Auditing Notes: "To Hear"

AUDITING NOTES
1. Define auditing?
 Historically, the word ‘Auditing’ has been derived from Latin word “Audire” which means
“to hear”.
 In fact such an expression conveyed the manner in which the auditing was conducted during
ancient time. However ever a period of time, the manner of conducting has undergone
revolutionary change.
 ACCORDING TO GENERAL GUIDELINESS ISSUED BY THE ICAI,
”Auditing is defined as a systematic and independent examination of data, statements, records,
operations and performance [financial or otherwise] of an enterprise for a stated purpose. In
any auditing situation, the auditor perceives and recognizes the propositions before him for
examination, collects evidence, evaluates the same and on this basis formulates which is
judgement which is communicated through his audit report.
2. What are the two objectives of auditing?

Ans: The objectives of an audit may be classified into two groups, namely –
Primary objective and secondary objective.
The main or primary objective of audit to-day is to find out whether the accounts of a
particular concern exhibit a true and fair view of the earning and financial statement of affairs.
In the process of carrying out the primary objectives, certain other objectives automatically
come to the scene. These are the secondary objectives. These objectives which are incidental
to the primary objectives, may be stated as follow:
[a] detection of errors, [b] detection of frauds
[c] Prevention of error, and [d] prevention of frauds.
3. What are the two advantages of auditing?

[a] Detection of errors and frauds: Errors and fraud are detected in the course of audit,
although their detection is the not main objective of audit
[b] Borrowing is made easy: An audited accounts become reliable and acceptable to banker. So
management can get necessary loan from bank by presenting audited accounts of the business.
1 AUDITING Praveen Sharma -9831849493

Classes Available for XI - XII, B.com 1-2-3 year, CPT, IPCC, CS Found. / CS Inter (Cost & A/C) / CS Final (FM-Forex)
“Don't think You are late” *SuBh*JiVaN*
4. What are the two Disadvantages of auditing?
[i] Possibility of errors and frauds: The auditing does not give any guarantee as to the truth
and correctness of financial accounts of a concern whose books of accounts have been audited
by a qualified auditor. Errors and frauds may remain undetected in the audited accounts of
the business.
[ii] Want of complete picture: The auditing does not reveal the complete picture of the
business. While examining the books of accounts, an auditor has to depend a lot on the facts
shown by the books. So, if the facts have been wrongly manipulated in a clever manner, the
auditing may not reveal them.
5. Mention any two differences between accountancy & audit?

[a] Accountancy is concerned with the preparation of final accounts and other explanatory
which are helpful to the management. Auditing is concerned with the verification and
examination of those recorded in the books of accounts.
[b] The objective of accountancy is to show the financial position of the business on a specified
date and to determine the operating result for the specific period of time. The objective of
audit is to verify the truth and fairness of financial position and of the operating result of the
concern and at the same time to discover errors and frauds if any, in accounts.
6. What are the basic principles governing an Audit as laid down in

AAS -1 or SA 200? PS ICA me WAA…
[A] Integrity, and objectivity and independence,
[b] Confidentiality,
[c] Skills and competence,
[d] Work performed by others
[e] Documentation,
[F] Planning,
[g] Audit evidence,
[h] Accounting standard,
[i] Audit conclusion and reporting.

7. What is Independent financial audit?
 Independent financial audit is the audit conducted by a person who is independent’ of the firm.
 He is an outsider, usually a professional chartered Accountant, who verifies books of accounts
on the basis of supporting documents and vouchers to form an unbiased opinion on the
reliability and fairness of financial statements.
 As the independent auditor is not an employee of the firm there is no interference in his work
from the management.
 So his report on the financial can be considered trustworthy and reliable.
8. What do you mean by limited Review?

 Very often an auditor is required to submit report on interim financial statements prepared by
the company on urgent basis.
 Under these circumstances the auditor finds little time to conduct thorough examination of
books and other supporting Documents.
 Moreover, it may also not possible for the client to balance books and provide all documentary
evidences.
 So instead of conducting a full-fledged audit, the Auditor has to make restricted study of
books and other documents. This system of Audit is called Limited Review.
9. Define ‘Propriety Audit?

 The term ‘Propriety’ denotes appropriateness or rightness.
 So propriety audit can be Defined As assessment of rightness of managerial decisions in
connection with various Financial events or transactions of the business.
 It verifies whether all transactions are Being executed in the best interest of the company
or not.
 Propriety audit sees whether All employees exercise same degree of skill, care and caution
in executing business transactions as they are supposed to do in case of their personal
transactions.
 In other words, in the propriety audit it is seen whether all transactions are fair,
Compatible with the interest of the company and conducted with the expected level of
efficiency.
 It sees that no transaction results in any personal gain for an employee.
 According to Eric Kohler “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 the conduct.”

10. Define Performance audit?
 Performance audit can be defined as a systematic and independent appraisal or evaluation
of the performance of the business.
 In its various key area like manpower, work load distribution, productivity and
profitability, job performance , cost monitoring etc.
 So Performance audit is not concerned with verification of books of accounts of the business.
 The auditor conducting performance audit is not required to report on reliability and fairness
of financial statements. Rather his objective is to enable the management to improve the
performance of the business in different key area.
11. What is continuous audit?

 The system of audit under which the auditor or his assistant makes a detail examination of
all the transaction continuously throughout the year or at regular intervals :- say weekly,
fortnightly or monthly etc., is called the continuously audit.
 The auditor visits the client’s concern at regular or irregular intervals during the currency of
the financial period and check the books to date as far as possible.
 As under this system, each and every transaction is minutely; so, it is mostly useful to large
organisation.
 IN THE OPINION OF R.C WILLIAMS- “A continuous audit is one where the auditor or his
staff is constantly engaged in checking the accounts during the whole period or his staff
attends at regular or irregular intervals during the period.”
12. What is periodical audit?

