Question Bank Principles and practices of Auditing
Unit 1 Two Marks Questions 1. Define Auditing?
Ans. Mautz: defines auditing as being “Concerned with the verification of accounting data with determining the accuracy and reliability of accounting statements and reports.” . Defi Define ne Audit uditor or?? Ans! Auditor is a trained professional who is responsible to review and verify the accoun accountin ting g data data of any busine business ss undert underta"i a"ing ng perta pertaini ining ng to its busine business ss activities. #. $tate $tate any any two ob%e ob%ecti ctives ves of of audit? audit? Ans! Primary Primar y Objec O bjectie tie . &he primary ob%ective of an auditor is to respect to the owners of his business e'pressing his opinion whether account e'hibits true and fair view of the state of affairs of the business. $econdary (b%ectives! Detection and prevention of )rauds and errors. *. +hat +hat is is gover governme nment nt audi audit? t? Ans! Ans! ,ove ,overn rnme ment nt audi auditt serve servess as a mech mechan anism ism or proc proces esss for for publ public ic accounting accounting of government government funds. funds. -t also provides provides public accountin accounting g of the oper operat atio iona nall mana manage geme ment nt /rog /rogra ramm mmee and and poli policy cy aspe aspect ctss of publ public ic administration as well as accountability accountability of the officials administering them. 0. +hat do you you mean mean by by statutor statutory y audit? audit? Ans! any audit carried on as per the reuirement of law is called as a statutory audit. eg! all companies have to get their accounts audited as per the provision of the company2s Act of 1304.
4. ,ive ,ive the meani meaning ng of e'tern e'ternal al audit audit?? Ans! -t refers to the audit of a business concern underta"en independently by a professional ualified auditor. $uch an audit report is uite independent of the business concern by whom he he is appointed to audit. audit. 5. +hat +hat is fin final al aud audit it?? Ans! )inal audit is conducted by the statutory auditors after the close of the fina financ nciial peri perio od with ith a vie view to prepa repare re the fina financ nciial stat statem emen entts 6 audit report to be presented to the 7oard of Directors and to be filed with statutory authorities. 8. +hat +hat is ta' ta' aud audit it?? Ans! a &a' &a' audit refers to e'amining e'amining of an organisations or individuals individuals incomes or e'pe e'pens nses es and and clai claims ms of dedu deduct ctio ions ns or e'em e'empt ptio ions ns for for the the purp purpos osee of assessment of ta'. 3. +hat +hat is mana managem gement ent Audit Audit?? Ans! 9anagement audit is one of the techniues of management control. -t refers to the systematic e'amination of the activities of management at all levels of management . 1:.+hat do you mean by cost audit? Ans! Cost Audit means audit of cost records.-n other words it refers to detailes chec"ing and verification of correctness of cost accounts costing techniues and system. 11.+hat do you mean by performance audit? Ans! -n this type type of audit the auditor e'amines the growth of the organi;ation organi;ation in terms of production sales and profitability of the organi;ation.
1.+hat do you mean by audit note boo"? Ans! Audit note boo" is a note boo" which is maintained by the audit staff in which large variety of matters observed during the course of audit are recorded. 1#.$tate any two ob%ectives of audit note boo"? Ans! &wo ob%ectives of Audit
4. ,ive ,ive the meani meaning ng of e'tern e'ternal al audit audit?? Ans! -t refers to the audit of a business concern underta"en independently by a professional ualified auditor. $uch an audit report is uite independent of the business concern by whom he he is appointed to audit. audit. 5. +hat +hat is fin final al aud audit it?? Ans! )inal audit is conducted by the statutory auditors after the close of the fina financ nciial peri perio od with ith a vie view to prepa repare re the fina financ nciial stat statem emen entts 6 audit report to be presented to the 7oard of Directors and to be filed with statutory authorities. 8. +hat +hat is ta' ta' aud audit it?? Ans! a &a' &a' audit refers to e'amining e'amining of an organisations or individuals individuals incomes or e'pe e'pens nses es and and clai claims ms of dedu deduct ctio ions ns or e'em e'empt ptio ions ns for for the the purp purpos osee of assessment of ta'. 3. +hat +hat is mana managem gement ent Audit Audit?? Ans! 9anagement audit is one of the techniues of management control. -t refers to the systematic e'amination of the activities of management at all levels of management . 1:.+hat do you mean by cost audit? Ans! Cost Audit means audit of cost records.-n other words it refers to detailes chec"ing and verification of correctness of cost accounts costing techniues and system. 11.+hat do you mean by performance audit? Ans! -n this type type of audit the auditor e'amines the growth of the organi;ation organi;ation in terms of production sales and profitability of the organi;ation.
1.+hat do you mean by audit note boo"? Ans! Audit note boo" is a note boo" which is maintained by the audit staff in which large variety of matters observed during the course of audit are recorded. 1#.$tate any two ob%ectives of audit note boo"? Ans! &wo ob%ectives of Audit
•
-t helps the auditor to "now about the progress of audit wor" and the efficiency of his staff in audit wor".
1*.+hat do you mean by audit wor"ing papers? Ans! Audit wor"ing papers refers to the audit papers which records the audit evidence resulting from the audit wor" performed to provide support for the auditor2s opinion including the representation! r epresentation! 10.$tate any two purposes of audit wor"ing papers? Ans! &he two purposes of audit wor"ing papers are! &hey &hey show show the the e'te e'tent nt of adhe adhere renc ncee to acco accoun unti ting ng prin princi cipl ples es and and • •
accounting standards. &hey can be used as a permanent of uic" preparation of audit report.
