Thursday, May 09, 2019

Dibrugarh University B.Com 4th Sem: Auditing Solved Papers (May' 2016)

2016 (May)
COMMERCE (General/Speciality)
Course: 403 (Auditing)
Time: 3 hours
The figures in the margin indicate full marks for the questions
Full Marks: 80
Pass Marks: 24
1. (a) What are the objects of audit? Explain them briefly.                                                          14

Ans: Objectives of Auditing: Auditors are basically concerned with verifying whether the account exhibit true and fair view of the business. The objectives of auditing depend upon the purpose of his appointment. There are two main objectives of auditing.
1.       Primary objective and
2.       Secondary or incidental objective.
Primary Objective: The primary objective of an auditor is to respect to the owners of his business expressing his opinion whether account exhibits true and fair view of the state of affairs of the business. It should be remembered that in case of a company, he reports to the shareholders who are the owners of the company and not tot the director. The auditor is also concerned with verifying how far the accounting system is successful in correctly recording transactions. He had to see whether accounts are prepared in accordance with recognized accounting policies and practices and as per statutory requirements.
Secondary Objective: The following objectives are incidental to the main objective of auditing:
A) Detection and prevention of errors: errors are mistakes committed unintentionally because of ignorance, carelessness. Errors are of many types:
a.       Errors of Omission: These are the errors which arise on account of transaction into being recorded in the books of accounts either wholly partially. If a transaction has been totally omitted it will not affect trial balance and hence it is more difficult to detect. On the other hand if a transaction is partially recorded, the trial balance will not agree and hence it can be easily detected.
b.      Errors of Commission: When incorrect entries are made in the books of accounts either wholly, partially such errors are known as errors of commission. E.g.: wrong entries, wrong Calculations, postings, carry forwards etc such errors can be located while verifying.
c.       Compensating Errors: when two/more mistakes are committed which counter balances each other. Such an error is known as Compensating Error. E.g.: if the amount is wrongly debited by Rs 100 less and Wrongly Credited by Rs 100 such a mistake is known as compensating error.
d.      Error of Principle: These are the errors committed by not properly following the accounting principles. These arise mainly due to the lack of knowledge of accounting. E.g.: Revenue expenditure may be treated as Capital Expenditure.
e.      Clerical Errors; A clerical error is one which arises on account of ignorance, carelessness, negligence etc.
f.        Location of Errors: It is not the duty of the auditor to identify the errors but in the process of verifying accounts, he may discover the errors in the accounts. The auditor should follow the following procedure in this regard:
                                 i.      Check the trial balance.
                               ii.      Compare list of debtors and creditors with the trial balance.
                              iii.      Compare the names of account appearing in the ledger with the names of accounting in the trial balance.
                             iv.      Check the totals and balances of all accounts and see that they have been properly shown in the trial balance.
                               v.      Check the posting of entries from various books into ledger.
B) Detection and Prevention of Fraud: A fraud is an Error committed intentionally to deceive/ to mislead/ to conceal the truth/ the material fact. Frauds may be of 3 types.
a.       Misappropriation of Cash: This is one of the majored frauds in any organisation it normally occurs in the cash department. This kind of fraud is either by showing more payments/ less receipt. The cashier may show more expenses than what is actually incurred and misuse the extra cash. E.g.: showing wages to dummy workers. Cash can also be misappropriated by showing less receipts E.g.: not recording cash sales. Not allowing discounts to customers. The cashier may also misappropriate the cash when it is received. Cash received from 1st customer is misused when the 2nd customer pays it is transferred to the 1st customer’s account. When the 3rd customer pays it goes forever. Such a fraud is known as “Teaming and Lading”. To prevent such frauds the auditor must check in detail all books and documents, vouchers, invoices etc.

b.      Misappropriation of Goods: Here records may be made for the goods not purchase not issued to production department, goods may be used for personal purpose. Such a fraud can be deducted by checking stock records and physical verification of goods.

c.       Manipulation of Accounts: this is finalizing accounts with the intention of misleading others. This is also known as “WINDOWS DRESSING”. It is very difficult to locate because it is usually committed by higher level management such as directors. The objective of WD may be to evade tax, to borrow money from bank, to increase the share price etc.
