2 MARKS QUESTIONS AND ANSWERS

1. Define auditing.
According to Spicer and Pegler auditing is “such an examination of the books,
accounts and vouchers of a business as will enable the auditor to satisfy himself that
the balance sheet is properly drawn up so as to give a true and fair view of the state
of affairs of the business and whether the profit and loss account gives a fair view of
the profit or loss for the financial period, according to the best of his information
and is shown by the books and if not in what respect he is not satisfied”
2. Meaning of auditing.
Auditing means the detailed examination of books of accounts of an organization for
a given period by an independent and qualified person called an auditor. Auditing is
done with the help of vouchers, documents and other information. Auditor states
whether the profit and loss account is true and balance sheet exhibits a fair view of
state of affairs of business or not
3. State any 2 types of errors.
i. Clerical Errors
 Errors of commission
 Errors of omission
 Compensating errors
ii. Errors of Duplication
iii. Errors of Principle
4. Define audit programme.
Audit programme is the auditor’s plan of action specifying work to be done,
procedures to be followed for doing work, persons responsible for completion of
work and duration of time within which work has to be completed. It is prepared by
an auditor before the commencement of an audit for conduct of audit
5. What is internal control?
Internal control refers to various methods or measures adopted in an organization
in order to safeguard its assets, ensure reliability and accuracy of accounting data,
promote operational efficiency and encourage adherence to prescribed managerial
policies
6. What is internal check?
It is an arrangement of accounting duties under which work of one person comes
under scrutiny of another person so that it is not possible to commit fraud without
collusion between 2 or more persons. Under this system, no person is left in sole
management of any one duty. For example, encashment of cheque
7. What is audit notebook?
A audit notebook is a book, register or diary maintained by audit staff during course
of audit for recording his observations during the course of audit, points to be
discussed with senior audit clerk or auditor, points which require further
clarifications, explanations and investigations and also enquiries made and replies
received there to. It is a book maintained by audit staff for the purpose of making
note during the course of audit of all the important matters relating to audit. It is
maintained for each business concern for each year which may be in the form of a
bound registrar or loose sheet filed together
8. State the contents of audit notebook.
 Nature of business
 Organization structure of enterprise
 Progress of audit work
 Copy of audit programme
9. What are audit working papers?
Audit working papers refers to papers and documents which come into possession
of an auditor and information recorded or developed by auditor in the course of an
audit about accounts of his client’s business
10. Give the meaning of valuation.
Valuation of assets means determination of money value at which assets are shown
in balance sheet. In audit, it implies critical examination and testing of determined
value of assets on the basis of GAAP. It is the process of ensuring that money value of
asset as shown in balance sheet has been properly determined
11. Give the meaning of verification.
Verification means confirmation of truth. Verification of assets and liabilities means
proving truth about existence and correctness of money value of assets and
liabilities appearing in the balance sheet of business
12. What do you mean by contingent liabilities?
Contingent liabilities are those liabilities which may or may not arise in the future
for payment. The auditor should ensure that all known and unknown liabilities have
been accounted in the books of accounts and have been shown in balance sheet. For
example, liabilities on bills receivable discounted and not matured
13. Give the meaning of an auditor.
Company auditor is an agent or servant of shareholders who are required to
examine the accounts of company and give an assurance to shareholders that the
annual accounts of the company are genuine and they give a true and fair view of
state of affairs of the company
14. What is audit report?
 An audit report is a statement through which an auditor submits his findings and
expresses his opinion on the state of affairs of a company’s business. It is the
medium through which an auditor expresses his opinion on the financial statements
of a business
15. What is professional ethics?
A set of ethical standards regulating the relationship of Chartered Accountants with
their clients, employees, employers, fellow members of group and public generally is
called professional ethics. It is the behavior of a member of a professional body
towards other members of his profession and towards members of public
16. What are educational institutions?
An educational institution is a place where people of different ages gain education,
including preschools, childcare, primary-elementary schools, secondary-high
schools and universities
17. What is co-operative society?
A cooperative society is a voluntary association of people, whose motive is the
welfare of contributors. It is intended to help each other. They are formed for
mutual assistance of its members
18. Meaning of balance sheet audit.
Verification of all items included in balance sheet combined with examination of
related income and expenses accounts is known as balance sheet audit. Audit work
commences from balance sheet working back to books of original entry. It includes
checking of capital, reserves and provisions, profit and loss account balance an
assets and liabilities of business. It is an evaluation of accuracy of information found
in a company’s balance sheet
19. Meaning of cost audit.
Cost audit is an independent and critical examination of various records maintained
by company, to ascertain whether cost of product manufactured by company have
been correctly determined in accordance with correct costing principles
20. Meaning of tax audit.
A tax audit is the process of a formal investigation conducted by federal tax agency
or state tax authority to verify and inspect accounts of a tax payer to confirm that
tax payer accurately reported income and deductions in their tax returns in
adherence to provisions of Income Tax Law
21. Meaning of complete audit.
Complete audit is a kind of audit under which all records and books of accounts are
audited by an auditor. A complete audit examines system of internal control and
details of books of account, including subsidiary records and supporting documents
22. Meaning of detailed audit.
 A detailed audit, also known as a comprehensive audit, is an in depth examination
of an organization’s financial records, systems, transactions and operations
23. Meaning of partial audit.
It is a kind of audit where work of auditor is curtailed. Under partial audit, audit of
whole account is not conducted. Only the audit of particular area where owner
thinks it is essential to conduct an audit will be conducted
24. Meaning of interim audit.
Interim audit is a kind of audit which is done between 2 annual audits. It is suitable
for those companies which want to declare interim dividend. If there is interim audit
the final audit can be completed very soon, errors and frauds can be detected easily
and quickly and it imposes a moral check on client staff
25. Meaning of management audit.
A management audit is an independent and systematic analysis and evaluation of a
company’s overall activities and performances. It is a valuable tool used to
determine efficiency, functions, accomplishments and achievements of company
26. Meaning of propriety audit.
Propriety audit has been described as an audit of actions and decisions of
executives. Focus of such an audit is on financial discipline, authority structure,
efficiency, rules and regulations and protection of public interest
27. Meaning of performance audit.
A performance audit is an independent assessment of an entity’s operations to
determine its specific programs or functions are working as intended to achieve
stated goals. Performance audits can cover various aspects such as financial
management, program effectiveness and compliance with laws and regulations
28. Meaning of operational audit.
An operational audit is an examination of manner in which an organization
conducts business, with the objective of pointing out improvements that will
increase its efficiency and effectiveness. It involves intelligent examination of
various operations of different functional areas of business and observing
weaknesses, lapses, inefficiencies in operations and suggesting ways for
strengthening system
29. Meaning of environmental audit.
Environmental audit is an independent assessment performed by different
organizations to ensure that they are complying with Environmental Policies. It
examines amount of risk or injury or actual harm caused and determines types of
pollution produced by assessing range of locations, procedures and activities
30. Meaning of audit documentation.
 Audit documentation is the record of procedures performed, evidence obtained and
conclusions reached as a part of an audit. The proper preparation of audit
documentation is critical for several reasons, including the following:
 It can be used as a defense if auditor is ever accused of negligence
 It is easier for review to examine
 It represents a better level of quality control over an audit
 It shows auditors in later years how audit was conducted
 It can be used as a training tool for junior auditors
31. What is audit strategy?
Audit strategy refers to overall plan and approach that an auditor or audit team
develop to conduct an audit effectively and efficiently. It is a critical element in audit
process and helps in guiding auditors to achieve objectives of audit. It outlines how
an audit must be conducted and sets timing and scope of audits. It helps to develop
an audit plan
32. What is audit engagement?
An audit engagement refers to professional service provided by an audit firm or
auditor to examine and evaluate financial statements and related information of an
entity. The primary objective of an audit engagement is to express an opinion on
fairness and accuracy of financial statements, ensuring that they present a true and
fair view of entity financial position and performance. It is an independent and
systematic examination of company financial records, systems and controls by a
qualified professional
33. Purpose of audit engagement.
 Assurance
 Compliance
 Detection of errors and frauds
 Decision making
 Risk assessment
34. Contents of audit engagement letter.
 Objective of audit of financial statements
 Management responsibility for financial statements
 Management responsibility for preparing accounts on a going concern basis
 Any restriction to auditor’s liability, if it could be and is restricted
35. Meaning audit evidence.
Audit evidence refers to information and documentation that auditors gather and
evaluate during an audit to support their findings and conclusions about a
company’s financial statements and internal controls. Auditors use this evidence to
 assess accuracy, completeness and reliability of financial information presented by
audited entity. Primary purpose of gathering audit evidence is to provide assurance
to stakeholders that financial statements are free from material misstatement and
are in compliance with relevant accounting standards and regulations
36. Meaning of written representation.
A written representation is a statement or assertion made by management to
auditor in written form. These representations are an essential part of audit process
as they provide additional evidence regarding financial statements and related
matters. Purpose of written representation is to confirm certain information, facts
or assertions that are relevant to audit. These are statements made by client
management, confirming certain topics or supporting audit evidence
37. Meaning of audit risk.
Audit risk is risk that auditor’s face, when they issue an incorrect opinion on
financial statements, leading to possibility that statements are materially misstated.
Audit risk is the overall risk that auditor is willing to accept for issuing an audit
opinion

5 MARKS QUESTIONS AND ANSWERS

1. Mention or state types of errors and frauds.
Errors refer to unintentional mistake or misstatement or misjudgments made in the
books of accounts by the account assistants. Errors are committed innocently. An
auditor by detecting errors puts a moral check upon the staff of concern and creates
a sense of fear in the minds of those responsible for errors and thereby indirectly
helps in the prevention of recurrence of errors in future. The following are the
various types of errors:
 Clerical Error or Technical Errors
These errors are committed in the course of recording transaction in the
books of original entry such as cash book, purchase and sales book. These
errors can also occur in the totaling or balancing of ledger accounts. Thus
technical errors may be sub divided into-
 Errors of Omission
These takes place where a transaction has not been recorded in the
books of account either wholly or partially. If a transaction is omitted
altogether from books of accounts, it is known as complete omission.
However, if only one aspect of transaction has been entered in books, it
will be known as partial omission
 Errors of Commission
 When incorrect entries are made in the books of accounts either
wholly or partially, then such errors are known as errors of commission.
For example, the amount of 535 may be entered as 355 in the books of
accounts
 Compensating or Off Setting Errors
When the effect of one error is counter balanced or
compensated by another error, then such errors are called
compensating errors
 Errors of Duplication
Such errors arise when an entry in a book of original entry has been made
twice and has also been posted twice in ledger accounts
 Errors of Principle
If a transaction is recorded in the books of accounts against the generally
accepted accounting principles then the error is known as an error of principle.
These cannot be detected by mere routine checking
2. Distinguish between accounting and auditing.

Basis Book Keeping and Accountancy Auditing

Period Book keeping and accountancy
work is done continuously
throughout the year
Nature of work Book keeping and accounting
work is constructive in approach
Recording of business Book keeping and accountancy is
transactions concerned with current recording
of business transactions
Detection of frauds Book keepers and accountants are
not expected to detect frauds
Status Book keepers and accountants are
employees of concern
Remuneration Book keepers and accountants are
paid regular salaries
Qualification Book keepers and accountants
need not be CA
Knowledge Book keepers and accountants
may or may not have the
knowledge of audit techniques and
procedures
Accountancy and audit Book keepers or accountants
work cannot take up both accountancy
Auditing work is generally
undertaken at the end of
financial year
Auditing is concerned with
examination of past
transactions
Auditing is concerned with
examination of past
transactions
Auditors are required to
detect fraud
Auditors are the outsiders
or qualified CA
Auditors are given fees for
specific work done
Auditors should be CA
Auditors must have the
knowledge of audit
procedures and
techniques
Auditors can take up both
accountancy and audit
 and audit work work

Code of conduct Book keeping and accounting Auditing work is governed

work is not governed by any code by code of conduct
of conduct prescribed by an prescribed by ICAI
professional body
3. Distinguish between internal check and internal control.

Basis Internal Check Internal Audit

Meaning It is the arrangement of
accounting duties under
which work of one person
comes under analysis of
another person
Scope Scope of internal check is
quite limited
Commencement of work It starts operating from the
moment a transaction is
entered
Suitability Any organization can adopt
system of internal check
Nature of work Work of one employee is
automatically and
independently checked by
another person
simultaneously
Appointment of staff There is no separate staff
appointed specially for the
purpose
Objectives Aims at prevention or
minimization of errors or
frauds
4. State the advantages of audit programme.
 Audit programme can be started immediately in a systematic manner once an audit
programme is made ready
 It ensures that each part of audit work is completed and nothing is omitted
 It provides guidelines to audit staff for performance of audit work allotted to them
Internal audit is a
continuous and systematic
review of accounting,
financial and other
operations of a concern by
staff specially appointed for
the purpose
Scope of internal audit is
quite broad
It starts only after
transaction have been
recorded in the books
It is adopted only by those
business undertakings who
really need it
Work of an employee is
checked by internal auditor,
after the former has finished
work
There is a separate staff of
internal auditors especially
appointed for the purpose of
internal audit
Aims at discovering errors
and frauds already
committed
  Auditor is relieved from botheration of giving instructions to his audit staff from
time to time
 It facilitates proper distribution of work among audit staff
 It facilitates continuity in audit work
 It fixes up responsibility among audit staff for any omission or commission
 It helps auditor to watch progress made by audit staff in audit books
 It helps auditor to exercise effective control over his audit staff
 It helps to complete audit work within scheduled time
 It serves as an evidence of work done by auditor and can be produced in the court of
law as an evidence in case auditor is charged with negligence in performance of his
duties
 It helps to increase efficiency of audit staff and serves as a guide for audit in
succeeding years
 It brings about uniformity in audit work as the same audit program can be followed
every year with necessary alteration
5. Difference between external and internal audit.

Basis Internal Audit External Audit

Conduct of audit It is conducted by staff of It is conducted by an
organization independent and qualified
CA
Periodicity It is carried out continuously It is carried out generally,
throughout the year once in a year
Scope of audit Scope of internal audit is Scope of external audit is
determined by management determined either by statue
or by agreement
Objective It is to ascertain whether the It is to find out whether the
internal check and financial statements exhibits
accounting system in a true and fair state of affairs
business are adequate and of business unit or not
effective
Nature of work Auditor examines both Auditor examines only the
accounting and non accounting transactions
accounting transactions
Audit report It is not required to submit It is required to submit hi
any audit report audit report to the
shareholders or owners of
the business unit
Responsibility It is responsible only to It is responsible to all
management stakeholders of business
unit
Duties Duties of an internal auditor Duties of external auditor
can be modified or reduced cannot be modified or
by management reduced

Appointment By management By shareholders or

government
Remuneration Remuneration is fixed by Remuneration is fixed by
management shareholders or owners
Status Internal auditor does not External auditor enjoys
enjoy independent status independent status
Detection of errors and Detection of errors and Detection of errors and
frauds frauds are the main frauds are the secondary
objective of internal auditor objectives of external
auditor
Attendance at meetings They have no right to attend They have the right to
a meeting of shareholders attend a meeting of
shareholders
6. Objectives of verification and valuation of assets and liabilities.
OBJECTIVES OF VERIFICATION OF ASSETS AND LIABILITIES
 To find out whether assets and liabilities shown in balance sheet actually exist
 To ascertain whether assets and liabilities appearing in balance sheet are shown at
their correct values
 To confirm position and ownership of assets appearing in balance sheet
 To find out whether there is proper classification of assets and liabilities
 To check arithmetical accuracy of books of accounts
 To ascertain whether balance sheet gives a true and fair view of financial position of
business