14.Define Audit /rogram? Ans! An Audit Audit program is an outline of all procedures to be followed in order to arrive at option concerning the client2s financial financial statements. 15.$tate the types of audit program? Ans! &he types types of audit audit program are! are! =i> =i> )i'ed or or ri rigid au audit pro prog gram ramme. =ii =ii> )le' )le'ib ible le audit udit prog rogram ramme. 18.+hat do you mean by fi'ed audit program? Ans! Ans! ,ene ,enera rall lly y audi audito torr prep prepar ares es audi auditt prog progra ram m on the the sugg sugges esti tion onss and and recommendation of assistant staffs but such program cannot be changed during the course of audit which is "nown as fi'ed audit 13.+hat do you mean by )le'ible Audit Audit /rogram? Ans! An audit program which can be changed as per the need time nature of business and auditing standard standard is "nown as fle'ible fle'ible audit program. :.+hat do you mean by internal audit? Ans! -nternal audit is a review of operations and records underta"en within a business by specially assigned assigned staff. 1. +hat is interim audit?
Ans! this audit is conducted in between two final audits. ,enerally this audit is done in case of %oint $toc" Company which are paying interim dividend. At the same time there are certain companies which close their accounts over in 4 months such companies also prefer interim audit! g!@ commercial ban" their interim audit enables the business enterprise to publish interim report. 1.+hat is cash audit? Ans! -t involves verification of cash transactions. All cash entries for a given period have to be verified with cash vouchers. &he report is submitted regarding cash receipts and payments. .+hat is partial audit? Ans! when audit is carried out in respect of only a part of boo"s of accounts it becomes partial audit. -f the proprietor suspects fraud wants to investigate certain facts and figures he may prefer partial audit.
!ig"t Marks #uestions:
B1. 7riefly e'plain the different types of frauds? Ans. )rauds is an act done intentionally to get an advantage or gain. rrors are unintentional whereas frauds are intentional errors. &ype of frauds following type of frauds can occur in the boo"s of account! =i> 9isappropriation of goods! +hen any employee or any outsider of the company steels the goods =raw material semi@finished product or finished goods> this type of fraud occurs. =ii>9isappropriation of cash! similarly cash can also be misappropriated. &he auditor has to verify the loss of cash by@
1. Chec"ing receipts of the business . Cash used by the firm and #. 7alance cash in hand =iii>)alsification of 7oo"s@-ntentionally writing the boo"s of account in a wrong way is "nown as falsification of the boo"s of account. &his type of fraud is done in the boo"s of account with the involvement is interested in showing a picture of the state of affairs of the company in such a way that suits them. &here may be a hidden purpose behind it. &his type of act can be done for following purposes!@ 1. &o show less profit! &his can be done by showing less receipt or by showing less e'pense. &his ob%ect may be to save ta' or to avoid ta"eover bids. . &o show more profit! this can be done by showing more receipts or by showing fewer e'penses. &his can be done in order to attract more investments loans. (r to attract the shareholders etc. B. +rite differences between auditing and accounts. ( 'plain difference between boo" "eeping and accountancy?
$l.no /oints difference
of Accounting
Auditing
1
9eaning
-t is concerned with recording -t is concerned with of business transactions verification of accounts systematically prepared by the accountant
(b%ective
&he ob%ective is to "now the &he ob%ective is to verify financial result of the business the truth and fairness of the accounts
#
$cope
&he scope of accounting is &he auditing is concerned limited to the preparation of with chec"ing of accounts. financial statements
*
$tatus
Accountant is an employee of Am auditor is an the organi;ation independent auditor who does not belong to the
organi;ation 0
7enefit
Accountant gets salary for his Auditor gets fees for his wor" wor" "nown as audit fees.
4
/eriod of wor"
Accounting wor" is carried -t is done usually at the end throughout the year. of the year.
5
Bualification
&here is no formal &o become a company ualification for accounting auditor one should be a wor" ualified chartered accountant.
8
Dependence
Accountancy is not dependent Auditing can be started only on auditing after accounting ends and it is dependent on accounting
3
Accountancy is a constructive Auditing is an analytical wor" wor"
1:
Accountability
&he accountant is accountable to management
Auditor is accountable to shareholders.
B#. Distinguish between internal audit and independent audit. =dec :::> -nternal Audit
-ndependent Audit or 'ternal audit
-t is a type of audit conducted by the &his is a type of audit performed by the own staff of the organi;ation auditors outside the business specifically assigned for that purpose. organi;ations. &his audit wor" is carried continuously throughout the year
out &his audit is wor" happens once at the end of the year
-n this type of audit thorough &hey are no way related to e'aminations of the accounting preparation of accounts or transactions as well as the system management of organi;ation according to which transactions are recorded are conducted.
the the
-t is done to verify the reliability and &his audit is conducted in order to fulfill authenticity of the financial accounting the legal reuirement of the business. and other records presented to the management.
B*. 7riefly state the advantages and disadvantages of interim audit? Ans: Advantages Of Interim Audit
1. -nterim audit is good where the publication of the interim figure is necessary. . &hen final audit can be completed very soon if there has been an interim audit. #. rrors and frauds can be detected more uic"ly during the final audit. *. &here is moral chec" on the staff of the client as the accounts are chec"ed say after three or si' months in the interim audit. Disadvantages Of Interim Audit
1. )igures may be altered in the accounts which have already been audited. . -t will mean that the audit staff will have to prepare notes when they finish the interim audit. #. -nterim audit is an additional wor" because final audit must be conducted after conducting this audit too. B0.write down the differences between continuous and interim audit? Ans! Differences between continuous and interim audit are as below! /oints of -nterim audit distinction
Continuous audit
1
$ee
&he fee of interim audit is low.