 The system of audit which is taken up after the books have been closed at the end of financial
or accounting period and thereafter carried on continuously until completed is called the
periodical audit.
 In case of periodical audit, after the completion of accounting of financial year, the work of
audit begins.
13. What is statutory audit?

According to the companies act, the audit has been made compulsory is called statutory audit.
The nature and scope of audit is governed by the provision of the companies act and articles of
association. The auditor usually conducts his work of audit on basic of companies Act,
memorandum, Articles, prospectus and directors’ minute book, etc.

14. What is internal audit?
 According to ICAI ”Internal Audit is an independent managements function , involves a
continuous and critical appraisal of the functioning of an entity with a view to suggest
improvement there to and add value to and strengthen the overall governance mechanism of
the entity , including the entity ‘s risk management and internal control system ”.
 Internal audit is an audit conducted on behalf of the management of an enterprise with the
object of assisting the management discharge of responsibilities effectively and involves an
examination and evaluation of various activities of the enterprise . It is a review of the
operations and records, sometimes continuously undertaken, within a business, by specially
assigned staff.
15. What is audit programme?

 An audit programme consists of series of verification procedure to be applied to the
financial statement and accounts of a given company for the purpose of obtaining sufficient
evidence to enable the auditor to express an informed opinion on such statement.
 In other word, an audit programme is a detailed plan of applying the audit procedures in the
given circumstance with instructions for the appropriate techniques to be adopted for
accomplishing the audit objectives.
16. What is audit file?

The file which is used for preserving the written statements of necessary matter relating to
audit is called audit file. It is a process of recording the important information relating to
procedure and conduct of audit. The audit file includes different audit documents like audit
notes, audit programme, audit working papers, etc.
The audit file is generally of two types, as –
{i} permanent audit file and {ii} current audit file.
17. What is audit Memorandum?

 An audit memorandum a statement containing all useful information regarding the business of
the client.
 It indicate the method of operation, policies as to the different aspects of the business.
 It should also contain all the conditions in respect of audit.
 The object of preparing the memorandum is to record the general information of the
business which may be of real use to him while carrying on the work of audit.
 If it is a first audit, it will have to be prepared thoroughly so that it cover the various aspect
of the concern.
 But where the audit work was carried out earlier, only changes, if any, concerning various
items should be notes.
 The term’ audit memorandum; though not commonly used, covers different aspects, like audit
manual, audit programme, audit file and internal control questionnaire, etc.

18. What is audit working paper?
 The audit working paper constitute the link between the auditor’s report and the client’s
records.
 SA 200 states, “The auditor should document matters which are important in providing
evidence that the audit was carried out in accordance with the basic principles”.
 According to SA 230 Documentation refers to working paper prepared or obtained by the
auditor and retained by him in connection with performance of his audit.
 The objects of an auditor’s working paper are to record and demonstrate the audit work
from one year to another.
 Working paper should record the audit plan, nature, timing and extent of auditing
procedure performed, and the conclusion drawn from the evidence obtained.
 Working paper should be designed and properly organized to meet the circumstances of
each audit and the auditor’s needs in respect thereof.
 Working paper should be sufficiently complete and detailed for an auditor to obtain an
overall understanding of the audit.
19. What is audit note book?

 An audit note book is usually a bound book in which a large variety of matters observed during
the course of audit are recorded.
 It is thus a part of the permanent record of the auditor available for reference later on, if
required.
 The audit note book provides a valuable help to the auditor in picking up the links of work when
the concerned assistant is away or the work is stopped temporarily.
 The audit clerk may come across several difficulties for which he notes down the important
points and enquires along with the observation, explanation obtained and evidence seen which
he has to refer to the officials of the clients for satisfactory answers or which he has to
discuss with the senior or auditor.
20. Explain the concept of audit evidence?

 SA 200 on basic principles governing an audit states that, ”the auditor should obtain
sufficient appropriate audit evidence through the performance of compliance and substantive
procedures to enable him to draw reasonable conclusion therefrom on which to base his opinion
on the financial information”.
 SA 500 on audit evidence further expends this concept. The audit evidence should, in total,
enable the auditor to form an opinion on the financial information. In forming such an option,
the auditor may obtain audit evidence on a selective basis by way of judgmental or statistical
sampling procedure. For example, the auditor may select only certain accounts receivable for
payroll rates have been properly authorized.

21. What is audit planning?
Audit planning refers to establishing the overall audit strategy to conduct an effective audit in
an efficient and timely manner. As per SA 300, “planning an audit of financial statements”,
Audit planning involves following activities:
a. Acquiring knowledge of the client’s accounting system, policies and internal control
procedures
b. Establishing the desired degree of reliance that can be placed on internal control.
c. Setting the scope, timing and extent of audit procedures to be applied.
d. Deciding the analytical procedures to be applied.
e. Obtaining a general understanding of the legal and regulatory framework applicable to the
entity and how the entity is complying with that framework.
f. Deciding how such resources are managed, directed and supervised.
22. What is routine checking?

 The checking of books which are carried on by the auditor as a matter of routine work is known
as routine checking.
 In other words, the work performed by auditor in order to see whether the transaction
recorded in the books of account are proper and whether scientific method has been followed
in recording the transaction, is called the routine checking.
23. What do you mean by internal control?