To conclude it can be said that, it is not the main objective of the auditor to discover frauds and irregularities. He is not an insurance against frauds and errors. But if he finds anything of a suspicious nature, he should probe it to the full.
Scope of Audit
The scope of audit is increasing with the increase in the complexities of the business. It is said that long range objectives of an audit should be to serve as a guide to the management future decisions.
Today most of the economic activities are largely conducted through public finance. The auditor has to see whether these larger funds are properly used. The scope of audit encompasses verification of accounts with a intention of giving opinion on its reliability. Hence it covers cost audit, management audit, social audit etc. It should be remembered that an auditor just expressed his opinion on the authenticity of the account. He has no power to take action against anybody, in this regard its said that “an auditor is a watch dog but not a blood hound”.
The auditor can determine the scope of an audit of financial statements on the basis of various factors. Factors which affects the scope of Audit are as follows:
a.      Legal Requirements: The auditor can determine the scope of an audit of financial statements in accordance with the requirements of legislation, regulations or relevant professional bodies. The state can frame rules for determining the scope of audit work. The auditor can follow all the law applicable on the audit work while checking the accounts of a business concern.
b.      Entity Aspects: The audit should be organized to cover all aspects of the entity as far as they are relevant to the financial statement being audited. A business entity has many areas of working. A small entity may have few functions while a large concern has many functions. The auditor has duty to go through all the functions of a business. The audit report should cover all function so that the reader may know about all the working of a concern.
c.       Reliable Information: The auditor should obtain reasonable assurance as to whether the information contained in the underlying accounting record and other source data is reliable and sufficient as the basis for preparation of the financial statements. The auditor can use various techniques such as compliance test and substance test to test the validity of data.
d.      Proper Communication: The auditor should decide whether the relevant information is properly communicated in the financial statements. Accounting is an information system so facts and figures must be so presented that reader can get information about the business entity. The auditor can mention this fact in his report. The principles of accounting can be applied to decide about the disclosure of financial information in the statements.
e.       Evaluation: The auditor assesses the reliability and sufficiency of the information contained in the underlying accounting records and other source date by making a study and evaluation of accounting system and internal controls to determine the nature, the nature, extent and timing of other auditing procedures.
f.        Comparison: The auditor determines whether the relevant information is properly communicated by comparing the financial statement with the underlying accounting records and other source data to see whether they properly summarized the transaction and events recorded therein. The auditor can compare the accounting record with financial statement in order to check that same has been processed for preparing the final accounts of a business concern.
g.      Judgments: The auditor determines whether the relevant information is properly communicated by consideration the judgement that management has made in preparing the financial statements, accordingly, the auditor assesses the selection and consistent application of accounting policies, the manner in which the information has been classified and the adequacy of disclosure. The auditor must have the quality of judgement when accounting books to not provide true data.
h.      Evidence: The audit evidence available to auditor is persuasive rather than conclusive in nature. Due to judgment and persuasive evidence absolute certainty in auditing is really attainable. That is why the auditor can express an opinion as true and fair instead of exact and cent percent correct. The personal judgments affect the value of many items. The value of such items becomes an opinion so cent percent accuracy is not there.
i.        Errors: The auditor may get an indication that some fraud or error may have occurred which could result in material misstatement would curse the auditor to extend his procedures to confirm or dispel his suspicion. It is the duty of auditor to check cent percent items in order to discover the error in accounting books and other records when he smells any doubt. He should clear the doubt or confirm it while going through the record.
(b) What are ways to plan an internal audit? Discuss the advantages and disadvantages of the use of an audit programme.                                 4+5+5=14
Ans: Internal auditing may be defined as a service to the management regarding independent evaluation of various activities of organization. More clearly, Internal auditing is an independent appraisal activity within an organization for the review of operations as a service to the management. Internal audit is a regular activity performed by the employees of the organization, to ensure correctness of accounting data and to detect fraud by way of periodical review of organization system, procedures and policies. Internal audit is systematic and continuous process of examining and reporting the operations and records of a firm by its employees.