OBJECTIVES OF VALUATION OF ASSETS

 To verify whether asset shown in balance sheet have been properly valued
 To indicate that balance sheet represents a true and fair view of financial position of
business
 To indicate that there is no manipulation of account to inflate or reduce profit
7. Explain verification of goodwill.
Goodwill is defined as assessed value of reputation of a business. The difference
between purchase price and net assets which are purchased represents goodwill
acquired by business. It is an intangible asset. Its value depends upon earning
capacity of business and fluctuates accordingly. Steps to be considered while
verifying goodwill:
  Goodwill is generally brought into books of accounts only when some
consideration in money or money’s worth has been paid for it while
purchasing a business. Auditor has to see whether this has been done by client
 Auditor should verify value of goodwill by comparing it with amount shown in
purchase agreement entered into between client and vendor of business
 Partnership deed or articles of partnership should be inspected by auditor if
goodwill is created in books of partnership firm
 Auditor cannot interfere in valuation of goodwill
 Auditor can advice management on valuation of goodwill
8. Explain verification of investment.
When auditing investments, auditors need to consider several key points to ensure
accurate verification and valuation. Following are some of the crucial points:
a. Understanding of investment type
Ensure a comprehensive understanding of various types of investments,
such as stocks, bonds, mutual funds and derivatives
b. Verification of existence
Physically verify existence of investment assets by confirming with third
parties or custodians, examining physical certificates or accessing electronic
records
c. Ownership and rights
Confirm ownership of investments and validate rights associated with each
investment, including voting rights and entitlement to dividends or interest
d. Documentation review
Examine supporting documents like contracts, agreements and investment
certificates, to verify terms and conditions of investments
e. Valuation methods
Understand and assess appropriateness of valuation methods used by
entity, such as market value, fair value etc.
f. Market quotations
Verify accuracy of market quotations used for valuation by comparing them
to independent, reliable sources or pricing services
g. Fair value assessment
Assess reasonableness of fair value measurements, considering market
conditions, economic indicators and any changes in investment circumstances
h. Impairment testing
Evaluate whether there are indicators of impairments and assess adequacy
of any impairment testing conducted by entity
i. Income recognition
 Verify accuracy of income recognition related to investments, including
interest, dividends and capital gains
j. Disclosure requirements
Ensure compliance with disclosure requirements, including details about
investment types, valuation methods and related risks as per accounting
standards
k. Internal controls
Evaluate effectiveness of internal controls related to acquisition, holding and
disposal of investments to prevent and detect misstatements
l. Legal compliance
Verify that investments comply with relevant legal and regulatory
requirements including any restrictions on transfer or redemption
m. Subsequent events
Consider any subsequent events or changes in market conditions that may
impact the valuation or classification of investments
n. Audit documentation
Maintain comprehensive audit documentation, including audit procedures
performed, evidence obtained and conclusions reached
o. Management representation
Obtain management representations regarding completeness, accuracy and
valuation of investments
9. Explain verification of creditors.
Trade creditors include suppliers of raw materials and other requirements of
organization. Amount due to them at the time of preparation of financial statements
is a liability and should be shown on the liability side of balance sheet. While
verifying sundry creditors, an auditor should bear in mind following points:
 Auditor should evaluate system of internal check as regards to credit
purchases
 Auditor should obtain schedule of creditors from management and examine it
with reference to individual creditor account
 Auditor should inspect documents relating to credit purchases such as copies
of purchase orders, goods received notes, invoices and compare them with
schedule of creditors
 Auditors should check posting from subsidiary book, such as purchases book,
purchases returns book, cash book, bills payable book etc. and compare them
with creditors account in ledger
 Auditor should check purchase book and purchase return book with the help
of invoices and credit notes
  Auditor may also obtain statements of accounts directly from creditors to
verify accuracy of amount due to them from client business
 Auditor has to check entries made in goods inwards book to ensure that all
goods purchased during the financial year have been actually received and
entries are also made in purchase book
 Proper attention should be given to entries made either at beginning or at the
end of the year to confirm that no fictitious entries are made by dishonest
employees
 If any creditors balance is unpaid for a long period, auditor should enquire
into the matter to check whether amount involved has been misappropriated
 If business maintains a provision for discount on creditors, auditor should
check same with reference to creditors ledger
10. Explain verification of bills payable.
In case of bills payable, auditor should follow the following verification procedure:
 Auditor should obtain a schedule of bills payable and its totals should be
compared with bills payable book and bills payable account
 Bills paid after balance sheet date should be examined with entries passed in
cashbook
 Auditor should obtain confirmatory statements from drawers directly with
permission of his client
 Auditor should pay special attention to bills that have been paid between date
of balance sheet and date of his audit have been duly written in books
11. Explain verification of contingent liabilities.
Contingent liabilities are those liabilities which may or may not arise in the future
for payment. The auditor should ensure that all known and unknown liabilities have
been accounted in the books of accounts and have been shown in balance sheet. For
example, liabilities on bills receivable discounted and not matured

Verification

 Auditor should obtain a list of contingent liabilities duly certified from management
to ensure that all contingent liabilities have been disclosed
 To verify existence of contingent liabilities, auditor should examine accounts books,
minutes, correspondence and share certificates
 If there is provision for contingent liabilities, auditor should examine minutes book
or resolution to confirm provisions
 Auditor should see that contingent liabilities are properly disclosed in balance sheet
  If provision have not been made by management for certain contingent liabilities
and if auditor thinks that they are likely to materialize as actual liabilities, he should
insist on management to make necessary provision for them
12. Explain the liabilities of a company auditor.
A company auditor is appointed under the Companies Act, so his liabilities are
determined by companies act. The liabilities of a company auditor can be grouped
under 2 heads. They are:
i. Civil Liabilities
Liability of an auditor to pay damages is known as civil liability. Civil liabilities of a
company auditor may be grouped under 2 heads, namely:
a. Civil liability of an auditor for negligence
An auditor of a company is appointed by shareholders. As such, he becomes
an agent of shareholder. He must safeguard the interest of the company. To
safeguard the interest of company, he must exercise reasonable care and skill
in performance of his duties. If he fails to do so and as a consequence thereof,
if company suffers any loss, auditor will be held liable to compensate loss
suffered by company
b. Civil liability of an auditor for misfeasance
Misfeasance means breach of trust or duty imposed by law. In other
words, if an auditor of a company does something wrongfully in the
performance of his duties, resulting in financial loss to company, he is held
guilty of misfeasance
ii. Criminal Liabilities
Criminal liability of an auditor arises out of an act constituting a crime, say,
misrepresentation of facts, falsification of facts, issue of false certificate, making of
false statement, destruction of any voucher or document or doing any other act,
with an intent to deceive others. Penalty for any criminal liability is that the auditor
may be imposed with a fine or imprisonment or both
a. Criminal liability of an auditor under the Companies Act 1956
 Where prospectus issued by a company includes any untrue statement
or misstatement by auditor, auditor becomes criminally liable. In this
case, he may be punishable with imprisonment for a term which may
extend to 2 years or with a fine which may extend to 5000 or both
 If an auditor intentionally gives false evidence upon any examination
about the winding up of company, he becomes punishable with
imprisonment for a term which may extend to 7 years along with fine
 An auditor of company becomes liable for criminal prosecution, if he, in
any return report, certificate, makes a false statement, particularly
 knowing it be false or omits any material fact, knowing it be material.
The punishment on conviction will be imprisonment for a term which
may extend to 2 years and also a fine
 If an auditor destroys, mutilates or makes alterations in any books,
papers or securities belonging to company with the intent to defraud or
deceive any person at the time of winding up of company, he becomes
punishable with imprisonment for terms which may extend to 7 years
and also a fine
 If central government takes actions and prosecutes any officer
connected with affairs of company, auditor is required to assist the
prosecution. If he fails to do so, he becomes punishable with
imprisonment for 6 months and with fine up to 5000 or with both
b. Criminal liability of an auditor under the Indian Penal Code
If an auditor issues or signs any certificate, knowing or believing that such
certificate is false in any material point, he becomes punishable in the same
manner as if he gives false evidence
c. Criminal liability of an auditor under the Income Tax Act of 1961
If an auditor induces in any person to make delivery to income tax
authorities, a false statement or declarations relating to any income
chargeable to tax, he becomes punishable with simple imprisonment which
may extend to 6 months with fine which may extend to 1000 or both
d. Criminal liability of an auditor under the Chartered Accountants Act
1949
If a person, not being a CA, acts as auditor of a company and signs any
document, he becomes liable for criminal prosecution
13. Explain the audit of educational institutions.

Sourced income of educational institutions is feed from students, grants from government
or local body, subscription and donations and income from investments. The audit of
income should be on the following lines

General aspects

 Auditor should examine charter, trust deed or university act, if any and note all rules
and regulations, especially those which are related to accounts
 Auditor should inspect minutes books of board to management, governing body or
managing committee of educational institution and ascertain from them any
resolution is specifically passed in respect of accounts
  Auditor should study internal check system in operation to know how far it is
satisfactory
 Auditor should obtain a copy of budget or financial statements to study the different
heads of income and expenditure

Incomes

 Auditor should verify receipts of monthly or terms fees from counterfoils or carbon
copies of receipts, register of students and cash book
 Auditor should also see whether cash received has been banked daily or not
 Auditor should vouch receipts on account of admission fees by reference to proper
documentary evidence
 Auditor should compare receipts from admission fees with the application forms for
admission
 Auditor should vouch receipts on account of examination fees by reference to
proper documentary evidence
 Auditor should also verify other charges collected from students, such as laboratory
fees and fine carefully
 Auditor should see that concessions of fees and free ships given to students are duly
authorized by proper authority
 Auditor should vouch grant aid received from government or local body carefully by
examining correspondence and any other documentary evidence
 Receipts from donations and subscriptions should be verified with counterfoils of
receipts book, cash book and list of donors or subscribers published in normal
report
 Auditor should vouch income from endowments, if any, and see that income arising
there from have been utilized for objects of endowments

Expenditures

 Auditor should vouch amount of salaries paid to staff through registers, counterfoils
of cheque book, cash book and pass book
 Auditor should see whether any increment given to an employee has been duly
sanctioned by proper authority
 Auditor should see that while making payment of staff salaries, income tax has been
deducted at source and duly deposited with income tax department
 Establishment expenses must be carefully vouched with relevant vouchers and
entries in cash book
  Payment of scholarship should be verified with receipts from students and
scholarship register
 Auditor should vouch items of capital expenditure and see that they are sanctioned
by proper authority

Miscellaneous

 Auditor should ascertain all purchase are properly authorized by a responsible

official
 Auditor should verify stocks of stationery sports materials and equipments as far as
possible
 Auditor should see that proper records have been maintained for these items
 Auditor should ensure whether adequate depreciation has been provided on fixed
assets like furniture and equipments
 Auditor should see that proper distinction has been made between capital and
revenue receipts and capital and revenue expenditure
 Auditor should see that assets and liabilities are properly exhibited in balance sheet
 Auditor should verify cash and bank balance in usual manner
 Auditor should see that investments representing prize endowments funds are kept
separately and are not mixed up with ordinary investments
14. Statutory audit.
I. Statutory audit
It refers to audit of accounts of a business concern compulsorily carried out
under the provision of a statute or law. It is carried out in a number of organizations
like banking companies, insurance companies and joint stock companies
i. Features of Statutory Audit
a. It is compulsory under law
b. It is required to be conducted by a qualified auditor
c. In this case rights, duties and liabilities of auditor are governed by statute or
law applicable to undertaking
d. It is an independent and external audit
e. It should be a complete audit or full audit
f. Auditor is the representative of owners of enterprise. So he is required to save
interest of owner and not interest of members
ii. Advantages of Statutory Audit
a. Statutory audit enables shareholders to know the truth and fairness of
representations made by management in financial statements regarding
results of business operations and financial conditions of enterprise
 b. Statutory audit protects the interest of beneficiaries against possible fraud by
trustees and also protects interests of trustees who may not possess adequate
knowledge of principles of accounting or trust law, in the case of a trust
c. In case of a cooperative society, statutory audit helps in proper maintenance
of books and accounts and it acts as a check against frauds by managing
committee
iii. Types of Statutory Audit or organizations where Statutory Audit is carried out
a. Statutory audit of joint stock company
b. Audit of trust
c. Statutory audit of a cooperative society
d. Statutory audit of other corporate bodies
15. Government audit.
It refers to audit of accounts of government departments and offices, government
companies and statutory or public corporations. The government maintains a
separate department in the name of ‘Accounts and Audit Department’ which
performs audit of its different departments and offices. This department is headed
by Comptroller and Auditor General of India. The auditors are meant only for
government departments and their duties and liabilities are defined by
departmental rules and instructions
i. Features
a. It is provided by law
b. It is conducted either by Comptroller and Auditor General of India and his
staff or by professional chartered accountant approved by Comptroller and
Auditor General of India
c. It is an internal audit because government audit is carried out by Comptroller
and Auditor General of India, who is the head of department maintained for
carrying out audit of government departments and offices
d. It is a continuous audit as it is conducted continuously as a very large number
of transactions are involved
ii. Objectives
a. To verify that expenditure of government department is sanctioned in
accordance with rules and regulations of department concerned
b. To ensure that expenditure is incurred out of the fund which has been
sanctioned by competent authority
c. To see that expenditures already sanctioned has been incurred by an officer
who are authorized to do so
d. To ensure that payments have been made to right person and they are duly
entered on the basis of receipts received from them
 e. While vouching receipts it is to be ensured that such receipts are against
payment which have already been made
f. To see that payments have been properly classified as capital and revenue
g. To check system of granting allowances and to ensure that they have been
granted under rules framed for the purpose
h. To ensure that entire expenditure has been incurred in accordance with
general principles
i. To verify existence of stocks and stores and their valuation
j. To ensure that a proper system of stock taking has been adopted
k. To make suggestions to proper authority for improvements in rules and
regulations for greater efficiency and economy
iii. Types
a. Audit of government departments and offices
b. Audit of government companies
c. Audit of statutory corporation
16. Explain the audit of co-operative society.

Audit of co-operative society are to be conducted by the Registrar of Co-operative Society

through his authorized persons or by CA. Co-operative societies in main have been
governed by the central act i.e. The Co-operative Society Act 1912

Types of audit of co-operative societies

i. Annual audit
Final audit takes place only after the end of the trading period when all the
transactions for the whole year are completely recorded and balanced, trading and
profit and loss account and balance sheet have been prepared. Auditor carried on
his audit work continuously till it is completed
ii. Concurrent audit
It is conducted in societies where turnover runs in crore of rupees. In these
institutions transactions are heavy. It takes place along with the period of
maintenance of accounts and auditor is engaged continuously in audit work
throughout the year
iii. Test audit
It takes place after the final audit to test the effectiveness and efficiency of audit
staff. Only selected societies are subjected to test audit. This takes place by superior
officers in the presence of auditor who has conducted the audit
iv. Interim audit

