Questions and Answers
What is one of the primary roles of management auditors?
The statutory auditor is required to examine the policies of management.
False
What should a team of management auditors possess to conduct an effective audit?
Expertise in various fields of management and cooperation from top-level management.
The management audit reveals irregularities and defects in the ________ of management.
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Which of the following is NOT a quality of a management auditor?
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What does the management auditor's report include?
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What is the meaning of the word 'audit'?
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What are the main objectives of auditing?
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Which of the following is not a subsidiary objective of auditing?
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What is an interim audit?
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Who can be appointed as an auditor of a limited company?
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The auditor's primary role is to manage the financial affairs of the business.
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Match the type of audit with their descriptions.
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An auditor can be removed without special resolutions.
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What is the consequence of misstatement in a prospectus by an auditor?
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What is tax audit?
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What is the punishment for knowingly providing false information during an audit?
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What does an audit programme represent?
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What is the purpose of an audit note book?
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Match the following terms with their definitions:
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Internal checks and internal audits are the same.
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An audit note book is maintained by audit staff to note errors, doubtful queries, and __________.
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What are the objectives of internal control?
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What should be done with cash receipts immediately upon receipt?
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What is the main aim of vouching the purchase book?
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Duplicate invoices must be entered in the purchase book if original invoices have already been recorded.
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Which items must an auditor verify while vouching purchase returns? (Select all that apply)
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What should be done with sales made in the current year?
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The auditor should not check cancelled sales invoices.
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What must goods sent on consignment be considered until sold?
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What are the key features of an investigation? (Select all that apply)
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Investigation is a type of ____ which is not legally compulsory.
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What does valuation mean in the context of an audit?
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What are some methods of asset valuation? (Select all that apply)
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What is the primary duty of an auditor regarding capital in a firm?
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An audit is always conducted for a period of 5 years.
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What is the objective of a management audit?
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What are some advantages of management audit? (Select all that apply)
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Study Notes
Meaning and Definition of Auditing
- The word "Audit" is derived from the Latin word "Audire", meaning "to hear".
- Auditing is the verification of financial positions as disclosed by financial statements.
- It is an examination of accounts to ensure they give a true and fair view of a business's financial position and profit or loss.
Objectives of Auditing
- The main objective is to find the reliability of financial position and profit and loss statements.
- Subsidiary objectives include:
- Detection and prevention of fraud and errors.
- Ascertainment of truth and fairness of financial statements.
- Providing advice on financial affairs to management.
- Helping in detecting and preventing errors and frauds.
Importance of Auditing
- Auditing is essential for all commercial and non-commercial organizations.
- Importance can be summed up in the following points:
- Audited accounts help in knowing the value of a business for sale purposes.
- Disputes over correctness of profits can be avoided.
- Shareholders can judge the performance of management from audited accounts.
Types of Audit
- Based on ownership:
- Audit of Proprietorship
- Audit of Partnership
- Audit of Companies
- Audit of Trusts
- Audit of Co-operative Societies
- Government Audit
- Based on time:
- Interim Audit
- Continuous Audit
- Final Audit
- Balance Sheet Audit
- Based on objectives:
- Internal Audit
- Cost Audit
- Secretarial Audit
- Independent Audit
- Tax Audit
Qualities of an Auditor
- An auditor must be a qualified chartered accountant.
- An auditor must have:
- Thorough knowledge of principles and practice of accountancy.
- Adequate knowledge of financial management, industrial administration, and business organization.
- Thorough knowledge of audit case laws.
- Ability to understand technical details of business.
- Honesty and impartiality.
Appointment of an Auditor
- Appointment in case of sole proprietorship is done by the owner.
- Appointment in case of partnership is made by mutual consent of all partners.
- Appointment in case of companies is contained in Section 139 of Companies Act 2013.### Casual Vacancy in Government Company
- In case of a casual vacancy in a government company, the Comptroller and Auditor General shall fill the vacancy within 30 days.
- If the Comptroller and Auditor General fails to fill the vacancy, the board shall fill the vacancy within the next 30 days.
Qualifications of an Auditor
- A person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant.
- Where a firm, including a limited liability partnership, is appointed as an auditor of a company, only the partners who are chartered accountants shall be authorized to act and sign on behalf of the firm.
Disqualifications of an Auditor
- The following persons shall not be eligible for appointment as an auditor of a company:
- An officer or employee of the company.
- A person who is a partner, or who is in employment of an officer or employee of the company.
- A person or firm who, whether directly or indirectly, has a business relationship with the company, or subsidiary of such holding company or associate company of such nature as may be prescribed.
- A person whose relative is a director or is in the employment of the company as a director or key managerial personnel.
- A person who is in full-time employment elsewhere, or a person or a partner of a firm holding an appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding an appointment as auditor of more than 20 companies.