Advantages of audit programme
a)      Audit programme is prepared to locate exactly the responsibility of every clerk in the auditor’s staff.
b)      It promotes division of work in a well organized manner.
c)       Since the programme takes into consideration all the details involved in the work to be followed during audit, no portion of the work is left from checking.
d)      It helps the auditor to monitor the progress of the work.
e)      It will be easier to fix responsibilities for omissions and commissions.
f)       It serves as a valuable evidence for the work done.
g)      It serves as a guide for future audit.
h)      It ensures that audit process in a systematic manner.
i)        It eliminates inefficiency and saves time.
j)        Incase if any audit assistant goes on leave, his work can be easily continued by others.
k)      Before signing the report, it is easily possible for the auditor to have the final review of the work done by him.  At this stage, it may be explored whether everything has been completed or not.
l)        It avoids duplication of work.
Disadvantages of Audit Programme
a)      Due to fixed and strict audit programme, the audit work becomes mechanical and monotonous.
b)      As the audit programme prescribes the rigid routine, the audit staff does not display initiative in exploring more efficient ways of completing work.
c)       Audit programme is suitable for large business concerns and not for small concerns.
d)      Any defect in audit programme may leave certain items from being checked.
e)      Lack of proper audit procedure for different business concerns as each of these may be following different accounting procedures or may have a separate problem of its own.
The above disadvantages can be minimized if the audit programme is made more flexible and audit staff encourages to go beyond the work mentioned in the audit programme. The auditors should also periodically review the programme in the light of experiences gained in the previous year. He should impress upon the audit staff. The audit programme is only guidance and they should use their initiatives, intelligence and common sense at all times during the course of the audit.
2. (a) (i) What is routine checking? Mention the advantages of this checking.                    3+4=7
Ans: Routine checking                  
Routine checking is a checking of books of original entry and ledgers as a matter of routine work to determine the arithmetical accuracy and to detect errors and frauds and ensures the reliability of final accounts. It includes checking of casting of ledger accounts, posting to ledger accounts, preparation of trial balance and final accounts. 
Advantage or importance of Routine Checking: There are many advantages of routine checking. These are discusses below:                             
(i) Examination of arithmetical accuracy of books of accounts.
(ii) Through checking of books of accounts to detect errors and frauds and to prevent them.
(iii) Ensuring reliability of final accounts
(iv) Prevent to alter figures in books of accounts
(v) Easy examination of books of accounts.
(ii) “Vouching is the essence of an audit.” Explain this statement.                                          7
Ans: Vouching: The act of examining vouchers is referred to as vouching.  It is the practice followed in an audit, with the objective of establishing the authenticity of the transaction recorded in the primary books of account.  It essentially consists of verifying a transaction recorded in the books of account with the relevant documentary evidence and the authority on the basis of which the entry has been made; also confirming that the amount mentioned in the voucher has been posted to an appropriate account which would disclose the nature of transaction on its inclusion in the final statements of account.  After examination, each voucher is marked in a manner to ensure that it may not be presented again in support of another entry.
Importance of vouching: Vouching of transactions is the most important audit step in any type of auditing. Voucher is the document which describes any transaction and whole building of accounting stands on vouchers. Such is the importance of voucher and vouching. The importance and objectives of vouching are given below:
1.       Back bone of auditing: Vouching is first step in detailed auditing. It gives grounds and reasons for further investigation. It is primary activity to know the worth of any business.
2.       Careful vouching helps the auditor to detect fraud, misappropriation of money, errors, falsification etc.
3.       Detailed vouching acts as a moral check on employees.
4.       Vouching helps in separation of revenue with capital items.
5.       Vouching helps in ascertaining whether the transaction is in relation to business or some other activity outside the business.
6.       It is the foundation stone for any accounting process.
7.       Effective vouching makes the rest of audit easy and fast.
8.       Vouching helps the auditor to determine whether the voucher belongs to the period of audit.
From the above discussion, it is clear that vouching is the essence of audit.
(b) How would you verify the following assets?                                               3 ½ x4=14
1.       Patent Right.
2.       Intangible Assets.
3.       Livestock.
4.       Leasehold Property.
Ans: 1. Patent Right: Patents: patent rights should be verified with the certificates granting such rights. If a patent is purchased, he should verify the assignment deed. He should see whether the deed is registered in the name of his client and patents are the property of the client. The auditor should also examine whether fees paid to purchase patents are treated as capital expenditure. If renewal fees is paid, it should be treated as revenue expenditure. If the client has number of patents he should get the list of patents with details such as the date of acquisition, the period of which its acquired etc. Patents are written off over the period of which they are acquired. Hence, they are shown in the BS at cost less written off amount.
