2016 (August)
COMMERCE (General)
Course: 302
(Auditing)
Full Marks: 90
Time: 3 hours
The figures in the margin indicate full
marks for the questions
1. (a) What is
Continuous Audit? What are its advantages? State the differences between
Continuous Audit and Periodical Audit. 2+4+8=14
Ans: CONTINUOUS AUDIT: Continuous audit: Continuous audit
is a system of audit where the auditor and his staff Examines all the transactions
and books of accounts in details continuously throughout the year at regular
intervals i.e. weekly or fortnightly or monthly etc.
According to Spicer and Pegler, “a continuous audit is one where the auditor’s staff
is occupied continuously on the accounts the whole year round, or where the
auditor attends at intervals, fixed or otherwise, during the currency of the
financial year and performs an interim audit; such audits are adopted where the
work involved is considerable and have many points in their favour although
they are subject to certain disadvantages.”
Advantages
of continuous audit: Following are the advantage of continuous
audit in an organization. These are discussed below:
(i) Extensive checking: As the
auditor regularly visits the client’s office, he should get time for extensive
checking of small transactions and the audit work can ne smoothly conducted.
(ii) Early detection of errors and frauds: As
continuous audit is conducted throughout the whole year, errors and frauds can
be quickly detected. The accounting staff should not get sufficient time to
manipulate accounts.
(iii) Early Preparation of Final accounts: AS this
audit is conducted throughout the whole year, it is possible to prepare final
accounts i.e. Profit and Loss account and Balance Sheet just at the end of the
financial year. The management and the owners can know the financial results
without delay.
(iv) Deceleration of interim dividend: Those
companies who want to declare interim dividend at the middle of the year is to
prepare interim accounts. Continuous audit helps to get interim account in
time.
(v) More reliability on audited accounts: If
continuous audit is done throughout the year, all the interested parties can
rely much on the audited accounts.
(vi) Moral check: As a
result of continuous audit employees should feel a moral pressure and the
chances of errors and frauds are minimized.
(vii) Early declaration of dividend: With the
help of continuous audit final accounts are prepared just at the end of the
financial year and the shareholder get dividend without delay.
(viii) Early submission of report: As
continuous audit is conducted throughout the year the auditor can complete
final accounts audited just at the end of the financial year and can submit his
audit report to the shareholders as early as possible.
(ix) Increase in efficiency: As audit
is conducted on continuous basis, all the transactions are correctly recorded
in the books of accounts and overall efficiency in according work can be made.
Difference
Between Continuous Audit and Periodical Audit
Basis
|
Continuous
Audit
|
Periodical
Audit
|
i.
Timing of audit
|
Continuous
audit is conducted throughout the year.
|
Periodical
audit is conducted after the preparation of final account.
|
ii. Organisation
|
It is suitable
for Large organization.
|
It is suitable
for small organization
|
iii. Preparation
of final accounts
|
As this audit
is conducted throughout the whole year, it is possible to prepare final
accounts i.e. Profit and Loss account and Balance Sheet just at the end of
the financial year.
|
Since audit is
conducted after the preparation of final account, it is not possible to
prepare final accounts just at the end of the financial year.
|
iv. Costs
|
It is costly.
|
It is less
costly as compared to continuous audit.
|
v. Detection
of frauds and errors
|
It helps in
early detection of frauds and errors. Staff do have sufficient time to
manipulate accounts.
|
It is very hard
to detect frauds and errors because audit is done only after the preparation
of final accounts.
|
vi. Reliability
|
If continuous
audit is done throughout the year, all the interested parties can rely much
on the audited accounts.
|
It is less
reliable as compared to continuous audit.
|
Or
(b) What are the
objects of Auditing? What are the essential qualities required of an auditor
apart from the statutory qualifications? Discuss the advantages of the use of
an audit programme. 4+6+4=14
Ans:
Objectives of Auditing (Role 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.
Errors of
Principles (2015): 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.
