2017 (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? Discuss its advantages and
disadvantages. How does it differ from periodical Audit? 4+10=14
Ans: 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.
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.
Disadvantage
of continuous audit: The following are the disadvantages of
continuous audit:
(i) High Cost: As
continuous audit is conducted throughout the year the organization has to give
huge remuneration to the auditor. Therefore, a small concern cannot afford the
high cost of conducting such audit.
(ii) Difficulties in accounting work. As a
result of frequent visits of the auditor often it is seen that the books of
accounts are checked by the audit staff and for this audit work is hampered.
(iii) Change of figures: It may
so happen that the portion of accounts which have already examined by the
auditor may alter the figures by the dishonest employees to achieve some
personal interest.
(iv) Loss of continuity of work: As
continuous audit is conducted at regular intervals, the auditor may left
unchecked same audit work which was pending during his last audit work.
(v) Adverse effect on employees morale:
(vi) monotony in Work
(vii) Chances of collusion between
organization’s staff and auditor’s staff
How disadvantage many overcome:
(i) No work unfelt:
(ii) Prepare fixed audit programme
(iii) Rotation of Work
(iv) Frequent visit:
(v) Use of special mark:
(vi) Use of ink for writing of castings
(vii) Keep important notes:
(viii) Preparation of effective audit
programme
(ix) Pending of checking impersonal and
general ledger:
(x) A revise of the past work
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 is internal control? Explain the elements of a good system of
internal control. 4+10=14
Ans:
Internal Control: Internal
Control is a Systematic measures such as reviews, checks
and balances, methods and procedures instituted by an organization to
conduct its business in an orderly and efficient manner,
safeguard its assets and resources, determine and
detect errors, fraud, and theft, ensure accuracy and
completeness of its accounting data, produce reliable
and timely financial and management information, and
ensure adherence to its policies and plans.
According to W.W.BIGG: “Internal Control is
best regarded as indicating the whole system of controls, financial and
otherwise, established by the management in the conduct of a business,
including internal check, internal audit and other forms of control.”
Elements, features characteristics principles of a
good Internal Control System: An
effective internal control system should have the following factors:
1. Competent
and trust worthy staff: people in charge of internal control system must be
reliable and highly competent about the work. Lack of knowledge and dishonesty
will spoil the efficiency of the system.
2. Records of
financial and other organizational plans: A good internal control system must
have good documentation system. Filing, recording, classifying, etc will help
in this regard.
3. Segregation
of duties: normally, there should be a separate department for internal control
this reduces frauds, bias etc. normally, a clerk in charge of accounting
function should not be in charge of assets also.
4. Supervision:
proper reviewing of the operations of the company regularly makes the control
system effective.
5. Authorization:
all transactions must be properly authorized. In other words, the authority of
each person should be well defined.
6. Sound
practices: the company should have well established procedures, policies,
delegations organizational manuals etc.
7. Internal
Audit: it’s a part of internal control and it should be independent of internal
check.
8. Accounting
Controls: proper accounting information systems should be established so that
the information relating to accounts is properly collected, recorded and
accounts prepared.
2. (a) Describe the objectives of vouching. How would an auditor
proceed to vouch credit purchases?
4+10=14
Ans: Objectives of Vouching
Vouching is a substantive audit procedure
which aims at verifying the genuineness and validity of a transaction contained
in the accounting records. It involves
examination of documentary evidence to support the genuineness of transaction.
Main object of vouching the payments is not only to find out that money has
been duly paid but also to vouch payments for the following purposes. Some of
the objectives of vouching are mentioned below:
(a) To verify
that all transactions have been duly authorized.
(b) To check
that there is no omission of any entry and all transactions relate to the
period under audit.
(c) To check
that all transaction and related to the nature of business and expenditures are
proper business charge.
(d) To verify
cash in hand and a Bank.
(e) To detect
if there is any misappropriation of cash or goods.
(f) To see
that the payments have been duly received by the correct payees.
(g) The
vouching in support of the entries are legally valid with regard to its date,
authority, related to business concern etc.
