and knowledge of accounts of the trust. The trustees are appointed to manage and look after. The property and business of the trust. Accounts are maintained according to trust deed. There are more chances of frauds and misappropriation of incomes.

5)      Audit of Co-operation Societies: They are established under the co-operative Act 1912. It contains various provisions for regulation and working of the societies. The auditor should have an expert knowledge of the particular Act  under which co-operative society under auditing is functioning. It is usually once in every F.y

6)      Government Department Audit: A Separate department is maintained by Government of India, known as account and audit department. This department is headed by controller and auditor General of India. It works only for government offices and departments and working strictly according to rules and regulations.

II.                  Based on Time:

·         Interim Audit:- When an audit is conducted between two annual audits, such audit is known as interim audit. It may involve complete checking of accounts for a part of the year some time, it is conducted to enable the board of directors to declare an Interim dividend. Errors and frauds can be deducted at the earliest. It is also for the purpose of dealing with interim figures of sales.

·         Final audit: This means when the audit work is conducted after the close of financial year or trading period when all the accounts have been balanced and a trading & P&L a/c   and the balance sheet have been prepared. The auditors visits the clients and completes the audit in one sitting. After the accounts are finalized the auditor is invited to audit the accounts It is ales expensive system and minimization of chances of alterative of audited work.

·         Continuous Audit: A Detailed Audit as it is sometimes called is an audit which involves a detailed examination of months. The auditor visits his clients at regular or irregular every transaction. At the end of the year he checks the profit & loss accounts and Balance sheet.

·         Balance sheet audit: This audit relates to the verification of various items of Balance sheet such as assets liabilities, reserves and surplus, provisions and profit & loss balances. The procedure is to follow a back ward process. First the items is located in the Balance sheet then it is located in the original records for the purpose of verification. The auditor is highly skilled and experienced.

III.                Based on Objectives:

1.       Independent / External Audit: It is conducted by an independent professionally qualified person who is not an employee of the organization by wring his services. This audit enjoys better credibility in the eyes of the public

2.       Internal Audit : It implies the audit of accounts by the staff of the business who may or may not have professional qualification for audit of accounts. He is permanent in nature and helps the business in early detection of errors and frauds. The objectives and function depends on the nature of operations and business.

3.       Cost Audit: It was 1^st time introduced in 1965 in India. It is an effective means of control in the hands of management and it is a check on behalf of the share holders of the company, consumers and Govt. The cost accountant help in maintaining proper cost records and suggests the means for reducing the cost of production, there the cost auditor checks the work of cost accountant, whether work is done according to plan.

4.       Tax Audit :Under It act profit shown by P&L account have to be adjusted as per the provision are not the same due to various reasons.

5.       Government Audit : Audit of government officer and departments is covered under this heading. The main objective is to

a)      Ensure that every payment is made as per rules and regulations

b)      Payments have been sanctioned by the proper authority

6.       Secretarial Audit: It is concerned with verification compliance by the company of various provisions of companies Act and other relevant laws, and any default there of may attract heavy penalties for the company, directors and other officials.

2)      What is continuous Audit? Explain the Advantages & disadvantages of such Audit.

     Ans)            A Detailed Audit as it is sometimes called is an audit which involves a detailed examination of the books of accounts at regular intervals of say one or three months.

Definitions: According to R.C Williams “A continuous or detailed Audit is one where the auditor or his staff is constantly engaged in checking the accounts during the whole period or where the auditor or his staff attends at regular or irregular intervals during the period”

Advantages:  

·         Discovery of errors and Frauds: Audit is carried out throughout the year, so errors and frauds can be discovered easily and quickly

·         Fast presentation of Accounts: Check work is performed during the course of work so audited accounts can be presented to share holder just after the end of financial year.

·         Preparation of Interim Accounts: Helps in preparations of interim Accounts without much delay, where the directors of a company wish to declare an interim dividend.

·         Proper planning: Planning is deciding in advance what is to be done in the future. Auditor can plan his work in a systematic manner and work accordingly

·         Complete checking of records: Sufficient time is available for detailed checking as audit is carried out throughout for detailed checking. As audit is carried out throughout the year. Any doubts can be solved in a better way.

·         Accounts Maintained: Efficiency of accounts staff will increase and their work will be up-to-date and accurate.