Essential qualities of an auditor
An Auditor must possess the
following essential qualities
1. Professionally Competent: It is the basic quality of an auditor. He must have a
complete and thorough knowledge of the accountancy. To understand the
accounting details he can apply his knowledge and skill. It is only possible if
he has a sound background in accountancy and he is professionally competent.
2. Honest: This is the personal quality of an auditor. He should
have the high moral standard. It is his duty to report on the fact basis. The
auditor must be honest and sincere with his profession. He is responsible not
to sign any paper which is no correct under his observation.
3. Up to Date Knowledge: An auditor's knowledge of auditing must be up to date.
He must know the techniques of auditing. He must have the knowledge of other
subjects relating auditing.
4. Knowledge of
Business/Mercantile Law: It is the
professional quality of an auditor to aware of the mercantile law, he has a
complete knowledge of Contract Act, Sales of Good Act, Agency, Negotiable
instruments Act, Partnership Act etc.
5. Knowledge of Taxation Law: It is also a professional quality of an auditor. He is
aware of income tax ordinance 1979, sales tax and excise act and wealth tax etc
this is helpful in checking the correct return of income etc.
6. Intelligent: It is also important quality of an auditor that he
should be intelligent.
7. Qualification: For a professional auditor it is necessary that he
should be charted accountant. According the company's ordinance 1984 it is
essential qualification for auditor.
8. Tactful: It is also the personal quality of an auditor. Technical
information is required to comment and criticize the policies of management. In
case of missing can collect it from the client.
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.
2. (a) Explain the
importance of Vouching. What are the distinctions between Vouching and
Verification? 6+8=14
Ans: 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.
Difference between Verification and
Vouching
BASIS
|
VOUCHING
|
VERIFICATION
|
1. Nature
|
It examines the entries relating to the transactions
recorded in the books of accounts with the help of documentary evidence.
|
Verification examines truth about assets and liabilities
appearing in the Balance Sheet of the concern.
|
2. Basis
|
It is based on documentary
evidences.
|
It is based on personal investigation as well as documentary
evidences.
|
3. Time
|
It is done during the whole
year.
|
It is done at the end of the year when the Balance sheet of
the concern is prepared.
|
4. Valuation
|
It is not concerned with
valuation.
|
Verification includes
valuation in its Scope.
|
5. Utility
|
It certificates correction of
records.
|
It certifies the existence of assets and liabilities at
balance sheet date.
|
6. Personnel
|
It is done by the junior staff of the auditor like audit
clerk.
|
It is done by the auditor himself or by his assistant.
|
Or
(b) Discuss the auditor’s
duties in proper valuation and verification of liabilities. How would you
verify the following specific liabilities? 8+3+3=14
a) Sundry Creditors for goods supplied.
b) Bills Payable.
Ans: Verification is a process carried out to confirm the
ownership valuation and existence of items at the balance sheet date. Spicer and Pegler have defined verification as “it implies an
inquiry into the value, ownership and title, existence and
possession and the presence of any charge on the assets”.
Verification is a process by which an auditor
satisfies himself about the accuracy of the assets and liabilities appearing in the Balance Sheet by inspection of the documentary evidence available. Verification means proving the truth, or
confirmation of the assets and liabilities appearing in the
Balance Sheet. Thus, verification includes verifying:
a) The existence of the assets
b) Legal ownership and possession of the assets
c) Ascertaining that the asset is free from any
charge, and
d)
Correct valuation
Auditor’s Duties during verification
While conducting
verification following points should be considered by the auditor:
1. Existence: The
auditor should confirm that all the assets of the company physically exist on
the date of balance sheet.
2. Possession:
The auditor has to verify that the assets are in the possession of the
company on the date of balance sheet.
3. Ownership: The
auditor should confirm that the asset is legally owned by the company.
4. Charge or
lien: The auditor has to verify whether the asset is subject to any charge
or lien.
5. Record: The
auditor should confirm that all the assets and liabilities are recorded in the
books of account and there is no omission of asset or liability.