%egal Position
&he interim audit compulsory by law.
is
&he fee of continuous audit is high.
not Continuous audit is compulsory by law.
#
Objecties
-nterim audit chec"s and Continuous audit shows the true determines the profit or loss for and fair view of the financial the particular period. statement.
*
&cale Business
0
&cope
-n interim audit there is no -n continuous audit there is a detailed chec"ing of accounts. detailed chec"ing of accounting records.
4
'erification
erification of assets and -n continuous audit it is done liabilities are done when when balance sheet is prepared. interim audit is conducted.
5
Period Audit
8
(nterest Of -n case of interim audit third -n case of continuous audit third party may be interested. T"e T"ird party has no interest. Party
3
Trial Balance /reparation of trial balance is -t is not compulsory compulsory in interim audit. continuous audit.
1:
)eport
Of -nterim audit is conducted for Continuous audit is conducted the both large scale and small only for large scale business. scale business.
Of -nterim audit period is upto the particular date.
Continuous audit period is for one whole year
&he report of interim audit is Continuous audit report is presented at the end of the presented at the end of the interim audit. accounting period.
B4. Distinguish between continuous audit and internal audit? Sl.
Continuous Audit
Internal Audit
n o
1
in
Chec"ing of AEC is done by an -t is conducted by staff employees auditor of concern specially appointed for
purpose.
-ts ob%ective is to findout truthness -ts ob%ect is to ensure that internal and fairness of financial chec"s and accounting system are statementEoperating result of adeuate and effective. business.
#
Auditor must be ualified chartered Auditor need not be accountant chartered accountant.
*
&he auditor conducting continuous $taff conducting internal audit is not audit is independent of management independent of management
0
-t is done by e'ternal auditor
4
Audit report needs to be submitted
5
Auditor is responsible to share Auditor is responsible to internal holders staff
ualified
-t is done by internal staff
B5. Distinguish between continuous audit and )inal audit? Ans! &he difference between continuous audit and final or annual audit are as below! &l*no Points distinction
of +ontinuous audit
Annual or final audit
1
Period
Continuous audit remains )inal audit is done at the continue for whole year. end of the year
&cope
-n case of continuous audit -n case of final audit accounts are chec"ed in detail. detailed chec"ing is not made as compared to continuous audit.
#
+"ances Of $raud
-n continuous audit chances of -n case of final accounts errors and frauds are reduced. chances of fraud and
errors high. *
'isits
-n case of continuous audit the -n final audit the auditor auditor ma"es many visits. ma"es one visit in a year.
0
,iidend
&o declare the interim dividend Due to final audit only and final dividend continuous final dividend is declared. audit is very useful.
4
&cale Of Business
Continuous audit is desirable )inal audit is very for large si;e of business. desirable for small business.
5
+"ecking
Continuous audit has strong -n case of final audit chec" on the employees. there is a less chec" on the employees.
8
$ee
)ee of continuous audit is high )inal audit fee is low as as compared to the final audit. compared to the continuous audit
3
Time Of +onduct
Continuous audit can be )inal audit is conducted conducted when entries and after the completion of records are being prepared. entries and record.
1:
&uitability
-n case of poor internal control -n case of effective system continuous audit system control system final audit is suitable. may be conducted.
11
Proper Planing
-n case of continuous audit -n case of final audit planning is effective because effective planning is not accounts are prepared in time. made because accounts are prepared late.
B8. Distinguish between internal and e'ternal audit? Ans: Diference between internal audit or auditor and external audit or auditor
1. Appointment :Internal auditor : Internal auditor is appointed by the management o the
company. External auditor : External auditor is appointed by the shareholders o the company. . !egal "osition :Internal auditor : !egally internal audit is not compulsory. External auditor : External audit is compulsory by law. #. $tatus % Auditor :Internal auditor : Internal auditor is employee o the company. External auditor : External auditor is an independent person. &. 'uali(cation :Internal auditor : )or internal auditor any speci(c *uali(cation is not compulsory. External auditor : )or external auditor speci(c *uali(cation is compulsory. +. $ubmission % ,eport :Internal auditor : Internal auditor has not to submit any report. External auditor : External auditor submits report to the shareholders. . )ixation % ,emuneration :Internal auditor : Internal auditor remuneration is (xed by the management o the company. External auditor : External auditor remuneration is (xed by the shareholders o the company. . /ame % ,emuneration :Internal auditor : Internal auditor recei0es salary. External auditor : External auditor recei0es audit ee. . /ature % 2hec3ing :Internal auditor : Internal auditor chec3s all the transactions. External auditor : External auditor may apply test chec3. 4. ,ight % Attending 5eeting :Internal auditor : Internal auditor has no right to attend the meetings o the company6s shareholders. External auditor : External auditor has a right to attend the meetings. 17. 8inds % Audit :Internal auditor : Internal audit is 3ind o continuous audit. External auditor : External audit is conducted ater the preparation o (nal accounts. 11. 9uidance :-
Internal auditor : Internal auditor gi0es suggestions to the management or the betterment o the business. External auditor : External auditor has no need to gi0e suggestions unless he is as3ed. 1. Duties :Internal auditor : Internal auditor primary duty is to (nd the rauds and errors. External auditor : External auditor has to report about (nal accounts whether these are true or alse. 1#. ,emo0al :Internal auditor : Internal auditor can remo0ed by the management. External auditor : External auditor can be remo0ed by the share holders. 1&. 2ase % 5isconduct :Internal auditor : Internal auditor cannot be prosecuted or proessional misconduct except 2.A;. External auditor : External auditor can be prosecuted.