·         Valuable Suggestions: Helps auditors to know technical details of business and give proper suggestions.

Disadvantages:

·         Alteration of figures: Even after accounts have been audited, alternation of Figures may be done by dishonest clerk

·         Cost/Expensive: An expensive system of audit and suits only the budget of big organizations.

·         Dislocation of client’s work: Regular visit of auditor may dislocate smooth flow of office work

·         Regular Visits: Regular visits of auditor provide scope for unhealthy relationship between him and clerks

·         Losing link in work: Auditor may lose continuity, if work is not completed continuously and certain question may be left unanswered.

·         Work of auditors: An auditors work becomes very mechanical as it is continuous

3)      What is interim audit? Explain the Advantages & Disadvantages of interim audit?

Ans)            Interim Audit is an audit conducted in between the annual audits it is conducted to find out the interim profit and know the financial position at the end a part of the accounting year. For example an audit of accounts prepared for the period of six months from 1^st April to 30^th September would be interim Audit.

Advantage:

          Interim audit is similar to continuous audit and enjoys similar advantages

·         Quarterly Results: A public limited company listed on the stock exchange can comply with the statutory provision of declaring quarterly results

·         Interim Dividends to share holders: The share holders would be happy as the company can pay interim dividends to the share holders

·         Quick preparation of final A/c: Since the interim audit is already done, the final A/c can be prepared immediately after the year end.

·         Up-to-date Accounts for Banks: The up-to-date interim a/c are useful to banks and investors for taking decisions regarding loans and investment

·         Check on employees:  Interim audit acts as check on the employees to keep the accounts ready and up-to-date.

·         Though final audit: The auditory has more time at his disposal at the time of final audit which reduces the risk of missing any materials items.

Disadvantages and Precautions:

a)      Expensive: Since the auditor does two audits in one year the audit fees are more to that extant. Interim Audit is they expensive.

b)      Audit in installments: Since the audit work is done at two stages and not at one go, audit may be inefficient. It is difficult at the time of final audit to take up the work precisely at the stages where it was left at the time of interim audit

c)       Disrupts Accounts works: Interim audit disrupts the work of accounts staff. To avoid this advantage, the audit program should be coordinated with the client to avoid disruption in routine accounts work.

4)      Define Tax Audit & State its objectives?

            Statutory audits as well as the cost audit are taken up as result of specific provisions contained in the companies Act, 1956. However anew concepts of tax audit has been evolved lately under the income Tax Act, 1961 provides, for compulsory audit of accounts of certain assesses whose turnover or receipts exceeds the specified limit. The Income Tax Act has provided for rules and regulations regarding tax audit. The tax audit can be undertaken by the practicing members of the institute of CA of India.

             There are no specific rules laid down by the CA Act 1949 from time to time, the institute of CA of India issues certain guidelines regarding conduct of Tax Audit. The objectives of such audit is assist the tax authorities in determination of correct tax liability. The  Tax auditor has to report about the transactions which have an effect on fixation of tax liability.

Compulsory Tax Audit U/S uuAB:

                Under the above section Tax audit is compulsory for a person carrying on any business or profession if:

·         In the case of a profession if the gross professional receipts in the previous year exceed Rs. 2500000

·         In the case of an  assesses covered under sections 44AD, 44AE, 44BB or 44BBB.

The audit report in prescribes form should be obtained from the auditor and filed with the return of income the tax auditor cannot accept more than 30 tax audit assignments in a financial year.      

Objective of Tax Audit:

1)      Report the requirements of form No 3CA / 3CB and 3CD

2)      To ensure the book of account and other records of assesses are properly maintained.

3)      Book of account accurately reflect the income tax payers and deduction are correctly declared

4)      Facilitate the administration of tax law by proper presentation of accounts before tax authorities and considerably save the time of assessing officers in caring out routine verification.