6. Audit
report: Under CARO the auditor has to report whether the management has
conducted physical verification of fixed assets and stock and the difference,
if any, between the physical inventory and the inventory as per the book.
7. Event after
balance sheet date: The auditor should find out whether any event after the
date of balance sheet has affected any items of assets and liabilities.
Valuation of assets means determining the
fair value of the assets shown in the Balance Sheet on the basis of generally
accepted accounting principles. The valuation of assets is very important
because over-statement or under-statement of the value of assets in the Balance
sheet not only distorts the true and fair view of the financial position but
also gives wrong position of profitability. The valuation of the assets is the
primary duty of the officials of the company. The auditor is required to verify
whether the value ascertained is fair one or not. For this, he may rely on the
technical certificate issued by the experts in the field.
Auditor Duties Regarding Valuation:
An auditor can obtain the certification of
valuer and other competent persons. Usually, the assets are valued by responsible
officials. An auditor audits many types of companies and he can’t be an expert
to value all kinds of assets. An auditor is not a valuer, and can’t be expected
to act as such. All that he can do is to verify the original cost price and to
ascertain as far as possible the current values are fair and reasonable and are
in accordance with accepted principles. It must be borne in mind that the
actual valuations are made by officials who have a practical knowledge of such
assets and that an auditors duty is confined to testing the valuations as far
as he can and in this way satisfy himself with correctness of the balance sheet
position. However, he can’t guarantee the accuracy of valuations.
In simple words, in the absence of suspicious
circumstances he can rely on the trusted officials of the company but this will
not relive him from his responsibilities if assets are incorrectly valued. He
should exercise reasonable care and skill, analysis critically all the facts
and satisfy himself that generally accepted. Accounting principles are
followed. He should not certify what he believes to be incorrect.
Verification of creditors and bills payable:
a)
Creditors: Creditors are the person from whom goods are purchased on credit. Auditors
should obtain a statement of account from the creditors and compare it with the
creditor’s ledger. In case discrepancies, the auditors should check cash book
and pass book to verify whether or not any payment is made to creditors after
preparation of final accounts.
b) Bills
Payable: Bills Payable are negotiable instruments acknowledging the debt.
He should get a statement of bills payable and compare it with the bill payable
book. If any bills payable has been paid after the balance sheet date but
before the audit, he should verify cash book and pass book. Such bills should
not be included in the balance sheet.
3. (a) State clearly
the rights and duties of an auditor of a company under the Indian Companies
Act. 7+7=14
Ans: Rights, Duties and Liabilities of
Auditors
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 nonpayment 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.
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.
Or
(b) What are
Divisible Profits? As an auditor, state the legal provisions relating to the
payment of final dividend. 4+10=14
Ans:
Divisible Profits and Rules regarding Dividends and Transfer to reserves
The term “Divisible Profit” is a very
complicated term because all profits are not divisible profits. Only those
profits are divisible profits which are legally available for dividend to
shareholders. Dividends cannot be declared except out of profits, i.e. excess
of income over expenditure; ordinarily capital profits are not available for
distribution amongst shareholders because such profits are not trading profits.
Thus, profits arising from revaluation or sale of fixed assets or redemption of
fixed liabilities should not be available for distribution as dividend amongst
shareholders. The principles of determination of the divisible profit are given
below:
1)
According to Section 123 of the Companies Act,
2013 no dividends can be declared unless:
Ø
Depreciation has been provided for in respect
of the current financial years for which dividend is to be declared;
Ø
Arrears of depreciation in respect of previous
years have been deducted from the profits; and
Ø
Losses incurred by the company in the previous
years.
2)
Section 123 of the Companies Act, 2013
provides that before any dividend is declared or paid a certain percentage of
profits for that financial year depending upon the rate of dividend to be paid
or declared should be transferred to the reserves of the company.
