SECTION B

Questions and answers. Each question carries 5 marks

1. Distinguish between accounting and auditing. (2012, 2013)
Differences between accounting and auditing:
a) Meaning: Accounting is the act of collecting, recording, analyzing and interpretation of
financial transactions but auditing is the act of examination of books of accounts and
evidential documents, so as to prove the true and fair view of profitability and financial
position.
b) Beginning of Work: Work of accounting begins when financial transactions take place
but work of auditing begins when work of accounting ends.
c) Scope: Accounting prepares profit and loss account and balance sheet and other
statements as per the instruction of auditor but auditor checks the books of accounts
considering their fairness as well as complying with the provision of company act or not.
d) Nature Of Work: Accounting keeps the record of financial transactions but auditor checks
and verifies the books of accounts.
e) Staff: An accountant is a staff of an organization and draws the salary from the business
but an auditor is an independent person who is appointed for specific period and gets a
sum of remuneration.
f) Preparation of Report: An accountant does not prepare report after the completion of his
task but he has to give information to the management when needed but auditor needs to
prepare and present report after the completion of his work to the concerned authority.
g) Responsibility: An accountant remains responsible to the management but an auditor is
responsible to the owners or shareholders.
2. State the merits and demerits of continuous audit. (2012)
Advantages of continuous Audit:
a. Complete checking of all the records: Since the audit is carried out throughout the year,
sufficient time is available for detailed checking. Any enquiry and doubt arising in the
course of audit can be tackled in a better way.
b. Proper planning: Auditor can plan his audit work in a systematic manner. He can evenly
spread his work throughout the year. It will improve efficiency of auditor.
c. Early detection of frauds and errors: The work of auditor becomes easier for detecting
frauds and errors, otherwise it will involve more time.
d. Up-to-date accounts: The efficiency of account staff will increase and their work will be
up-to-date and accurate.
e. Valuable suggestions: Continuous audit will help the auditor to understand the
technicalities of business. This will help the auditor to make suggestions for the
improvement of business.
f. Preparation of interim accounts: Interim accounts can be prepared without much delay. It
will help the Board of Directors to declare interim dividend.

Disadvantages of Continuous Audit:

a. Expensive: It is an expensive system as it may not suit the budget of small organizations.
b. Dislocation of routine work: Frequent visits by auditor may dislocate the smooth flow of
office work.
 c. Alteration of Figures: after the accounts have been audited, the figures may be
fraudulently altered by the staff.
d. Losing link in the audit work: As the work is not completed continuously, the auditor
may lose continuity and certain questions and inquires may be left unanswered.

3. State the differences between Internal Audit and External Audit. (2012, 2014, 2016)
Internal Audit External Audit
a) Internal Audit is a constant audit a) External Audit is an examination and
activity performed by the internal evaluation by an independent body, of the
audit department of the annual accounts of an entity to give an opinion
organisation. thereon.
b) Internal Audit is discretionary. b) External audit is compulsory.

c) Internal Audit Report is submitted
to the management.
d) Internal Audit is a continuous
process.
e) The purpose of Internal Audit is
reviewing the routine activities of
the business and give suggestions
for improvement.
f) Internal Audit provides an opinion
on the effectiveness of operational
activities of the organisation.
g) Internal Auditors are the
employees of the organisation as
they are appointed by the
management itself.
c) External Audit Report is handed over to the
stakeholders like shareholders, debenture
holders, creditors, suppliers, government, etc
d) External Audit is conducted on a yearly basis.
e) External Audit aims at analysing and verifying
the accuracy and reliability of the financial
statement.
f) External Audit gives an opinion of the true and
fair view of the financial statement.
g) External Auditors are not the employees, they
are appointed by the members of the company.

