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Thursday, July 18, 2019


2016 (August)
COMMERCE (General)
Course: 302
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
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.
(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
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.
(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.
(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
(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)
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.
(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.
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.
(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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