Penalties for not getting the accounts audited as required by section uuAB:

                  According to section 271B. The assessing officer may impose penalty if assesses is failed to file tax audit report as required under sec 44AB. The penalty shall be lower of the following amounts:

·         5% of total sales, turnover or gross receipts car the case may be in business in such year or year

·         5% of the gross receipts profession, in such year of year

·         Rs. 1,50,000

4. Explain the differences between internal and external audit?

Internal Audit	External Audit
Primary Audit: To help and guide management	Primary Audit: To safe guard the interests of owners, shareholders and other parties who do not have knowledge of day – to – day operations the organization.
Auditors Qualification: May or May not have professional qualification	Auditors Qualification: Must have a professional qualification
Nature of Work: Continuous	Nature of Work: Periodical
Conducted by: Permanent staff of the business or outside agencies sometimes	Conducted by: Independent qualified auditor
Objective: Early detection of errors and frauds and their prevention	Objective: To see whether final statement give true and fair view financial position and profits
Auditors controls: Under direct control of management	Auditors controls: Enjoys better status and independence

UNIT – III

Planning of Audit

1)      What are the main steps to be taken into account while commencement of New Audit?

Ans)  An auditor should consider how much time should be denoted in auditing the account of a business concerns will depend entirely upon the circumstance of a particular case and the training experience and knowledge of auditor. His preparation will be decided by the scope of work assigned to him and the method in which he will proceed.

·         Letter of Appointment: The auditor should in his own interest satisfy himself that he has been duly appointed to act as an auditor. He must have a proper letter of appointment from authority of concern.

·         Scope of Audit: He should obtain instructions in writing from his clients about the nature and scope of his work and duties. He must also get instructions whether he has to do accountancy work or audit work or both.

·         Nature of Business: He should familiarize himself with the nature and technical details of the business of his clients Eg: Incase of audit of the accounts of manufacturer the auditor should visit the factory understand the process and nature of equipment materials labor used.

·         System of Accounting Employed: He should examine the system of accounting employed in the concern the system accounts depends upon the nature of business.

·         Condition of internal check: He should obtain a written statement of the internal check if any, in operation and should decide to rely or not to rely up on it.

·         List of Books: He should obtain a list of all the books maintained by the concern and the name of the clients in charge of charge of the various books, signed by a responsible officer of the concern

·         List officers: He should ask his clients to prepare a list of debtors and creditors and the officers of the company together with their duties and powers

·         Instruction to clients: He should give instructions to his clients to keeps ready

1)      Trial Balance and final accounts

2)      Schedule on debtors & creditors

3)      Stock – sheet indicating method of valuation

4)      Details of investments with cost and market price

5)      Legal documents, contracts etc.

·         List of debtors & Creditors: He should also ask his clients to prepare of list of debtors & creditors, keeps the legal papers, list of contracts securities and other documents ready for inspection

·         Change of Auditor: If he is appointed in the place of another her should find out the reasons for the changes of auditors and if possible contact the removed auditor and check the facts.

2)      What is Audit planning? What is required for developing an audit plan? State its advantages?

    Ans)             For effective and efficient conduct of an audit, audit planning is required. But planning should be continuous throughout the course of audit assignment

Meaning: Generally, planning in deciding in advance what is to be done in the future. It is the process of thinking before doing.

Definitions: Statements of standard Auditing practices(SAP)-I renamed as auditing and assurance standards (AAS-I) states that “the auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner”

Goals of Audit Planning:

a)      Developing time budgets

b)      Assigning audit staff personnel

c)       Scheduling dates for interim and yearend audit procedures

Goods Audit plan should be based on:

·         Knowledge of accounting system in the organization

·         Policies of the company

·         Internal control procedures

·         Reliability of internal control system

·         Determining & programming nature and timing of work to be performed

·         Audit procedures to be followed

·         Coordinating the work to be performed

Developing an Audit plan: The auditor should put his plan in black & white i.e in writing according to the size and complexity of organization it includes.

·         Statutory responsibilities under assignments

·         Term of engagement

·         Required legal rules

·         Reports nature & timings

·         Old & new accounting policies in the organization

·         Important audit areas

·         Effect of any new accounting or audit pronouncement an audit under consideration

·         Possible rotation of emphasis over a period an specific audit areas

·         Reliability of accounting & control system

·         Areas requiring special attention like chance of error and fraud

·         Nature & extent of audit evidence to be obtained

·         Involvement of experts

·         Involvement of others auditors like branch auditors

·         Allocation of work between joint auditor and procedures for its control and review

·         Establishing and coordinating staffing requirements

Advantages:

·         Attention is give to imp areas of audit

·         Problems are identified

·         Work is completed expeditiously

·         Assistants are properly utilized

·         Co-ordinate work done by other auditor experts

3)      What is an audit Note Book? What are its main contents Advantages & disadvantages?