 The term ‘Internal control’ refer to the various methods and procedures adopted for the
control of production, distribution and the whole system (financial & otherwise) of the
enterprise.
 According to Old AAS-6 (Revised) entitled, “Risk assessment and internal Control”, the
system of internal control may be defined as “the plan of Organization and all the methods and
procedures adopted by the management of an entity to assist in achieving management’s
objective of ensuring, as for as Practicable, the orderly and efficient conduct of its business,
including adherence to management policies, the safeguarding of asses, Prevention and
detection of fraud and error, the accuracy and completeness of the accounting records , and
the timely preparation of reliable financial information”.
24. What do you mean by internal check system?

Internal check has been defined by the institute of chartered accountants of England and wales
as the “check on day –to-day transaction which operate continuously as part of the routine
system whereby the work of one person is proved independently or is complementary to the
work of another, the object being the prevention or early detection of errors or fraud.

25. What is meant by internal audit?
 According to ICAI “internal audit is an independent management function , which involves a
continuous and critical appraisal of the functioning of an entity with a view to suggest
improvement there to and add value to and strengthen the overall governance mechanism of
the entity , including the entity’s risk management and internal control system.”
 Internal audit is an audit conducted on behalf of the management of an enterprise with the
object of assisting the management to discharge its responsibilities effectively and involves an
examination and evaluation of various activities of the enterprise
 Internal audit is a thorough examination of the accounting transaction as well as that of the
system according to which these have been recoded, with a view to reassuring the management
that the accounts are being properly maintained and the system contains adequate safeguards
to check any leakage of revenue or misappropriation of property or assets and the operation
have been carried out in conformity with the plans of the management.
 IT is a review of the operation and records, sometimes continuously undertaken, within a
business, by specially assigned staff.
26. What is Internal control questionnaire {ICQ}?

 Internal control questionnaire {ICQ} is a comprehensive and well-structured series of question
concerning internal control.
 ICQ is prepared by the auditor for collecting information about the existence, operation and
efficiency of internal control in an organization.
 ICQ is the most widely used technique of evaluation of internal control. Before embarking on
audit, the auditor frames the questionnaire covering important areas of operation namely
purchase, sales, stock keeping, wage payment etc. Each question in the questionnaire is set
with the aim of assessing strength of internal control at every stage of an operation. The
question range from system of authorization, flow of transaction, documents used in the flow,
recording of transaction, division of labour aiming at internal check, handling of assets,
reporting of transaction to management and review of operations.
 Generally question are so framed that 'Yes' answer indicates a satisfactory position and 'No'
answer suggests deficiency in the control system.
 In case of 'No' answer provision is also made for further explanation or details.
 In case of question not relevant to the business, 'Not applicable' reply is given.
 The questionnaire is sent by the auditor to the client with the request to get it filled by some
responsible officer.
 After going through the answer, if some incongruities (inappropriate) are noticed, the auditor
should discuss the matter with the concerned officers.
 The auditor then reports the deficiency to the management and suggest for improvement in
the internal control system.

27. What is sampling?
 The sampling in audit refers to the process of a few transactions out of large number of similar
transaction in such a way that every transaction has equal chance of being selected. It is
presumed that selected transaction represent other transaction in the population. It is most
likely that the checking of those sampled transaction will lead the auditor to the same
conclusion he would arrive at in case of extensive routine checking.
 According to SA-530,"Audit sampling " audit sampling is "the application of audit procedures
to less than 100% of item within a population of audit relevance such that all sampling units
have a chance of selection in order to provide the auditor with a reasonable basis on which to
draw conclusion about the whole population."
 It is to be noted that as audit sampling involves checking only a part of the whole mass of
transaction, it involves the audit risk. But even by undertaking hundred percent checking of
transaction, the auditor cannot escape audit risk.
28.What is simple random sampling?

Under this method the entire population e.g., purchase or sales invoice are considered for
sampling. This method is considered appropriate provided the population to be sampled does not
widely vary. For example, the population may be considered for simple random sampling, if say
sales invoice fall within the range Rs 10,000 to Rs 50,000 and not in the range between Rs 500
to Rs 5,00,000.
29. What is analytical procedure in the audit?

 Analytical procedure means the study of the relationship among relevant financial and non-
financial data, observing the trend and enquiry into the reason of some unusual fluctuation in
the amounts of some items which are not consistent with other relevant information or which
deviate from predicted amount.
 As per SA 520, ‘Analytical procedures’, "analytical procedures means evaluation of financial
information through analysis of plausible relationship among both financial and non-financial
data. Analytical procedures also encompass su8ch investigation as is necessary of identified
fluctuation or relationship that are inconsistent with other relevant information or that differ
from expected values by a significant amount".
30. What do you mean by auditing in depth?

 Audit in depth implies examination of a few selected transaction from the beginning to the end
through the entire flow transaction i.e., from initiation to the completion of the transaction by
receipt of payment of cash and delivery or receipt of the goods.
 This examination consists of studying the recording of transaction at the various stages
through which they have passed.
 At each stage, relevant records and authorities are examined; it is also judged whether the
person who has exercised the authority in relation to the transaction is fit to do so in terms
of the prescribed procedure.

31. What is test checking?
 Test checking is a substitute for detailed checking.
 In a large, it is rather impracticable for an auditor to check all of the numerous transaction.
 It is likely necessary or possible to examine very entry in details.
 It will also be very expensive that very few companies would feel that they could to be
audited.
 Under some circumstances, the auditor has no other way than to rely on some test checking.
32. What is routine checking?

 The checking of books which are carried on by the auditor as a matter of routine work is
known as routine checking.
 In other words, the work performed by auditor in order to see whether the transaction
recorded in the books of account are proper and whether scientific method has been followed
in recording the transaction, is called the routine checking.
33. What do you mean by cutoff examination?