B3 ,ive the meaning of audit wor"ing papers? +hat are is contents? Ans! Audit wor"ing papers are those papers which contain essential facts about accounts which are being audited. -ts defined as the file of analysis summaries comments and correspondence build up by the auditor during the course of audit. &he auditor maintains papers as supporting evidence to the audit wor". &he institute of chartered accountants of -ndia states that “an auditor is e'pected to maintain evidence of wor" done by him and his staff”. Usually audit wor"ing papers contains a copy of the trial balances schedule of debtors and creditors reconciliation statements important correspondence etc. Contents of Audit wor"ing papers! 1. Audit programme . Audit noteboo" #. Audit appointment letter *. Correspondence done in relation to audit programme 0. Fist of debitors and creditors
4. (pening and closing trail balance 5. A copy of the audit report 8. ules of organi;ation memorandum of association articles of association prospectus. tc. 3. Fist of cost vouchers 1:.Documents relating to depreciation
B.1:. e'plain audit wor"ing papers and audit files as vital tools of an audit wor"? Ans! Audit wor"ing papers are those papers which contain essential facts about accounts which are being audited. -ts defined as the file of analysis summaries comments and correspondence build up by the auditor during the course of audit. &he auditor maintains papers as supporting evidence to the audit wor". &he institute of chartered accountants of -ndia states that “an auditor is e'pected to maintain evidence of wor" done by him and his staff”. Usually audit wor"ing papers contains a copy of the trial balances schedule of debtors and creditors reconciliation statements important correspondence etc. Purpose of maintaining working paper:
1. &hey show the e'tent to which accounting principles and auditing standards have adhered to. . &hey provide the reuired support for the auditors report. #. &hey also reveal the efficiency with which the audit wor" was done. *. &hey can be used as evidence in the court to defend himself against negligence in his duty. 0. &hey help the auditor in finali;ing his report uic"ly. 4. &hey help the auditor to understand the efficiency of the accounting system internal chec" system etc. B.11. state the ob%ective of cost audit?
And! the following are the ob%ectives of cost audit! a> &o establish the accuracy of the costing data. &his is done by verifying the arithmetical accuracy of cost accounting entries in the boo"s of accounts. b> &o ascertain whether the costing records have been maintained properly or not. c> &o find out whether the costing principles by management are followed in the preparation of cost accounts or not. d> &o confirm whether the cost statements are drawn from costing records and e'hibit true and fair view of cost of production. e> &o verify whether each iten of e'penditure entered in costing records have been properly incurred or not. f> &o print out the inefficiencies in the area of material labour and machines and to assist the management to evaluate suitable measures for controlling them. g> &o chec"up the general wor"ing of the costing department and to suggest ways and means for its smooth wor"ing. B.1 state the ob%ectives of management audit? Ans! Objectives Of Management Audit Main objectives of management audit are as follows: 1. &o formulate the goal of an organi;ation. . &o ensure the fulfillment of goals. #. &o help management to improve the activities and procedures. *. &o help all the members of management to ma"e effective discharge of their duties. 0. &o help in the improvement of profits. B1#. +rite a note on audit program?
And! Meaning Of Audit Program An auditor prepares a plan after the selection of senior and %unior staffs allocating the %obs to them mentioning when to start how to do the wor" etc. &his plan is "nown as audit program. An auditor should include all the procedures in written form ob%ectives of each sector and all the directions which are to be given to the staffs which helps to control their wor"s and helps to implement such programs into action. )ollowing are the facts regarding meaning of audit program! G Audit program is a detailed wor" plan which includes the time of doing wor" and how to do the wor"s. G Audit program includes audit procedures G Audit program estimates the duration to complete the audit tas" G $enior staffs prepare audit program to %unior staffs on the basis of nature of business G ,enerally accepted points are included in the audit program G Hunior staffs put tic" mar"s in the completed tas"s B.1*! Distinguish between management audit and cost audit? Ans! the main differences between management audit and cost audit are as under! $l.no
Cost audit
9anagement audit
1
-t is the verification of cost accounting -t is the investigation into the ob%ectives records to measure the internal and actions of the management to efficiency of the business. measure the performance of the management.