    Ans)   Meaning:   Audit Note Book is a diary or registered maintained by audit staff to note errors, doubtful queries and difficulties. The purpose is to note down various points which need to be either clarified with the client or the chief auditor. It is also used for recording important points to be included in the auditor’s report.

Contents:

·         A list of books of accounts maintained

·         Names, duties and responsibilities of principal officers

·         Particulars of missing receipts & voucher

·         Mistakes and errors detected

·         Various totally & balances

·         Points deserving the attention of the auditor

·         Extracts from the minutes and cataracts

·         Points to be part of the auditor’s report

·         Date of commencement and completion of the audit

Advantages:

·         Ensures uniformity  and help in knowing the amount of work performed

·         Important matters relating to the audit work may be easily recalled

·         Facilitates the preparation of the audit report

·         No difficulty in completing the work, in case the assistant in charged is changed

·         Responsibility for errors undetected can be fixed on clerk concerned

·         It shows the extent of the interest and pains taken by the audit staff

·         Ensures that the audit program has been sincerely followed deviations can be noticed

·         A reliable evidence in the court of law, if an auditor has to defend himself

Disadvantages: In case the audit work is conducted negligently by the staff of an auditor the audit note book can act as an evidence against the auditor himself. How-ever it is a document whose advantages out do its limitations

Advantages of Internal control:

·         Internal control helps to protect the assets of the business from misuse, theft, accident etc

·         Internal control helps to implement management policies to attain corporate goals

·         Internal control helps the auditor in his/her work detecting all the errors and frauds which are committed in the books of accounts

·         Internal control helps to increase the accuracy and reliability of financial statement and books of accounts

·         Internal control helps the management to prepare and implement effective plans by providing correct and fact information

·         Internal control helps to put moral pressure on staffs

Disadvantages of internal controls:

·         Judgments: The effectiveness of controls will be limited by decisions made with human judgment under pressures to conduct business based on the information at hand.

4)      Explain Internal control advantages & disadvantage?

    Ans) Definition:  According to spicer and pegler, “Internal control is best regarded as the whole system of controls financial and otherwise, established by the management in the conduct of a business including internal check, internal audit and other forms of controls.

                         Internal control is the plan of organization and all of the coordinated methods and procedures adopted with in a business to safe guard its assets check the accuracy and reliability of its accounting data, promote operational efficiency and encourage adherence to the prescribed managerial policies. We can say that internal control is a broad term with a wide coverage. Its scope extends beyond those matters which related directly to the functions of accounting and financial department.

                            Previously internal check and control was taken as the same term but nowadays owners and managers are separate and different. So it is taken as a separate term. Internal control incorporates inspection, internal audit and other factors of control Nowadays, if is essentially for the smooth operation of accounting cash and other transactions of Business.

·         Break downs: Even well designed internal controls can break down. Employees sometimes misunderstand instructions or simply make mistakes. Errors may also result from new technology and the complexity of computerized information system.

·         Management override: High level personnel may be able to override prescribe policies and procedures for personal gain or advantage. This should not be confused with management intervention, which represents management actions to depart from prescribed policies and procedures for leg it mate purpose.

·         Collusion: Control system can be circumvented by employee collusion. Individuals acting collectively can alter financial data or other management information in a manner that cannot be identified by control system.

5)      What is audit program? How is it prepared? What are the advantages & Disadvantage?

A)     Meaning: Audit program represents an outline of procedure to be followed to support an opinion on financial statements. It is the auditor’s plans of action. It provides a plan of the work of examination and a set of audit procedures, specifically designed for each audit.

Definition: According to prof megis  “An audit program is a detailed plan of audit work to be performed, specifying the procedures to be followed in verification of each item in financial statements and giving the estimated time required”

Preparation of audit program:

                In drawing up a satisfactory audit program the auditor should given attention to

1)      Ascertain exact scope of his duties and study the different aspects an operations of the client’s business

2)      Obtain a list of all the books in use in business, together with the names of the persons in charge of them.

3)      Obtain Financial and statistical records and legal documents

4)      Obtain a written statement of the internal check in operation and examine it thoroughly.