It is through vouching that the auditor comes
to know the genuineness of transactions recorded in the client’s books of
account wherefrom the financial statements are drawn up. Apart from
genuineness, vouching also helps the auditor to know the regularity and
validity of the transaction in the context of the client’s business, nature of
the organisation and organisational rules.
A)
VOUCHING
OF PURCHASE BOOK (Credit Transactions): While
vouching the purchase book auditor should pay special attention to the
following points: 2015
1. Internal
Control Examination: The auditor
should check the internal control system and decide that upto how much extent
he can rely upon it.
2. Checking Of
Invoices: The auditor
should check the entries in the purchases day book with the invoice. He should
pay his attention to the following points :
a. The date of
invoice.
b. The name of
the supplier.
c. The entry in
the goods received register.
d. The account
involved.
e. Initials of
the checking authority.
3. Comparison
With Order Book: Various entries
of purchase book should be compared with the order book and good inwards book.
In this way if there is any fictitious entry it will be traced out.
4. Checking Of
Authority: The auditor
should check that all the entries made in the book must be authorized by the
responsible officer.
5. Vouchers
Cancellation: As the voucher is
passed it should be cancelled. The auditor should check it and vouch the
purchase book with the credit memos, bill and invoices.
6. Over All
Checking: The auditor should check the costs cross costs and carry forward
of the purchase book.
Or
(b) What do you mean by verification of Assets? How does it differ from
valuation? 4+10=14
Ans:
Verification of Assets and Liabilities
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.
Differences
between Verification and Valuation
|
Basis
|
Verification.
|
Valuation.
|
|
Objective
|
Verification is done to prove the existence, ownership and title
to assets.
|
It certifies the correct value of the asset at the date of the
BS.
|
|
Applicability
|
Verification is done or both assets and liabilities.
|
Usually only values of assets are certified.
|
|
Auditor’s involvement
|
Verification is done by the auditor.
|
It’s done by the experts and responsible officials.
|
|
Evidence
|
Verification is made on the basis of evidence.
|
Valuation is made based upon the certificate issued by the
officials.
|
|
Scope
|
It is a complete process of examination and checking. It
includes verification of existence of assets, ownership, title etc.
|
Valuation is a part of the process of examination. It is not
concerned with existence, ownership and title.
|
|
Auditor’s liability
|
An auditor is held liable for improper verification of assets
and liabilities.
|
An auditor cannot be held liable for any improper valuation of
assets as valuation of assets is done by valuers or owners.
|
3. (a) Discuss the provision which are contained in sec 139 of the companies Act 2013
regarding appointment of the company Auditor. 14
Ans: Appointment of a Company Auditor:
According to Section 224 of the
Companies Act, every company whether private or public must appoint an Auditor
or auditors to audit the final accounts. The provisions relating to the
appointment of auditor are as follows:
1.
Appointment
of First Auditors:
(a) In case of a Non-Government Company[Sec.
139(6)]: The first auditor of the company is to be appointed by BOD within 30
days from the date of incorporation of company. Note here that this is not from
the date of commencement of business. First auditor shall hold office upto the
conclusion of first AGM. If BOD fails to appoint the first auditor, it shall
inform the members of the company. The members of the shall within 90 days at
an extraordinary general meeting appoint the auditor.
(b) In case of a Government Company [Sec.
139(7)]: In case of any government company or any other company which is owned
or controlled by central or state government either directly or indirectly, the
first auditor shall be appointed by the Comptroller and Auditor General (CAG)
of India within 60 days from the date of registration of the company. In case
the CAG does not appoint such auditor within the above period, the Board of
directors of the company shall appoint such auditor within next 30 days.
2.
Appointment
of Subsequent auditors:
(a) In case of Non-Government Company
[Sec. 139(1)]: Every company shall, at the first AGM appoint an individual or
firm as an auditor who shall hold office form the conclusion of that meeting
till the conclusion of its 6th AGM and thereafter till the conclusion
of every 6th meeting. The following points need to be noted in this
regard:
a. The company shall place the matter
relating to such appointment by member at every annual general meeting.
b. Before such appointment is made,
the written consent of the Auditor to such appointment and a certificate should
be obtained. The certificate shall also indicate whether the auditor satisfies
the criteria provided in sec. 141.
c. The company shall inform the
auditor concerned of his or its appointment.
d. The company shall also file a
notice of such appointment with the registrar within 15 days of such
appointment.