-t is generally a programme of one year
#
-t has to be conducted only by ualified -t can be conducted by any independent cost accountants or CAs person having good "nowledge of management priciples an practices
-t may cover more than one year
*
Cost audit is made compulsory for -t is not compulsory for any company companies engaged in production processing manufacturing or mining activities
0
&here is a time limit fi'ed by the any $tatue for the submission statue for the submission of cost audit management audit report. report
of
&ection - + ./0 marks #uestions and answers1
B1. 'plain the types of audit? Ans! Classification of audit or types of audit Audit can be classified on different types! = 1> Classification of Audit on the basis of (rgani;ation structure. = >Classification of audit on the basis of Degree of independence of the auditor = #> Classification of Audit on the basis of method or approach to audit wor" or on the basis of e'tent of wor" to be performed or on the basis of conduct of audit. =*> Classification of audit on the basis specific ob%ectives Classification on the basis of organi;ation or organi;ation structure ! @ (n the basis of organi;ation structure audit may be classified into three types. &hey are! = 1>$tatutory audit = > ,overnment audit = #> /rivate Audit $tatutory Audit! @ $tatutory audit refers to the audit of accounts of a business enterprises carried out compulsorily under the provisions of a statute or law. -t is is the audit carried out compulsorily under any statute any law. . ,overnment audit! @ ,overnment audit refers to the audit of accounts of ,overnment departments and offices ,overnment companies and statutory or public corporations. #./rivate audit or oluntary audit ! @ +here an audit is not compulsory under any statute but is underta"en by the owners voluntarily to get the benefit of audit the audit is called private audit. -n other words private audit refers to the audit of accounts of private enterprises such as a sole trading concerns partnership firms and other individuals and institutions. Classification of audit on the basis of Degree of -ndependence!@ 1. -nternal audit . 'ternal audit -nternal audit! @-nternal audit is a continuous and systematic review of the accounting financial and other operations of a concern by the staff specially appointed for the purpose. -n other words it is the audit of accounts by the staff specially appointed for the purpose. . 'ternal Audit. Audit conducted by independent ualified person and e'amines the boo"s of accounts and report to the management.
(n the basis of Conduct of audit or methods or approach to audit wor" 1. Continuous Audit. Continuous audit is one where the auditor2s staff is occupied continuously on the accounts whole the year round and performs interim audit. -t is an audit under which detailed e'amination of the boo"s of accounts is conducted continuously throughout the year. -t is continuous review of the accounts of the organi;ation. -t is generally applicable to ban"ing company and insurance company. . )inal Audit or Annual or periodical audit -t is an audit carried out after the preparation of financial statement. -t is an audit where the auditor ta"es up his wor" of chec"ing the boo"s of accounts only at the end of the accounting year. -n this case the audit wor" is commenced and completed in a single uninterrupted session. #. -nterim Audit. -t is an audit conducted between two annual audits. -n other words it is the audit conducted in the middle of the financial year. -t is carried out for some specific purpose for declaring interim dividend ascertaining interim profit. *.
7alance sheet audit ! @ 7alance sheet audit is a type audit which concentrates mainly on the verification of the items in the balance sheet such as capital reserves profit and loss account balance liabilities and provisions and all the assets of the business.
0. (ccasional Audit!@ An occasional audit is an audit which is conducted once a while whenever the need arises. -n other words it is a "ind of audit which is not conducted on regular basis but is conducted for a special event time or purpose. 4. Complete Audit ! @ Complete audit is a "ind of audit under which all the records and boo"s of accounts are audited by an auditor. 5. /artial Audit! @ -t is a "ind of audit the scope of which is limited one. -t is carried out in respect of only a part of the boo"s of accounts of a business for a part of whole of the period. Classification of audit on the basis of specific ob%ectives! @
1. Cash Audit! @ -t is a type of partial audit which is underta"en for only cash receipts and cash payment. . $pecial Audit!@ -t is a "ind of audit with some special ob%ect in view. -t is a fact finding enuiry. #. (perational Audit! @ -t is an efficient e'amination of the various operations of the different functional area of business. *. /roprietary Audit! @ -t is an audit in which various actions and decisions are e'amined to find out whether in public interest and whether they meet the standard of conduct. 0. fficient Audit! @ -t is an evaluation of overall efficiency and performance of an organi;ation. 4. &a' Audit! @ -t means audit for ta' purpose. Audit reuired to be carried out of income ta' act of 1341. -t is conducted by certified Chartered Accountant. 5. Cost Audit. -t is a thorough e'amination of the cost accounting records of a company by a cost auditor to ensure that they are accurate and they also follow to the cost accounting principles procedures and plans. 8. 9anagement Audit. -t is the critical e'amination scrutiny and appraisal of plans policies procedures ob%ectives means and operational area of the organi;ation. -t is the audit of managerial actions and decisions. -t is the audit of activities of various level of the managers. 3. $ocial Audit! @ $ocial audit is a systematic study and evaluation of a business enterprise2s social performance as distinguished from its economic performance. $ocial audit is intended to evaluate the social performance or social contribution of a business organi;ation. &-$C( firstly adopted social audit.
B. +hat is continuous audit and final audit? (r e'plain continuous audit is a double edged weapon. +hat are their merits and demerits? Ans! Continuous Audit
Continuous audit or a detailed audit is an audit which involves a detailed e'amination of boo"s of account at regular intervals i.e. one month or three months. &he auditor visits clients at regularintervals during the financial year and chec"s each and every transaction. At the end of the year auditor chec"s the profit and loss account and thebalance sheet. A continuous audit is not of much use to small firm as its accounts can be audited at the end of the financial year without much loss of time. Advantages Of Continuous Audit 1. Easy to quic discovery of errors
rrors and frauds can be discovered easily and uic"ly as the auditor chec"s the accounts atregular intervals and in detail. As a auditor visits the client after a month or two or so on the number of transactions will be small and hence the errors will be detected easily and uic"ly. !. "no#$edge of tec%nica$ detai$s
$ince the auditor remains more in touch with the business sEhe is in a position to "now its technical details and hence can be of great help to herEhis clients by ma"ing valuable suggestions. &. 'uic (resentation of accounts
As most of the chec"ing wor"s are already performed during the year the final audited accounts can be presented to the shareholders soon after the close of the financial year at annual general meeting. ). "ee(s t%e c$ient*s staff a$ert
As the auditor visits the clients at regular intervals the cler"s are very regular in "eeping the accounts up@to@date. &hey will see that there is no in accuracy or frauds as it would be detected by the auditor at the ne't visit. +. Mora$ c%ec on t%e c$ient*s staff
-f the auditor pays surprise visit it will have a considerable moral chec" on the cler"s preparing the accounts as they do not "now when the auditor may pay a
visit to chec". 9oral chec" will be more valuable to ma"e staff alert and careful. Disadvantages Of Continuous Audit
-n spite of the above@mentioned advantages of a continuous audit there are certain drawbac"s of such and audit which are as follows! /* Alteration of figures
)igures in the boo"s of account which have already been chec"ed by the auditor at previous visit may be altered by a dishonest cler" and the frauds may be committed. 2* ,isturbance of client3s work
&he freuent visits by the auditor may disturb the wor" if the client and cause inconvenience to the latter. 4* !5pensie
Continuous audit is an e'pensive system of audit because an auditor devote more time. $o company needs to pay more amount as the remunerations of an auditor. 6* Queries may remain outstanding
&he audit cler" may lose the thread of wor" and the ueries which sEhe wanted to ma"e may remain outstanding as there might be a long interval between two visits.