- A person who has been convicted by a court of an offence involving fraud and a period of 10 years has not elapsed from the date of such conviction.
Remuneration of an Auditor
- The remuneration of the auditor of a company shall be fixed in its general meeting or in such manner as may be determined therein.
- The remuneration under subsection (1) shall, in addition to the fee payable to an auditor, include the expenses incurred by the auditor in connection with the audit of the company.
Removal, Resignation of an Auditor
- The auditor appointed under section 139 may be removed from his office before the expiry of his term only by a special resolution of the company after obtaining the previous approval of the Central Government.
- The auditor who resigns from the company shall file within a period of 30 days from the date of resignation, a statement in the prescribed form with the company and the Registrar, and the auditor shall also file such statement with the Comptroller and Auditor General, indicating the reasons and other facts as may be relevant with regard to his resignation.
Rights of an Auditor
- Right to access books of accounts: Every auditor of a company has the right to free and complete access at all times to the books, accounts, and vouchers of the company.
- Right to obtain information and explanation: An auditor is authorized to obtain such information and explanation as the auditor may think necessary for the performance of his duties as auditor.
- Right to receive notice: All notices of the company and other communications relating to any general meeting of the company shall be forwarded to the auditor of the company.
- Right to sign audit report: Only the person appointed as an auditor of the company, or where a firm is so appointed, only a partner in the firm practicing in India, may sign the auditor's report or authenticate any other document of the company required by law to be signed or authenticated by the auditor.
- Right to seek legal and technical advice: The auditor of a company is entitled to seek the legal and technical advice which may be needed in the performance of his duties.
- Right to remuneration: On completion of his work, an auditor is entitled to his remuneration.
- Right to be indemnified: For many purposes, an auditor is considered to be an officer of the company and has a right to be indemnified out of the assets of the company against any liability.
Duties of an Auditor
- Duties under section 143(1):
- The auditor has a duty to enquire whether loans and advances made by the company have been properly secured, and whether the terms and conditions thereof are prejudicial to the interest of the company or its members.
- The auditor has a duty to enquire whether the assets of the company, being shares or debentures and other securities, have been sold at a price less than at which these were purchased.
- Duties under section 143(2):
- The auditor has the duty to report to the members of the company, the accounts examined by him, and every financial statement to be laid before the company in the general meeting.
- The auditor shall state in his report to the best of his information and knowledge, whether the said accounts and financial statements give a true and fair view of the state of the company's affairs or not.
- Duties under section 143(3):
- The auditor has the duty to seek and obtain all information and explanations which are necessary for his audit.
- The auditor has a duty to ensure that the books of account as required by law have been kept by the company.
- The auditor has a duty to see whether the company has adequate internal financial control systems in place and their operative effectiveness.
Liabilities of an Auditor
- Civil Liabilities:
- Liability for Negligence: The liability of an auditor arises where it is proved that his client has suffered a loss due to his professional negligence.
- Liability for Misfeasance: The court may assess damages against delinquent directors and other officers of the company, including an auditor for misfeasance or breach of trust.
- Criminal Liabilities:
- Mis-statement in Prospectus (section 34): Where an auditor makes a false statement with material particulars in returns, reports, prospectus, or other statements knowingly it to be false or omits any material facts knowing them to be false.
- Non-Compliance by Auditor with Section 143 and 145: If the auditor does not comply with section 143 and 145 regarding making his report or signing or authentication of any document and makes willful neglect on his part.
- Failure to Assist in Investigation (section 217(6)): Where the central government appoints an inspector to investigate the affairs of the company, it is the duty of the auditor to preserve and produce to the inspector all books and papers relating to the company.
- Penalty for Falsification of Books (section 336): Any officer, including an auditor of a company which is being wound up, with an intention to defraud or deceive any person, destroys, mutilates, alters, falsifies any books, papers, or securities.
- Penalty for Deliberate Act of Commission or Omission (section 448): If any officer, including an auditor of the company, deliberately makes a statement in any return, report, certificate, balance sheet, prospectus, etc. which is false or which contains an omission of material facts.
Audit Programme
- Definition: Audit programme represents an outline of procedures to be followed to support an opinion on financial statements. It is the auditor's plan of action.
- Advantages:
- Enables the auditor to keep in touch with the work done and general progress of the work.
- The auditor can be certain that the audit staff will cover the whole ground.
- Helps to increase the efficiency of audit assistants.
- Fixing of the responsibility of audit assistants becomes easier.
- Provides a check against the possibility of certain important items requiring verification being omitted.
- Continuity is not lost even if the person on duty is changed.
Audit Notebook
- Definition: Audit notebook is a diary or register maintained by audit staff to note errors, doubtful queries, and difficulties.
- Contents:
- A list of books of accounts maintained.
- The names, duties, and responsibilities of principal officers.
- Particulars of missing receipts and vouchers.