Aspects of co-operative audit

  Registrar shall audit or asks to be audited by some person authorized by him by
general or special order in writing in this behalf
 The audit of registered co-operative society shall be conducted at least once in every
year
 Audit should include an examination of overdue debts, if any and a valuation of
assets and liabilities of society
 Registrar, collector or any person authorized by general or special order in writing
in this behalf by registrar shall at times have access to all the books of accounts,
papers and securities of a society and every officer of society shall furnish such
information in regard to transactions and working of society as the person making
such inspection may require
17. Internal audit.
Internal audit is a continuous and systematic review of accounting, financial
and other operations of a business concern by staff specially appointed for the
purpose
i. Features
a. It is undertaken by concerns which are large in size
b. It is optional and carried on continuously throughout the year
c. Scope of internal audit may vary depending upon nature and size of
organization
d. It may be an addition to external audit
e. Staff engaged in internal audit are appointed by management and are
considered as employees of organization
f. Techniques and methods of internal audit are the same as those in
independent audit
g. Internal audit is conducted to ascertain whether an effective internal control
system exists to prevent errors and frauds and whether accounting systems
and procedures are adequate
ii. Objectives
a. To ascertain whether internal check and accounting system are adequate and
effective
b. To ascertain whether predetermined policies, plans and procedures have
been compiled with
c. To ascertain reliability of accounting and other data compiled within
organization
d. To evaluate performance of personnel who are entrusted with certain
responsibilities
 e. To suggest to management improvements desired in internal check system,
accounting system etc.
18. Merits of audit.
i. To business enterprise and management
a. Audit ensures accuracy, authenticity and reliability of books of accounts and
financial statements
b. Audit helps management to ascertain whether legal requirements in matters
of accounts, returns and statements are compiled with
c. Audit indicates true causes of fluctuations in expenses and incomes and true
financial position of concern
d. Audit helps in detection and prevention of errors and frauds
e. Audit examination makes employees vigilant, regular and up to date in their
work as they know that audit would complain about them if accounts are not
kept properly and up to date
f. Audit throws light on weaknesses of existing system of internal check and
internal control and thus helps management to take remedial steps in time
g. Where books of accounts are audited, accounts and financial statements are
uniformly prepared, which helps in easy comparison of accounts from year to
year
h. As audited accounts are widely regarded as reliable state of affairs, loans and
other credit facilities can be easily obtained by concerns
i. As audited accounts are readily accepted by tax authorities liability of an
enterprise as to income tax, wealth tax, sales tax etc. can be easily determined
j. Audited statements of accounts provides a mutually satisfactory basis for
solution of disputes as to higher wages and bonus to workers
k. Insurance claims in case of loss or damage to business property on account of
fire etc. can be easily determined on the basis of audited accounts of previous
years
l. Audited accounts are more reliable as evidence in court of law
m. If a business is to be sole as a running concern, there arises necessity for
valuation of assets and liabilities and determination of purchase consideration
receivable by seller which can be done easily based on audited accounts
ii. To owners of business
a. To sole traders
In case of a sole trader, auditing assures him that all business
transaction has been duly accounted for and there are no errors and frauds
and also helps him for future planning. A sole trader can value his business on
the basis of audited accounts for the purpose of sale of his business
 b. To a partnership firm
In case of a partnership firm, audited accounts serve as an evidence
of proper management of affairs of business by employers and active
partners. Further audited accounts are of great help in valuation of goodwill
and settlement of accounts on admission, retirement or death of partner. It
minimizes chances of disputes among partners
c. To a joint stock company
In case of a joint stock company, audit of accounts assure
shareholders that affairs of their company are run smoothly and their
investment is safe and also shareholders of company can value their shares
on the basis of audited accounts
d. To a co-operative society or a trust
In case of a co-operative society or trust, audit of accounts
assures members or beneficiaries that affairs of society or trust are conducted
properly and their interest are looked after properly
iii. To others [like creditors, government employers, investing public etc.]
a) To lenders
Lenders of long term as well as short term loans can depend on audited
financial statements while taking decision to grant credit to business
concerns
b) To government
Tax authorities can depend on audited statements in assessing
sales tax, income tax and wealth tax of business. Audited accounts are useful o
government to grants subsidies to business
c) To employees
Audit of accounts safeguards the interest of workers and is helpful in
settlement of claims for higher wages and bonus
d) To insurance companies
Insurance companies can rely on audited accounts to
settle claims in respect of damage or loss of any business asset by fire, theft
etc.
e) To purchaser of a business
Purchaser of a business can easily calculate amount of purchase
consideration on the basis of audited accounts
19. Demerits of audit.
i. It is not concerned with making important aspects of a business such as managerial
efficiency, financers, business ethic etc. It cannot be expected to do justice to its
objects
 ii. Audit is a postmortem of accounts, it begins where accountancy ends
iii. Owing to limitations of time and cost, it may not always be possible for an auditor to
make detailed checking of all transactions that means even audited accounts can be
incorrect sometimes
iv. An auditor has to depend on books of accounts and records presented before him. If
books of accounts have been manipulated, auditing may not reveal such
manipulation
v. Sometimes an auditor has to see and depend upon opinions of experts. Opinions of
experts may not be always be wholly reliable and it reduces value of audit report
vi. Audit work requires exercise of professional judgment as to correctness and
fairness of entries in books of accounts. Sometimes professional judgments of
auditor may be faulty as his personal opinion may cloud his sense of judgment
vii. An auditor has to collect adequate evidence in support of every entry made in books
of accounts. It depends on correct type of audit techniques employed by auditor
viii. Unless accounting system of business is supported by well developed internal check
and internal control systems, audit will fail to produce desired results
20. Features of audit working papers.
i. Standard form
Working papers should be prepared in a standard form. Subject matter
should be arranged under various headings and sub headings. There should be
space for names and initials of persons who have prepared working papers and
those who have cross checked them
ii. Proper layout
There should be proper design and layout of working papers. This will
bring uniformity into maintenance of working papers
iii. Space for margin
There should be enough margin space after each note for noting down
auditor’s remarks and decisions
iv. Good quality paper
Paper of good quality should be used for working papers, as they are
subject to frequent handling. Paper used should be of uniform and convenient size
so that working papers can be filed easily and properly
v. Proper organization and arrangement
Working papers should be properly organized and arranged, so that
auditor will be able to locate any particular matter easily
vi. Completeness
Audit working paper should be complete in all respects. They should contain
detailed information on all essential facts
 vii. Clarity
Working paper should be quite clear and self explanatory
viii. Relevant details
Details included in working papers should be relevant
ix. Accuracy
Information contained in working papers should be accurate
x. Neatness and legibility
Notes made on working papers should be legible and neat
21. Contents of audit notebook.
i. Nature of business
ii. Organization structure of enterprise
iii. Name of principal officers, their powers, duties and responsibilities
iv. Instructions from management regarding audit
v. List of books of accounts maintained by business
vi. System of internal check, internal audit and system of accounting followed in
business
vii. Technical details and terms used in business
viii. Extracts from minutes and contracts
ix. Date of commencement and completion of audit
x. Progress of audit work
xi. Record of suggestions made by audit staff
xii. Particulars of errors and frauds discovered
xiii. Particulars of all documents, vouchers and invoices
xiv. Points which are to be discussed with senior audit clerk
xv. Important points which require further explanations and clarifications
xvi. Points to be included in audit report
xvii. Totals and balances of important books of accounts already checked
xviii. A copy of audit programme
xix. Enquiries made and replies received
22. Explain audit planning. [Meaning, benefits and factors affecting].
Audit planning means developing a general strategy and a detailed approach for the
expected nature, timing and extent of audit. Developing an overall strategy for
effective conduct and scope of examination is audit planning. Audit planning is the
process of deciding in advance what is to be done, who is to do it, how it is to be
done and when it is to be done by auditor in order to have efficient and effective
completion of work

Benefits
 i. Accomplishment of objectives
Audit plan ensures that it provides right means to achieve audit
objectives. Further it also ensures that appropriate attention is devoted to
important areas of audit
ii. Identification of problems
A well drawn and established audit plan helps in identifying potential
problems
iii. Timely completion of work
It ensures that work is complete properly within specified time and no
important area is left out
iv. Facilitates coordination
It facilitates coordination of audit work done by auditors and other
experts
v. Better audit work
It helps in improving quality of audit work and provides promptness
and perfection in audit programme

Factors affecting audit planning

a. Size of company
b. Nature of operations of company
c. Accounting system, internal control and adherence standard
d. Environment in which company operates
e. Previous experience with client
f. Knowledge of client business
g. Terms of engagement
h. Statutory duties connected with audit
i. Nature of report, timing for submission
j. Accounting policies followed by entity, any change effected thereon
k. Identification of significant and special audit areas
l. Setting of materiality level for audit purposes
m. Probability of misstatement appearing in financial statements due to fraud or errors
n. Related party transactions- transactions of entity with those persons who are
intimately related to management
o. Extent of participation in audit work by other people- internal auditor, experts and
joint auditors
23. Factors considered or criteria for selecting audit evidence.
i. Relevance
ii. Reliability
 iii. Sufficiency
iv. Cost effectiveness
v. Convenience
vi. Preservation
vii. Materiality of assertion to be tested
viii. Need for resolution of inconsistency
ix. Accepted audited standards or agreed upon procedures to obtain evidence
24. Fraud risk factors.
i. Unusual transactions
Keep an eye on transactions that deviate from norm. Sudden large
transactions or a high frequency of small transactions might be a warning
ii. Internal control weaknesses
If there are holes in system, like inadequate oversight or poor segregation of
duties, it becomes easier for fraudsters to enter in
iii. Unusual behavior
Changes in behavior, especially by key personnel, need to be taken into
consideration. Maybe someone who is always punctual suddenly starts working odd
hours or avoids scrutiny
iv. Lifestyle inconsistencies
If an employee’s lifestyle seems inconsistent with their reported income, it is
worth investigating. Sudden luxury car purchase might not align with their salary
v. Frequent changes in records
If there are a lot of alterations or deletion in financial records, someone might
be trying to cover their tracks
vi. Vendor issues
Fraudsters might set up fake vendors or collude with real ones. Watch for
over billing, fictitious practices and take them seriously
vii. Employee complaints
Sometimes, the best tip comes from within. If employees raise concerns
about financial practice, take them seriously
viii. High employee turnover
A high turnover rate in finance or accounting department might make it easier
for fraud to go undetected or for new employees to be manipulated
ix. Pressure, opportunity and rationalization
Frauds often occur when an individual feels pressure [financial needs], see an
opportunity [weak internal control] and can rationalize their actions. Understanding
these factors is crucial
25. Auditor responsibility to consider fraud and errors in audit of financial
statements.
i. Understanding of fraud and errors
Auditors should have a thorough understanding of what constitutes fraud
and errors in financial reporting. Fraud involves intentional misstatements or
omissions of information, while errors are unintentional mistakes
ii. Professional attitude
Auditors are required to approach their work with professional manner. This
means maintaining a questioning mindset and not taking information at face value.
They should be alert to the possibility of fraud or error in financial statements
iii. Risk assessment
Auditors must assess risk of material misstatements due to fraud or error.
This involves considering various factors including industry, company’s internal
controls, nature of financial transactions and management integrity
iv. Internal control evaluation
Auditors evaluate effectiveness of company’s internal controls. Strong internal
control can help prevent and detect frauds and errors. Auditors may test these
controls to ensure they are operating as intended
v. Testing and sampling
Auditors conduct substantive testing to detect material misstatements in
financial statements. This involves examining documents, conducting inquiries and
performing analytical procedures. Sampling techniques are often used to select
items for testing
vi. Fraud risk assessment
Auditors are required to specifically assess risk of fraud in financial
statements. This includes considering potential for management override of
controls, revenue recognition schemes and other fraudulent activities
vii. Communication with management and those charged with governance
If auditors identify fraud or errors during audit, they have a duty to
communicate these findings to management and those charged with governance
that is board of directors
viii. Documentation
Auditors must maintain comprehensive documentation of their audit work,
including their assessment of fraud risk, procedures performed and results of these
procedures. This documentation provides a record of their work and supports their
findings
ix. Reporting
 If auditors discover material fraud or errors in financial statements, they must
report them in their audit report. This ensures that users of financial statements are
aware of any significant issues that may affect their reliance on information
26. Features of internal control.
a. Internal control is overall control established by management of a business
organization for effective and efficient control of its operations
b. Internal control comprises plans, methods and procedures for effective
control of operations of enterprise
c. Internal control comprises internal check and internal audit and accounting
administrative controls
d. Internal control system is established by management of business
e. It is intended to help management to run business effectively
27. Divisions of control.
a. Control environment
This is where overall tone of organization is set. It includes integrity, ethical
values and competence of company’s people as well as management’s philosophy
and operating style
b. Risk assessment
In the context of auditing, this involves evaluating how company identifies
and addresses risks related to financial reporting. Auditors need to understand
company’s risk appetite and how it manages uncertainties
c. Control activities
Auditors look at policies and procedures in place to ensure that financial
information is accurate. This includes activities such as approvals, verifications,
reconciliations and segregation of duties
d. Information and communication
This component focuses on how financial information is captured, processed
and communicated. Auditors assess whether there is clear and effective
communication both within the organization and with external parties
e. Monitoring activities
Auditors want to know how well internal control system is monitored and
how quickly issues are identified and addressed. Regular internal and external
audits are part of this, ensuring that any deviations from norm are spotted and
corrected
28. Appointment of company auditor.
i. First Auditor
First auditor of a company is appointed by the Board of Directors within the
month of registration of company. First auditor, appointed by BOD will hold office
 till the conclusion of first annual general meeting of the company. If BOD fails to
appoint first auditor, company may appoint first auditor in the general meeting.
First auditor appointed by shareholders in the general meeting, will also be
reappointed at the first AGM of the company
ii. Subsequent Auditor
Every subsequent auditor is appointed every year at every annual general
meeting by shareholders. A subsequent auditor appointed by shareholders at any
annual general meeting will hold office till the conclusion of next AGM

APPOINTMENT OF AN AUDITOR BY CENTRAL GOVERNMENT

If a subsequent auditor is not appointed by shareholders at any AGM, company must bring
it to the notice of central government within 7 days of conclusion of annual general
meeting. On receiving notice, central government may appoint an auditor to fill vacancy

APPOINTMENT IN CASE OF CASUAL VACANCY

Any casual vacancy in the office of an auditor can be filled up by BOD. However, casual
vacancy caused by resignation of an auditor cannot be filled up by BOD. It can be filled up
by shareholders at AGM. An auditor appointed to a casual vacancy can hold office only till
the conclusion of next AGM