Provided that nothing in this sub-section
shall be deemed to prohibit the voluntary transfer by a company of a higher
percentage of its profits to the reserves in accordance with such rules as may
be made by the Central Government in this behalf.
3)
No dividend shall be payable except in cash;
4)
There is no prohibition on the company for the
capitalization of profits or reserves of a company for the purpose of issuing
fully paid-up bonus shares or paying up any amount for the time unpaid on any
shares held by the members of the company.
5)
Any dividend payable in cash may be paid by
cheque or warrant sent through the post directed to the registered address of
the shareholder entitled to the payment of the dividend or in the case of joint
shareholder to the registered address of that one of the joint shareholder
which is first named on the register of members or to such person and to such
address as the shareholder or the joint shareholder may in writing direct.”
Transfer
to Reserves: Section 123 of the Companies Act, 2013 provides that
No dividend shall be declared or paid by a
company for any financial year out of the profits of the company for that year
arrived at after providing for depreciation in accordance with the provisions
of Schedule II, except after the transfer to the reserves of the company a
certain percentage of its profits for that year as specified:
i.
Where the dividend proposed exceeds 10 percent
but not 12.5 percent of the paid-up capital, the amount to be transferred to
the reserves shall not be less than 2.5 percent of the current profits;
ii.
Where the dividend proposed exceeds 12.5
percent but does not exceeds 15 percent of the paid-up capital, the amount to
be transferred to the reserves shall not be less than 5 percent of the current
profits;
iii.
Where the dividend proposed exceeds 15
percent, but does not exceed 20 percent of the paid-up capital, the amount to
be transferred to the reserves shall not be less than 7.5 percent of the
current profits; and
iv.
Where the dividend exceeds 20 percent of the
paid-up capital, the amount to the transferred to reserves shall not be less
than 10 percent of the current profits.
4. (a) What are the privileges of
Registered Co-operative Societies? Explain the duties of an auditor of a
registered Co-operative society. 6+8=14
Or
(b) What special points should be
borne in mind by you in carrying out an investigation on behalf of a person who
wants to purchase business of a going concern? 14
5. (a) What is
qualified report? Under what circumstances as an auditor of a public limited
company would you qualify your report? Draft a qualified report giving at least
four reasons. 2+4+8=14
Ans: Qualified Audit Report: A qualified report
means an audit report which is not clean. In case auditor has any reservation
in respect of certain methods mentioned in the financial statements he may
qualify his report. A qualified opinion shall be expressed as being subject of
or except for the effects of the matter to which the qualification matters. If
the accounting standards issued by Institute of Chartered Accounts of India is
not followed by the company the auditor may qualify his report. The
company Act doesn’t lay down any specific requirement regarding the manner in
which the auditor should qualify his report. It should not lead any confusion
to the reader. Before submitting a qualified report he should discuss the
issued with that of the management. He should see that qualified report is free
from ambiguity, vague statements etc.
Circumstances for Qualification of Audit
Report: In following circumstances the auditor has to
qualify his report.
(a) He cannot conduct audit satisfactorily due
to non availability of certain books of
accounts or records, information
or explanations necessary for conduct of his audit.
(b) He finds that the Balance Sheet and Profit & loss Account have not been prepared
in accordance with accepted accounting principles.
(c) He detects that provisions for Bad & Doubtful Debts, Depreciation etc. are not
adequate.
(d) He detects that the company has created
certain secret reserve.
(e) The stock in trade has been valued at market price which is more
than cost price.
(f) He finds that the contingent liability for bills discounted has not been disclosed.
a)
Adverse Opinion: The worst type of financial
report that can be issued to a business is an adverse opinion. This indicates
that the firm’s financial records do not conform to GAAP. In addition, the
financial records provided by the business have been grossly misrepresented.
b)
Disclaimer of Opinion: On some occasions, an
auditor is unable to complete an accurate audit report. This may occur for a
variety of reasons, such as an absence of appropriate financial records. When
this happens, the auditor issues a disclaimer of opinion, stating that an
opinion of the firm’s financial status could not be determined.