4. Explain the duties of a company auditor. (2012)

Duties of an Auditor: Duties under section 143 (1):
a. The auditor has a duty to enquire whether loans and advances made by the company have
been properly secured whether the term and the conditions there of are prejudicial to the
interest of the company or its members.
b. Duty to enquire whether assets of the company being shares or debentures and other
securities have been sold at a price less than at which these were purchased.
c. Whether any shares have been allotted for cash, whether cash actually received and
whether the position in the account books and balance sheet is correct, regular and not
misleading.
Duties under section 143 (2):
The auditor has the duty to report 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, the said
accounts and financial statements whether give a true and fair view or not, of the state of
companys affairs
 Duties under section 143(3):
a. He has the duty to sought and obtain all information and explanation which are
necessary for his audit.
b. He has a duty to ensure that the books of accounts as required by law have been kept
by the company.
c. He has a duty to see whether the company has adequate internal financial control
systems in place and their operative effectiveness.
d. He has a duty to ensure whether the companys balance sheet and profit and loss
account dealt within the report or in agreement with the books of account and returns.
5. How do you vouch the receipts from debtors? (2013, 2014)
Vouching is concerned with examining documentary evidence to ascertain the authenticity of
entries in the books of accounts. In other words it is an inspection by the auditor of evidence
supporting the transactions made in the books. Vouching is a technique used by an auditor to
judge the truth of entries appearing in the books of accounts.
Role of Auditor in vouching collection from debtors:
a. The auditor should verify whether all the receipts are deposited into the bank in the
immediate following day.
b. He should ensure that the discounts given are at uniform rate to all debtors and that due
authorization is obtained in case of higher discounts.
c. If a customer becomes insolvent, the amount due from him can be claimed through his
Official Receiver. If possible, a part of the total amount due can be recovered in
installments . The auditor can verify the same by examining the correspondence with the
official receiver and the statement received from him.
d. If the debtors have not sent their statement of accounts, the auditor can contact the
customers directly and ask for their confirmation of balance.
6. State the merits of computerised environment. (2013, 2014, 2015)
Merits of computerised environment:
a) Examination of data is more rapid.
b) Examination of data is more accurate.
c) The only practical method of examining large amounts of data.
d) Gives the auditor practical acquaintance with live files.
e) Provides new opportunities to the auditor.
f) Overcomes in some cases a loss of audit trail.
g) Relatively cheap to use once set up costs have been incurred.

7. State the steps to be followed by an auditor to detect errors. (2013)

The auditor carries out necessary checks before expressing his opinion on the truth and
fairness of financial position and operating results of an entity as reflected in financial
statements. The auditor seeks to ensure that there is no material misstatement of financial
information arising from errors or frauds are as follows:
a) It is the responsibility of management to prevent errors and frauds.
 b) The auditor is not liable for any subsequent discovery of misstatement of financial
information resulting from errors and frauds if he carried out his duty according to the
generally accepted auditing practices.
c) If he discovers any errors or frauds during his audit. He is property must also bring to
the notice of the concerned the occurrence of fraud at the earliest time
d) The auditor need not sniff for errors and frauds. But if he smells something about it,
he should not leave them carelessly. He must enlarge his extent of checking and
modify checking procedures to suit the occasion.
8. State the merits and demerits of annual audit. (2014)
The advantages of annual or periodical audit are as follows:
a) No Dislocations in the Work of Client: In case of annual audit, as the auditor visits the
clients office only once a year the office work is not unnecessarily disturbed.
b) Less Chance for Alteration of Figures: As audit work is done only in a one continuous
session, chance for alteration of figures is minimum.
c) Less Expensive: It is a less expensive system and suitable for small business houses.
d) Takes only Reasonable Time: The audit work can be finished quickly within a reasonable
time.
e) Proper Maintenance of Link in Work: As audit work is done and completed in a
continuous session, link in work can be properly maintained.
f) Easy Allocation of Work: In continuous audit, work can be allocated easily according to
time schedule.

9. Explain in brief the advantages of auditing. (2014, 2016)

Advantages of auditing:
Now-a- days Business people get their Accounts audited by Professional auditor with a -view to
making the accounting information transparent and reliable. It has some advantages.
1) Detection and Prevention of errors and fraud: Auditing helps a business to detect and
prevent the fraud and errors. It can be located and rectified at an early and initial stage.
2) Acceptability by the authorities:- Audited accounts are readily acceptability by the
Income tax, sates tax and other authority.
3) Professional advice available:- Independent Auditors also reader service other than
auditing. They do tax work, advice on internal control system in operation and prepare
report required by govt agencies.
4) Speedy Processing on loan:-Financial institutions consider audited accounts genuine
and authentic and list helps then in speedy processing of loan proposals.
5) Settlement of disputes: The audited accounts of a trim by an independent person
minimizes the dispute among the partners.
6) Helps to provide net worth and goodwill:- In case of sale or take over of Business as a
going concern by other party. Audited acuity carry greater reliability to deciding out of
net worth and good will of Business.
7) Settlement of insurance claims:- Audited accounts are likely to have more creditability
and this helps in early and easy settlements on insurance claims in case on fire.
8) Useful to compare the financial performance:-
Audited financial statements are considered more reliable to compare the financial to
compare the financial performance of a business concern over the years.
 9) Keeps accounts department vigilant: A regular audit of accounts keeps the accounts
department not only up-to-date but also careful and vigilant.
10) Identify the weak areas: It helps to identify the weak areas which helps management to
get over the weakness and achiever their good within stipulated time.