29. Qualifications of an auditor.

i. A person can be appointed as an auditor of a company only if he is a CA within
the meaning of Chartered Accountants Act of 1949
ii. In case of a firm being appointed as an auditor of a company, all the partners
of the firm must be CA and practicing in India
iii. Auditor must be a holder of a certificate under the restricted auditor
certificate rules 1956
30. Disqualifications of an auditor.
 A body corporate
 An officer or employee of company
 A person who is a partner or who is in the employment of an officer or employee of
company
 A person who is indebted to the company for an amount exceeding 1000 or who has
guaranteed repayment of any debt of more than 1000 due to company by a third
party
 A director or a member of a private company
 An auditor who has any direct financial interest in the company
 An auditor who receives only loan or guarantee from or on behalf of the company
 An auditor who has any business relationship other than as an auditor in the
company
 An auditor who has been in the employment in the country
 An auditor whose relatives are in the employment of the company
31. Professional misconduct.
Section 22 of Chartered Accountant Act 1949 has defined professional misconduct.
This section has defined professional misconduct as professional misconduct means
any failure to perform a duty according to accepted professional standards which
may result in a loss or damage to the client who has engaged the auditor.
Professional misconduct imposes a civil liability on an auditor to pay damages to the
party who has suffered loss or damage. In general words, professional misconduct is
unethical or unprofessional behavior that falls short of ethical o professional
standards, guides or codes of conduct, accepted by a particular profession. Some of
the instances of professional misconduct are:
 No member of ICAI can allow any unqualified or non member to practice in his
name or on his behalf
 A member cannot share his fees directly or indirectly with any non member
 A member of institute cannot share any fees, brokerage or commission earned
by a non member
 A CA in practice cannot take any person as a partner unless such a person is
also a CA in practice
 It prohibits a member to secure professional business through a person not
qualified to be his partner
 It prohibits a member from contracting or interviewing people or sending
circulars or advertising to secure professional work
 A CA should not advertise his professional attainments or make use of any
designations
 If an auditor is appointed by a limited company in place of an existing auditor,
he should not accept appointment without first communicating with retiring
auditor to enquire into reasons which compelled him to retire or reasons as to
why his services were dispensed with
 An auditor should first ascertain whether his appointment as an auditor of a
company is in order according to Companies Act or not
 A CA is prohibited from charging his remuneration by the way of a percentage
of profits or on the basis of results of his work
 A CA is prohibited from engaging himself in any trade or business other than
that of a CA
  A member cannot accept a position held by another person under the
conditions of amount under cutting
32. Audit procedure of NGO.
Auditing of Non Governmental Organizations [NGO] presents unique challenges due
to nature of their operations, funding sources and accountability to donors and
beneficiaries. Effective audit procedure for NGO is designed to ensure compliance
with regulations, financial transparency and proper use of funds for organization’s
charitable purposes. The audit procedure is:
i. Understanding the organization
Gain a thorough understanding of NGO mission, objectives, activities and
organizational structure
ii. Assessing risk and materiality
Identify risks specific to NGO, such as misappropriation of funds, lack of
transparency and inadequate program monitoring
iii. Financial reporting and accountability
Examine financial statements to ensure accuracy, completeness and
proper disclosure of activities, assets and liabilities
iv. Governance and internal controls
Evaluate effectiveness of internal controls and assess NGO governance
structure, including role of board of directors and existence of governance
policies
v. Compliance with regulatory requirements
Verify compliance with local, national and international laws and
regulations governing NGO, including tax exempt, status and reporting
obligations
vi. Review of supporting documentation
Examine supporting documentation for financial transactions, including
invoices, receipts, contracts and basic statements
vii. Testing of donor funding
Trace funding sources to ensure proper allocation and utilization of donor
funds. Confirm that funds are used in accordance with donor restrictions
viii. Review of grant agreements
Confirm that funded programs and projects are executed as planned
ix. Review of board minutes and governance
Examine board meeting minutes to assess oversight and decision making
processes. Verify that governance policies are in place and followed
x. Verification of beneficiary records
 Confirm accuracy and validity of beneficiary records for program
activities, such as education, health care and relief efforts
xi. Cash handling and disbursement procedures
Assess controls over cash handling, disbursements and petty cash funds to
prevent misappropriation
xii. Internal control testing
Test effectiveness of internal controls through enquiry, observation and
sample testing
xiii. Management representation letters
Obtain written representations from management to confirm accuracy and
completeness of information provided
xiv. Communication with stakeholders
Discuss audit findings with key stakeholders, including board of directors,
donors and beneficiaries
33. Audit procedure of charitable institutions.
Auditing of charitable institutions requires specific considerations due to unique
nature of their operations, funding sources and accountability to donors and
beneficiaries. Effective audit procedures for charitable institutions are designed to
ensure compliance with regulations, financial transparency and proper utilization of
funds for charitable purposes. The audit procedure is:
i. Understanding charitable institution
Gain a comprehensive understanding of institution’s mission, activities,
beneficiaries and organizational structure
ii. Assessing risk and materiality
Identify risks relevant to charitable institutions, such as misuse of funds,
lack of transparency and inadequate program monitoring
iii. Financial reporting and accountability
Examine financial statements for accuracy, completeness and proper
disclosure of activities, assets and liabilities. Verify appropriate allocation of
expenses among administrative and fund raising activities
iv. Program effectiveness and impact
Evaluate effectiveness of programs in achieving the institution’s
charitable mission and objectives
v. Governance and internal controls
Assess effectiveness of internal controls, including segregation of duties,
authorization processes and financial reporting mechanisms
vi. Compliance with regulatory requirements
 Verify compliance with local, national and international laws and
regulations applicable to charitable institutions including tax exempt status
and reporting obligations
vii. Risk assessment and fraud detection
Identify areas susceptible to fraud, misappropriation and corruption
viii. Review of supporting documentation
Examine supporting documentation for financial transactions, including
invoices, receipts, contracts and bank statements
ix. Testing of donor contributions
Trace donor contributions to ensure proper recording and reporting.
Confirm that funds are used in accordance with donor intentions
x. Review of grant agreements
Confirm that funded programs and projects align with institution’s
charitable objectives
xi. Review of board minutes and governance
Examine board meeting minutes to assess decision making processes
xii. Cash handling and disbursement procedures
Assess controls over cash handling, disbursements and petty cash funds to
prevent misappropriation
xiii. Internal control testing
Test effectiveness of internal controls through inquiry, observation ad
sample testing
xiv. Audit findings and recommendations
Document and communicate significant findings, deficiencies and areas of
improvement
xv. Communication with stakeholders
Discuss audit findings with key stakeholders, including board of directors,
donors and beneficiaries. Provide assurance on institution’s financial
transparency and accountability
34. Audit procedure of government.
Auditing of government entities involves a distinct set of considerations due to
public nature of their operations, accountability to tax payers and compliance with
legal and regulatory requirements. Effective audit procedure for government
entities are designed to ensure transparency, fiscal responsibility and proper
utilization of public funds for the benefit of citizens. The audit procedures are:
i. Understanding government entity
Gain a comprehensive understanding of government entity’s functions,
services, programs and organizational structure
 ii. Assessing risk and materiality
Identify specific risks to government entities, such as mismanagement of
public funds, lack of accountability or non compliance with laws
iii. Compliance with laws and regulations
Verify compliance with relevant laws, regulations and statutes governing
government entities
iv. Financial reporting and accountability
Examine financial statements to ensure accuracy, completeness and proper
disclosure of activities, assets, liabilities and equity. Verify appropriate
classification and presentation of financial information
v. Internal controls and accountability
Assess effectiveness of internal controls over financial reporting,
procurement and contract management
vi. Risk assessment and fraud detection
Identify areas vulnerable to fraud, corruption or misappropriation of
public funds
vii. Review of supporting documentation
Examine supporting documentation for financial transactions, contracts,
agreements and expenditure authorizations
viii. Testing of revenue and expenditures
Verify completeness and accuracy of revenue collection and expenditure
transactions. Confirm that public funds are collected, recorded and expended
in accordance with established procedures
ix. Evaluation of public program outcomes
Assess outcomes and impact of government programs on citizens and
communities
x. Internal control testing
Test effectiveness of internal controls through inquiry, observation and
sample testing
xi. Audit findings and recommendations
Document and communicate significant findings, deficiencies or areas for
improvement
xii. Management representation letters
Obtain written representations from government officials to confirm
accuracy and completeness of information provided
xiii. Communication with stakeholders
 Discuss audit findings with key stakeholders, including governing bodies,
citizens and oversight agencies. Provide assurance on transaparency,
accountability and responsible use of public funds
35. Audit procedure of local body.
Auditing of local government bodies involves specific considerations due to nature
of their operations, accountability to citizens and compliance with regulations and
budgetary constraints. Effective audit procedures for local bodies are designed to
ensure transparency, accountability and responsible use of public funds for the
benefit of local community. The audit procedure is:
i. Understanding local government body
Gain a comprehensive understanding of local body functions, services,
programs and organizational structure. Identify the legal and regulatory
framework governing local body operations
ii. Assessing risk and materiality
Identify risks specific to local government bodies such as mismanagement
of funds, lack of accountability or non compliance with laws and regulations
iii. Budgetary compliance
Verify compliance with budgetary limits and appropriations established
by governing bodies. Confirm that expenditures align with approved budgets
and allocations
iv. Financial reporting and transparency
Examine financial statements to ensure accuracy, completeness and
proper disclosure of activities, assets, liabilities and equity. Verify appropriate
classification and presentation of financial information
v. Program effectiveness and community impact
Evaluate effectiveness of local programs in addressing community needs
and priorities
vi. Internal controls and governance
Assess effectiveness of internal controls over financial reporting,
procurement and contract management
vii. Risk assessment and fraud detection
Identify areas vulnerable to fraud, corruption or misappropriation of
public funds
viii. Review of supporting documentation
Examine supporting documentation for financial transactions, contracts,
agreements and expenditure authorizations
ix. Testing of revenue and expenditures
 Verify completeness and accuracy of revenue collection and expenditure
transactions. Confirm that public funds are collected, recorded and expended
in accordance with established procedures
x. Assessment of public program outcomes
Evaluate outcomes and impact of local programs on community and
residents
xi. Compliance with laws and regulations
Verify compliance with local, regional and national laws and regulations
applicable to local government operations
xii. Evaluation of local governance policies
Assess effectiveness of local governance practices, public engagement and
mechanisms for accountability
xiii. Internal control testing
Test effectiveness of internal controls through inquiry, observation and
sample testing
xiv. Audit findings and recommendations
Document and communicate significant findings, deficiencies or areas for
improvement
xv. Communication with stakeholders
Discuss audit findings with key stakeholders, including local officials,
residents and oversight agencies. Provide assurance on transparency,
accountability and responsible use of public funds
36. Audit procedure of hotels.
Auditing of hotels involves specific considerations due to nature of their operations,
revenue streams and customer service focus. Effective audit procedures for hotels
are designed to ensure accurate financial reporting, proper internal controls and
compliance with industry regulations. The audit procedure is:
i. Understanding hotel operations
Gain a comprehensive understanding of hotel’s operations, services, facilities
and revenue streams. Identify specific challenges and risks associated with
hotel industry
ii. Assessing risk and materiality
Identify risks relevant to hotels, such as revenue misstatements, occupancy
fraud, inventory management issues and lack of compliance with hospitality
regulations
iii. Revenue recognition and control
 Verify accuracy of revenue recognition, including room revenue, food and
beverage sales and ancillary services. Assess internal controls over revenue
collection, billing and cash handling
iv. Financial reporting and accounting
Examine financial statements for accuracy, completeness and proper
disclosure of revenue, expenses, assets, liabilities and equity
v. Internal controls and risk management
Assess effectiveness of internal controls over cash handling, inventory
management, guest services and procurement
vi. Compliance with hospitality regulations
Verify compliance with local, regional and national regulations and
licensing requirements applicable to hospitality industry
vii. Customer experience and service quality
Assess hotel’s commitment to customer service, guest satisfaction and brand
reputation
viii. Review of supporting documents
Examine supporting documentation for financial transactions, guest
invoices, contracts and operational records
ix. Testing of room revenue
Verify accuracy of room revenue recognition, including room rates,
occupancy rates and discounts. Confirm proper recording of room charges
and taxes
x. Review of food and beverage sales
Assess accuracy of food and beverage sales recording, including menu
pricing, sales reconciliation and billing
xi. Inventory management and controls
Verify accuracy of inventory records for consumable items, supplies and
fixed assets. Assess controls over inventory procurement, storage and usage
xii. Cash handling and Point Of Sales systems
Test controls over cash handling, POS systems and payment processing
xiii. Compliance with health and safety regulations
Review compliance with health and safety regulations related to food
handling, sanitation and guest safety
xiv. Audit findings and recommendations
Document and communicate significant findings, control weaknesses or
areas for improvements. Provide recommendations to enhance financial
reporting accuracy and internal controls
xv. Communication with management
 Discuss audit findings and recommendations with hotel management,
including finance, operations and compliance teams
37. Audit procedure of hospitals.
Auditing of hospitals involves specific considerations due to complexity of their
operations, patient care services, revenue streams and compliance with healthcare
regulations. Effective audit procedures for hospitals are designed to ensure accurate
financial reporting, patient data security, regulatory compliance and quality patient
care. The audit procedure is:
i. Understanding hospital operations
Gain a comprehensive understanding of hospital functions, services, patient
care, revenue streams and organizational structure. Identify the specific
challenges and risks associated with healthcare industry
ii. Assessing risk and materiality
Identify risks relevant to hospitals such as revenue misstatements, coding
and billing errors, patient data breaches and compliance with healthcare
regulations
iii. Revenue recognition and billing
Verify accuracy of revenue recognition including patient services revenue,
insurance claims and government reimbursements. Assess controls over
billing processes, coding accuracy and claim submissions
iv. Financial reporting and accounting
Examine financial statements for accuracy, completeness and proper
disclosure of revenue, expenses, assets, liabilities and equity. Review the
classification and presentation of financial information
v. Internal controls and data security
Assess effectiveness of internal controls over patient data security, billing,
cash handling and procurement. Review data security practices, patient
privacy and compliance with healthcare data regulations
vi. Compliance with healthcare regulations
Verify compliance with healthcare regulations, accreditation standards and
licensing requirements applicable to hospitals
vii. Quality of patient care and clinical processes
Assess hospital’s commitment to patient safety, clinical quality, infection
control and risk management
viii. Review of supporting documentation
Examine supporting documentation for financial transactions, patient
records, insurance claims, contracts and operational records
ix. Billing and revenue cycle audit
 Verify accuracy of patient billing, insurance claims and reimbursement
calculations. Assess controls over revenue cycle, including charge capture,
coding and claims submission
x. Patient data security and privacy audit
Review controls over patient data access, transmission, storage and
sharing to ensure compliance with privacy regulations
xi. Clinical and patient care process audit
Assess quality and effectiveness of clinical processes, patient care
protocols, and medication administration and infection control
xii. Inventory management and pharmacy audit
Verify accuracy of inventory records for pharmaceuticals, medical
supplies and equipment. Assess controls over inventory procurement, storage
and dispensing
xiii. Compliance with medical regulations
Review compliance with medical and healthcare regulations related to
clinical practices, patient care and medical record documentation
xiv. Audit findings and recommendations
Document and communicate significant findings, control weaknesses or
areas for improvement. Provide remuneration to enhance financial reporting
accuracy, data security and patient care quality
xv. Communication with hospital management
Discuss audit findings and recommendations with hospital management,
including finance, operations, clinical and compliance teams
38. Audit procedure of clubs.
Auditing of clubs involves specific considerations due to the nature of their
activities, membership structure, revenue sources and internal controls. Effective
audit procedures for clubs are designed to ensure accurate financial reporting,
proper utilization of funds and compliance with club bylaws and regulations. The
audit procedure is:
i. Understanding club operations
Gain a comprehensive understanding of club’s functions, activities,
membership, revenue streams and organizational structure. Identify specific
challenges and risks associated with club operations
ii. Assessing risk and materiality
Identify risks relevant to clubs such as revenue misstatements,
membership dues tracking, event revenue recognition and compliance with
club by laws
iii. Membership management and revenue
 Verify accuracy of membership dues recording, including membership fees,
subscriptions and event participation fees. Assess controls over revenue
collection, invoicing and payment processing
iv. Financial reporting and accounting
Examine financial statements for accuracy, completeness and proper
disclosure of revenue, expenses, liabilities and equity. Review classification
and presentation of financial information
v. Internal controls and governance
Assess effectiveness of internal controls over cash handling, event
management, budgeting and financial reporting. Review club’s governance
status including role of board of directors and compliance with club bylaws
vi. Compliance with club bylaws
Verify compliance with club bylaws, rules and regulations governing
membership, operations, events and financial matters
vii. Event and activity management
Assess controls over event planning, execution, revenue recognition and
expense allocation
viii. Review of supporting documentation
Examine supporting documentation for financial transactions,
membership records, event contracts and operational records
ix. Membership dues and fee verification
Verify accuracy of membership dues recording, fees collection and proper
allocation
x. Event revenue and expense audit
Assess controls over event revenue recognition, ticket sales, sponsorship
income and related expenses. Verify accurate recording of event revenues and
expenses
xi. Budgetary compliance review
Evaluate compliance with budgetary limits, financial plans and allocations
established by club governing body
xii. Cash handling and financial controls
Test controls over cash handling, petty cash funds and payment
processing. Assess segregation of duties and reconciliation procedures
xiii. Audit findings and recommendations
Document and communicate significant findings, control weaknesses or
areas for improvement. Provide recommendations to enhance financial
reporting accuracy, internal controls and compliance with club bylaws
xiv. Communication with club management
 Discuss audit findings and recommendations with club management,
including finance, operations and compliance team
39. Audit procedure of banks.
Auditing of banks involves specific considerations due to highly regulated and
complex nature of their operations, financial transactions, and risk management and
compliance requirements. Effective audit procedure of banks is designed to ensure
accuracy of financial statements, assess effectiveness of internal controls and
evaluate compliance with banking regulations. The audit procedure is:
i. Understanding bank operations
Gain a comprehensive understanding of bank’s functions, financial
products, services, risk management and organizational structure. Identify
specific challenges and risks associated with banking industry
ii. Assessing risk and materiality
Identify risks relevant to banks such as credit risk, liquidity risk,
operational risk, regulatory compliance and financial fraud
iii. Financial reporting and accounting
Examine financial statements for accuracy, completeness and proper
disclosure of assets, liabilities, income, expenses and equity. Review
classification and presentation of financial information
iv. Internal controls and risk management
Assess effectiveness of internal controls over financial reporting, risk
management, loan underwriting, cash handling and fraud prevention. Review
risk management practices, including credit risk assessment and exposure
limits
v. Compliance with banking regulations
Verify compliance with banking regulations, including capital adequacy,
anti money laundering, know your customer and reporting requirements
vi. Review of loan portfolios
Assess quality of loan portfolios, credit risk assessments, loan approved
processes and loan loss provisioning
vii. Verification of cash and treasury operations
Verify controls over cash handling, cash vaults, treasury operations and
reconciliation procedures
viii. Review of supporting documentation
Examine supporting documentation for financial transactions such as loan
agreements, contracts, compliance reports and operational records
ix. Loan portfolio review
 Assess quality of loans, loan classifications and impairment assessments.
Verify compliance with loan terms, documentation requirements and
collateral valuation
x. Deposits and treasury verification
Verify accuracy of deposits, withdrawals and treasury transactions. Assess
controls over cash handling, cash management and liquidity management
xi. Compliance with regulatory requirements
Review compliance with banking regulations, including reporting
obligations, risk management standards and customer due diligence
xii. Internal control testing
Test controls over financial reporting, reconciliation processes, cash
handling and risks management
xiii. Audit findings and recommendations
Document and communicate significant findings, control weaknesses or
areas for improvement. Provide recommendations to enhance financial
reporting accuracy, internal controls and compliance with regulations
xiv. Communication with bank management
Discuss audit findings and recommendations with bank management,
including finance, operations, risks management and compliance teams
40. Essentials of audit report.
a. Title of report
Title of audit report should help reader to identify report. It should disclose the
name of client. Title distinguishes the audit report from other reports
b. Name of addressee
Addressee normally refers to the person who appoints the auditor. If a company
appoints auditor, addressee should be shareholders. As per law, complete address
of addressee is required. Addressee for the statutory audit shall be shareholders
and in the case of special audit, it is central government
c. Introductory paragraph
Introductory paragraph should specify that it is the auditor’s opinion on
financial statements audited by him. The period covered by financial statements
should be stated with exact dates
d. Scope
This part should include the matter of fact relating to manner in which audit
examination was made. Audit examination should cover company’s accounts, profit
and loss account, and balance sheet and cash flow statements. Examination should
be as per the relevant law
e. Opinion
 Auditor’s opinion on the books of account and financial statements examined by
him is based on the information which is free from bias. The auditor has to give his
opinion as follows:
 Whether financial statements are arithmetically correct and correspond to
the figures recorded in the books of accounts
 In case of unqualified opinion, whether financial statements represent a true
and fair view of state of affairs and results of operations
 In case of qualifies opinion, if balance sheet and profit and loss account do not
present a true and fair view, reasons for what and where things are wrong
f. Signature
Signature part should include manual signature of auditor. Personal name and
signature of auditor should be given. If auditor is a firm, signature in the personal
name and firm name should be given
g. Place of signature
This should include the location of auditor or auditor firm, which is ordinarily
their city
h. Date of report
Date of completion of audit work should be mentioned in this section
41. Significance of audit report.
i. Financial accountability
Primary purpose is to provide assurance to stakeholders that financial
statements are free from material misstatements and accurately represent
company’s financial position
ii. Credibility
An audit report adds credibility to a company’s financial statements. It is like an
unbiased third party vouching for accuracy and reliability of financial information
iii. Compliance verification
Auditor ensures that financial statements comply with accounting standards,
legal requirements and regulatory guidelines. This is crucial for maintaining
transparency and avoiding legal issues
iv. Risk management
Audit process involves assessing and addressing risks. The report highlights
areas of concern or weakness in internal controls, helping the company manage
risks effectively
v. Investor confidence
Investors often rely on audit reports to make informed decisions. A clean audit
report can boost investor confidence, while red flags in report might raise concerns
vi. Board and management oversight
 Audit report is a tool for board of directors and management to assess
effectiveness of internal controls and financial reporting processes
vii. Loan approvals
Lenders may require audited financial statements before approving loans. Audit
report provides assurance to lenders about the financial health of borrowing
company
viii. Bench marking
Companies can use audit reports for benchmarking their financial performance
against industry standards. It provides insights into areas that may need
improvement
ix. Regulatory compliance
Many regulatory bodies mandate audit for certain businesses. Audit report is a
key document for demonstrating compliance with these regulations
x. Continuous improvement
Audit findings and recommendations in report can serve as a basis for continuous
improvement in internal controls and financial reporting processes
42. Basic elements of audit report.
i. Title
Report usually starts with a title that clearly indicates it is an audit report
ii. Introduction
This section provides an overview of purpose and scope of audit. It may also
include a brief description of audited entity
iii. Audit objectives and scope
Clearly defined objectives and scope of audit helps to set boundaries and
expectations for readers
iv. Audit methodology
This section outlines methods and procedures used during audit process. It helps
to establish credibility of audit findings
v. Executive summary
A concise summary of key findings, conclusions and recommendations, is often
the first section to be read. It should provide a quick overview of audit results
vi. Background information
Relevant background information about audited entity or context of audit
vii. Findings
Main body of report presents detailed findings of audit. This includes both
positive aspects and areas of concern or non compliance
viii. Conclusions
 A section where auditor summarized their overall assessment based on the
findings. Conclusions may highlight areas of strength as well as weaknesses
ix. Recommendations
Suggestions for improvement or corrective actions based on audit findings should
be mentioned. These are often actionable steps that audited entity can take to
address identified issues
x. Management response
In some cases, audited entity may provide a formal response to findings and
recommendations. This response is sometimes included in audit report
xi. Appendices
Additional supporting documents, data or detailed information that is referred to
in the main body of report should be mentioned. It could include charts, graphs or
specific details of audit process
xii. Audit opinion
In some audit reports, especially financial audits, there is a section where auditor
provides an overall opinion on financial statements. The most common opinion are
unqualified or qualified or adverse or disclaimer opinion
xiii. Signature of auditor
Audit report must contain the signature of auditor
43. Professional accountants in public practices and business.
PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICES
Professional accountants in public practices are individuals who provide a
wide range of accounting, auditing, taxation and advisory services to clients, which
can include individuals, businesses, nonprofit organizations and government
entities. They play a crucial role in ensuring financial transparency, compliance and
accountability for their clients
PROFESSIONAL ACCCOUNTANTS IN BUSINESS
Professional accountants in business work within organizations, including
corporations, government agencies, nonprofit organizations and educational
institutions. They contribute to various aspects of financial management, decision
making and strategic planning within their organization