5)      Un – necessary procedure for checking should be avoided

6)      The program adapted should be elastic

7)      Audit program should be drawn up for each audit according to the work involved and after taking opinion of the experienced audit staff.

Advantages:

1)      Audit work can be started once an audit program is made ready

2)      Facilitates completion of audit work without omitting any portion of the same

3)      Work can be planned and phased and routine gets systematic

4)      Audit assistants know their clear cut duties, so efficiency increases

5)      Serves as a valuable evidence of work done

6)      Assures adherence to the principle of auditing and accounting

7)      Serves as a guide for the future audits of the audit program

8)      Continuity is not lost even if the person on duty is changed

9)      Chief auditor is saved from botheration of issuing instructions to the staff repeatedly

Disadvantages:

1)      Makes the clerks mechanical and specialized in only one work

2)      Work may be hurried up to complete if within the scheduled time

3)      No necessary for small business concern

4)      Rigid program for all kinds of business is useless

5)      Inefficient and negligent auditor may take shelter behinds this

6)      Uniformity of audit program cannot be applied extensively, as the nature of work in audit of organizations differ.

               

    

   

UNIT-IV

1)      Define “vouching” and state its objectives and importance?

A)     Vouching is an important part of auditor’s duty. He may be held negligent if he had been vouching carelessly.

Meaning: It is concerned with examining documentary evidence to ascertain the authenticity of entries in the books of accounts. It is a technique used by an auditor to judge the truth of entries appearing in the books of accounts.

Definition: According to Taylor and perry.

                                “Vouching is the examination of the evidence offered in substantiation of entries in the books including in such examination the proof. So far as possible, that no entries have been omitted from the books”

Objectives:

·         To check if all the transaction have been recorded properly in the books of accounts

·         To verify that the recorded transactions are supported by a documentary evidence.

·         The voucher which support the entries are properly dated

·         The check whether no fraud or error has been committed while recording transactions in the books.

·         In internal check system if the vouchers have been processed carefully through various stages

·         If every transaction recorded has been adequately authenticated by a responsible person

·         Whether distinction has been made between capital & revenue items while recording the transaction.

Importance of Vouching:

                Vouching is the act of checking evidential documents to find out errors and frauds and to know the authenticity important for an auditor due to the following reasons:

·         Vouching is the back bone of Auditing: Main aim of auditing is to detect errors and frauds to proving the true and fairness of results presented by income statements and balance sheet. Vouching is only the way of detecting all sorts of errors and planned frauds. So, it is the back bone of auditing

·         Vouching is the Essence of Auditing: Auditing not only checks the accuracy of books of accounts but also checks whether the transactions are related to business or not. All the transactions are performed after the prior approval of concerned authority or not, transactions are real or not because an accountant may include fictitious transaction To commit frauds. All these facts can be found with the help of vouching. So, vouching is essential for auditing.

·         Vouching is important To see whether evidence are correct or Not:               

An auditor checks the books of accounts to detect errors and frauds, frauds may be committed presenting duplicate vouchers. All the small and big amount of frauds can be detected with the help of vouching. So, all the evidential documents and records are to be checked carefully and in details by an auditor which is the scope of vouching.

2)      How do you vouch the petty cash book?

A)                   Petty cash book is an important book. It records petty cash payments. It is usually maintained on the ‘imprest system’ In many cases the petty cash payment is considered as unimportant. But in fact there are many opportunities for committing fraud and misappropriation as there are no vouchers for a number of petty payments. Before commencing the vouching of petty cash book the auditor should check the system of internal check in regard to the petty cash transactions. It sound, he should adopt the following course of action.

·         The amount received by the petty cashier should be checked with the payments entered in the main cash book.

·         The totals, balances and the casting of the petty cash book should be checked

·         Duly authorized vouchers should be insisted for every payment over a certain amount say Rs.20

·         For Expenses for which vouchers are not available the auditor should examine the summary to see if it is signed by a responsible official

·         Some petty payments taken at random should be checked with the vouchers.

·         Payments made towards postage and stationery should be checked with the entries in the “Postage register” and stationery register respectively.

·         The auditor should see that the petty cashbook is periodically to ensure that the petty cash payments are bonafide

·         He should verify the closing balance of petty cash on the balance sheet date.

·         He should not allow. Iou’s to be included in petty cash balance.