Specimen
of Qualified Report (2014)
To,
The Share
Holders of ABC Ltd.
We have
audited the attached Balance Sheet of ABC Ltd as on 31.03.2016 and also the
P&L account of the company for the year ended on that date and report that:
1. We have
obtained all information and explanation which to the best of our knowledge and
belief were necessary for the purpose of our audit.
2. In our
opinion proper books of accounts as required by law have been kept by the
company so far as appears from our examination of the books subject to the
comments given here under:-
In the
absence of stock register, adjustments relating to balances on the registers
have been accepted on the basis of management decision.
3. The
Balance Sheet and P&L account dealt with by the report are in agreement
with the books of accounts and returns.
4. Subject
to the qualification given below in our opinion and to the best of our
information and according to the explanation given to us the accounts together
with the notes there on and documents attached there to give the information
required by the company’s Act of 2013 in the manner so required and give a true
and fair view:
(a) In the case of Balance Sheet of the state of the company as at
31.03.2016; and
(b) In the case of the Profit and Loss Account of the profit of
the company for the year ended on that date.
a. The provision for depreciation of fixed assets is inadequate.
b. Stock has been valued at market price which is higher than the
cost price by Rs.……
c. No provision for bad debt has been made for the doubtful debt
in case of old bad debt.
d. The debentures agreements restricts the payment of future cash
dividends to earnings after 31st March …………….
Date: Signed
Place: (Name,
partner XY Associates)
Charted
Accountant.
Or
(b) Distinguish
between Management Audit and Cost audit. State the advantages and disadvantages
of Management Audit. 6+8=14
Ans:
Difference between Management Audit and Cost Audit
Management
audit
|
Cost
audit
|
a)
It is optional for the company.
|
a)
It is directed by Central Govt., therefore
compulsory for the company.
|
b)
It can cover all aspects of management viz. planning,
organising, control etc.
|
b)
It covers all aspects of a particular
product for which audit is specifically ordered.
|
c)
It is independent appraisal activity of the
management to ensure compliance with organizational objectives.
|
c)
It is dependent on order of the Central
Govt. to ensure compliance with statutory requirements.
|
d)
It is carried out to evaluate the efficacy
of the control system in the organization.
|
d)
It is carried out to evaluate the efficacy
of the costing system of a specified product.
|
e)
It is intended to review all managerial
aspects of the company so as to enhance efficiency and efficacy of the entire
system.
|
e)
It is intended to review, examination and
appraisal of cost accounting records so as to ensure true and correct cost of
production.
|
f)
The scope is pretty wide as it includes
review and appraisal of all the decisions taken by the management.
|
f)
The scope is narrow to activities relating
to a particular product and includes review and appraisal of cost accounting
system, variation in cost per unit, sales and export sales, abnormal and
non-recurring costs, efficiency and adequacy of control of a particular
product.
|
g)
Can be conducted by any suitable person
acceptable to the management. Generally a team of experts is designated the
task. The experts are qualified in different fields. The qualification is not
prescribed in any Act.
|
g)
Can be conducted by a Cost accountant
appointed by BOD after approval of the Central Govt. Qualifications of Cost
accountant are specified in Section 233(B) of Companies Act 2013.
|
h)
No fixed periodicity.
|
h)
Periodicity is as per directives of Central
Govt., It is conducted on year to year basis.
|
i)
Report is submitted to the top management.
|
i)
Report is submitted to the Central Govt.
with a copy to company.
|
j)
The copy of report need not be circulated to
the shareholders of the company.
|
j)
The copy of report can be circulated to the
shareholders of the company only when it is so desired by the Central Govt.
|
ADVANTAGES OR
IMPORTANCE OF MANAGEMENT AUDIT:
There are several
advantages of conducting management audit of an organization. When an
organization grows in its volume and activities, there is a need for management
audit for evaluating efficiency and effectiveness of the management at all
levels of the organization. The advantages and importance of management audit
are discussed below:
(i) Evaluates
efficiency of the management: Management audit is a method of
independent and 'systematic evaluation of the management activities at all
levels of management to ascertain the functions, efficiency and achievement of
the management (i.e. policies) as compared to standards set by the company.