 One of the fundamental principal of accounting refers to the recording of transaction for a
particular year alone.
 The recording of transaction relating to the previous year or following year should not be
taken into account.
 The term 'cut off refers to the procedure adopted by the management to ensure the
separation of transaction at the close of one accounting period from those at the
commencement of the next accounting period.
 So, cut off examination mean the examination of transaction and related evidential matters
for a test period before and after the balance sheet date.
34. What is vouching?

 The act of examining vouchers. It is the practice followed in an audit, with the objective of
establishing the authenticity of the transaction recorded in the primary books of account.
 It essentially consists of verifying a transaction record in the books of account with the
relevant documentary evidence and the authority on the basis of the which the entry has been
made; also confirming that the amount mentioned in the voucher has been posted to an
appropriate account which would disclose the nature of the transaction on its inclusion in the
final statements of account.
 Checking item of Profit & loss A/C or Statement of P/L as per Schedule III.

35. What are the common features of valid vouchers?
A voucher is considered to be valid on the basis of the nature of specialty of the transaction.
But all the voucher should have a few common features which may be stated as follow:
{a}. Relating to the client or concern : All the vouchers of the concern should be in the name
of the client or of the concern .
{b}. Date of voucher similar to the date of transaction : the date to be recorded in the
voucher should be similar to the date of transaction taken place . Both the date will be same
and similar.
36. Distinguish between vouching & routine checking.

(a) Routine checking is concerned with ascertaining accuracy of casting, positing and carry
forward, posting and checking of all ledger accounts.
(b) The scope of vouching is much wider than that of routine checking. The scope of routine
checking is confined with the books of account; but in case of vouching; has to go beyond the
books of account in order to trace out the source of transaction.
37. What do you mean by preliminary expense?

 Expenses incurred in connection with the formation of a new company or a new project such as
stamp duty, registration fee, printing charges of various documents like memorandum and
Articles of Association etc. Are referred to as preliminary expense. Such costs are initially
borne by the promoters who are subsequently reimbursed as per term of agreement.
 As per Companies Act 2013, Preliminary Expenses should be deducted From RESERVE &
SURPLUS in Balance sheet.
38. What are the general principal of vouching? SADA BAHAR POINT
[a] That the date of the voucher falls within the accounting period
[b] That the voucher is made out in the client's name.
[c] That the voucher is duly authorised;
39. What are the objective of vouching

[a] Correction of voucher : The work of vouching involves correction of vouchers and related
evidences .
[b] Evaluation of evidence and voucher: ITs involves the evaluation of collected evidences and
voucher.
[c] Examination of vouchers: It is concerned with examination of vouchers or documents in
such a manner the auditor may satisfy himself as to the authenticity and validity of the
recording of transaction.

40. What is meant by verification of assets?
 According to Spicer and Pegler: “The verification of asset implies an enquiry into the value,
ownership and little, existence and possession and the presence of any charge on the asset".
 In short verification means the proof of existence or confirmation of asset and liabilities on
the date of balance sheet.
 Verification of asset is an important audit process.
 By convention its scope has been limited to inspection of asset, where it is practicable, and
collection of information about them on an examination of documentary and other evidence so
as to confirm.
41. What is meant by verification of liabilities?

Verification of liabilities means the determination of the liabilities according to their nature
and examining the amount of those liabilities on the date of balance sheet. Verification of
liabilities is as much important as that of the asset.
42. What is meant by valuation of asset?

 Valuation of asset means the examination of the accuracy and propriety of the valuation of
those assets which are shown in the balance sheet of the company at the close of financial year.
 In auditing, valuation does not only imply the calculation or determination of values of different
asset shown in the balance sheet, but includes also the critical examination and verification of
the determined values of the asset on the basis of generally accepted principles and convention.
43. What do you mean by contingent liability?

The term 'contingent liability' refers to the obligation relating to the past transaction or other
events or condition that may arise in consequence of one or more future events which are
presently deemed possible but not probable. Contingent liabilities may or may not crystallize
into the actual liabilities. If they do become actual liabilities, they give rise to a loss or an
expense.
Examples of contingent liabilities-
[a] Uncalled liabilities on partly paid shares
[b] Arrear cumulative dividend,
[c] Estimated amount of contracts yet to be executed on capital account and provided by it etc.
[d] Bills discounted
44. What do you mean by contingent asset?

Contingent asset may be defined as possible future gains, claims or services which are likely to
be materialised or received out of the business operation preceding the balance sheet date. A
contingent asset may or may not arise depending upon the occurrence of future uncertain
events.

Following are some of the examples of contingent asset
[a] Possibility of refund of any duty collected by Government
[b] Legal action brought by the company against other company for infringement of copy rights.
[c] Claim for money from previous endorser of bill receivable which has been discounted and
might be dishonored.
45. What is the special qualification that an auditor should possess?
46. What person are disqualified from holding the office of auditor in a company?
The following persons are not qualified for appointment as auditors of a company:
(a) AS body corporate;
(b) An officer or an employee of the company;
(c) A person who is a partner, or who is in the employment of an officer or employee of the
company;
(d) A person who is indebted to the company for more than 1000 or who has given guarantee or
provided any security in connection with the indebtedness of any third person to the company
for more than 1000 ;and
(e) A person holding any security of that company.
47. What is joint audit?

 When more than the one firm/individual are appointed to conduct a statutory audit, is called
joint audit.
 In other words audit implies statutory audit of a firm conducted by more than one statutory
auditor.
 It is the usual practice of big companies and corporation with the divergent and widespread
activities to appoint several Chartered Accountants as joint auditor.
 Joint auditors ensures pooling together the resources and expertise of more than one firm of
auditors in conducting audit which is otherwise very difficult or impracticable for a single
firm.
 SA299, "Responsibility of joint auditors", has laid down principles in respect of joint audit.