·         He should see that the periodical advances does not exceed the limit prescribed for this purpose.

Objectives of vouching petty cash Book: The Main objectives of vouching petty cash book are as follow:

·         Verifying the validity and accuracy of the transactions

·         Detecting frauds and irregularities

·         Verifying the actual balance of petty cash by physical count

·         Determining that the petty cash balance shown in the balance sheet is accurately stated and that all petty cash expenses are properly posted to the appropriate accounts

·         Evaluating the system of internal control over petty cash transaction and funds

3)      What is Routine checking? State it objectives Advantages and Disadvantages?

A)     Routine checking is a part of the audit work. So it is to be conducted intelligently with care and caution. Routing checking Means “Checking of arithmetical accuracy of books of original entry and ledgers”

Objectives:

·         Verification of the arithmetical accuracy the original books

·         Ascertainment of postings from books of original entry to the correct account in the ledger

·         Ensuing, by special ticks, that no figures are altered after they have been checked.

Contrary to this the objects of vouching are much wider in their scope.

Routine checking involves normally four types of function:

1)      Checking of casts, sub cast, carry – forwards and other calculations in the books of original entry.

2)      Checking of postings in to the ledgers

3)      Checking of casts and balances of various accounts in the ledger and

4)      Checking of transfer of balances from the ledger on to the trial balance

Advantage:

·         The books of original entry can be thoroughly checked and the errors and frauds can be easily detected

·         Postings (i.e matters taken records made in the books of original entry to the ledger) can be checked

·         The checking of castings and postings done in routine checking is the very basis upon which the final results of audit depend. Hence, it helps in the checking of final accounts ultimately

·         In short, it reveals the errors and frauds of a simple nature and, if done with care and caution, it helps in the verification of the arithmetical accuracy of the entries

·         Routine checking is a simple job which can be done easily by a person with an ordinary knowledge of accounts

·         It is the simplest device for audit work

Disadvantages:

·         Routine checking is practically a mechanical process and hence, it can cause monotony to those who are entrusted with this task

·         Only minor cases of fraud can be detected by routine checking major items of fraud cannot be brought to light

·         There appears to be a lot of difficulty in tracing out compensating errors and errors of principal

·         Routine checking is not always considered important in the audit of a business where self-balancing system used

4.    What is vouching? Explain precautions that the auditor should take while examing a voucher?

A)             Vouching is concerned with examining documentary evidence to a certain the authenticity of entries in books of accounts. In other words, it is an inspection by the auditor of an evidence supporting the transaction made in the books. Vouching is a technique used by an auditor to judge the truth of entries appearing in the books of accounts.

                  Vouching is an important part of auditor’s duty an audit must be very careful while vouching the transactions

Points to be Noted by Auditor:

·         Authenticity of transaction

·         Accuracy of amount recorded

·         Proper classification of accounts

·         Date and serial number of vouchers

·         Checked vouchers should be stamped or tick marked with a special sign

·         Amount on the receipt should be shown in words and figures

·         Receipt should indicate the period of payment

·         Proper treatment for voucher in the personal names of the partners, manager, directors, etc

·         Special ticks for vouchers is doubtful

·         Whether vouchers are certified by a responsible officers of the business

·         Explanation from concerned official for any missing vouchers

·         Should not take any help from client’s staff

·         Examine all expenses pertaining to the business

·         Revenue stamp on any receipt obtained from a party for Rs 20/- or more

·         Distinction made between capital and revenue

·         Vouching of a books of accounts of a particular period must be completed in one sitting

·         Any alternations in the vouchers must be supported by the concerned officer’s initials

·         Special ticks for vouching cash payments, receipts purchases, sales etc

·         Any doubt, checking must be full

·         If purchase are made on cash basis, transaction should be recorded only once.

UNIT-V

1)      Write about the qualifications and disqualifications of auditors?

A)     Qualifications:  As per sec (41(1) following with are qualified to act as an auditor of a company…

a)      An individual who is a CA with certificate of practice as per the Indian charted accounts act 1949

b)      A partnership firm having majority of the partner as CA practicing in India

c)       A limited liability partnership firm constituted under limited liability partnership Act 2008 having majority of partners as CA practicing in India.