2. Intangible assets:
Goodwill:  goodwill is an intangible assets representing the value of the reputation of the firm which enables it to earn more than normal profit. The value of goodwill varies with the earning capacity of the business. When a business has been purchase and goodwill is paid for the auditor should verify the agreement with the vendors. Whenever a business is acquired, goodwill is the difference between the value of acquisition and cost of acquisition. Sometimes, goodwill may also be created by spending huge amounts to innovate new products. Such goodwill is known as Deferred Goodwill. Its capitalized over a period of time. Goodwill is shown in the books at cost less the written off amount.
Patents: patent rights should be verified with the certificates granting such rights. If a patent is purchased, he should verify the assignment deed. He should see whether the deed is registered in the name of his client and patents are the property of the client. The auditor should also examine whether fees paid to purchase patents are treated as capital expenditure. If renewal fees is paid, it should be treated as revenue expenditure. If the client has number of patents he should get the list of patents with details such as the date of acquisition, the period of which its acquired etc. Patents are written off over the period of which they are acquired. Hence, they are shown in the BS at cost less written off amount.
Copy Rights: copy rights are those rights to produce or reproduce any creative work. The auditor should verify the agreement between the holder of the copy right and his client. Copy right is shown is BS at cost price less written off amount.
Trademarks: they are registered brands. It gives the holder exclusive right to own the brand and protect it from imitation. An auditor should verify the certificate issued by the concerned authority, the fees paid for renewal etc trademarks are valued at cost price less written off amount.
3. Livestock 
Livestock is commonly defined as domesticated animals raised in an agricultural setting to produce labour and commodities such as meat, eggs, milk, fur, leather, and wool. The auditor must follow the following steps while verifying livestock.
1.       He should review the procedure for maintenance of stock and records.
2.       Examine the efficiency of internal check and control system.
3.       He should insure that livestock are properly valued.
4.       If possible, the auditing staff should physically verify the stock.
5.       See whether stock verification process contains adequate safeguards against possible errors and frauds.
6.       Test check the physical existence of a part of the stock. Stock is valued at cost price/ market price whichever is lower/less.
4. Leasehold Property
The auditor should adopt the following procedures while verifying leasehold property:
1. The auditor should verify leasehold property by an inspection of the lessee and the terms of lease.
2. If property has been mortgaged, the title deeds should be in the possession of the mortgagee, from whom a certificate to that effect should be obtained.
3. If the leasehold property has been sub-let, the counterpart of the tenant’s agreement should be examined.
4. The auditor should physically inspect the properties if possible.
5. The auditor should verify that the lease has been duly registered, particularly if it extends for more than a year.
3. (a) State clearly the right and duties of an auditor of a company under the Indian Companies Act.                      14
Ans: Rights and Powers of Company Auditors [Sec. 143]
A company auditor has the following rights:
1.       Right of Access Books of Accounts: As per Section 143(1) of the Companies Act every auditor of the company has the right to access at all times to the books of accounts and vouchers of the company, whether kept at the head office of the company or elsewhere. According to Sec. 148, A company auditor has the right to examine the cost records also which are required to be maintained by certain companies relating to production sales, stores etc.
2.       Right to Obtain Information and Explanations: An auditor can call for any information or explanation from different officers of the company which he may think necessary for the performance of his duties.
Apart from the auditor’s right to obtain information and explanation it is the duty of every officer of the company to furnish without delay the information to the company auditor. If the directors or officers of the company refuse to supply some information on the ground that in their opinion it is not necessary to furnish it, then the auditor has the right to mention that in his audit report.
3.       Right to Receive Notices and Other Communication Relating to General Meetings and to attend them: According to section 146 of the companies act an auditor of a company has the right to receive notices and other communications relating to the general meetings in the same way as that of the members of the company.
Similarly an auditor also has the right to attend any annual general meeting and also to be heard at those meetings which he attends and which concerns him as an auditor.