(b) In Case of Government Companies
[Sec. 139(5)]: In case of any government company or any other company which is
owned or controlled by central or state government either directly or
indirectly, the Comptroller and Auditor General (CAG) shall in respect of a
financial year, appoint an auditor duly qualified to be appointed as an auditor
of companies under this act, within a period of 180 days from the commencement
of the financial year, who shall hold office till the conclusion of the AGM.
3.
Filling of
Casual Vacancies [Section 139(8)]:
In the
case of a company other than a company whose accounts are subject to audit by
an auditor appointed by the CAG of India:
(a) Any
Casual Vacancy due to reasons other than resignation: Any casual vacancy in the
office of an auditor shall be filled by the board of directors within 30 days.
(b) Any
Casual vacancy due to resignation: Such appointment shall also be approved by
the company at a general meeting convened within 3 months of the recommendation
of the board and he shall hold the office till the conclusion of the next
annual general meeting.
In the
case of a company whose accounts are subject to audit by an auditor appointed
by the CAG of India:
(a) Any
casual vacancy in the office of an auditor shall be filled by the CAG of India
within 30 days.
(b) In
case the CAG of India does not fill the vacancy within the said period the
board of directors shall fill the vacancy within next 30 days.
(b) What
is the procedure of transfer shares in a company? Point out the auditor’s
duties in this connection. Distinguish between transfer and transmission of
shares. 2+6+6=14
4. (a) Discuss the various points to be considered by the auditor in
the audit of an educational Institution. 14
Ans: The auditor of a
Educational Institution has a right to examine the books and vouchers of the
business to enable his to satisfy himself whether or not the balance sheet is
drawn up, so as to exhibit a true or fair view of the state of affairs of the
business, according to the best of his information and explanation given to
him. To enable him to perform his duty, the auditor should take the following
steps :
1. Examine
the Trust Deed, or Regulations in the case of school or college and note all
the provisions affecting accounts. In
the case of a university, refer to the Act of Legislature and the Regulations
framed thereunder.
2. Read
through the minutes of the meetings of the Managing Committee or Governing
Body, noting resolutions affecting accounts to see that these have been duly
complied with, specially the decisions as regards the operation of bank
accounts and sanctioning of expenditure.
3. Check
names entered in the Students’ Fee Register for each month or term, with the
respective class registers, showing names of students on rolls and test amount
of fees charged; and verify that there operates a system of internal check
which ensures that demands against the students are properly raised.
4. Check
fees received by comparing counterfoils of receipts granted with entries in the
cash book and tracing the collections in the Fee Register to confirm that the
revenue from this source has been duly accounted for.
5. Total
up the various columns of the Fees Register for each month or term to ascertain
that fees paid in advance have been carried forward and the arrears that are
irrecoverable have been written off under the sanction of an appropriate
authority.
6. Check
admission fees with admission slips signed by the head of the institution and
confirm that the amount had been credited to a Capital Fund, unless the
Managing Committee has taken a decision to the contrary.
7. See
that free studentship and concessions have been granted by a person authorised
to do so, having regard to the prescribed Rules.
8. Confirm
that fines for late payment or absence, etc., have either been collected or
remitted under proper authority.
9. Confirm
that hostel dues were recovered before students’ accounts were closed and their
deposits of caution money refunded.
10. Verify
rental income from landed property with the rent rolls, etc.
11. Vouch
income from endowments and legacies, as well as interest and dividends from
investment; also inspect the securities in respect of investments held.
12. Verify any Government or local authority grant
with the relevant papers of grant. If
any expense has been disallowed for purposes of grant, ascertain the reasons
and compliance thereof.
13. Report any old heavy arrears on account of fees,
dormitory rents, etc, to the Managing Committee.
14. Confirm
that caution money and other deposits paid by students on admission have been
shown as liability in the balance sheet and not transferred to revenue.
15. See
that the investments representing endowment funds for prizes are kept separate
and any income in excess of the prizes has been accumulated and invested along
with the corpus.