48. Write a short note on special audit
The companies act, empowers the central Government, in certain cases, to call for a 'special
audit'. The central Government may order to get this audit conducted in cases where it has
reasons to believe:
(a) That the affairs of the company are not being managed on sound business principles or
according to prudent commercial practices; or
(b) That the company is being managed in a manner likely to cause serious damage to the
interests of the trade, industry or business to which it pertains;
(c) That the financial position of the company is such as might endanger its solvency.
The special audit aims at providing the Government with a critical appreciation of the
performance of the company and its financial position.
49. Explain the meaning of 'Divisible profits

 The portion of profit which can be legally be distributed to the shareholders of the company
by way of dividend is called the 'divisible profits'.
 The distinction between profit and divisible is not very much relevant in case of sole
proprietorship or partnership business as because the sole proprietor or partner are at liberty
to withdrawn the entire amount of profit or even the capital from the business if they so
desire.
 But such is not case with a joint stock company, there are some legal constraints to distribute
the entire amount of profit among the shareholders in case of Joint Stock Company.
 Therefore, only that profit which can be legally distributable among shareholders is divisible
profits.
50. What is capital profit? Give example.

 Capital profits are those profit which are not earned during the normal course of
business. Capital profits are not trading profits.
 In other words, capital to that profit which is earned from capital transactions. Whether
the profit is revenue or capital is determined on the basis of nature and transaction of
business.
 The profits earned will be regarded revenue one to a company but the same will be capital
profit to another company.
Examples of capital profits:
(i) Profit on revaluation of fixed assets of the business
(ii) premium received on issue of shares debentures.
(iii) Redemption of debentures at discount;
(iv) profits earned on forfeiture the shares.
(v) Profit prior to incorporation
(vi) profits arising out of forfeiting the unclaimed divided
(vii) profit earned from sale of fixed assets and so on.

51. Explain the concept of true & fair.
The concept of true and fair is a fundamental concept in auditing. the phrase "true and fair" in
the auditor report signifies that auditor is required to express his opinion as to whether the
state of affairs and the results of the entity as ascertained by him in the course of his audit are
truly and fairly represented in the accounts under audit, this requires that the auditor should
examine the accounts with a view if verify that all assets, liabilities, income and expenses are
stated as amounts, which are in accordance with accounting principles and policies are relevant
and no material amount, item or transaction has been omitted
52. How is the first auditor of a company is appointed?

a) The first auditor are generally to be appointed by the board of directors by means of a
resolution within 90 days of the date of registration of the company.
b) The auditors so appointed shall hold office until the conclusion of the first annual general
meeting.
c) If the board of directors fails to appoint the first auditors, the company at a general
meeting may do so.
d) The auditors so appointed by the board of directors may be removed by the company at a
general meeting and which then may appoint any other auditor.
53. Under what circumstances an auditor is appointed by the Government?

Where at an annual general meeting, no auditor are appointed or re-appointed the central
Government may appoint a person to fill the vacancy. it is the duty of the company to give notice
of the fact, that no auditor was appointed in the annual general meeting, to the central
government within seven days of the annual general meeting, no form has been prescribed under
the stature for such matters. In the case of default to give such notice to the central
Government, the company and it's every officer in default shall be punishable with fine that
may extend to Rs 5,000.
54. Mention any two rights of an auditor under companies act, 2013?
a) Right of access to books,etc; The auditor has a right of access at all times to the books
and vouchers of the company whether kept at the head office of elsewhere.
b) Right to receive information and explanation: under the same section, a company auditor is
entitled to require from the directors, managers or secretary of the company such information
and explanations as he may think necessary for the performance of his duties auditor.
55. Mention any two liabilities of an auditor under the companies act, 2013?
[a] Liability for negligence: An auditor is perform certain duties as an agent of his client . If
he does not perform his duty with reasonable care and skill and consequently the shareholder
suffer, he will be held liable for negligence of duty, no question of compensation will arise.

[b] Liability for misfeasance: The term
'misfeasance 'means breach of trust of duty. If an auditor does something wrongfully in
the performance of his duties resulting in a financial loss to the client he will be guilty of
misfeasance.
56. Explain the meaning of ' Divisible profit?

 The portion of profit which can be legally be distributed to the shareholders of the company
by way of dividend is called the 'divisible profits'.
 The distinction between profit and divisible is not very much relevant in case of sole
proprietorship or partnership business as because the sole proprietor or partner are at liberty
to withdrawn the entire amount of profit or even the capital from the business if they so
desire.
 But such is not case with a joint stock company, there are some legal constraints to distribute
the entire amount of profit among the shareholders in case of Joint Stock Company.
 Therefore, only that profit which can be legally distributable among shareholders is divisible
profits.
57. What is meant by interim dividend?

 If dividend is declared and paid partly to the shareholders before the preparation of final
accounts for a financial year, it is called interim dividend.
 In Other words, when it is declared in between two general meeting of the company of the
company, it is called interim dividend.
 The articles of association of a company often authorize the directors to declare interim
dividend. For declaration of interim dividend, there is no need for shareholding's meeting.
58. What is unclaimed dividend?

 After the declaration of dividends, when the shareholders do not present the dividend
warrants to Claim money from the company, and as a result, it is not possible to pay dividend to
them, it is called unclaimed dividend.
 Again if dividend is not paid within the legally-specified time, it is called unpaid dividend.
 At the end of the accounting period, it is transferred to 'Unclaim dividend account'.
 It appears as a liability under the heading of current liabilities, IN SHORT TERM PROVISON
in the balance sheet.
59. What do you mean by profit prior to incorporation?