7* !5tensie note taking
'tensive note ta"ing may be necessary in order to avoid any alteration in the figures after the audit. B#. +hat are the steps to be underta"en by the auditor before starting the new audit?
Ans! An auditor must prepare well before he actually commences a new audit. Ie has to ta"e certain steps or bear in mind certain considerations before commencing a new audit. &hese steps are "nown as preliminary steps or general steps. &he following are the important preliminary or general steps to be ta"en by an auditor in all types of concerns before the commencement of a new audit! -. (btaining letter of appointment. Auditor should satisfy himself that he has properly appointed. --. Jnowing the scope of his studies. ---. Ascertaining the nature of the business underta"en by the client enterprise. -. Jnowledge of the organi;ational structure of the client business. /attern of authority and responsibility are revealed through the organi;ational structure. . (btaining the list of principal officers of the client business. -. Jnowledge of internal chec" internal control and internal audit --. Jnowledge of system of accounting of the client business. ---. Fist of boo"s maintained in the organi;ation. -K. Detailed study of important documents of the organi;ation. K. $tudy of prospectus preliminary contracts etc of the organi;ation. K-. $tudy of the previous year financial statements. K--. nuiry about the reason for the change of the auditor. K---. ,iving instructions to the client. a> &he boo"s should be closed before the audit. b> oucher should arranged date vise. c> $chedules should be "ept for ready reference such as schedules of debtors and creditors list of bad and doubtful debts schedule of investment schedule of depreciation etc..
K-. Division of audit wor" among the auditors. K. /reparation of audit program. B* give the meaning of audit note boo". +hat are the contents and merits ? Ans! Audit ,ote -oo A note boo" which is prepared by the audit staff to note down all the uncleared ueries which sEhe may find in the course of audit and reuires further clarification and e'planation is "nown as audit note boo". Audit note boo" contains information regarding day@to@day wor" performed by the audit staff on any particular date.
Generally the following information is incorporated in audit note book: 1. &he nature of the business carried on and the important documents relating to the constitution of the business i.e. 9emorandum (f Association Articles (f Association = in the case of limited companies> and /artnership Deed = in the case of partnership firm> and other legal documents. . &he name of the client and the audit year. #. A list of boo"s of accounts in use. *.
1. outine ueries not cleared i.e. missing receipts and vouchers etc. . Details of mista"es and errors discovered. #. &he points raised during the course of audit to which the attention of the auditor must be drawn i.e. failure of the company to comply with the provisions of the Companies Act or of the 9emorandum of Association and other legal reuirements. *. 'tracts from minutes boo"s and contracts and other correspondence with various government agencies financial institutions debtors creditors etc. 0. &he points to be incorporate in the audit report. 4. &he points which needs further e'planation and clarification e.g. a change in the basis of valuation of finished stoc"s or in the computation of depreciation etc. 5. Date of commencement and completion of the audit. 9erits of audit noteboo" &he ma%or points which are detected or found during the course of audit can be noted in audit note boo". $o an auditor can get the following benefits by maintaining audit note boo" properly! /* 9o 9eed To )epeat Task
All the facts related to audit are noted down in the audit note boo". +hile auditing the boo"s of accounts of same organi;ation auditor does not need to do the same wor". $o sEhe can save time and cost. 2* elps To 8et +learance Against T"e +ase O$ Misfeasance And 9egligence
-f any person files the cases against the auditor charging misfeasance and negligence an auditor can present audit note boo" in the court or concerned authority and can get clearance against such cases. 4* elps To )efer (n $uture
Auditor can refer such noted point in the future which helps to continue the wor" of audit in future to the auditor. B0. +hat are the merits and limitations of audit? Ans! Auditing has become a compulsory tas" in the business organi;ation. All the organi;ations li"e business social industries and trading organi;ations ma"e audit of boo"s of accounts.