15 MARKS QUESTIONS AND ANSWERS

1. Classifications of auditing.
1. ON THE BASIS OF ORGANIZATIONAL STRUCTURE
II. Statutory audit
 It refers to audit of accounts of a business concern compulsorily carried out
under the provision of a statute or law. It is carried out in a number of organizations
like banking companies, insurance companies and joint stock companies
iv. Features of Statutory Audit
g. It is compulsory under law
h. It is required to be conducted by a qualified auditor
i. In this case rights, duties and liabilities of auditor are governed by statute or
law applicable to undertaking
j. It is an independent and external audit
k. It should be a complete audit or full audit
l. Auditor is the representative of owners of enterprise. So he is required to save
interest of owner and not interest of members
v. Advantages of Statutory Audit
d. Statutory audit enables shareholders to know the truth and fairness of
representations made by management in financial statements regarding
results of business operations and financial conditions of enterprise
e. Statutory audit protects the interest of beneficiaries against possible fraud by
trustees and also protects interests of trustees who may not possess adequate
knowledge of principles of accounting or trust law, in the case of a trust
f. In case of a cooperative society, statutory audit helps in proper maintenance
of books and accounts and it acts as a check against frauds by managing
committee
vi. Types of Statutory Audit or organizations where Statutory Audit is carried out
e. Statutory audit of joint stock company
f. Audit of trust
g. Statutory audit of a cooperative society
h. Statutory audit of other corporate bodies
III. Government audit
It refers to audit of accounts of government departments and offices,
government companies and statutory or public corporations. The government
maintains a separate department in the name of ‘Accounts and Audit Department’
which performs audit of its different departments and offices. This department is
headed by Comptroller and Auditor General of India. The auditors are meant only
for government departments and their duties and liabilities are defined by
departmental rules and instructions
iv. Features
e. It is provided by law
 f. It is conducted either by Comptroller and Auditor General of India and his
staff or by professional chartered accountant approved by Comptroller and
Auditor General of India
g. It is an internal audit because government audit is carried out by Comptroller
and Auditor General of India, who is the head of department maintained for
carrying out audit of government departments and offices
h. It is a continuous audit as it is conducted continuously as a very large number
of transactions are involved
v. Objectives
l. To verify that expenditure of government department is sanctioned in
accordance with rules and regulations of department concerned
m. To ensure that expenditure is incurred out of the fund which has been
sanctioned by competent authority
n. To see that expenditures already sanctioned has been incurred by an officer
who are authorized to do so
o. To ensure that payments have been made to right person and they are duly
entered on the basis of receipts received from them
p. While vouching receipts it is to be ensured that such receipts are against
payment which have already been made
q. To see that payments have been properly classified as capital and revenue
r. To check system of granting allowances and to ensure that they have been
granted under rules framed for the purpose
s. To ensure that entire expenditure has been incurred in accordance with
general principles
t. To verify existence of stocks and stores and their valuation
u. To ensure that a proper system of stock taking has been adopted
v. To make suggestions to proper authority for improvements in rules and
regulations for greater efficiency and economy
vi. Types
d. Audit of government departments and offices
e. Audit of government companies
f. Audit of statutory corporation
IV. Voluntary audit or Private audit
Where audit is not compulsory under any statute, but is undertaken by owners
voluntarily to get benefits of audit, such audit is known as private or voluntary
audit. This suits to sole trading concerns, partnership firms and other individuals
2. ON THE BASIS OF DEGREE OF INDEPENDENCE
I. Internal Audit
 Internal audit is a continuous and systematic review of accounting, financial
and other operations of a business concern by staff specially appointed for the
purpose
iii. Features
h. It is undertaken by concerns which are large in size
i. It is optional and carried on continuously throughout the year
j. Scope of internal audit may vary depending upon nature and size of
organization
k. It may be an addition to external audit
l. Staff engaged in internal audit are appointed by management and are
considered as employees of organization
m. Techniques and methods of internal audit are the same as those in
independent audit
n. Internal audit is conducted to ascertain whether an effective internal control
system exists to prevent errors and frauds and whether accounting systems
and procedures are adequate
iv. Objectives
f. To ascertain whether internal check and accounting system are adequate and
effective
g. To ascertain whether predetermined policies, plans and procedures have
been compiled with
h. To ascertain reliability of accounting and other data compiled within
organization
i. To evaluate performance of personnel who are entrusted with certain
responsibilities
j. To suggest to management improvements desired in internal check system,
accounting system etc.
II. External Audit or Independent Audit
External auditors are independent firms that inspect accounts of entity and
render an opinion on whether its statements conform to GAAP and present fair
financial position of company and results of operations. The external auditor’s
primary obligation is to verify financial statements for the use of people outside the
organization
3. ON THE BASIS OF CONDUCT OF AUDIT
I. Continuous Audit
According to RC Williams, “A continuous audit is one where auditor or his
staff is constantly engaged in checking the accounts during the whole period or
where the auditor or his staff attends at regular intervals during the period”.
 Continuous audit refers to an audit under which a detailed examination of books of
accounts is conducted continuously throughout the year or irregular during year
i. Advantages
a. Audit is carried out throughout the year as such there is sufficient time for
detailed checking of all books of accounts
b. It facilitates detection and rectification of errors easily and quickly
c. Continuous presence of auditor throughout the year imposes moral check on
staff of client and thereby reduces scope for frauds
d. Frequent visit of auditor to clients business makes accounting staff of client to
be regular and forces them to keep books of accounts up to date
e. Accounts are checked throughout the year and hence it enables business to
place audited financial statement before shareholders immediately after close
of accounting year
f. Owners of a business can get any desired information duly verified at any time
without difficulty
g. Auditor will be in constant touch with clients business and will be able to
make useful suggestions for improvements of operational efficiency
h. Auditor can plan his work properly and take it up at convenient time without
under pressure at the course of accounting year
i. When there is continuous audit, interim statement of audit can be prepared
easily
ii. Disadvantages
a. It is suitable for a large business concern
b. Figures in books of accounts which have already been checked by auditor in
his previous visit may be altered fraudulently by dishonest employees of
client
c. Auditor is required to take extensive note of work done by him at each visit so
as to prevent any alteration in figures
d. Frequent and unexpected visit of auditor may cause inconvenience to clients
staff and dislocation in their work
e. Frequent visit by auditor staff to clients business may lead to close and
friendly relation between staff of client and staff of auditor
f. As audit is carried out throughout the year there is a danger of audit becoming
mechanical
II. Final Audit/ Annual Audit/ Periodical Audit
Final audit is an audit which is carried out after the close of a
financial year when the books of accounts have been closed and financial statements
have been drawn up
 i. Advantages
a. Cost is less and so suitable for small business concerns
b. Audit work can be completed within a reasonable time as it is done in one
continuous sitting
c. As audit work is completed in one sitting without intervals, entire audit work
is completed in a single session
d. Auditor does not cause any dislocation in work of client staff as auditor begins
audit work only after accounts are closed
e. As audit staff finishes its work in one or few sittings, there are less chances of
collusion between client staff and auditor staff
f. Final audit is convenient for auditors as he need not maintain a large staff
g. Audit work does not become mechanical and monotonous
ii. Disadvantages
a. Errors and frauds are found only after the close of accounting year that means
errors and frauds are allowed to remain in books for a long period
b. It is only a postmortem examination of accounts
c. Auditor detects errors and frauds after they have been committed
d. Auditor depends upon test checking, as a result in records frauds can exist
even after the accounts have been audited
e. Delay in getting auditor’s report
f. Final audit is not effective in imposing moral check on clients staff
g. Not suitable for a business concern where there are numerous transactions
h. Does not help in preparation of interim accounts and declaration of interim
dividend
III. Complete Audit
Complete audit is a kind of audit under which all records and books of
accounts are audited by an auditor. A complete audit examines system of internal
control and details of books of account, including subsidiary records and supporting
documents
IV. Detailed Audit
A detailed audit, also known as a comprehensive audit, is an in depth
examination of an organization’s financial records, systems, transactions and
operations
V. Partial Audit
It is a kind of audit where work of auditor is curtailed. Under partial audit,
audit of whole account is not conducted. Only the audit of particular area where
owner thinks it is essential to conduct an audit will be conducted
VI. Interim Audit
 Interim audit is a kind of audit which is done between 2 annual audits. It is
suitable for those companies which want to declare interim dividend. If there is
interim audit the final audit can be completed very soon, errors and frauds can be
detected easily and quickly and it imposes a moral check on client staff
VII. Balance Sheet Audit
Verification of all items included in balance sheet combined with
examination of related income and expenses accounts is known as balance sheet
audit. Audit work commences from balance sheet working back to books of original
entry. It includes checking of capital, reserves and provisions, profit and loss
account balance assets and liabilities of business. It is an evaluation of accuracy of
information found in a company’s balance sheet
4. ON THE BASIS OF SPECIFIC OBJECTIVE
I. Cost Audit
Cost audit is an independent and critical examination of various records
maintained by company, to ascertain whether cost of product manufactured by
company have been correctly determined in accordance with correct costing
principles
II. Management Audit
A management audit is an independent and systematic analysis and
evaluation of a company’s overall activities and performances. It is a valuable tool
used to determine efficiency, functions, accomplishments and achievements of
company
III. Operational Audit
An operational audit is an examination of manner in which an
organization conducts business, with the objective of pointing out improvements
that will increase its efficiency and effectiveness. It involves intelligent examination
of various operations of different functional areas of business and observing
weaknesses, lapses, inefficiencies in operations and suggesting ways for
strengthening system
IV. Performance Audit
A performance audit is an independent assessment of an entity’s
operations to determine its specific programs or functions are working as intended
to achieve stated goals. Performance audits can cover various aspects such as
financial management, program effectiveness and compliance with laws and
regulations
V. Propriety Audit
 Propriety audit has been described as an audit of actions and decisions of
executives. Focus of such an audit is on financial discipline, authority structure,
efficiency, rules and regulations and protection of public interest
VI. Tax Audit
A tax audit is the process of a formal investigation conducted by federal tax
agency or state tax authority to verify and inspect accounts of a tax payer to confirm
that tax payer accurately reported income and deductions in their tax returns in
adherence to provisions of Income Tax Law
VII. Environmental Audit
Environmental audit is an independent assessment performed by
different organizations to ensure that they are complying with Environmental
Policies. It examines amount of risk or injury or actual harm caused and determines
types of pollution produced by assessing range of locations, procedures and
activities. It is the examination of accounts of revenues and costs of environmental
and natural resources, their estimation, depreciation and recorded in books of
accounts
2. Internal check as regards to payment of wages.

In business, where number of workers is large, work connected with maintenance of wage
records and payments of wages is of much importance. There are many possibility of
misappropriation of cash under this item. Unless there is an effective and efficient system
of internal check in operation as regards wages, auditor cannot satisfactorily check entries
connected with wages

Objectives of system of internal check regarding wages

 To ensure correctness of time cards and piece work cards

 To ensure correctness of wage sheets
 To avoid inclusion of dummy workers in wages sheets
 To ensure correct payment of wages for right work to right workers