The profit prior to incorporation means the profit earned when the company had not come into
the existence. A profit prior to incorporation is in the nature of capital profits. Such profits
may utilised for the following purposes:
(a) The interest to be paid to fee vendor on the purchase price from the date of purchase to
the date of incorporation, if any, shall first be charged against such profit.

(b) The remaining portion of the profit can be utilised in writing off goodwill purchased from
the vendor.
(c) Any balance left will be available for writing down the fixed asset purchased from the
vendor.
(d) The final balance of such profits should be transferred to capital reserve.
60. What do you mean by Auditor's report?

The document through which the auditor communicates his opinion is known as Audit reports. An
auditor has to submit as per requirements of law or as per term of contract, a report of his
finding to his client. It is the medium through which an auditor expresses his opinion on the
financial statements or other data under audit. Therefore, auditor's is the end product of
every audit containing a statement of facts. It is an important document in which the auditor
sets forth the scope and nature and also gives his unbiased opinion regarding the financial
statement of the client.
61. What do you mean Auditors ' certificate?

 A certificate means that a person issuing or signing it vouchsafes the exactness of the
statement he makes; that is, what he states is cent per cent true and correct.
 When an auditor certifies a statement, it implies that the contents of that statement are
measurable and that he has verified the accuracy of the data.
 The term 'auditor's certificate' is, therefore, used where the auditor verifies the accuracy
of the facts. An 'Auditor's certificate' represents that he has verified certain figures and is
in a position to certify their accuracy as per examination of document and books of accounts.
62.Mention any two content/elements of auditor's report.

(a) TITLE: the auditor's report should have an appropriate title. It may be appropriate to use
the term "Auditors report" in the title to distinguish the auditor's report from reports that
might be issued by others, such as by the officers of the entity, the board of directors, or
from the reports of others.
(b) ADDRESSEE: the auditor's report should be appropriately addressed as required by the
circumstances of the engagement and applicable laws and regulations. Ordinarily, the auditor's
report is addressed to the authority appointing the auditor.

63. What are the characteristic of a good audit report?
(a) Simplicity: simplicity is considered as one of the characteristic of an audit report. The
language used in the report should be clear and understandable so that concerned parties
cannot face any difficulty to comprehend it.
(b) Information based: the audit report should be based on factual information and not on any
guesswork or presumption. If any information is not available to him, he will state the fact
clearly.
(c) Fairness: the scope of the work i.e. types of work done by the auditors should be clearly
mention in the report. Moreover, the auditors should clearly state whether the books of
accounts exhibit a true and fair view of the state of affairs of the business.
64. What are the different types of audit report?

1. Clean or Unqualified Report:
2. Qualified Report:
3. Adverse Report:
4. Report with Disclaimer:
5. Compartmental or Piecemeal opinion or Report:
65. Clean or unqualified report.

Where an auditor gives an opinion in his report about the reliability and fairness of financial
statements without any reservation, is called clean or unqualified report. An auditor makes a
clean or unqualified report when he is satisfied with various matters such as-
(a) He has got reasonable evidence in support of all materials transaction.
(b) All entries have been passed according to generally accepted accounting principles..
(c) The financial statements correspond to the books of accounts.
(d) All relevant information have been disclosed.
66. Qualified Audit Report

When an auditor expresses his opinion in his audit report subject to some reservation, he is said
to be have qualified his report. In other words, his assertion in the qualified report regarding
fairness of financial statements depend upon some condition.
As for example, the auditor does not agree with his client regarding treatment of an item such
as subsidy or gratuity, he may qualify the report. The reason of qualification should always be
clear stated in the report.

67. Adverse report or Negative Report
An adverse report is the report in which the auditors categorically states that profit and loss
account and balance sheet do not exhibit a true and fair view of the states of affairs and
working results of the company. Generally extreme cases like non-provision or under provision of
depreciation, taking fictitious sales etc. Compel the auditor to give negative or adverse report.
An adverse report should be given by the auditor, only when he has strong and convincing
evidence to support his conclusion. He should disclose all the reason of adverse report.
68. Report with Disclaimer.

Very often it may not be possible for a statutory auditor to collect all the information which
are necessary for expressing an opinion on the financial statements. This situation may arise
because of incomplete accounts submitted by the client or reluctance of client to furnish
requisite information as sought by him. When an auditor is to submit such inconclusive audit
report because of reason beyond his control, such report is called a report with disclaimer.
When the auditor is to submit with disclaimer he should give the justification for such
disclaimer in his report.
69. What is meant by investigation of accounts?

 Investigation simply means an examination of accounts and records of a business undertaking
with some special purpose. It is a special kind of examination of accounts or records carried on
by an investigation with a investigator with a predefined purpose in accordance with the
necessity of the situation and is concerned with something more than the verification of
accuracy of figures of the Balance sheet.
 In the opinion of Taylor and Perry, "Investigation involves enquiry into the facts behind the
accounts, i.e. into the technical, financial and economic position of the business organisation.”
70. Mention any two object/purpose of investigation?

The work of investigation is carried out for various purposes. However, the common purpose for
which it is undertaken are as follows:
(a) On behalf of a person intending to purchase a business: When a person or firms intends
to purchase a going concern, this work of investigation may be necessary in order to acquire a
clear idea about the profitability, financial position and efficiency of the business, etc. before
its purchase.
(b) On behalf of a person intending to join a business as a partner: If a person decides to
join a partnership business as a partner, before joining the firm, an investigation may be felt
necessary in order to ascertain profitability, financial position and goodwill of the business.

