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NOTES ON AUDITING

Shubham Garg
Mohit Sharma
+91-7877030368
+91-9530469131

Bhavesh Sharma +91-8233442261

Q.1 What is auditing ? Different kinds of auditing ? Objectives of auditing ?


Ans It is an independent examination of financial statements with a view to express an opinion thereon.
Kinds of Auditing- On the basis of
(A)Authority
1. Audit under statute.
2. Audit under
private institution.
3. Internal audit.

(B)Scope

(C)Time

1. Complete audit.
2. Partial audit.

1. Continuous audit.
2. Periodical audit.
3. Interim audit.

(D)Objective
1. Special audit.
2. Cost audit.
3. Management audit.

Objectives of auditing (SA-200-overall objectives of independent auditor)


1.
2.
3.
4.

Examination of truth
Fairness of final accounts
Discovery of errors.
Detection of fraud.

5.
6.
7.
8.

Prevention of fraud.
Prevention of errors.
Advice to management.
Ascertaining true financial position.

Q.2 Difference between test checking & routine checking ?


Ans Test checking
1. Examination of few selected transaction rather than all.
2. Time saving.
3. Cheaper.
4. Suitable for large enterprise.
5. Less detailed checking.
6. Difficult to detect fraud & errors.
7. Alteration of figures possible.
8. Less efficient & effective.

Routine checking
1. Examination of regular transactions.
2. Time consuming.
3. Expensive.
4. Not suitable for large enterprise.
5. Detailed checking.
6. Easy to detect fraud & errors.
7. Alteration of figures not possible.
8. More efficient & effective.

Q.3 What are the importances of vouching ? Explain with a case law ?
Ans Meaning of vouching - The act of examining vouchers is known as vouching.
Importance of Vouching
1.
2.
3.
4.

Backbone of auditing.
Essence of auditing.
Documentary evidence.
To know accuracy.

5.
6.
7.
8.

Truth of book entries.


Authorisation of transactions.
Helps in knowing unrelated transactions.
Helps in examination of entries.

Case Law - (Armitage V/S Brewer & Knott-1932)


The auditors were held liable for negligence in this case because they failed to detect the fraud in the vouchers
This case came at a conclusion that vouching plays a very important role in auditing.

Q.4 Essay on verification of assets(Goodwill, investment, furniture fixtures) ?


Ans The following point describe the verification of assets
1.
2.
3.
4.

Existence.
Authority
Ownership
Performance

5.
6.
7.
8.

Charge.
Valuation.
Presentation.
Disclosure.

Q.5 Meaning of audit report ? Difference between standard & qualified audit report ?
Ans Meaning of audit report Written opinion of the auditor regarding whether the financial statements
present true & fair position of the organization.
As per SA-700 Forming an opinion on financial statements there are 2 types of report whose difference is:Standard(unqualified) audit report
Qualified report
Issued when
Issued when
1. Auditor is fully satisfied.
1. Issued when auditor is not fully satisfied.
2. Books of accounts show true & fair view.
2. Books of accounts doesnt show true & fair view.
3. Auditing standards are duly applied.
3. Auditing standards are not duly applied.
4. Auditor received adequate information.
4. Auditor didnt got adequate information.
5. Accounting principles are consistently followed.
5. Accounting principles are not consistently followed
Q.6 Special audits of Banking company, education institute, insurance company ?
Ans -

Audit of Banking company

Stage-1-Pre-commencement work.

Stage-3-Overall audit plan or programme.

Stage-2-Understanding the business of bank branch.

Stage-4-Audit procedures.

Stage -5-Formation of report

Audit of Education institute-Examine the following things


1.
2.
3.
4.
5.
6.

Trust deed
Minutes of the meeting.
Names entered in student register or not.
Admission fees with admission slips.
Free Studentship & concession.
Fines.

7. Hostel dues.
8. Rental income
9. Investment income.
10. Expenditure incurres.
11. Taxation.
12. Grants.

Audit of insurance company


(A)Vouching of income
1. Receipts of premium.
2. Policy register
3. Re-insurance register.

(B)Vouching of expenses
1. Claim register.
2. Agent commission.
3. Managerial expenses.

(C)Verification of assets & liabilities


1. Advanced loan.
2. Securities.
3. Investment.

Q.7 Define investigation ? Procedure to investigate affairs of a company for a suspected fraud ? Difference
b.w audit & investigation ?

Ans Meaning of investigation Systematic, critical & special examination of records of a business for
specific purpose.
Procedure to investigate affairs of a company for a suspected fraud
Regarding fraud of cash
1. Checking cash book.
2. Checking petty cash book.
3. Checking salary & wages.

Regarding fraud of goods

Manipulation in accounting

1. Checking through receipt or issue. 1. Examine internal control.


2. Test checking.
2. Scrutiny of transactions.
3. Gatekeepers record.
Difference b/w auditing & investigation

Basis

Auditing

1. Meaning

It is an independent examination of
financial statements with a view to
express an opinion thereon

2. Nature
3. Held by
4. Appointed by
5. Protection of interest
6. Scope

Compulsory.
C.A
Owner or shareholder.
According to owner.
To express opinion.

7. Period
8. Evidence
9. Extent
10. Format

Financial year.
Pursuasive.
Believable.
Prescribed by law.