16. Verify
that the Provident Fund money of the staff has been invested in appropriate
securities.
17. Vouch
donations, if any, with the list published with the annual report. If some donations were meant for any specific
purpose, see that the money was utilised for the purpose.
18. Vouch
all capital expenditure in the usual way and verify the same with the sanction
for the Committee as contained in the minute book.
19. Vouch
in the usual manner all establishment expenses and enquire into any unduly
heavy expenditure under any head.
20. See
that increase in the salaries of the staff have been sanctioned and minuted by
the Committee.
21. Ascertain
that the system ordering inspection on receipt and issue of provisions,
foodstuffs, clothing and other equipment is efficient and all bills are duly
authorised and passed before payment.
22. Verify
the inventories of furniture, stationery, clothing, provision and all
equipment, etc. These should be checked
by reference to Stock Register and values applied to various items should be
test checked.
23. Confirm
that the refund of taxes deducted from the income from investment (interest on
securities, etc.) has been claimed and recovered since the institutions are
generally exempted from the payment of income-tax.
24. Verify
the annual statements of accounts and while doing so see that separate
statements of account have been prepared as regards Poor Boys Fund, Games Fund,
Hostel and Provident Fund of Staff, etc.
Or
(b) Distinguish between Audit and Investigation. Explain in detail the
procedure for an investigation. 4+10=14
INVESTIGATION:
When for a
special purpose an inquiry is made into the accounts of the business it is
called investigation.
In other words, we may say that audit which is conducted for a particular object is called investigation.
In other words, we may say that audit which is conducted for a particular object is called investigation.
Investigation involves inquiry into facts behind the
books and accounts, into the technical, financial and the economic position of
the business or organisation. Investigation is an examination of books
and records preliminary of financing or for any specified purpose, sometimes
differing in scope from the ordinary audit. Investigation implies an
examination of and record for some special purpose.
Classes
of Investigation
There are many
types of Investigation, but certain main classes can be identified. Following
are some of the areas where the investigation is mostly called for:
1.
Investigation on behalf of a person or company
who wants to purchase a running business.
2.
Investigation on behalf of a person who is
interested to join as a partner in a partnership firm.
3.
Investigation on behalf of a person who wants to
lend money to a business or interested to know its financial position.
4.
Investigation on behalf of the owner/shareholder
of the business who suspects a fraud.
5.
Investigation on behalf of the tax authority for
assessing actual tax liability.
Difference
between Audit and Investigation
|
Basis
|
Audit
|
Investigation
|
|
Legal binding
|
Audit of annual financial statements is compulsory
under the Companies Ordinance, 1984.
|
Investigation is not compulsory under Companies
Ordinance but voluntary depending upon necessity.
|
|
Objective
|
Audit is conducted to ascertain whether the
financial statements show a true and fair view.
|
Investigation is conducted with a particular object
in view, viz to know financial position, earning capacity, prove fraud,
invest capital, etc.
|
|
Period
|
Audit is conducted on annual basis.
|
Investigation may be conducted for several years at
a time, say three years.
|
|
Parties for whom conducted
|
Audit is conducted on behalf of shareholders (or
proprietor, or partners).
|
Investigation is usually conducted on behalf of
outsiders like prospective buyers, investors, lenders, etc.
|
|
Documents
used
|
Audit is not carried out of audited financial
statements.
|
Investigation may be conducted even though the
accounts have been audited.
|
|
Extent of work
|
Audit is normally conducted on test verification
basis.
|
Investigation is a thorough examination of books of
accounts.
|
|
Reporting
Party
|
Audit report is addressed to shareholders (or
proprietors or partners).
|
Investigation report is addressed to the party on
whose instruction investigation was conducted.
|
|
Adjustment in net profit
|
In case of audit net profit disclosed by audited
accounts is final without further adjustments.
|
In case of investigation in order to determine real
earnings certain adjustments are always essential.
|
|
Person performing work
|
Audit is to be conducted by a chartered accountant.
|
Investigation may be undertaken even by a
non-chartered accountant.
|
5. (a) State the importance of Audit Report. Discuss the various types
of Audit Report. 4+10=14
Ans: Importance of Audit Report
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.