GUIDELINES FOR DESIGNING SYSTEM OF INTERNAL CHECK REGARDING WAGES

i. General Guidelines
 All appointments and dismissals of workers and fixation and alteration of
wage rates should be in writing and should be authorized by a competent
person of personnel department. These information should be communicated
to wages office, which is entrusted with task of preparation of wages sheets
 Separate personal records should be maintained for each worker, showing his
name, number, address, date of appointment, scale of pay etc.
  Wages office, which is a section of accounting department, should be set up
and placed under the control of a responsible officer other than cashier
 Copies of orders relating to increase in pay, promotions, punishment involving
deductions from wages etc. should be communicated to wages office
concerned with preparation of wages sheets
ii. Guidelines For Maintenance Of Wages Records
a. Time records must be maintained for each worker. The time of arrival of
workers at factory and departure from factory must be recorded by gate
keeper or time keeper
b. Recording of attendance time is quite necessary in the case of time workers
who are paid wages on the basis of time and piece workers who are paid on
the basis of quantum of work. For recording attendance time of workers,
different devices may be used. They are:
 Attendance Registers
Under this, record of attendance time is kept through attendance
registers. Attendance registers are maintained at gate under the
supervision of gate keeper. Gate keeper records arrival and departure
time of each worker based on tickets or labour cards submitted by each
worker
 Metal Tokens
Under this system, each worker is given a metal token bearing his
number. At the factory gate, time board is maintained. Each worker
hangs his token on time board as he enters factory gate and time keeper
records his attendance in attendance register. In this case, time keeper
has to be vigilant to see that no worker hangs token of others who are
late or absent
 Time Recording Clock
If the concern wants to maintain records for attendance by machines,
it is preferable to use time recording clock. The time recording clock is
placed under the charge of a gate keeper. When a worker enters factory,
he inserts time card provided to him into time recording clock, which
records time and date of arrival on card. Similarly when he leaves
factory, he inserts card into time recording clock which records date
and time of departure on card. This card provides a correct and clear
record of time spent by worker in factory
c. Another set of time record should be maintained for time workers by foreman
of each workshop
d. Time workers are given time cards for recording time of entry into workshop,
time spent on different jobs and time of leaving of workshop
e. These cards are required to be signed by foreman of each workshop
f. Time records maintained at gate by gate keeper and time cards maintained at
each workshop by foreman should be compared to see that there are no error
and frauds in recording of time worked and workers do not waste their time,
after they enter factory
g. In case of piece workers, workers are paid wages for work done by them
h. For piece workers, job cards or work cards are also maintained along with
records of time of arrival and departure
i. These cards are meant for recording quantity of work done by workers
j. Piece work card of a worker should be signed by worker, foreman of
workshop and where possible, by godown keeper to whom goods produced
are delivered
k. Worker should not be allowed to work overtime unless he is properly
authorized to do so by a responsible officer
l. When worker is allowed to work overtime, an overtime slip is issued to him
on which details about his name, address, nature of duty etc. are required to
be stated
m. When worker works overtime, he should record the department in which he
has worked overtime on overtime slip
n. Overtime records or overtime slips should be separately maintained and
should be passed by foreman and also by works manager
o. Reasons for allowing employees work overtime should be reviewed from time
to time by a responsible official
p. Workers should not be allowed to leave factory before scheduled departure
time
q. In case a worker has to go before scheduled departure on his personal work,
he should take written permission of foreman or works manager
r. When written permission is given to worker for going out of factory during
working hours, pass out slip is prepared in duplicate, mentioning purpose of
his going out
s. One copy of pass out slip is to be given to gate keeper
t. Second copy is to be given to foreman, who will send the same to wages office
for records
u. Time records of time workers, piece work cards, overtime records and pass
out slips are required to be passed on to wages office at the end of every week
for preparing wages sheets
iii. Guidelines For Preparation Of Wages Sheets
a. There should be a separate office or section in accounting department for
preparation of wages sheets
b. Wage office should be placed under the control of a responsible official
c. Responsible official should not be connected with maintenance of wage
records and in the actual payment of wages
d. In case of large concerns, it is advisable to use loose wage sheets so that work
of preparation of wage sheets can be distributed among a number of clerks in
wage office
e. Wage sheets should be prepared at the end of every week or month with the
help of time cards, piece work cards, overtime slips and pass out slips
f. Separate wages sheets should be prepared for time wages and piece wages
g. Wages sheets should be prepared on individual pay roll
h. Work of preparation of wage sheets should be distributed among a number of
clerks in wage office, who have no hand wither in preparation of wage records
or in payment of wages. The work of preparation of wage sheets should be
distributed among clerks as follows:
 First 2 clerks should examine time cards, piece work cards, overtime
slips and pass out slips to ensure correctness of time of work and
quantum of work done
 3rd clerk should fill in name of worker, his number, time worked, rate of
wages, amount of wages, overtime pay, bonus, gross amount payable
and deduction towards tax, insurance premium, rent, loans et. On wages
sheets
 4th clerk should check work done already and calculate net amount of
wages after deduction
 5th clerk checks whole work thoroughly
i. Wage office should check totals, gross and net wages thoroughly and ensure
that deductions are properly made
j. Wage sheets should also be certified as correct and signed by some
responsible official, such as works manager, director etc.
k. Number of workers and rate of wages shown in wage sheet should be checked
with official list of workers and their rate of wages found in personnel
department. This step will prevent inclusion of dummy workers in wages
sheet
l. After wages sheets are prepared and certified as correct by responsible
official, they should be handed over to cash department for payment of wages
iv. Guidelines For Payment Of Wages
 a. Work of payment of wages should be entrusted to cashier, who has not been
associated with preparation of wage sheets
b. Clerks who were associated with preparation of wage sheets are not allowed
to take part in payment of wages to avoid any collusions
c. After getting wage sheets from wage office, cashier should withdraw
necessary sum as shown under net wages column from bank
d. After money has been withdrawn from bank by cashier, amount payable to
each worker should be kept in separate envelopes called pay packets
e. Pay packet should indicate name, number of worker and amount contained
there in
f. All workers who are to receive wages should be asked to be present
personally at the time of payment of wages
g. Foreman of each department should be present at the time of payment of
wages to identify workers and to prevent impersonation of workers who are
absent
h. Payment of wages should be made in the presence of works manager
i. Signature of each worker should be obtained on wages sheets
j. Wages of absentee worker should not be paid to other workers
k. After payment of wages is completed, a list of unclaimed wages should be
prepared and signed by cashier, foreman and works manager
l. Payment of unclaimed wages on a subsequent date should be made only
against authorization by a responsible official
m. Any wages unclaimed after a reasonable period should be banked
n. Proper care should be taken in payment of wages to casual labour
o. If casual laborers are employed, separate records should be maintained for
them
3. Explain verification of land and building.
i. Land and Building
There are 2 types of buildings. They are:
a. Freehold Property
It refers to land and building which is absolute property of business. While
undertaking verification and valuation of freehold property, auditor should
observe following points:
 Examine title deeds
Auditor should examine title deed relating to freehold land and
building to ensure that they are in the name of client. If there is any
doubt relating to title of property, he should consult lawyer of client
 Examine conveyance or brokers account
 If freehold property has been purchased, he should examine
correspondence, conveyance deed and broker’s account. If freehold
property consists of building constructed by client, auditor should ask
for and examine architect and builder certificate
 Capitalization of expenses
Auditor should see that legal expenses, brokerage and other expenses
incurred for acquisition of freehold property are capitalized
 Mortgage of freehold property
If freehold property is mortgaged, auditor should get a certificate from
mortgage stating that title deed are in his possession. He should also
make proper enquiry to ensure that there is no second mortgage on
freehold property. If title deeds of freehold property are with bank or
lawyers for safe custody, auditor should get a certificate from bank or
lawyer stating that they are held by him for safe custody and not as
security for any loan
 Additions to freehold property
Auditors should check additions to freehold property, if any, made
during the year with the help of relevant vouchers. Auditor should also
see that cost of additions are capitalized
 Sale of freehold property
If any freehold property is sold during the year, auditor should check
such sales and see that profit or loss thereon is correctly dealt within
the accounts
 Repairs and renewals
Auditor should see that repairs and renewals of freehold property are
charged to revenue account
 Provision for depreciation
Auditor should examine adequacy of provision of depreciation on
freehold property
 Appreciation of freehold building
If any appreciation of freehold property is taken into account,
auditor should see that appreciated value is clearly disclosed in balance
sheet. He should also obtain a certified copy of valuation of property
from a professional valuer
 Shown in balance sheet
 Auditor should see that freehold property is shown separately in
balance sheet under the head fixed asset. He should also see that
freehold property is shown at cost less depreciation
b. Leasehold Property
Leasehold property refers to land and building acquired by business for a
fixed period on lease
 Examine lease deed
Auditor should examine lease deed to ascertain cost of leasehold
property, terms and conditions of lease
 Registered
If lease is for more than one year, auditor should see that lease deed is
registered
 Amount is capitalized
Auditor should see that amount paid for lease property is capitalized
 Examine receipt for lease
Auditor should see that lease rent is paid regularly and lease is
existing. For this purpose, auditor should examine last receipt of
payment of rent
 Examine agreement with subtenant
Auditor should see that agreement with sub tenant exists, if it is
sublet to others
 Addition to leasehold property
Auditor should verify with relevant vouchers that amount spent on
additional leasehold property is capitalized
 Repairs and renewals
Auditor should see that repairs and renewals are charged to revenue
account
 Provision for depreciation
Auditor should see whether depreciation is charged and whether
provision for depreciation is made according to the life of lease
 Shown in balance sheet
Auditor should see that leasehold property is separately shown in
balance sheet under the head fixed assets along with depreciation
4. Explain verification of plant and machinery.
Plant and machinery is a fixed asset meant for concern. In big concerns, usually a
separate register called “Plant Register” is maintained, which helps auditor for
 verification as it gives costs of various plants, particulars of sales, provision for
depreciation etc. Auditor should observe the following points:
a. Verify plant and machinery purchased
Auditor should verify plant and machinery purchased with original invoice
b. Addition to plant and machinery
Auditor should verify additions to plant and machinery during the year
c. Examine schedule of plant and machinery
Auditor should call for and examine schedule of plant and machinery
signed by engineer
d. Examine plant register
Auditor should examine plant register if it is maintained by concern
e. Check plant register with plant and machinery account
Auditor should check plant register with plant and machinery account to
ensure that plant and machinery account shows the true value of plant and
machinery
f. If plant and machinery is kept abroad
Auditor should get a certificate from local auditor, if plant and machinery is
kept abroad
g. Sale of plant and machinery
Auditor should see that sales proceeds of plant and machinery is credited to
concerned account
h. Repairs and renewals
Auditor should see that repairs and renewals are not capitalized, but are
charged to profit and loss account or revenue account
i. Provision for depreciation
Auditor should see that adequate depreciation is written off
5. Explain verification of stock in trade.
Stock in trade refers to stock of goods which have to be ultimately converted into
cash. It is the principal source of revenue for a business
a. For manufacturing concerns, stock in trade includes:
 Stock of raw materials
 Stock of semi finished goods or work in progress
 Stock of finished goods
 Scrap
 By products
 Stores and spare parts
b. For trading concerns, stock in trade includes only finished goods
Verification of stock in trade means checking physical existence of stock, ownership of
stock, quantities included in statements of stock, arithmetical accuracy of statement of
stock i.e. calculations, extensions and final totals

Objectives of verification and valuation of stock in trade

 To ensure amount shown against stock in trade is represented by physical stock of

goods and that reasonable care has been taken in determining physical quantities
and condition of stock in trade
 To ensure that client owns goods, and that obligations of client towards goods are
disclosed in the financial statements
 To ensure that stock in trade has been fairly and consistently priced in accordance
with acceptance accounting principles

Importance of verification and valuation of stock in trade

 Stock in trade usually constitutes single largest current asset of an enterprise,

involving considerable amount
 Values of stock in trade has considerable influence over profit or loss of business
 Stock in trade directly affects financial position of enterprise
 Verification of quality, condition and value of stock in trade is a difficult task
 Stock in trade is more susceptible to errors and manipulation in stock taking and
valuation

Elements or aspects of verification and valuation of stock in trade

 Verification of stock in trade [i.e. verification of existence of stock in trade]

 Valuation of stock in trade [i.e. proper valuation of stock in trade]

Verification of stock in trade

Auditor should bear in mind the following points, while verifying stock in trade:

 Auditor should check internal check system’s efficiency

 Auditor should obtain copies of physical layout of all plants
 Auditor should obtain details as to quantity and value of stock for comparison
 Auditor should satisfy himself that proper and adequate records of stock have been
maintained by client
 Auditor should secure copy of stock taking instructions issued to staff
 Auditor should check on personnel employed for stock taking
  Auditor should see that goods sold on or prior to closing date are not included in
stock
 Auditor should see that capital items are excluded
 Auditor should do test checking
 Auditor should review and be familiar with procedure and arrangements of
maintenance of stock records
 Auditor should check correctness of calculations
 Auditor should check purchase and sales and compare balance with stock in hand as
shown in stock sheets
 Auditor should verify stock with consignee with the help of certificate received from
consignee
 Auditor should verify whether all goods taken in stock sheets are passed through
purchases books
 Auditor should always guard himself against errors which creep into physical
verification of stock in trade
6. Explain the rights and duties of company auditor.

DUTIES AND RESPONSIBILITIES OF COMPANY AUDITOR

i. Statutory Duties – imposed by companies act

Statutory duties refer to the duties imposed by the statute i.e. by the Companies
Act. It may be noted that statutory duties of an auditor cannot be restricted either by
AOA of company or by any resolution of members of company or directors of
company
A. Duty to make certain enquiries
 Whether loans and advances made by company on the basis of securities have
been properly secured
 Whether the terms on which loans have been made are not prejudicial to
interest of company or its members
 Where company is not an investment company, whether shares, debentures
and other securities of company have been sold at price less than its purchase
price
 Whether loans and advances made by company have been shown as deposits
 Whether position as stated in the books is correct, regular and not misleading
B. Duty to sign his audit report
It is the duty of an auditor to sign audit report prepared by him. In case of firm of
auditors, any partner of the firm can sign the audit report
C. Duty to assist investigators or inspectors
 It is the duty of auditor of a company to prepare and produce all books and
papers relating to company under investigation to investigators or inspectors and to
give them all assistance in connection with investigation
D. Duty to assist central government in connection with prosecution
An auditor of a company is required to give central government all reasonable
assistance in connection with prosecution of directors, managing directors or other
officers of company
E. Duty to certify statutory report
Auditor of company should certify statutory report as correct after it has been
certified mere correct by not less than 2 directors, one of whom should be the
managing director
F. Duty to report
 Whether he has obtained all information and explanation to the best of his
knowledge and which were necessary for the purpose of his audit
 Whether, in his opinion, proper books of accounts, as required by law, have
been kept by company and proper returns necessary for the purpose of his
audit have been received from branches not visited by him
 Whether the company’s balance sheet and profit and loss account are in
agreement with the books of accounts and returns
 Whether, in his opinion and to the best of his information and according to
explanations given to him, whether balance sheet and profit and loss account
have been drawn up according to the requirements of companies act and
exhibits a true and fair view of state of affairs of company
ii. Contractual Duties- duties arising out of common law or under his contract
with company
An auditor is appointed by an agreement with his client i.e. the company. So he has
some duties arising out of common law or law of contract. They are:
 If he is requested to perform certain special duties under the contract with
company, say conduct of efficiency audit or propriety audit, he has to perform
them
 An auditor is required to perform his contractual duties with reasonable care
and diligence in order to avoid his liability for breach of contract
iii. Certain duties imposed by legal or court decisions
 He is not bound to be a detective or to approach his work with suspicion that
there is something wrong
 Auditor is justified in believing the responsible officials of company and rely
upon their representations, provided he takes reasonable care
  An auditor should correspond in writing with the previous auditor in whose
place he has been appointed as auditor of the company
iv. Duties arising out of professional ethics
 It is the duty of an auditor not to practice as an auditor unless he is a member
of ICAI and a holder of certificate of practice from the council of the institute
 An auditor should comply with rules and regulations formulated by ICAI
 Auditor must be honest, sincere, technically competent and carry on his duties
with due regard to public interest and not his personal interest
 Auditor should disclose full and fair information about working and financial
positions of company to all stakeholders