Sec 141(2):-If firm of auditors i.e partnership firm or LLP is appointed as an auditor of a company, the appointment should be in the name of the firm and the report shall be signed by only those partners who are CA and entitled to sign the report.

Disqualifications:

                As per sec 141(3),the following persons shall not be eligible for appointment as an auditor of a company, namely…

·         A body corporate other than a LLP in corporate as per limited liability partnership Act 2008

·         An officer or employee of the company

·         A person who is a partner or an employee of an officer or employee of the company

·         A person who, or his relative or partner

a)      Is holding any security (or) interest in the company exception the relative may hold security or interest is the company of fact value not exceeding Rs.1 lakh

b)      Is indebted to the company in excess of such amount as may be prescribed (5 lakh) (or)

c)       Has given a guarantee or provided any security in connection with the indebtedness of any thired person to the company for such amount as may be prescribed(1 lakh)

·         A person or a firm having business relationship with the company of such nature as may be prescribed

·         A person whose relative is a director or is in the employment of the company as a director or key managerial personnel

·         A person who is in full time employment elsewhere or a person or a firm holding appointment as an audit of more than twenty companies at the time of appointment or reappointment in the company

·         A person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such verdict

·         Any person whose subsidiary or associate company or any other form of entity is engaged in service as provided in sec 144

2)      Explain the Rights of an auditor?

A)           Anybody who is given a task to perform must get the rights which may be essential for the proper performance of the risk. To enable the auditor of a company to discharge his duties properly, the companies Act, give him the following rights

·         Rights of access to books of accounts:

            Every auditor of a company has right to free an complete access at all times to the books, accounts and vouchers of the company the term ‘vouchers’ includes all documents correspondence, agreement etc., Which support any of the transactions of data disclosed in the financial statement directly or indirectly. The term ‘books’ includes financial accounting, statutory and statistical books, the term ‘all times’ means only during the normal business hours. The documents are available to the auditor whenever they may be kept by the company.

·         Right to obtain information and explanation:

           An auditor is authorized to strengthen the position of auditor requires every officer of the company to furnish without delay information to the auditor, whether or not such information is available from the accounts of the company.

·         Right to inspect branch account:

           Where the accounts of any branch officer are audited by a person other than the company’s auditory, the company’s auditor shall be entitle to visit the branch office, if he deems it necessary to do so for the performance of his duties as an auditor. He shall also have access at all time to the books, accounts and vouchers of the company maintained at the branch office.

            However, in the case of banking companies having a branch office outside India it shall be efficient, if the auditor is allowed access to such copies of, and extract from, the books accounts of the branch as have been transmitted to the principal office in India.

·         Right to receive notice:

           All notices of the company and other communications relating to, any general meeting of a company, which any member of the company is entitled to have sent to him, shall also be forwarded to the auditor of the meetings and make any statement or explanation with regard to the accounts audited by him. However, he is under no duty to answer to any question.

·         Right to sign the audit report:-

              Only the person appointed as auditor of the company or where firm is so appointed only a partner in the firm practicing in India, may sign the auditor’s report or authenticate any other document of the company required by law to be signed or authenticated by the auditor.

               The auditor is to make report to the members of the company and not the Board of directors auditor has the right to recommend to the board the changes in the accounting system which may be necessary. If his recommendation are not acted up on he has the right to report the fact to the members of the company report.

3)      What is Audit report? State its importance and contents of audit report?

A)               An auditor’s report is the medium through which an audit expresses his opinion on the financial statement it is nothing but a statement of facts. The facts are those which have not only been collected but also considered at the same time.

Definition:

       Tan caster defines an audit report as “a statement of collected and considered facts, so drawn up as to give clear and concise information to persons who are not already in possession of the full facts of the subject-matter of the report.