71. What do you mean by management audit?
The term 'management audit' implies an independent appraisal and review of activity within the
organisation on the basis of certain standards as to whether the functions of management have
been performed as per rules and policies set at various level of management. Precisely, it may be
define; as the audit of management process and function. Thus it can be concluded that
management audit is concerned with the appraisal of performance of management.
72. What is cost audit?

 'Cost audit' means a thorough examination of cost accounting records of an undertaking by a
cost auditor.
 The term 'cost audit' has been defined by different professional institution and individuals,
some of which are given below:
 The definition given by the institute of Cost and Management Accountants (London)
is-" Cost audit is the verification of the correctness of cost accounts and of adherence
to the cost accounting plan"
 In the opinion of Smith and Day, "By the term cost audit is meant the detailed
checking of the costing system, technique and accounts to verify their correctness and
to ensure adherence to the objectives of cost accountancy"
73. What is social audit?

Social audit can be defined as the assessment of the social performance of a firm in the society
to which it belongs. It verifies whether a firm is discharging its social obligation commensurate
with social costs or determents to the society caused by its operation.
74. What is Energy audit?

Energy auditing can be defined as the assessment of energy use pattern of a factory, examining
whether there is wastage of energy and identifying energy saving opportunities. As a result
many factories have been taking energy management programmes to cope with severe energy
shortage and for performing the profitability of their operation. Energy audit is one of such
step of any energy management programme.
75. What is System audit?

System audit is a kind of investigation of the system of accounts. Its purpose is to design
appropriate system of accounts suitable for the business or revise the existing system suitably.
It is no denying the fact that the business world is dynamic in nature. The information
requirement of different stakeholders is constantly changing. So, the accounting system
frequently need to be revised so that they provide the information desired by the stakeholders
as an aid to decision making. Therefore, companies should employ auditors to analyze their
accounting system and business methods to ascertain whether accounting records and practices

are up to date and economical; and whether such records and practices may be changed so as to
do the work better, quicker and at less cost under the changing situation.
76. What is Peer review?

 The term 'Peer' means a person of similar standing. On the other hand, the term 'review'
means re-examination or retrospective evaluation of some work. So in the context of
professional, jobs, the system of review of work done by a professional of similar knowledge
and quantity is called peer review.
 As per the statement of peer review of ICAI (2002), 'Peer review' means an examination and
review of the system and procedures to determine whether they have been put in place by the
practice unit for ensuring the quality of attestation services as envisaged and
implied/mandated by the Technical standards, Ethical Standards and professional Standards
and whether these were effective or not during the period under review.
 The statement has said that the examination and review of a practice would be carried out by
a "Reviewer" who is a member, selected from a panel of reviewers maintained by the peer
Review board of the Institute.
77. What do you mean by standards on auditing (SA)?

 Standards on auditing refer to a set of systematic guidelines used by auditors while
conducting audit of company's account.
 These guidelines are generally prescribed by the professional bodies of accountants based on
collective deliberation and views of different segments of society and interested groups
such as regulators, industry and academics.
 These standards provide principles and techniques of auditing which help the auditor ensure
performing his duties most efficiently and effectively.
 They are a set of ideas which serves as a framework for auditing.
 Some SA are as follow
 SA 230 Audit Documentation
 SA 500 Audit Evidence
 SA 505 External Confirmation
 SA 530 Audit Sampling
 SA 570 Going Concern
 SA 610 Using the work of another Auditor
 SA 520 Analytical procedure
 SA 550 Related Parties
 SA 240 Fraud
 SA 299 Responsibility of Joint Auditor etc

78. What do you mean by Environmental Audit?
 Environment refers to external condition and surrounding in which people, animals or plant live.
But now this external surrounding is getting polluted day by day.
 Different types of pollution which are now damaging environment are (a) Air pollution, (b)
Water pollution, (c) Soil pollution, (d) Sound pollution.
 Many industries are directly responsible for pollution of air, water, soil, and sound. Specially,
industries like pesticide industry, tannery industry, petro-chemical industries, thermal power
generation, cement industry, foundry industry etc. cause have damage to the environment.
This damage, although not completely avoidable, can be restricted to a great extent if proper
measures are taken. For this purpose, many countries have passed several environment related
legislation.
79. Write a short note on Tax audit

 According to sec.44AB of I.T act 1961,
 All persons having total turnover exceeding 100 lakh in case of business or
 Gross Receipt 25 lakh in case of professional during the previous year have to get
their accounts audited compulsorily by a chartered accountant.
So unlike statutory auditor, tax auditor under this section is not confined to company only.
 The approach of tax auditor is similar to that of statutory auditor. He applies the same
generally accepted auditing principles and can rely on the technique of selective verification.
However he is to keep the requirement of Income Tax Act and various judicial pronouncements
in this field. The tax auditor submits his report to management who is required to append it
with its I.T. Returns.
80. What do you mean by the term of audit engagement?

The audit of accounts has so far been made legally compulsory in case of Companies, Co-
operative societies and Registered Societies. In these cases, the respective law governs the
appointment of auditors and their duties. In all other cases the terms of appointment are
settled by an agreement between the auditor and client. The client tells the auditor what he
requires him to perform. On the other hand, the auditor specifies his terms if he is prepared to
accept the assignment. He must sign an agreement so that no misunderstanding can crop up in
future regarding nature and scope of audit. As per SA 210 “Agreeing the Terms of audit
Engagement”, the agreed terms of the audit engagement should be recorded in an audit
engagement letter or other suitable form of written agreement.