An auditorLs main duty is to detect errors and frauds preventing such errors and frauds and ta"ing care to avoid such frauds. &hus even though all organi;ations do not have compulsion to audit they ma"e audit of all the boo"s of accounts. 2* Audit elps To Maintain Account )egularly
An auditor raises uestions if accounts are not maintained properly. $o audit gives moral pressure on maintaining accounts regularly. 4* Audit elps To 8et +ompensation
-f there is any loss in the property of business insurance company provides compensation on the basis of audited statement of valuation made my the auditor. $o it helps to get compensation. 6* Audit elps To Obtain %oan
$pecially financial institutions provide loan on the basis of audited statements. A business organi;ation may obtain loan considering the audited statement of last five years. $o an organi;ation should ma"e audit compulsory to obtain loan. 7* Audit $acilitates T"e &ale Of Business
aluation of assets is made by the auditor. (n the basis of valuation of assets and liabilities businessman can sell his business. -t helps to determine the price of business. 0* Audit elps To Assess Ta5
&a' authorities assess ta'es on the basis of profit calculated by the auditor. -n the same way sales ta' authority calculates sales ta' on the basis of sales shown in the audited statement. ;* Audit $acilitates To +ompare
An auditor instructs an accountant in the same way which helps to compare boo"s of accounts of current year with the accounting of the previous year. $o comparing the accounts of current with previous years helps to detect errors and frauds. <* Audit elps To Adjust Account Of ,eceased Partner
aluation of all the assets and liabilities of the business is made by the auditor while auditing boo"s of account. $uch valuation helps to clear the amount of deceased partner. =* Audit elps To Present A Proof
-f any case is filed against the auditor regarding negligence auditor can present audited report as a proof to settle such case. $o it helps to present proof to settle such cases. />* Audit Proides (nformation About Profit Or %oss
A businessman wants to "now profit or loss of his business after a certain period of time. $o the owner of the business can get information about profit or loss after auditing the boo"s of accounts. //* Audit elps To Prepare $uture Plan
All the audited statements remain true and correct. $uch true and correct account helps to prepare for the future plans. /2* Audit elps To (ncrease 8oodwill
Auditing shows the profitability and financial position of an organi;ation which creates faith of public over the business. &hus auditing helps to increase goodwill of an organi;ation. imitations of Auditing
1. All transactions cannot be c"ecked -t is not possible for an auditor to
chec" each and every transactionM he has to chec" them on sample basis. . !idence is not conclusie Audit evidence is not conclusive in nature the
confirmation of debtors is not conclusive evidence that all amount will be collected the conclusions are persuasive rather than conclusive. #. 9ot easy to detect some frauds - -t2s not easy for an auditor to detect the
deeply laid frauds which involves acts designed to conceal them such as forgery false e'planation and not recording transaction and so on. &. Audit cannot assure about profitability or efficiency of management
- ven though the accounts are audited it doesn2t that the user can ta"e granted the future profitability or prospects of concern as audit don2t comment on efficiency of the management. +. )ely on e5perts - &he auditor has to rely on e'perts li"e lawyers engineers
valuers etc. for estimation of contingent liability and valuation of fi'ed assets. B4. 'plain the essentials and ob%ects of audit wor"ing papers? Ans! Audit ?orking Papers: Audit wor"ing papers are those papers which contain essential facts about accounts which are being audited. -ts defined as the file of analysis summaries comments and correspondence build up by the auditor during the course of audit. &he auditor maintains papers as supporting evidence to the audit wor". &he institute of chartered accountants of -ndia states that “an auditor is e'pected to maintain evidence of wor" done by him and his staff”. Usually audit wor"ing papers contains a copy of the trial balances schedule of debtors and creditors reconciliation statements important correspondence etc. Purpose of maintaining working paper:
1. &hey show the e'tent to which accounting principles and auditing standards have adhered to.
. &hey provide the reuired support for the auditors report. #. &hey also reveal the efficiency with which the audit wor" was done. *. &hey can be used as evidence in the court to defend himself against negligence in his duty. 0. &hey help the auditor in finali;ing his report uic"ly. 4. &hey help the auditor to understand the efficiency of the accounting system internal chec" system etc. +or"ing papers should be clear complete and contain the necessary information so that they may be of ma'imum utility. &hey should be properly organi;ed documented and signed. -n this regard its said hat “an auditor is often %udged by the uality of the wor"ing paper prepared by him under his guidance”. wor"ing papers are confidential documents hence he should not disclose the facts to others. Doing so results in professional misconduct. +or"ing papers should be preserved properly because they are important documents. B5. +hat is audit programme? what are its merits and demerits? Ans! Meaning Of Audit Program An auditor prepares a plan after the selection of senior and %unior staffs allocating the %obs to them mentioning when to start how to do the wor" etc. &his plan is "nown as audit program. An auditor should include all the procedures in written form ob%ectives of each sector and all the directions which are to be given to the staffs which helps to control their wor"s and helps to implement such programs into action. )ollowing are the facts regarding meaning of audit program! G Audit program is a detailed wor" plan which includes the time of doing wor" and how to do the wor"s. G Audit program includes audit procedures G Audit program estimates the duration to complete the audit tas"
G $enior staffs prepare audit program to %unior staffs on the basis of nature of business G ,enerally accepted points are included in the audit program G Hunior staffs put tic" mar"s in the completed tas"s Merits of audit program /* Audit Program &aes Time And %abor
All the directions which are to be given to assistant are clearly stated in the audit program which helps to complete the tas" in time. Audit program also helps to conduct the audit of the business in coming years which saves time and labor. 2* Audit Program (ncreases !fficiency
All the responsibilities of auditor are divided among the number of staffs considering their s"ill and intelligence which helps to complete the wor" of audit properly. $imilarly the wor"s are divided among the assistant staffs on the basis of their caliber which helps to increase efficiency. 4* Audit Program elps To +ontrol
An auditor can compare the wor" performed by the assistants on the basis of audit program which helps to control their wor" if there are any deficiencies. 6* Audit Program elps To Maintain @niformity
+or"s are divided among the assistant staffsM so there is no any chance of leaving non audited statements. -f the wor" of audit is performed on the basis of audit program every year uniformity can be maintained in the wor" of audit which helps to compare the report of various years. 7* Audit Program elps To Make )esponsible
+or" of assistant is clearly defined in the audit program and assistant puts signature in the completed wor". $o if any wor" is left out assistant can be made liable for such wor". 0* Audit Program elps To Maintain +ontinuity
Audit program clearly shows the completed tas" and procedures of doing wor". $o if any staff leaves the %ob or remains absent new staff can easily continue the %ob of audit. ;* Audit Program elps To Present As Proof
Auditor can present audit program as proof if heEshe has been accused of misfeasance or negligence and can get clearance from such accusation. Audit program can be presented in the court also. Demerits of audit programme /* Audit Program arasses To &taffs
All the staffs should perform tas" within the limitation given in audit program. $o staffs can not use their "nowledge and caliber which harasses to them. 2* Possibility O$ Being @nsuitable
$taffs of the client get information about the audit program in advance which increases the chance of committing frauds. $imilarly it harasses the audit staffs so they perform the wor" of audit carelessly which also increases the chance of committing frauds. 6* Audit Program (s @nsuitable To &mall +oncern
$mall concern has less transactions and wor" of audit can be completed in short period of time. $oaudit program is not essential to audit such concern. 7* !5clusion Of Problems Of 9ew Tec"nology
B8. +hat are the advantages and disadvantages of management audit?