Importance of audit Report:

·         Audit Report is of much importance to the shareholders

·         It is a tangible proof of the financial state of affairs of the company

·         It indicates how the interests of the shareholders are being looked after the management

·         It is an evidence of the Auditor’s work

·         It gives the opinion of the auditor on the accounts of the company

·         It is the end product of every audit

Contents of Audit Reports:

           The Auditors reports is of much importance to contain certain matters. It must be clear and concise. It should be based on factual information. It should be convincing it should be force full and unbiased. The auditor has to take at most care and caution in drafting his report

Audit report should contain the following things:

·         Answer, clarification and explanation of furnished question are given by the concerned authority satisfactory or not

·         Income statement and Balance sheet is prepared by the company in prescribed structure or not

·         Accounts are maintained as per the provision of laid down rules and regulations or not

·         Balance sheet of the company presents true and fair view of financial position or not

·         High ranking official, representatives and staffs of the company have performed work as per the provision of rules and regulations or not, they have committed fraud or not

·         Transactions of the company are satisfactory or not

·         Auditor should provide suggestion if necessary

            In addition to above facts, an auditor should include other facts using his own discretion. Other facts which are to be incorporate in the report are given below

·         An auditor should include all the facts demanded by the company Act

·         Auditor should include the true and fairness of books of accounts as well as facts where he is not able to satisfy himself

·         Auditor should include all the important facts which directly affect the financial position of the company

·         An Auditor should include in the report that the audit of books of account is made in detail or applying test check   

·         Some abnormal transaction which are found during the course of audit but they are necessary for the company should be incorporated in the audit report

·         If there is special situation, an auditor should include it in the audit report

·         If auditor detects any frauds and errors during the course of audit, he must include in audit report clearly stating their effect in financial statements. Like regarding valuation of stock, depreciation system demarcation of capital and revenue etc.,

4)      Explain the Appointment and Reappointment of Auditor under companies Act 2013?

A)          The provisions regarding appointment of the auditors are contained in section 139 of the companies Act 2013

1)      Sec 139 (1) Appointment of Auditor by members:-

a)      A company shall appoint an individual or a firm as an auditor at the first annual general meeting and each subsequent sixth annual general meeting.

b)      Such auditor shall hold office till conclusion of sixth annual general meeting

c)       The manner and procedure of selection of auditor by the members at such meeting may be as prescribed

d)      Such appointment shall be placed before members at each annual general meeting for ratification

e)      Before such appointment of auditor a written consent to appointment and a certificate from him that it is in accordance with conditions as may be prescribed, shall be obtained from the auditors

2)      Sec 139(2) period for which appointment to be made:-

a)      An individual can be appointed of a term not more than five years

b)      An audit firm can be appointed for a consecutive term not more than two terms of five years

c)       An individual or a firm which has completed its term shall not be eligible for reappointment as auditor in the same company for five years from the completion of term

3)      Sec 139(3) Rotation of partner of audit firm or conduct of audit by more than one Auditor:

        The members of the company may resolve the rotation of partner and his team after certain interval or audit to be conducted by more than one auditor. The central Government may prescribe rules regarding the manner in which companies shall rotate the auditor.

4)      Sec 139(5) Appointment of auditor’s of Government companies:-

         The Comptroller and Auditor – General shall in respect of financial year appoint an auditor duly qualified within one hundred eighty days from commencement of financial year who shall hold office till conclusion of annual general meeting

5)      Sec 139(6) Appoint of first auditor by Board of Directors:-

         The first auditor of a company, other than Government company shall be appointed by Board of directors within thirty days of registration of company

           In the Board Fails to appoint first auditor it shall inform the members of company. Who shall appoint auditor within ninety days at extra ordinary general meeting who shall hold the office till conclusion of first annual general meeting.

6)      Sec 139(8) Casual vacancy of an Auditor:

a)      The casual vacancy of auditor, except in case of Government company, shall be filled by board of directors with in thirty days but if it arises as a result of resignation of the auditor it shall be approved within three months of recommendation of board. Such auditor shall hold office till conclusion of next annual general meeting.

b)      Casual vacancy in case of Government company shall be filled by comptroller and Auditor General with thirty day if he fails to fill the vacancy, the Board shall fill thvacancy

within next thirty days.

7)      Sec 139(9) Reappointment of a retiring Auditor:

Such auditor can be reappointed at annual general meeting if

a)      He is not disqualified for reappointment

b)      He has not given notice to company of his unwilling new meeting appointing some other person or providing expressly that he shall not be reappointed.

         All the above is subject to the provisions of Sec 139(1)

8)      Sec 139(10) where no auditor is appointed or reappointed at annual general meeting:

       The existing auditor shall continue to be the auditor of company.

9)      Sec 139(11) : Recommendation of audit committee:-

        If audit committee under sec 177 is constituted, all appointments of auditor shall be made after considering recommendations of such committee.