Investigation
Systematic, critical & special
examination of records of a
business for specific purpose.
Voluntary.
May or may not be C.A
Owner or third party.
According to management.
To answer questions of engagement
letter.
Not necessary.
Conclusive.
Detailed.
No specific format.

Q.8 Detailed audit procedure followed by tax auditor under section-44AB of income tax act ?
Ans
1. Identification of the concerns for which tax audit is compulsory.
2. To apply the provisions of section-44AB on such concerns which are as follows
Limit in case of
Business
Profession.
When Turnover > 1 crore
When gross receipts > 25,00,000
3. If assessee is covered under section 44AE, 44BB, 44BBB, 44AD then tax audit is compulsory.
4. Form of report 3CA/3CB/3CD
5. Due date of furnishing return 30 september.
6. Required section of furnishing return 139(1).
7. Penal provision If return is not filed within the specified date penal action can be taken.
Q.9 Define Management audit ? Deficiency of financial audit have lead to the growth of management audit ?
Ans Meaning of management audit - Systematic examination of decisions & actions of the management to
analyse the performance.
Due to the following limitations in financial audit the need of management audit has arisen :1. Inherent limitations.

5. Risk of fraud.

2. Use of professional judgement.


3. Use of sampling.
4. Management representations.

6. Time constraints.
7. Independence threats.
8. Limitations of scope.

Q.10 Auditor is a watch dog not a blood hound. Elaborate the statement with a case law ? Powers of auditor ?
Ans Case Law International laboratories V/S Dewar-1933
This case says that an auditor cannot be set free of his duties & shall be charged with negligence or nonperformance of his duties.
Duties or liabilities of auditor in the light of this statement1.
2.
3.
4.

To be suspicious is not a duty.


Believing the trustworthy employees.
Does not guarantee correctness.
Must be honest.

5.
6.
7.
8.

Should not check only arithmetical accuracy.


Work with reasonable care & skill.
Auditor is not a detective.
Auditor is not a street dog.

5.
6.
7.
8.

Right to access branch accounts.


Right to attend general meeting.
Right to receive remuneration.
Right to lien(Documents jabt karna)

Powers of auditors
1.
2.
3.
4.

Right to access book of accounts.


Right to obtain information.
Right to obtain explaination.
Right to visit branch office.

Q.11 Define internal check ? Internal check reduce the work of auditor but not his liability ?
Ans Meaning of internal check Method of organizing the system of book-keeping & arrangement of staff
duties.
Due to the following points internal check reduces the work of auditor, not his liability.
1. It simplifies the audit work.
2. Specialisation in work.
3. Record of every transaction.

4. Early detection of fraud & errors.


5. Increase in efficiency of employees.
6. Moral influence on employees.

Q.12 Meaning of audit programme ? How it should be constructed ? Essentials of a good audit programme ?
Ans Detailed plan of applying the audit procedure in the given circumstances.
The following points must be noted during Construction of an audit programme
1. Audit objective.
2. Audit procedure.
3. Extent of check.

4. Timing of check.
5. Allocation of work.
6. Special instructions.

Now, the essentials of a good audit programme are


1. Provides assistance.
2. Provide perspective.
3. Selection of assistant.

4. Accountability.
5. Serves as a guide.

Q.13 Shortnote on audit working paper ?


Ans Meaning Written records prepared during course of audit.

Importance of working papers(SA-230-Audit documentation)


1.
2.
3.
4.

Improves efficiency in audit work.


Aid in planning.
Aid in performance.
Aid in supervision.

5.
6.
7.
8.

Delegation of work.
Provides guidance.
Acts as an evidence.
Quality control of work.

Q.14 Difference between internal check & internal audit ?


Ans The difference is as followsBasis
Meaning

Objective

Internal check
Method of organizing the system of
book-keeping & arrangement of
staff duties.
Minimizing detected error & fraud.

Internal audit
Activity within an organization for
the review of operations.

Evaluating effectiveness of
implemented control.
Function
Routine function.
Specified staff function.
Need for staff
Not necessary.
Necessary.
Scope
Operates as a built in device.
Review of adequacy & operations.
Nature
Book keeping & clerical duties.
Evaluating quality & operating
effectively.
Orientation
Procedure oriented.
Control oriented.
Q.15 Essay on verification of liabilities( Loan, contingent liability, creditors) ?
Ans Loans
1.
2.
3.
4.

Inspection of agreement.
Revenue expenses.
Inspection of mortgage.
Correct presentation
in balance sheet.

Contingent liabilities
1. Bill discounted but not matured.
2. Uncalled amount of partly paid investment.
3. Cases not acknowledged as debt.
4. Security given by businessman for others.

Creditors
1. List of creditors
2. Scrutiny of list.
3. Purchase ledger.

Q.16 Shortnote on cost audit ?


Ans Meaning Verify the cost of manufacturing & production of a Product.
1.
2.
3.
4.
5.

Conducted by Cost accountant as per ICWA act-1959.


Appointed by Board of directors with prior approval of central government.
Powers & duties of cost auditor are same as in question-10
Report to be submitted to central government & members of the company.
Time limit Within 120 days of the closing of the year.

Q.17 Shortnote on Standards of auditing(SA)- Learn from question- 1, 5, 13.


Bhavesh Sharma
+91-8233442261

Mohit Sharma

Shubham Garg

+91-9530469131

+91-7877030368