10. Briefly explain the objectives of auditing. (2015)

The objectives of auditing are changing with the advancement of business techniques. Earlier
it was only to check the correctness of receipts and payments. The objectives of the auditing
have been classified under two heads:
a) Main objective
b) Subsidiary objectives
Main Objective: The main objective of the auditing is to find reliability of financial position
and profit and loss statements. The objective is to ensure that the accounts reveal a true and
fair view of the business and its transactions. The objective is to verify and establish that at a
given date balance sheet presents true and fair view of financial position of the business and
the profit and loss account gives the true and fair view of profit or loss for the accounting
period. It is to be established that accounting statements satisfy certain degree of reliability.
Thus the main objective of auditing is to form an independent judgement and opinion about
the reliability of accounts and truth and fairness of financial state of affairs and working
results.
Subsidiary objectives: The subsidiary objectives of the auditing are:
1) Detection and prevention of fraud: the one of the important subsidiary objective of
auditing is the detection and prevention of fraud. Fraud refers to intentional
misrepresentation of financial information. Fraud may involve:
a. Manipulation, falsification or alteration of records or documents
b. Misappropriation of assets.
c. Suppression of effect of transactions from records or documents.
d. Recording of transactions without substance.
e. Misapplication of accounting policies
2) Detection and prevention of errors: is another important objective of auditing. Auditing
ensures that there is no mis-statement in the financial statements. Errors can be
detected through checking and vouching thoroughly books of accounts, ledger
accounts, vouchers and other relevant information.
11. Distinguish between Internal check and internal control. (2015)
Internal check Internal control
1. Internal check is the valuable part of the 1. Internal control is a broad term with a
internal control. It is an arrangement of the wide coverage. It covers the control of
duties of members of staff in such a manner whole management system. Internal
that the work performed one person is control involves a number of checks and
automatically and independently checked by controls exercised in a business to
the other. ensure its efficient and economic
2. Internal check entails a proper and rational working.
distribution of work among the members of 2. To ensure management that information
staff of the enterprise keeping in view their it receives is both reliable and accurate
individual qualifications, experience and area as system of control is developed.
of specialization.
 3. A good system of internal check increases the 3. Internal control system also helps ensure
efficiency of work among the staff and leads that assets and secure and that
to overall economy. management policy is being followed.
4. where an organization is operating the system 4. Both management and independent
of internal check, the statutory auditor may auditors heavily rely on the system of
conveniently avoid detailed checking of the internal control in determining the
transactions. He may apply a few tests here timing nature and extent of their work.
and there and can relieve himself from 5. The existence of a good internal system
detailed checking. reduce to a large extant the work of an
5. If there is a good system of internal check the independent auditors.
owner of the concern may rely upon the
genuineness and accuracy of the accounts.

12. What are the objectives of verification of Assets and liabilities? (2015)
Verification of Assets:
Auditor has a duty to verify all the assets appearing on the balance sheet and also a duty to verify
that there are no other assets which ought to appear on the balance sheet.
Following aspects of assets must be verified:
a) Cost
b) Authorization
c) Value
d) Existence
e) Beneficial Ownership
f) Presentation in the accounts
Verification of liabilities:
Verification of liabilities is equally important as that of verification of assets. The Balance
Sheet will reveal the true and fair view of the state of affairs of the business concerns only
when the liabilities as well as assets are properly valued and verified. the auditor should have
to examine and see that:
a) all the liabilities have been clearly stated in the liability side of the Balance Sheet.
b) they are all relate to the business itself.
c) they are all correct and authorized by the responsible official.
d) they are shown in the Balance Sheet at their actual figures.

13. Briefly explain the advantages of audit programme. (2013, 2015, 2016)
The advantages of such an audit programme may be outline as below:
1) It ensures that all necessary work has been done and nothing has been omitted.
2) The auditor is in a position to know about the programme of the work done by his
assistant.
3) A uniformity of the work can be allowed as the same programme will be followed of
subsequent audit.
4) Work of the audit can be divided amongst the different juniors who will be responsible for
their work.
5) In care of change of negligence against the auditor for not having done some work, the
auditor can defend himself that the work had been done by him or his assistant who had
duly signed the audit programme.
 6) It is a kind of guidance to the audit clerk for the work he has to perform.
7) It facilitates the final review before the report is signed.
8) For a new clerk the audit programme is a guide to his duty.
9) It is a useful basis for planning the programme for the subsequent year.

14. What are the General principles of verification? (2016)

General principles regarding verification
1) Confirm that the assets were in existence on the date of the balance sheet.
2) Ascertain that the assets had been acquired for the purpose of the business and under proper
authority.
3) Confirm that owner ship of the asset rests with the organization.
4) Ascertain that no charge has been created on the asset.
5) Ensure that the current book value of the asset is determined after providing correct amount
of depreciation for various years.
6) Ensure that values reflect current physical condition of the asset.
7) Ensure that disclosures regarding assets are adequate.

15. State any five constraints of computerised audit. (2016)

Constraints of computerised audit:
a) Can be expensive to set up or acquire.
b) Some technical knowledge is required.
c) A variety of programming languages is used in business. Standard computer audit
programs may not be compatible.
d) Detailed knowledge of systems and programs is required. Some auditors would dispute
the need for this detailed knowledge to be gained.
e) Difficulty in obtaining computer time especially for testing.