(ii) Scrutiny of
the plans, policies and procedure: Management audit helps to determine how the
management has implemented their plans, policies and procedure to reach the
organizations goal.
(iii) Helps for
correction of plans, policies and procedure: Through management audit, it is
possible to change or revise the plans, policies and procedure as per needs of
the company.
(iv) Aids for
decision making: Management audit asses the ability of the managers to take
important decisions and helps them to rectify the defects.
(v) Helps to get
loan: Financial institutions who gives huge loan to the organizations are
interested to know the efficiency of the management and the profitability.
Management audit certainly gives a guide to them.
(vi) Helps to get
subsidy: Before granting subsidy by the government, to any entity they are
interested to know the efficiency and functioning of the management. Management
audit helps in this matter.
(vii) Helps to
increase profitability: Management audit helps the management to increase
profitability by giving remedies to maximize the organization's resources in an
efficient way.
LIMITATIONS OF MANAGEMENT AUDIT:
(i)
The management audit is audit of the
management, by the management, and for the management. The management auditors
are selected by the management itself. Such auditors may or may not be able to
handle the job assigned to them.
(ii)
The management auditors are generally familiar
with the organization and the staff and employees. The personal aspects cannot
be overlooked in such audits. Some may use this audit to level the score with
someone while other may utilize it to favour someone.
(iii)
They are more likely to take the facts for
granted and may not probe into depth to investigate the matter any further.
(iv) Time and
cost constraints may limit the scope, operation and extent of such audits.
The management audit team as selected by the management may not
look, act and work as a team. Conflicting interests, attitude and inclination
may jeopardize the entire objective of the audit.
6. Write short notes
on: (any four) 4x4=16
a) 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.
b) Internal Check: The term internal check implies that
the work of various members of the staff is allocated in such a way that the
work done by one person is automatically checked by another. It is defined as
“such an arrangement of book keeping routine where in errors and frauds are
likely to be prevented or discovered by the very occupation of book keeping
itself’.
Internal check is a system under which
accounting methods and details of an establishment are laid out that the
accounts and procedures are not under the absolute and independent control of
any one person or the contrary the work of one employee is complementary to
that of another. The system of IC is based upon the principle of division of
labour; where in performance of each individual is automatically checked by
another. This is possible by properly allocation the work and integration of
function of the employees in such a manner their work complements each others.
c) Contents of audit notebook: 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.
d) Secret Reserve: Secret reserve may be
defined as reserve which exists but not disclosed in the balance sheet of a
company. These types of reserves are created mainly by banking, insurance and
financing companies. These reserves are created to strengthen the financial
position of the concern. It is created by:
a) Writing down the asset below its book
value.
b) Providing excessive depreciation on assets.
c) Omitting some of existing assets.
d) Showing contingent liabilities are real
liabilities etc.
e) Reliability of Audit Report: Audit report is a statement on
financial position of the company which is issued after the conclusion of
audit. It is a medium through which an auditor expresses his opinion on the
financial statements under audit. It
generally shows the nature and scope of audit conducted by the auditor and his
opinion on the final accounts of the company. It is an important part of audit
because it provides the results of the audit conducted by the auditor. The
audit report is the final and ultimate report of audit process. 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.
7. Fill in the blanks
with suitable words: 1x4=4
1)
Audit cannot show result unless there are well
supported system of accounting and auditing. (Control/Accounting/Arrangement/Auditing)
2)
Audit Note-book serves as a reliable ____ in the
court of law. (document/evidence/witness)
3)
A good audit programme should be ____.
(fixed/detailed/flexible)
4)
A/An ____ dividend is declared before the
declaration of final dividend. (Proposed/Interim/Cash)
***
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