The auditor also has the right to make a statement or explanation with regard to the accounts he has audited. But he auditor is not expected to answer questions in the general meeting.
4.       Right to Visit Branches: According to section 143(8) of the companies act the auditor of the company has the right to visit the branch office or offices of the company. He can also audit such accounts of eh offices of the company provided that there is not qualified auditor to audit the accounts of the branch office or offices of the company, in such cases, the auditor has the right to access at all times to the books of accounts and vouchers that the company maintains at branch office or offices.
5.        Right of Lien: Auditor can exercise lien on books and documents placed at his possession by the client for non payment of fees, for work done on the books and documents. [Sec. 128]
6.       Right to Correct Any Wrong Statement: The company auditor is required to make a report to the members of the company on the accounts examined by him of the final accounts and the related documents which are laid down before the company in the general meeting.
7.       Right to sign the Audit Report: As per section 145 of the companies act only the person appointed as auditor of the company or where a firm is so appointed, only a partner in the firm practicing in India, may sign the audit report or authenticate any other document of the company required by law to be signed.
8.       Right to Being Indemnified: An auditor is considered to be an officer of the company and he has the right to be indemnified out of the assets of the company against any liability incurred by him in defending himself against any civil and criminal proceedings by the company if it is proved that the auditor has acted honestly or the judgment is delivered in his favour.
9.       Right to seek Legal and Technical Advice: The company auditor has the full right to seek the opinion of the experts and to take their legal and technical advice so as to discharge his duties efficiently.
10.   Right to Receive Remuneration: As per Section 142 of the Companies Act, the company auditor has the right to receive remuneration provided he has completed the work which he has undertaken to do so.
Duties of a Company Auditor
According to Sec. 143 of the Companies Act, 2013, the duties of auditors are classified under the following headings:
a)      Duty to Enquire: It is the duty of auditor to inquire into the following matters:
i.         Whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the company or its members.
ii.       Whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company.
iii.      Whether loans and advances made by the company have been shown as  deposits.
iv.     Whether personal expenses have been charged to revenue accounts.
v.       Whether or not cash has actually been received from allotment of shares.
vi.     Where the company not being an investment company or a banking company, whether so such of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than at which they were purchased by the company.
b)      Duty to make report: The auditor shall make a report to the members of the company. In his report, the auditor shall report on:
                     i.            Whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief necessary for the purpose of his audit and if not, the details thereof and the effect of such information on financial statements.
                   ii.            Whether in his opinion, proper books of account are required by law have been kept by the company so far as appears from his examination.
                  iii.            Whether the company’s balance sheet and profit and loss account dealt with in the report are in agreement with the books of accounts and returns.
                 iv.            Whether in his opinion, the financial statements comply with the accounting standards.
                   v.            Whether any director is disqualified from being appointed as a director.
                 vi.            Whether the company has adequate internal financial control system in place and the operating effectiveness of such control.
                vii.            Such other matters as may be prescribed under rule 11: The auditor’s report shall also include views and comments on the following matters.
1)      Whether the company has disclosed the impact, if any, of pending litigations on its financial position in its financial statement.
2)      Whether the company has made provisions, as required under any law or accounting standards, for material losses, if any on long term contracts including derivative contracts.
3)      Whether there has been any delay in transferring amounts, required to be transferred, to the investor education and protection fund by the company.
c)       Duty to report on frauds u/s 143 and rules 13: If an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offense involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the central government within such time and in such manner prescribed in rule 13.
(b) Explain the procedure of issue of shares at premium and at discount under the provisions of the Companies Act. Point out auditor’s duties in this regard.                                                          7+7=14
Ans: Issue of shares at Premium:
If Shares are issued at a price, which is more than the face value of shares, it is said that the shares have been issued at a premium. The Company Act, 2013 does not place any restriction on issue of shares at a premium but the amount received, as premium has to be placed in a separate account called Securities Premium Account.
Under Section 52 of the Company Act 2013, the amount of security premium may be used only for the following purposes:
a)      To write off the preliminary expenses of the company.
b)      To write off the expenses, commission or discount allowed on issued of shares or debentures of the company.
c)       To provide for the premium payable on redemption of redeemable preference shares or debentures of the company.
d)      To issue fully paid bonus shares to the shareholders of the company.
e)      In purchasing its own shares (buy back).