Ans: Advantages of management audit! 1. 9anagement audit provides information about strong and wea" points of the management after reviewing policies and programs. $o it helps to the smooth operation of an organi;ation. . 9anagement audit provides suggestions to the management which helps to maintain effective management. #. 9anagement audit helps the management providing suggestions to attain goal of an organi;ation. Disadvantages Of Management Audit
1. 9anagement auditor cannot understand the practical problems. $o the suggestions provided by them is theoretical but not practical. . $cope of management audit is vague. $o it does not help to achieve specific goal. #. ,enerally management gives more emphasis on maintaining boo"s of accounts rather than concentrating on other factors. $o it consumes time of farsighted management.
Unit -<&
B. +rite the meaning of internal chec"? Ans. -nternal chec" means a system under which the wor" connecting with carrying out and recoding of transactions is allocated among the various members of the staff so that errors and frauds are either prevented altogether or if committed are rendered capable of early detection by automatic operation of the system unless all the cler"s %oin hands in defrauding their employees. B#.+rite any two ob%ectives of internal chec"? Ans. &he ob%ectives of internal chec" are! =i>
&o detect errors and frauds easily and uic"ly.
=ii>
&o prevent misappropriation of goods or cash by any cler" etc.
=iii>
&o prepare final accounts with ease and efficiency as an efficient system can ma"e accounts more reliable.
B*. +rite ob%ects of internal control? Ans. &he ob%ects of internal control are! =i>
Assets /rotection! the assets are the bac"bone of any business. &hese are in the custody of some specific officers of the business. &he internal control system chec"s the valuation and protects the assets of the business.
ii;
/revention of errors! the purpose of internal control is to prevent errors.
=iii>
Accurate record! the main ob%ect of internal control is to maintain all records and transactions of business according to the generally accepted accounting principle.
B0. Define internal chec"? Ans.According to /rof.F..Dic"see defines internal chec" as” A an arrangement of the accounting routine that errors and frauds are automatically prevented or discovered by the very operation of the boo"@"eeping itself.” B4. 9ention any two principles of internal chec"? Ans. &he two principles of internal chec" are! =i>
&he management can determine the total amount of wor". &he whole wor" is divided among departments. &he heads of such department are responsible for the completion of wor" according to time table.
=ii>
Coordination is the principle of internal chec". All departmental managers are bound to coordinate with other in order to achieve organi;ation ob%ectives. -nternal chec" determines the degree of coordination among the managers.
B5. +hat are the methods of evaluating internal control? Ans. &here are two methods of evaluating internal control! =i>
-nternal chec"! is an arrangement of duties allocated in such a way that the wor" of one employee is automatically chec"ed by another.
=ii>
-nternal audit! is an evaluation and analysis of the business operation conducted by the internal staff.
B8write any two merits of internal chec"? Ans. &he two merits of internal chec" are! =i>
-t is very easy and convenient
=ii>
-t is uite easy to detect and prevent locating of errors and frauds.
B3. +rite any two demerits of internal chec"? Ans. &he two demerits of internal chec" are! =i>
-t is an e'pensive system for a small scale concern and hence it cannot afford in all divisions of organi;ation.
=ii>
&he auditor2s wor" may become very difficult if the system is defective and unorgani;ed.
B1:. +hat do you mean by internal audit? Ans. -nternal audit is a review of operations and records underta"en within a business by specially assigned staff. -t is an evaluation and analysis of the business operation conducted by the internal audit staff. -t is the overall system of internal control established in an organi;ation.
B11. +rite any two differences between internal chec" and internal auditing? Ans. &he two differences between internal chec" and internal auditing are! Sl.no
Internal check
Internal audit
1
-nternal chec" means separation of tas"s and divisions of duties
-nternal audit means continuous audit by the employees
-nternal chec" is applicable throughout the year.
-nternal audit is may not be conducted throughout the year.