81. Distinguish between Audit & investigation?
Point of Audit Investigation
Distinction
(i)
The object of audit is to Investigation generally carried
(ii) Object
examine whether the true and out with the object of obtaining
fair view has been disclosed information of a particular nature
through final accounts. required by a client.
(iii) Nature of work The work of audit is concerned The work of investigation is
with verifying whether true concerned with special
and fair view of affairs of the examination of different records
concern has been exhibited and transactions.
through financial statements.
82. Distinguish between ‘Auditor’s report’ and ‘auditor’s certificate.’

Point of Auditor’s report’ Auditor’s certificate’
Difference
(i) Main object
Auditor usually expresses his Auditor certifies the
opinion. correctness or exactness of
facts.
(ii) Nature & type
The report prepared by the A certificate is usually prepared
auditor is the outcome of his on the basis of each separate
deep thought and is confined to matter. As such, it does not
within the organization. express the depth of thinking.
83. Distinguish between intangible assets & fictitious assets?

Intangible assets Fictitious assets
These assets are as valuable as other These are actually revenue expenditure
assets of the business like plant which are temporarily capitalized.
machinery, building etc.
These assets can be sold, For example, The question of selling these type of
right to use patent can be sold to others assets does not arise as they are not
or goodwill can be sold along with business. assets in real sense.
They form part of capital employed or net They do not form part of capital employed
worth of the business. or net worth of the business.

84. Distinguish between verification & vouching.
Point of Verification Vouching
Distinction
(i) Nature of work
Apart from the verification of In this case, the examination
standard documents different and enquiry are made on
investigative works are essential standard documents. It is not
in cases of verification. possible to examine in detail.
(ii) Scope
The scope of verification is The scope of vouching is
wide. comparatively narrow.
85. Distinguish between verification & valuation.

Pointof Distinction Verification Valuation
(i) Meaning Apart from the examination of Valuation means the
determined value of different examination of adequacy of
assets, verification means the determined value of
examination of the existence, different assets and
ownership and title etc. liabilities.
This is a whole process.
(ii) Scope In such a case, the scope of work Since valuation is a part of
is comparatively extensive. verification, its scope of
work is comparatively little.
86. Distinguish between internal control system & internal check system.
Points of Internal control system Internal check system
distinction
(i) Nature
Internal control is the Internal check is part of internal
whole system of control. control.
(ii) Sphere of work
It exercises control over It is concerned with only work load
all the areas of a distribution. It ensures allocation of
function. duties in such a way that whole
purchase procedure is not
concentrated in the hands of one
person of one person only.

87. Distinguish between internal check system & internal audit system.
Point of Internal check system Internal audit system
distinction
(i) Nature
It is an inbuilt system and once It does not work
introduced it runs automatically and automatically. It is under
concurrently with the execution of taken after the
transaction. transaction takes place.
(ii) Function
It is an arrangement of allocation IT is an independent and
of duties in such a way that work of continuous review of
one employee is automatically operations and records.
checked by the work of another
employee.


Auditing Notes: "To Hear"

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Auditing Notes: "To Hear"

Uploaded by

Copyright:

Available Formats

AUDITING NOTES

2. What are the two objectives of auditing?

3. What are the two advantages of auditing?

1 AUDITING Praveen Sharma -9831849493

5. Mention any two differences between accountancy & audit?

6. What are the basic principles governing an Audit as laid down in

2 AUDITING Praveen Sharma -9831849493

8. What do you mean by limited Review?

9. Define ‘Propriety Audit?

3 AUDITING Praveen Sharma -9831849493

11. What is continuous audit?

12. What is periodical audit?

13. What is statutory audit?

4 AUDITING Praveen Sharma -9831849493

15. What is audit programme?

16. What is audit file?

17. What is audit Memorandum?

5 AUDITING Praveen Sharma -9831849493

19. What is audit note book?

20. Explain the concept of audit evidence?

6 AUDITING Praveen Sharma -9831849493

22. What is routine checking?

23. What do you mean by internal control?

24. What do you mean by internal check system?

7 AUDITING Praveen Sharma -9831849493

26. What is Internal control questionnaire {ICQ}?

8 AUDITING Praveen Sharma -9831849493

28.What is simple random sampling?

29. What is analytical procedure in the audit?

30. What do you mean by auditing in depth?

9 AUDITING Praveen Sharma -9831849493

32. What is routine checking?

33. What do you mean by cutoff examination?

34. What is vouching?

10 AUDITING Praveen Sharma -9831849493

36. Distinguish between vouching & routine checking.

37. What do you mean by preliminary expense?

39. What are the objective of vouching

11 AUDITING Praveen Sharma -9831849493

41. What is meant by verification of liabilities?

42. What is meant by valuation of asset?

43. What do you mean by contingent liability?

44. What do you mean by contingent asset?

12 AUDITING Praveen Sharma -9831849493

45. What is the special qualification that an auditor should possess?

47. What is joint audit?

13 AUDITING Praveen Sharma -9831849493

49. Explain the meaning of 'Divisible profits

50. What is capital profit? Give example.

14 AUDITING Praveen Sharma -9831849493

52. How is the first auditor of a company is appointed?

53. Under what circumstances an auditor is appointed by the Government?

15 AUDITING Praveen Sharma -9831849493

56. Explain the meaning of ' Divisible profit?

57. What is meant by interim dividend?

58. What is unclaimed dividend?

59. What do you mean by profit prior to incorporation?

16 AUDITING Praveen Sharma -9831849493

60. What do you mean by Auditor's report?

61. What do you mean Auditors ' certificate?

62.Mention any two content/elements of auditor's report.

17 AUDITING Praveen Sharma -9831849493