Auditor’s Duties regarding Issue of Shares at a Premium
1.          He must examine the Prospectus, Articles and the Directors’ Resolution in the Minute Book to verify that this is not only permissible but properly authorized also.
2.          He should vouch the amount of premium received and its transference to the securities premium reserve Account.
3.          He should see that this amount has been utilized only for the purposes mentioned in Sec. 78. He cannot object if the utilization is within law. If the premium is used for an unauthorized use, this amounts to reduction of capital.
4.          He should see that this amount has not been credited to profit and loss account but shown as “Reserves and Surplus” on the liabilities side of the Balance Sheet.
5.          He should note that provisions regarding reduction of share capital apply to securities premium reserve account as well.
Issue of shares at discount:
As per sec. 53 of the Companies Act, 2013, issue of shares at a discount is prohibited. This prohibition applies to all companies, public or private. Any issue of share at a discount shall be void. But a company can issue sweat equity shares to its directors or employees as a reward to them for their contributions. Sweat equity shares are those which are issued by a company at a discount or for consideration other than cash.
According to Section 54 of company act 2013, a company is permitted to issue sweat equity shares provided the following conditions are satisfied:
a)      The issue of shares at a discount is authorised by a resolution passed by the company in its general meeting and sanctioned by the Central Government.
b)      The resolution must specify the maximum rate of discount at which the shares are to be issued but the rate of discount must not exceed 10 per cent of the nominal value of shares. The rate of discount can be more than 10 per cent if the Government is convinced that a higher rate is called for under special circumstances of a case.
c)       At least one year must have elapsed since the company was entitled to commence the business.
d)      The shares are of a class, which has already been issued.
e)      The shares are issued within two months from the date of sanction received from the Government.
Auditor’s Duties regarding Issue of Shares at a Discount
The auditor must examine compliance with requirements under Sec. 54 and its presentation and disclosure in the Balance Sheet. The auditor must ensure that discount is allowed only in case of sweat equity shares. The auditor must see that at least one year must have been elapsed since the company was entitled to commence the business and rate of discount must not exceed 10%.
4. (a) What is statutory report? What are the points to be considered by the auditor before expressing opinion in respect of a statutory report?                                    4+10=14
Ans: Statutory Report – It’s Contents and Auditor’s duties                          
Statutory Report: A General meeting of the members should be held by every company limited by shares and every company limited by guarantee and having a share capital within a period of neither less than one month nor more than six months from the date at which the company is entitled to commence business. Such a meeting is called statutory meeting and the board of directors shall, at least 21 days before the day on which the statutory meeting is scheduled to be held, forward a report called statutory report to the every member of the company.
Content of statutory report:
1.       It sets out the total number of shares allotted and the mode of allotment.
2.       The total amount of the cash received by the company in respect of the shares allotted.
3.       An abstract of receipt and payment of the company. This report has to be duly certified by at least two directors. Out of which one shall be a managing director along with auditor of the company.
4.       Agenda of the meeting regarding the formation and prospects of the company.
5.       Particulars of directors, auditors, etc.
6.       Particulars of contract.
7.       Under writing contract.
8.       Arrears of call.
9.       Commission or brokerage.
The auditor’s duties before certifying the statutory report:                        2016
The statutory report should be certified by at least two directors of the company. The auditor has to certify the correctness of the statutory audit report. Before signing the report, the auditor has to take into consideration the following points:
1. Study of Legal Documents: Auditor should study the documents of the company like Articles, Memorandum and Prospectus very carefully.
2. Checking of Shares: Auditor should check the total number of shares allotted to different classes of shares. He should also check the fully and partly paid share.
3. Checking of Cash: Auditor should check the total amount of cash received by the company in respect of all the allotted shares.
4. Verify the Capital Receipts & Payment: Auditor should be very careful in verifying the capital receipts and payments.
5. Checking of Commission: Auditor should check all types of commission paid or unpaid with the issue or sale of debentures to any one.
6. Verify the Borrowing Power: Auditor should examine that the limit is imposed on the borrowing power of the company. If it is imposed then company has used his powers within limits.
7. Verify the Minimum Subscription: Auditor should also check the minimum subscription is according the requirements of act or not.