RIGHTS OF AN AUDITOR

i. Right to access to books of accounts and vouchers

An auditor of a company has a right to access, at all times, to books of accounts
and vouchers of a company, whether they are kept at head office of company or
elsewhere. Auditor of a company may examine books and vouchers whenever he
likes
ii. Right to obtain information and explanation
An auditor of a company has a right to obtain from directors and officers in the
company such information and explanations as he may think necessary for the
performance of his duties. If directors or officers of company refuse to supply any
information on the ground that in their opinion it is not necessary to furnish it,
auditor has a right to mention that fact in his report
iii. Right to comment on the inadequacy of accounting system in his report
If system of maintaining accounts is inadequate, auditor can advice directors to
amend system of accounting. However, if his advice or suggestion is not carried out
by directors, he has a right to mention the fact in his report. He has to state in his
report that proper books of accounts have not been maintain by company
iv. Right to receive notices and other communications of general meeting
An auditor of a company has a right to receive notifications and other
communications relating to any general meeting, like any other member of
company, irrespective of the fact whether accounts are discussed or not at that
meeting
v. Right to have legal, technical or expert advice
An auditor has a right to take legal, technical or expert advice on any matter
relating to business in order to perform his work satisfactorily. It may be noted that,
no doubt, auditor has the right to seek legal, technical or expert advice. But in his
report, he must give his own opinion and not that of the experts
 vi. Right to receive remuneration for his audit work
An auditor of a company has the right to receive remuneration for his audit work
provided he has completed the work which he undertook. It may be noted that
remuneration payable to auditor is fixed in the form of annual fee
vii. Right to be indemnified
An auditor of a company has a right to be indemnified, out of the assets of the
company, for any liability incurred by him in defending himself against any civil or
criminal proceedings by company, provided judgment is in his favor
viii. Right to sign the audit report
An auditor has the right to sign audit report. It may be noted that only a person
appointed as an auditor of company may sign the auditor report
ix. Right to make representation and to speak in general meeting when he is
asked to vacate office
An auditor has the right to make representation in writing and also to speak in
the general meeting in all cases when he is asked to vacate his office
x. Right to refuse to start audit work until the books of account of business is
balanced by management
An auditor has the right to refuse to start audit work until the books of accounts
of business are balanced by management
7. Objectives of auditing.
i. Primary or principle or main object of audit or auditing
Main object of auditing is to examine books of accounts and records so
as to find out whether books of accounts required by law are kept, whether proper
accounting principles and procedures are followed, whether books of accounts are
arithmetically accurate, whether transactions are recorded in books of accounts are
genuine and properly authorized and whether financial statements are drawn in
conformity with books of accounts and records and report to owner of business
whether profit and loss account gives a true and fair view of profit or loss account of
business for the financial year and balance sheet gives a true and fair view of state of
affairs of concern at the end of financial year. To ensure primary object and accuracy
of books of accounts, auditor must:
 Examine system of internal control or internal check
 Verify whether all books of accounts required by law are kept
 Verify whether proper accounting principles or procedures are followed
 Check arithmetical accuracy
 Verify authenticity and validity of transactions
 Confirm existence and value of assets and liabilities
  Find out whether financial statements are properly drawn up
ii. Subsidiary or incidental or ancillary objects of audit or auditing
Though making report constitute main object of an audit there are few
subsidiary objectives which make a report successful and meaningful. Most
important subsidiary objectives are:
a. Detection and prevention of errors
Errors refer to unintentional mistake or misstatement or
misjudgments made in the books of accounts by the account assistants. Errors
are committed innocently. An auditor by detecting errors puts a moral check
upon the staff of concern and creates a sense of fear in the minds of those
responsible for errors and thereby indirectly helps in the prevention of
recurrence of errors in future. The following are the various types of errors:
 Clerical Error or Technical Error
These errors are committed in the course of recording transaction
in the books of original entry such as cash book, purchase and sales
book. These errors can also occur in the totaling or balancing of ledger
accounts. Thus technical errors may be sub divided into-
 Errors of Omission
These takes place where a transaction has not been
recorded in the books of account either wholly or partially. If a
transaction is omitted altogether from books of accounts, it is
known as complete omission. However, if only one aspect of
transaction has been entered in books, it will be known as partial
omission
 Errors of Commission
When incorrect entries are made in the books of accounts
either wholly or partially, then such errors are known as errors of
commission. For example, the amount of 535 may be entered as
355 in the books of accounts
 Compensating or Off Setting Errors
When the effect of one error is counter balanced or
compensated by another error, then such errors are called
compensating errors
 Errors of Duplication
Such errors arise when an entry in a book of original entry
has been made twice and has also been posted twice in ledger accounts
 Errors of Principle
 If a transaction is recorded in the books of accounts against the
generally accepted accounting principles then the error is known as an
error of principle. These cannot be detected by mere routine checking
b. Detection and prevention of fraud
Fraud refers to intentional misstatements made in the books of
account by the account assistants with a view to cheat somebody. A fraud
may be committed in any of the following ways:
 Misappropriation of cash
It refers to fraudulent appropriations of money belonging to
another person by one to whom it has been entrusted with. Detection of
misappropriation of cash is not so easy. Only detailed checking of cash
book by auditor will bring fraud to light. In order to discover fraud,
auditor should check debit side of cash book with rough cash book,
salesmen report, counterfoils of receipts books, agents’ returns and
other original records. Cash may be misappropriated by-
 Recording cash sales proceeds at a figure lower than actual cash
sales proceeds
 Omitting to record credit sales
 Recording false cash purchase and pocketing amount, inflating
cash purchase
 Misappropriation of goods
Fraud may be in respect of goods i.e., misappropriation of goods.
This type of fraud is very difficult to detect especially when goods are
less bulky and are of higher value. Proper methods of keeping accounts
in regard to purchases and sales, stock taking, periodical checking of
stock, comparing percentage of gross profit to sales of 2 periods will
help to avoid misappropriation of goods
 Fraudulent manipulation of accounts
This type of fraud is more difficult to discover as it is usually
committed by persons holding high position like managers or directors
or other responsible officials with the object of-
 Showing more profit than what actually they are
I. So that if they get commission on profits they may get more
commission
II. Their service may be retained by showing to share holders,
that because of their efficiency they have shown more
profits and thus maintains confidence of share holders
 III. If they hold shares they may sell them at high price by
declaring higher dividend or to obtain further credit by
showing financial position of business better than what
actually it is or to attract more subscribers for sales of
shares of company
OR
 Showing less profits than what actually they are
I. In order to purchase shares in a market at a lower price
II. To reduce or avoid payment of income tax
III. To give a wrong impression about success of business to
competitors
iii. Specific Objectives
Audit does not imply mere financial audit. It covers other areas like
operations audit, cost audit, social audit, management audit etc.
a. Operation audit- specific objective is to evaluate existing operation of
enterprise in order to evaluate their cost effectiveness and to give expert
advice to improve efficiency of operations
b. Cost audit- specific objective is to check cost records of enterprise to make a
report on proper ascertainment of cost of goods and services
c. Social audit- to measure social performance of organization in preserving
and protecting environment
d. Management audit- auditor reviews organizational structure, assesses the
performance of management and suggests best course of action to run
business on efficient lines
8. Continuous audit.
According to RC Williams, “A continuous audit is one where auditor or his staff is
constantly engaged in checking the accounts during the whole period or where the
auditor or his staff attends at regular intervals during the period”. Continuous audit
refers to an audit under which a detailed examination of books of accounts is
conducted continuously throughout the year or irregular during year
iii. Advantages
j. Audit is carried out throughout the year as such there is sufficient time for
detailed checking of all books of accounts
k. It facilitates detection and rectification of errors easily and quickly
l. Continuous presence of auditor throughout the year imposes moral check on
staff of client and thereby reduces scope for frauds
m. Frequent visit of auditor to clients business makes accounting staff of client to
be regular and forces them to keep books of accounts up to date
 n. Accounts are checked throughout the year and hence it enables business to
place audited financial statement before shareholders immediately after close
of accounting year
o. Owners of a business can get any desired information duly verified at any time
without difficulty
p. Auditor will be in constant touch with clients business and will be able to
make useful suggestions for improvements of operational efficiency
q. Auditor can plan his work properly and take it up at convenient time without
under pressure at the course of accounting year
r. When there is continuous audit, interim statement of audit can be prepared
easily
iv. Disadvantages
g. It is suitable for a large business concern
h. Figures in books of accounts which have already been checked by auditor in
his previous visit may be altered fraudulently by dishonest employees of
client
i. Auditor is required to take extensive note of work done by him at each visit so
as to prevent any alteration in figures
j. Frequent and unexpected visit of auditor may cause inconvenience to clients
staff and dislocation in their work
k. Frequent visit by auditor staff to clients business may lead to close and
friendly relation between staff of client and staff of auditor
l. As audit is carried out throughout the year there is a danger of audit becoming
mechanical
9. Annual audit.
Final audit is an audit which is carried out after the close of a financial year when
the books of accounts have been closed and financial statements have been drawn
up
iii. Advantages
h. Cost is less and so suitable for small business concerns
i. Audit work can be completed within a reasonable time as it is done in one
continuous sitting
j. As audit work is completed in one sitting without intervals, entire audit work
is completed in a single session
k. Auditor does not cause any dislocation in work of client staff as auditor begins
audit work only after accounts are closed
l. As audit staff finishes its work in one or few sittings, there are less chances of
collusion between client staff and auditor staff
 m. Final audit is convenient for auditors as he need not maintain a large staff
n. Audit work does not become mechanical and monotonous
iv. Disadvantages
i. Errors and frauds are found only after the close of accounting year that means
errors and frauds are allowed to remain in books for a long period
j. It is only a postmortem examination of accounts
k. Auditor detects errors and frauds after they have been committed
l. Auditor depends upon test checking, as a result in records frauds can exist
even after the accounts have been audited
m. Delay in getting auditor’s report
n. Final audit is not effective in imposing moral check on clients staff
o. Not suitable for a business concern where there are numerous transactions
Does not help in preparation of interim accounts and declaration of interim
dividend
10. Merits of audit.
i. To business enterprise and management
n. Audit ensures accuracy, authenticity and reliability of books of accounts and
financial statements
o. Audit helps management to ascertain whether legal requirements in matters
of accounts, returns and statements are compiled with
p. Audit indicates true causes of fluctuations in expenses and incomes and true
financial position of concern
q. Audit helps in detection and prevention of errors and frauds
r. Audit examination makes employees vigilant, regular and up to date in their
work as they know that audit would complain about them if accounts are not
kept properly and up to date
s. Audit throws light on weaknesses of existing system of internal check and
internal control and thus helps management to take remedial steps in time
t. Where books of accounts are audited, accounts and financial statements are
uniformly prepared, which helps in easy comparison of accounts from year to
year
u. As audited accounts are widely regarded as reliable state of affairs, loans and
other credit facilities can be easily obtained by concerns
v. As audited accounts are readily accepted by tax authorities liability of an
enterprise as to income tax, wealth tax, sales tax etc. can be easily determined
w. Audited statements of accounts provides a mutually satisfactory basis for
solution of disputes as to higher wages and bonus to workers
 x. Insurance claims in case of loss or damage to business property on account of
fire etc. can be easily determined on the basis of audited accounts of previous
years
y. Audited accounts are more reliable as evidence in court of law
z. If a business is to be sole as a running concern, there arises necessity for
valuation of assets and liabilities and determination of purchase consideration
receivable by seller which can be done easily based on audited accounts
ii. To owners of business
e. To sole traders
In case of a sole trader, auditing assures him that all business
transaction has been duly accounted for and there are no errors and frauds
and also helps him for future planning. A sole trader can value his business on
the basis of audited accounts for the purpose of sale of his business
f. To a partnership firm
In case of a partnership firm, audited accounts serve as an evidence
of proper management of affairs of business by employers and active
partners. Further audited accounts are of great help in valuation of goodwill
and settlement of accounts on admission, retirement or death of partner. It
minimizes chances of disputes among partners
g. To a joint stock company
In case of a joint stock company, audit of accounts assure
shareholders that affairs of their company are run smoothly and their
investment is safe and also shareholders of company can value their shares
on the basis of audited accounts
h. To a co-operative society or a trust
In case of a co-operative society or trust, audit of accounts
assures members or beneficiaries that affairs of society or trust are conducted
properly and their interest are looked after properly
iii. To others [like creditors, government employers, investing public etc.]
a) To lenders
Lenders of long term as well as short term loans can depend on audited
financial statements while taking decision to grant credit to business
concerns
b) To government
Tax authorities can depend on audited statements in assessing
sales tax, income tax and wealth tax of business. Audited accounts are useful o
government to grants subsidies to business
c) To employees
 Audit of accounts safeguards the interest of workers and is helpful in
settlement of claims for higher wages and bonus
d) To insurance companies
Insurance companies can rely on audited accounts to
settle claims in respect of damage or loss of any business asset by fire, theft
etc.
e) To purchaser of a business
Purchaser of a business can easily calculate amount of purchase
consideration on the basis of audited accounts
11. Demerits of audit.
i. It is not concerned with making important aspects of a business such as managerial
efficiency, financers, business ethic etc. It cannot be expected to do justice to its
objects
ii. Audit is a postmortem of accounts, it begins where accountancy ends
iii. Owing to limitations of time and cost, it may not always be possible for an auditor to
make detailed checking of all transactions that means even audited accounts can be
incorrect sometimes
iv. An auditor has to depend on books of accounts and records presented before him. If
books of accounts have been manipulated, auditing may not reveal such
manipulation
v. Sometimes an auditor has to see and depend upon opinions of experts. Opinions of
experts may not be always be wholly reliable and it reduces value of audit report
vi. Audit work requires exercise of professional judgment as to correctness and
fairness of entries in books of accounts. Sometimes professional judgments of
auditor may be faulty as his personal opinion may cloud his sense of judgment
vii. An auditor has to collect adequate evidence in support of every entry made in books
of accounts. It depends on correct type of audit techniques employed by auditor
Unless accounting system of business is supported by well developed internal check
and internal control systems, audit will fail to produce desired results
12. Features, advantages and disadvantages of audit programme.

Audit programme is the auditor’s plan of action specifying work to be done, procedures to
be followed for doing work, persons responsible for completion of work and duration of
time within which work has to be completed. It is prepared by an auditor before the
commencement of an audit for conduct of audit

According to Metz, “An audit programme is a detailed plan with well-determined

procedures for audit work”
Essential features of an Audit Programme

i. It is prepared by auditor before commencement of audit

ii. It should be in writing
iii. It should contain full details and procedures of audit work
iv. It should indicate distribution of work among audit staff
v. It should fix up responsibility of audit staff with regard to conduct of audit
vi. It should specify duration of time within which audit work has to be completed
vii. It should be flexible permitting modifications in the course of audit

Advantages of Audit Programme

i. Audit programme can be started immediately in a systematic manner once an audit

programme is made ready
ii. It ensures that each part of audit work is completed and nothing is omitted
iii. It provides guidelines to audit staff for performance of audit work allotted to them
iv. Auditor is relieved from botheration of giving instructions to his audit staff from
time to time
v. It facilitates proper distribution of work among audit staff
vi. It facilitates continuity in audit work
vii. It fixes up responsibility among audit staff for any omission or commission
viii. It helps auditor to watch progress made by audit staff in audit books
ix. It helps auditor to exercise effective control over his audit staff
x. It helps to complete audit work within scheduled time
xi. It serves as an evidence of work done by auditor and can be produced in the court of
law as an evidence in case auditor is charged with negligence in performance of his
duties
xii. It helps to increase efficiency of audit staff and serves as a guide for audit in
succeeding years
xiii. It brings about uniformity in audit work as the same audit program can be followed
every year with necessary alteration

Disadvantages of Audit Programme

i. Audit programme makes work of audit staff monotonous and mechanical

ii. It discourages initiative and interest of audit staff as they have to act according to
audit programme
iii. As audit programme fixes a time limit for completion of audit work, audit staff may
hurry up to complete audit work as a result efficiency of audit staff may suffer
iv. There is a danger that some part of audit work may be left unchecked
 v. There cannot be a uniform audit programmed that can be adopted for all business
concerns
vi. When there is an audit programme there is a danger of some audit programme may
be followed from year to year without any alterations
vii. Audit programme reduces effectiveness of audit work
viii. Audit programme is not suitable for small business concerns
ix. A rigid audit programme is not useful
x. When there is an audit programme, auditors work has to be detailed and systematic.
This may increase work of auditor and cost of audit work
13. Inherent and acquired qualities of an auditor.
I. Inherent Qualities
i. Integrity
Auditors must demonstrate the highest level of honesty, ethics and
professional integrity. They are entrusted with the responsibility of assessing
an organization’s financial and operational information impartially
ii. Independence
Independence is a fundamental quality of auditor. They should be free
from any conflicts of interest or external pressure that could compromise
their objectivity
iii. Skepticism
Auditors need to approach their work with a skeptical mindset. This
means questioning information, seeking evidence and not taking things at face
value to uncover potential fraud
iv. Analytical skills
Auditors must possess strong analytical skills to examine financial data,
identify patterns and detect irregularities
v. Attention to details
The ability to pay close attention to even the smallest details is crucial
for auditors. Errors, no matter how minor can have significant implications
vi. Communication skills
Effective communication is vital for auditors. They need to convey
complex findings and issues clearly, both in written reports and oral
presentations
vii. Professional skepticism
Auditors should maintain a professional and objective stance, treating
all evidence and information with skepticism until it is verified
viii. Confidentiality
 Auditors often have access to sensitive information, so they must
maintain strict confidentiality and not disclose any information without
proper authorization
ix. Cautious approach
Auditors should exercise caution when making judgments or
decisions based on information they review. Rushed or impulsive decisions
can lead to errors
II. Acquired Qualities
i. Technical competence
Auditors need a strong understanding of accounting principles, auditing
standards and relevant laws and regulations. This knowledge is typically
acquired through formal education and on the job training
ii. Audit methodology
Auditors must learn and apply audit methodologies and techniques to
systematically examine financial records and internal controls
iii. Industry knowledge
Depending on the sector or industry they audit, auditors may need
specialized knowledge to understand industry specific risks, operations and
regulations
iv. IT Proficiency
In today’s digital age, auditors must be proficient in using various
auditing software, data analytics tools and information systems to assess
electronic records and transactions
v. Risk assessment
Auditors develop skill in risk assessment to identify areas of higher
audit risk and allocate resources accordingly
vi. Interpersonal skills
Auditors often work closely with clients or colleagues. Effective
interpersonal skills are essential for building rapport, gathering information
and resolving issues collaboratively
vii. Report writing
Ability to prepare clear and well structured audit reports is an
acquired skill. Auditors need to communicate their findings, conclusions and
recommendations effectively
viii. Continuing professional development
To stay current and effective, auditors must engage in ongoing
professional development, including attending training, workshops and
staying informed about changes in auditing standards and regulations
 14. Factors considered or criteria for selecting audit evidence.
i. Relevance
ii. Reliability
iii. Sufficiency
iv. Cost effectiveness
v. Convenience
vi. Preservation
vii. Materiality of assertion to be tested
viii. Need for resolution of inconsistency
ix. Accepted audited standards or agreed upon procedures to obtain evidence
15. Objectives of internal check.
i. Proper division of work
An ideal system of internal check aims to achieve proper division of work
among members of staff based on each individual’s qualification, training,
experience, ability etc. Proper division of work among staff is aimed at for the
following purposes:
 To allocate duties and responsibility among staff in such a way that each staff
member could be held responsible for a particular error or fraud
 To ensure proper staff development through appropriate and timely change
of work
 To increase efficiency of staff members
 To bring about economy in work
ii. Minimization of errors and frauds
A proper system of internal check aims at minimization and reduction of
errors, fraud and irregularities. It can be minimized:
 By ensuring that no one person does any single task from beginning to end
 By ensuring that work done by each staff member is independently and
automatically checked by another staff member in ordinary course of business
 By making each staff member liable for any error or irregularities in task
assigned to him
 By exercising moral pressure over staff members
iii. Early detection of errors and frauds
Another objective of an effective system of internal check is to detect errors
and frauds, if they have committed, at an early stage. It is possible by ensuring that
no one person does any single task from beginning to end and work performed by
one person is independently checked by another person and each person is
responsible for each detail of work done by him
 iv. Ensuring reliability of accounts
Another important objective of an internal check system is to ensure reliability
of accounts by seeing that no business transactions are left unrecorded, all
transactions are recorded accurately and accounts are kept up to date
v. Early preparation of final accounts
Another objective of an efficient system of internal check is to facilitate early
preparation of final account by ensuring that accounting system provides complete,
regular and reliable accounts
vi. Simplification of external auditor work
An efficient system of internal check aims at simplification of work of an
external auditor. When there is an efficient system of internal check in operation in
an enterprise, external auditor need not undertake a detailed examination of each
and every transaction. He can conduct his examination according to selective test
checking. This would simplify his work
16. Fundamentals of internal check.
i. Simple
System of internal check should be simple, easily workable and effective
ii. Careful and proper device
System should be carefully devised and properly regulated
iii. Proper selection of employees and training
Employees should be carefully selected and properly trained for job to be done
by each of them and allocation of duties should be based on individual ability,
training and specialization
iv. Division of work
Work should be so arranged that work performed by one individual is
automatically verified by another individual
v. Fixed responsibility
Responsibility of each individual must be properly defined and fixed and there
should be schedule of duty for every employee. There should be no duplication of
work at any level
vi. Rotation of employee
There should be frequent rotation of employee from one work centre to
another to insure against fraud and to broaden their work experience
vii. Responsible official
In case of large business concern, staff should be under control of responsible
official and strict supervision should be undertaken to ensure efficient operation of
internal check
viii. Use of mechanized methods
 Use of mechanized and electronic equipments such as cash register, calculators,
computers etc. should be introduced and encouraged mainly to avoid overwriting
and to reduce clerical work
ix. Standard form
Duties, instructions and procedure of each job should be stated in written form
so that duties can be easily fixed and chances of duplication can be avoided
x. Proper safeguard and use of assets
Safeguards should be prescribed for safe custody of unused cheque books,
securities and confidential files
xi. Reporting to management
Proper reporting to management is necessary for good system of internal check
xii. Review
System of internal check should be received from time to ascertain loopholes
and to introduce improvements
xiii. Other elements
a. Periodical leave
At periodical interval employee should be allowed to go on leave so that
any error and fraud committed by anyone could be detected by his substitute
during former’s leave period
b. Self balancing
Wherever possible, self balancing ledger system should be used
c. Perpetual inventory
There should be a system of perpetual inventory control providing
continuous accounting ability
d. Daily deposit of cash
Cash receipts should be deposited into bank daily or as quick as possible
e. Effective control
An effective control over all purchases, receipt and issue of goods and
correspondence with debtors and creditors should be done by a responsible official
17. Internal check as regards to cash sales.
In big business concerns, where there are a large number of daily cash sales
transactions, there are many chances of fraud and irregularities. So there should be
an effective system of internal check to reduce errors and frauds. There may be 3
types of sales:
i. Sales at counter
There should be an efficient system of internal check for counter sales. The
following are the procedures:
 For each section or counter, there must be a separate salesman
  Salesman is in charge of making sales
 A specific number or word may be allotted to every salesman
 Salesman should neither be allowed to receive cash from customers for goods
sold nor to deliver goods
 Every salesman is given a separate book containing blank copies of cash
memo printed in numerical sequence. Such books are of different colors for
different departments
 Salesman sells goods to a customer and prepares 3 copies of cash memo
 These copies are checked by other officials sitting nearby, and are, then signed
by salesman
 2 copies of cash memo are handed over to customer to whom goods have been
sold. He is instructed to pay cash to cashier
 Customer hands over 2 copies of cash memo and makes payment
 Cashier after having received price of goods, he retains one memo copy in his
hand and one copy is returned to customer after making same with stamp
“cash received” and then goods are handed over to customer
 Sometimes, goods are handed over to customer by gatekeeper after showing
his copy of cash memo. In such cases, 4 copies of cash memo are prepared and
4th copy is retained by gatekeeper