- Mistakes and errors detected.
- Points which need clarification and explanations.
- Points deserving the attention of the auditor.
- Various totals and balances.
- Points to be included in the auditor's report.
- Advantages:
- Ensures uniformity and helps in knowing the amount of work performed.
- Important matters relating to the audit work may be easily recalled.
- Facilities and preparation of the audit report.
- In case of the assistant in charge is changed, no difficulty is faced in continuing the incomplete work.
- The responsibility of the errors undetected can be fixed on the clerk concerned.
- The audit notebook shows the extent of the interest and pain taken by the audit staff.
- It helps in their appraisal.
- It ensures that the audit programme has been sincerely followed.
- Deviations can be noticed.
- It is reliable evidence in the court of law, if an auditor has to defend himself.
Audit Working Papers
- Definition: Audit working papers designate the files of analysis, summaries, comments, and correspondence built by an auditor during the course of the field work of an audit engagement.
- Objectives:
- They represent the volume of work performed by the auditor and his staff, which helps in preparing the report.
- They show the extent of adherence to accounting principles and auditing standards.
- They are useful as evidence against the charge of negligence.
- They act as a guide for subsequent examinations.
- They enable the auditor to know the weakness of the internal check system in operation as also the accounting system.
- They assist the auditor in coordinating and organizing the work of audit clerks.
Internal Control
- Definition: Internal control is a broad term with a wide coverage. It covers the control of the whole management system.
Importance of Internal Check
- Helps to detect errors and frauds easily
- Increases efficiency and economy in operations
- Provides convenience to the auditor
- Ensures accuracy of accounts
- Increases profits
Internal Check with Regard to Sales
- Receipt of orders:
- Should be numbered and preserved in Orders Received Book with full particulars
- A copy should be sent to the Despatch Department
- Despatch Department:
- Should take steps to pack the goods as per order
- Should prepare a statement of goods and send it to the customer
- Invoicing:
- Should be prepared in triplicate using carbon papers
- A responsible official should check the invoice particularly the rates charged and calculations made
- Sales Day Book:
- Entries should be made in the Sales Day Book with the help of the copy of invoices
- Goods Outward Book:
- Records should be made of dispatched goods
- Credit notes:
- Should be prepared and duly checked and initialed by the responsible official
- Entries should be made in the Sales Return Book
Internal Check with Regard to Purchases
- Requisition:
- Procedure for issuing purchase requisitions should be specified
- Should be filled by the head of the department and sent to the Purchase Department
- Enquiry:
- Purchases department should make an enquiry about terms and conditions of purchases from different suppliers
- Lowest tender should be accepted
- Purchase Order:
- Should be recorded in the Purchase Order Book
- Four copies should be prepared: one to vendor, one to Store Department, one to Accounting Department, and one to Purchase Department
- Receipt of goods:
- Goods should be properly inspected by the Purchase Department
- Entry should be made in the Goods Inward (Receipt) Book
- Making payments:
- Purchase Department should thoroughly check the invoices and send them to Accounting Department for payment
- Accounting Department should compare the invoice with the purchase order and incoming inspection report and verify the calculations
Internal Check with Regard to Fixed Assets
- Sanction of capital expenditure:
- Should be designated to a proper authority
- Sale of fixed assets:
- Should be designated to a proper authority
- Accounting records:
- Should be properly maintained and distinguished between capital and revenue expenditure
- Periodic inspection:
- Should be conducted to verify the existence and condition of fixed assets
- Fixed asset register:
- Should be maintained giving details of all fixed assets
- Insurance:
- Should be ensured adequality
Internal Check with Regard to Cash Transactions
- Cash Receipts:
- Should be dealt with by a separate clerk known as Cashier
- All receipts should be banked daily
- Bank reconciliation statements should be prepared
- Cashier should not be authorized to keep cash with him
- Cash Payments:
- Should be made by cheque
- Cheques should be drawn by a responsible officer
- Vouchers supporting payments should be stamped as paid before cheques are signed
Vouching
- Meaning:
- Examining documentary evidence to ascertain the authenticity of entries in the books of accounts
- Objectives:
- To verify that all transactions recorded in the books of accounts are supported by documentary evidence
- To verify that no fraud or error has been committed while recording the transaction in books of accounts
- To verify that accuracy has been observed while totaling, carrying forward and recording an amount in the account
- Vouching of Cash Transactions:
- Cash sales
- Cash received from debtors
- Loans
- Bills receivable
- Sale of Investment
- Sale of Fixed Assets
- Vouching of Cash Payments:
- Cash purchases
- Payment to creditors
- Bills payable
- Wages
- Payment of salaries
- Purchase of Investment
- Rent paid
- Loans
- Interest on Loan
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Description
This quiz covers the basics of auditing, including the meaning and definition of auditing, and its role in verifying financial statements.