8. Checking of Minutes: In order to see the allotments of shares and debentures auditor should examine the minutes of the directors meetings. He should also check the capital expenditure and borrowed loans which are duly sanctioned.
9. Examine the Pass Book: Auditor should examine the pass bank pass book and verify the receipts and payment with it.
10. Verify Documents: It is the duty of the auditor that he should verify all the legal documents of the company. Prospectus, Articles and Memorandum of Association are the most important documents.
(b) What do you mean by Propriety Audit? What are the instances where an auditor is required to conduct Propriety Audit under the Companies Act?                                             4+10=14
Ans: Propriety audit: Propriety audit is a method of audit which verifies the reasonableness of expenditure incurred by an organization and is not detrimental to public interest. This audit is generally applicable to the government organizations.
According to E. L. Kohler, " Propriety means that which meets the test of public interest, commonly accepted customs and standards of conduct. Propriety audit is an audit in which various actions and decisions are examined to find out whether they agree in public interest and whether they meet the standards of conduct."
Propriety audit not only determines the accuracy of books of accounts but also justify the expenditure in term of propriety and reasonableness. Therefore, this audit tests the public interest and evaluates its financial propriety in relation to standards or commonly accepted customs. Propriety audit is generally applicable to the government organizations as it involves a huge public money. So, public accountability is the main criteria of propriety audit. It evaluates the efficiency and prudence of government department and its propriety in relation to public money. This audit is conducted for the following purpose:
a)      Confirm collection of revenue: Propriety audit helps to assess whether revenue are properly collected and recorded in the books of accounts.
b)      Helps to detect fraud and misrepresentation: This audit helps to judge whether there is any fraud and misrepresentation of funds.
c)       Wastage of funds: With the help of propriety audit wastage of public funds can be determined and also its utilization can be verified.
d)      Verify justification of expenditure: Verify Justification of expenditure in relation to generally accepted standards and customs.
e)      Not detrimental: It verifies that the contracts made by the organization with the third parties are not detrimental to the public interest.

5. Write short notes on (any four):                                                          4x4=16
1. Contents of audit notebook.
Ans: Audit Note Book: The audit clerk maintains the audit notebook.  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 a written record of the queries made by him and the replies thereto.  It is part of permanent record of the audit office, which is used by the auditor while preparing his report. It should be noted that an audit notebook is meant to record only important and strategic items.  Matters, which are, or can be sorted out on the spot, or those of a trivial nature, need not be entered therein. Some of the important matters recorded in the Audit Note Book are as follows:
a)      Name of the business.
b)      Instructions from the management having relevance to the audit.
c)       List of book of account maintained by the enterprise.
d)      Accounting methods followed in the enterprise, and their defects.
e)      Any irregularities in the observance of laws and notifications applicable to the enterprise.
f)       List of missing vouchers and receipts.
g)      Matters requiring explanation or clarification.
2. Transfer of shares.
Ans: Auditor’s Duties regarding Transfer of Share
1.          To verify the Articles of Association of the company to know the procedure to be followed for the transfer of shares.
2.          To examine the Directors’ Minute Book to confirm approval of transfers and authorization of issuing new share certificates.
3.          To verify that transfer forms are duly completed, duly stamped and signed by transferor.
4.          To ensure that no forgery is committed.
5.          To vouch the transfer fee with the Cash Book or Bank Statement. It should be credited to Profit and Loss Account. To make an enquiry where the consideration for transfer appears to be inadequate.
6.          To check transferor names and class, number and distinctive numbers of shares as stated in the transfers and that the old certificates have been cancelled.
7.          To inquire whether a notice was given to the transferee in the case of partly paid shares and find out whether the ‘no objection’ letter has been received from the transferee within two weeks from the receipt of the notice.
8.          To inquire whether the transferee is in any way disqualified to be a member of the company.
9.          To see whether a notice was given to the mortgagee and whether the shares, which are mortgaged, are lodged for transfer.
10.      To check the transfer with the Share Register and to see whether shares have not be transferred twice.
3. Advantages of Cost Audit.
Ans: Following are the advantages of cost audit                              
To The Management
a)      Cost audit helps in detection of errors and frauds.
b)      The management gets accurate and reliable data based on which they can make day-to-day decisions like price fixation.
c)       It helps in cost control and cost reduction.
d)      It facilitates the system of standard costing and budgetary control.
e)      It helps the management in inter-unit / firm comparison.
f)       It enables the management to identify loss making propositions.