TYPES
OF AUDIT REPORT:
There are four types of audit report which are
given below:
a) Clean
Report: It is also known as Unqualified Report. It is given by the auditor if
he is satisfied with the fairness of Balance Sheet and Profit and Loss account
with all the contents of the financial statements and he is satisfied with
evidences, documents and explanation given by his clients.
b) 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.
c) 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.
d) 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.
Or
(b) What do you mean by Management Audit? Discuss the advantages and
disadvantages of management audit. 4+10=14
Ans: Management
Audit
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.
According to L.
R. Howard, "Management audit is an investigation of business from the
highest level downward in order to ascertain whether sound management prevails
throughout, thus facilitating the most effective relationship with outside
world and smooth running of internal organization."
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.
(v)
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 the following: (any four) 5x4=20
a) Fraud and Error: 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.
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.
c. Compensating
Errors: when two/more mistakes are committed which counter balances each other.
d. Errors of Principles: These
are the errors committed by not properly following the accounting principles.
e. Clerical
Errors; A clerical error is one which arises on account of ignorance,
carelessness, negligence etc.
i.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.
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.
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.
b) Routine Checking
Ans:
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.
Objective of routine checking: The
objectives of routine checking are discussed below:
(i) Checking of primary books
(ii) Examining arithmetical accuracy
(iii) Examination of pointing
(iv) Helps to detect errors and frauds
(v) Prevent to alter errors and frauds
(vi) Accuracy of Trail Balance
(vii) Reliability of Final Accounts
c) Cost Audit
Ans: It is an audit process for verifying the cost of manufacture
or production of any article, on the basis of accounts as regards utilisation
of material or labour or other items of costs, maintained by the company. In simple words the term cost audit means a systematic
and accurate verification of the cost accounts and records and checking of
adherence to the objectives of the cost accounting.
As per ICWA London’ “cost
audit is the verification of the correctness of cost accounts and of the
adherence to the cost accounting plan.”
The ICWAI defines cost audit
as " system of audit introduced by the government of India for the review,
examination and appraisal of the cost accounting records and attendant
information required to be maintained by specified industries"
From above definition
of cost audit, it is clear that cost audit is a sytematic examination of cost
accounts to verify correctness of cost accounting records.
d) Proprietary Audit
Ans: 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.
e) Statutory
report
Ans: 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:
a) It sets
out the total number of shares allotted and the mode of allotment.
b) The total
amount of the cash received by the company in respect of the shares allotted.
c) 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.
d) Agenda of
the meeting regarding the formation and prospects of the company.
e) Particulars
of directors, auditors, etc.
f) Particulars
of contract.
g) Under
writing contract.
h) Arrears of
call.
i)
Commission or brokerage.
f) Audit of Banking companies
Ans:
The auditor of a Banking Company has a right to examine the books and vouchers
of the business to enable his to satisfy himself whether or not the balance
sheet is drawn up, so as to exhibit a true or fair view of the state of affairs
of the business, according to the best of his information and explanation given
to him. To enable him to perform his duty, the auditor should take the
following steps :
1. Confirmation of Appointment: He should,
first of all, confirm that his appointment is in order.
2. Annual Accounts: He should see that Annual
Accounts of the banking company have been prepared in proper form.
3. Internal
Check: Auditor has to rely on the internal check system of the bank. He should
take the written statement about the well organized system of internal check.
4. Internal
Audit Checking: Internal audit staff of the bank completes the audit of bank
record thoroughly. Independent auditor should examine the audit work performed
by the internal audit staff.
5. Balance with
Other Banks: Auditor should obtain the certificate from the state bank for the
balances with other banks.
6. Verify Cash
in Hand: Auditor should check the cash in hand on the date of the balance
sheet.
7. Verify
Balance with RBI: If the money has been kept with the Reserve Bank of
India or any other bank, he should obtain a certificate confirming the deposit.
8.
Verification of unrecorded cheques and drafts: He should specially check
the receipt of drafts, cheques, etc., on the last working day which has not
been entered in the books.
9. Verify the
Loans and Advances: Auditor should verify the list of loans and advance with
the ledgers. He should compare the total of each schedule with general ledger.
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