This is the daily routine. At the end of day, salesman, cashier and gatekeeper prepare
summaries and send them to general manager or officer in charge. Salesman’s summary
reveals quantity and value of goods sold and that of cashier shows cash collections and
gatekeeper’s summary reveals goods delivered during day. If these summaries tally,
accounts are certified as correct. Daily cash sale receipts must be deposited into bank
either on same day or on next day

ii. Sales by travelling agent

There is a practice in big concerns to engage travelling agents to increase sales
and to collect debts. These travelers collect debts from old customers and accept
advances from new ones. A good system of control over these agents may be:
 Travelling salesman should be provided with rough receipt books
 Travelling salesman are required to issue rough receipt to customer for cash
received and they should be instructed to acquire final receipts from head
office
 Customers should be asked to contact head office or branch office, if final
receipt is not issued to them within a stipulated period
 These agents should be instructed to remit entire cash to head office
  These agents should not be allowed to deduct their commission or any other
expenditure out of it
 When they submit periodical statements, they will get cheques for expenses
incurred by them or for their salaries or commission
 Periodical statements submitted by travelling salesman must be thoroughly
examined by a responsible official
 Periodical statements of accounts must be sent to customers informing them
of balances due from them
 Special attention should be paid to customers accounts which have become
over due. Reminders should be sent to them
 Travelling salesman should not be allowed to remain in same area for long.
Efforts should be made to change area of travelling salesman from time to
time
iii. Postal sales
There should be effective system of internal check for postal sales. Internal check
system for postal sales should contain certain guidelines or points. They are:
 There should be a separate wing in sales department to deal with postal sales
 There should be separate registrar to record sales by post or VPP register
[Value Payable Post]
 Goods returned by customers should also be entered in VPP register
 Any advance received from customer should also be entered in VPP register
 As soon as cash is received against a VPP sale, it should be recorded in VPP
register
 Total amount received everyday against postal sales should be recorded in
cash book
 Cash received against postal sales should be deposited into bank
 At frequent intervals, a responsible official should check VPP register for
goods which have not been returned and also for those, for which payments
has not been received
18. Internal check as regards to cash purchases.

There should be an effective system of internal check with regard to cash purchases. The
following guidelines should be clearly noted in regard to internal check for cash
purchases:

 There should be a proper system of control with regard to cash purchases, so that
only required purchases are made for cash
  Cash purchases should be supervised and controlled by purchase department and
purchase department should be headed by a responsible official
 Purchase department must maintain a list of approved suppliers from whom goods
can be purchased for cash
 Procedure relating to placing of orders, approval of orders, receipt, inspection and
acceptance of goods should be clearly laid down
 Goods purchased for cash should be recorded in goods received or inward register
 Goods received should be properly checked to ensure that they are exactly as
ordered
 Payment for cash purchases should be made by crossed account payee cheques as
far as possible
 Payments made for cash purchases should be checked with cash memos or receipts
invoices issued by suppliers
 Before issuing cheques for cash purchases, it should be ensured that goods have
been received
 Person in charge of making payments for cash purchases should have nothing to do
with receipt of goods
 If any payment for cash purchases involves a big sum it is desirable that cheques for
such cash purchases are signed by more than one responsible officer
As soon as cheque has been issued, relevant invoice should be stamped “paid”, so
that it is not by mistake again passed for payment
19. Position of an auditor with regard to valuation of assets.

Valuation of assets is a difficult task and it requires technical knowledge. But an auditor
has neither technical knowledge nor time required for valuation of assets. So, an auditor
cannot be expected to do valuation of assets. Valuation of assets is done by officials of
business. Auditor has to only make an enquiry into valuation of assets and satisfy himself
that values of assets are properly determined. An auditor has to critically examine
valuation and satisfy himself that valuation of assets has been properly made and that
values of assets are correct. An auditor should do the following:

 Auditor should obtain all information available in respect of valuation of assets

 Auditor should critically examine and analyze all figures of valuation of assets
 Auditor should verify whether principles and practice of valuation of assets have
been consistent from year to year
 Auditor should verify whether value of assets have been determined properly in
accordance with GAAP
  Wherever necessary auditor should take assistance of technical experts for valuing
assets
 Auditor should ascertain whether current values of assets are fair and reasonable
20. Liabilities of an auditor.
A company auditor is appointed under the Companies Act, so his liabilities are
determined by companies act. The liabilities of a company auditor can be grouped
under 2 heads. They are:
i. Civil Liabilities
Liability of an auditor to pay damages is known as civil liability. Civil liabilities of a
company auditor may be grouped under 2 heads, namely:
 Civil liability of an auditor for negligence
An auditor of a company is appointed by shareholders. As such, he becomes
an agent of shareholder. He must safeguard the interest of the company. To
safeguard the interest of company, he must exercise reasonable care and skill
in performance of his duties. If he fails to do so and as a consequence thereof,
if company suffers any loss, auditor will be held liable to compensate loss
suffered by company
 Civil liability of an auditor for misfeasance
Misfeasance means breach of trust or duty imposed by law. In other
words, if an auditor of a company does something wrongfully in the
performance of his duties, resulting in financial loss to company, he is held
guilty of misfeasance
iii. Criminal Liabilities
Criminal liability of an auditor arises out of an act constituting a crime, say,
misrepresentation of facts, falsification of facts, issue of false certificate, making of
false statement, destruction of any voucher or document or doing any other act,
with an intent to deceive others. Penalty for any criminal liability is that the auditor
may be imposed with a fine or imprisonment or both
I. Criminal liability of an auditor under the Companies Act 1956
 Where prospectus issued by a company includes any untrue statement
or misstatement by auditor, auditor becomes criminally liable. In this
case, he may be punishable with imprisonment for a term which may
extend to 2 years or with a fine which may extend to 5000 or both
 If an auditor intentionally gives false evidence upon any examination
about the winding up of company, he becomes punishable with
imprisonment for a term which may extend to 7 years along with fine
  An auditor of company becomes liable for criminal prosecution, if he, in
any return report, certificate, makes a false statement, particularly
knowing it be false or omits any material fact, knowing it be material.
The punishment on conviction will be imprisonment for a term which
may extend to 2 years and also a fine
 If an auditor destroys, mutilates or makes alterations in any books,
papers or securities belonging to company with the intent to defraud or
deceive any person at the time of winding up of company, he becomes
punishable with imprisonment for terms which may extend to 7 years
and also a fine
 If central government takes actions and prosecutes any officer
connected with affairs of company, auditor is required to assist the
prosecution. If he fails to do so, he becomes punishable with
imprisonment for 6 months and with fine up to 5000 or with both
II. Criminal liability of an auditor under the Indian Penal Code
If an auditor issues or signs any certificate, knowing or believing that such
certificate is false in any material point, he becomes punishable in the same
manner as if he gives false evidence
 Criminal liability of an auditor under the Income Tax Act of 1961
If an auditor induces in any person to make delivery to income tax
authorities, a false statement or declarations relating to any income
chargeable to tax, he becomes punishable with simple imprisonment which
may extend to 6 months with fine which may extend to 1000 or both
 Criminal liability of an auditor under the Chartered Accountants
Act 1949
If a person, not being a CA, acts as auditor of a company and signs any
document, he becomes liable for criminal prosecution
21. Types of audit reports and their illustration.
i. Unqualified Audit Report or Clean Report
Unqualified audit report is issued to financial statements when auditor has
found no material misstatement after their testing. This report contains the
unqualified opinion from an independent auditor. The report shows that the entity’s
financial statements prepared gives a true and fair view and complies with the
accounting framework. Before giving a clean report, an auditor must observe
following points:
 He must examine whether the books of accounts of company are as per the
accounting principles
  He must observe all audit procedures necessary under circumstances
 He must see that all relevant provisions of companies act and other important
laws are compiled with
 He must be satisfied with the truthfulness and fairness of accounts and
financial statements of company
ii. Qualified Audit Report
It is the report that is issued by auditor to say that financial statements have
material misstatements. But those material misstatements are not extensive. It is
issued by an auditor when he is not satisfied with the affairs of company and
fairness of balance sheet and profit and loss account of concern. Qualified report is
given by an auditor only under certain circumstances:
 When he is not satisfied with accounts or financial statements presented to
him
 When proper books of accounts as required by law have not been maintained
 When there is a violation of companies act and any other important laws
 When there is a substantial departure from GAAP
 When there is a material misstatement in financial statements
 When there is an omission of a material disclosure
 When explanations sought by auditor are not made available to him
 When auditor is not satisfied with information and explanations given to him
 When he finds some discrepancy in treatment of certain items
 When assets are overvalued or under valued
 When stock in trade has been valued at market price which is more than cost
price
 When there is insufficient provision for depreciation on fixed assets
 When secret reserves have been created
iii. Adverse Audit Report
It is a type of audit report in which auditor finds material misstatements in the
financial statements. The misstatements found here are different from material
misstatements found in qualified audit report
iv. Disclaimer Audit Report
It is the report that is issued by an auditor when auditor finds it difficult to
obtain sufficient audit evidence to support his opinion

An independent auditor report is an official opinion issued by an internal or external

auditor as to the quality and accuracy of financial statements prepared by a company

Clean Audit Report

To the shareholders

ABC limited

Bagalkot

We have audited the attached balance sheet and profit and loss account for the year
ended……. and we report that-

1. We have obtained all information and explanations which, to the best of our
knowledge and belief were necessary for the purpose of his audit
2. Proper returns adequate for the purpose of our audit have been obtained from
branches not visited by us
3. Proper books of accounts as required by law have been kept by company so far as
appears from our examination
4. The company’s balance sheet and profit and loss account are in agreement with the
books, accounts and returns
5. In our opinion and to the best of our information and according to the explanation
given to us, balance sheet and profit and loss exhibits a true and fair view of state
of affairs of the company
For Roopa and Company [Senior Executive]
[Senior Executive]

Qualified Audit Report

To the shareholders

ABC Limited

Bagalkot

We have audited the attached balance sheet and profit and loss account for the year
ended……. and we report that-

1. We have obtained all information and explanations which, to the best of our
knowledge and belief were necessary for the purpose of his audit
2. Proper returns adequate for the purpose of our audit have been obtained from
branches not visited by us
3. Proper books of accounts as required by law have been kept by company so far as
appears from our examination
4. The company’s balance sheet and profit and loss account are in agreement with the
books, accounts and returns
 5. In our opinion and to the best of our information and according to the explanation
given to us, balance sheet and profit and loss account exhibits a true and fair view
of state of affairs of company, subject to the following reservations:
 Inadequate provision for bad and doubtful debts has been provided
 Over valuation of closing stock
 Capital expenditure is recorded as a revenue expenditure
 Incorrect provision for discount on debtors
For Roopa and Company [Senior Executive]
[Senior Executive]
22. Fundamental principles of professional ethics.
i. Integrity
Auditor must be honest and straight forward in all professional and business
relationships. It is about maintaining trusts
ii. Objectivity
Auditor should not let personal biases or conflicts of interest to cloud with
professional judgment. Auditor should stay objective and impartial
iii. Professional competence and due care
Keep skills sharp and provide services diligently. Do not take on tasks which
auditors are not qualified for
iv. Confidentiality
Respect and protect sensitive information. It is crucial for building trust with
clients and colleagues
v. Professional behavior
Uphold a professional image. Avoid behavior that could undermine professional
reputation
vi. Respect for others
Treat everyone with respect and courtesy, regardless of their position or status.
It fosters a healthy work environment
vii. Lawful and ethical conduct
Follow the law and adhere to ethical standards. This is the baseline for
professional behavior
viii. Accountability
Take responsibility for actions and decisions. If something goes wrong, address it
promptly and learn from it
ix. Transparency
Be open and honest in communications. Transaparency builds trusts and
credibility
x. Social responsibility
 Consider the broader impact of actions on society. Strive for positive contribution
to community and environment

TECHNICAL STANDARDS

Technical standards for auditing are primarily governed by the Institute of Chartered
Accountants of India [ICAI], the regulatory body for CA in India. They include:

a. Standards on Auditing [SAs]

ICAI issued Standards on Auditing, which are aligned with International
Standards on Accounting [ISA]. These standards provide guidance on various
aspects of audit process, including planning, risk assessment, evidence gathering
and reporting
b. Standards on Quality Control [SQC]
ICAI has issued Standards on Quality Control that provides guidance on quality
control policies and procedures that audit firms should establish. These standards
help to ensure that audit engagements are conducted with a high level of quality and
professionalism
c. Guidance notes
ICAI issues guidance notes to provide additional guidance and clarification on
specific auditing and accounting issues. These notes serve as a practical guidance for
CA in the application of auditing standards
d. Statements on reporting under section 143(3) of Companies Act
These statements provide guidance on reporting requirements under sec
143(3) of Companies Act. They outline the format and content of auditor’s report on
financial statements of companies
e. Code of ethics
ICAI has a code of ethics that establishes ethical requirements for CA, including
those engaged in auditing. The code emphasizes principles such as integrity,
objectivity, professional competence and confidentiality
f. Peer review board
ICAI has established a peer review board to conduct peer reviews of audit firms.
The peer review process ensures that firms comply with auditing and quality
control standards
g. Auditor’s report on financial statements under Companies [Auditor’s Report]
order, 2020
This guidance provides additional reporting requirements for auditors
under Companies Act [Auditor’s Report] order, 2020