 To The Government
a)      Cost audit ensures efficient functioning of the industry. This in turn, nurtures a healthy competition among the different companies and paves a path for fast progress.
b)      It helps in identification of sick units and enables the Government to make relevant decisions.
c)       It helps in fixing prices in the case of essential commodities and checking undue profiteering.
d)      It enables to take decisions as to granting of subsidies, incentives and protection to various industries.
e)      It helps to take decisions as to levies, duties and taxes.
To the Society
a)      Cost audit enables the Government to fix prices of essential commodities. This safeguards the interests of the society.
b)      Cost audit enables the Government to keep a check on undue profiteering by the manufacturers and avoids artificial price rise due to monopolistic tendencies.
To the Shareholders
a)      Cost audit reveals whether any of the products of the company are making losses. Thus though the company making an overall profit, a loss making line may eating up the company’s profits. This is brought to the notice of the shareholders and the management is forced to take remedial measures, thereby making optimum utilisation of resources.
b)      Cost audit ensures that the shareholders get a fair return on their investments.

4. Audit Programme.
Ans: Audit programme: By an audit programme we mean a written plan containing exact details with regard to the conduct of particular audit.  It is description of the work to be done which is prepared by an auditor for the guidance and control of assistants.  An audit programme provides a guide in arranging and distribution of work and in checking against the possibility of the omissions.
According to Howard Stettler “The programme is an outline of all procedures to be followed in order to arrive at an opinion concerning a clients’ financial statement”.
An audit programme should be elastic.  An audit programme should be chalked out in such a way that if there may be any need for revision that may be carried out without any difficulty. For this purpose auditor takes the following steps:
1.       Collects necessary information about the accounts to be audited
2.       Evaluates Internal Control System
3.       Designs audit working papers
5. Importance of Audit Report.
Ans: In case of a company management is separated from the ownership share holders appoint the auditor to check the accounts and submit a report to them. However, the report doesn’t guarantee accuracy of the accounts. The auditor is neither a guarantor nor an insurer. In one of the cases it was held that “the auditor must not be held liable for not tracing fraud, when there is nothing to arouse their suspicion and when those frauds are perpetrated by the trusted servants of the company”.
The auditor is expected to act honestly with reasonable skill and care. Audit report is an extremely significant document as share holders rely upon it. The auditor will be guilty of professional misconduct if he deliberately fails to disclose material facts known to him. Conceals misstatements and fails to obtain necessary information to complete his audit.
6. Choose the correct answer from the alternatives given below:                                            1x8=8
a)      Auditing refers to
                                 i.            Preparation and checking of accounts.
                               ii.            Examination of accounts of business unit.
                            iii.            Examination of accounts by professional auditors.
                             iv.            Checking the voucher.
b)      The Scope of work of internal audit is determined by the
                                 i.            Shareholders.
                              ii.            Management.
                              iii.            Government.
                             iv.            Law.
c)       Errors of omission are
                                i.            Technical errors.
                               ii.            Errors of principle.
                              iii.            Compensating errors.
                             iv.            None of the above.
d)      Stock should be valued at
                                 i.            Cost.
                               ii.            Market price.
                            iii.            Cost or market prices whichever is lower.
                             iv.            Cost less depreciation.
e)      Government may order for cost audit under
                                 i.            Section 227.
                               ii.            Section 233A.
                              iii.            Section 223B (Old)           Section 148 of Companies Act, 2013
                             iv.            Section 224.
f)       Institute of Chartered Accountants of India was established in
                                 i.            April 1, 1956.
                               ii.            April 1, 1949.
                              iii.            July 1, 1956.
                             iv.            July 1, 1949.
g)      Share can be issued at discount under Section
                                 i.            76.
                               ii.            75.
                            iii.            53 As per Companies Act’ 2013
                             iv.            89.
h)      Internal check is a part of
                                 i.            Internal audit.
                               ii.            Internal Accounting.
                              iii.            External Audit.
                             iv.            Internal control.

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