Professional Documents
Culture Documents
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.”
2. Define Auditor?
Ans: Auditor is a trained professional who is responsible to review and verify
the accounting data of any business undertaking pertaining to its business
activities.
Q3. Distinguish between internal audit and independent audit. (dec 2000)
1. Interim audit is good where the publication of the interim figure is necessary.
2. Then final audit can be completed very soon, if there has been an interim audit.
3. Errors and frauds can be detected more quickly during the final audit.
4. There is moral check on the staff of the client as the accounts are checked, say
after three or six months in the interim audit.
1. Figures may be altered in the accounts which have already been audited.
2. It will mean that the audit staff will have to prepare notes when they finish
the interim audit.
3. Interim audit is an additional work because final audit must be conducted after
conducting this audit too.
Ans: The difference between continuous audit and final or annual audit are as
below:
1. Appointment :-
Internal auditor : Internal auditor is appointed by the management of the
company.
External auditor : External auditor is appointed by the shareholders of the
company.
2. Legal Position :-
Internal auditor : Legally internal audit is not compulsory.
External auditor : External audit is compulsory by law.
3. Status Of Auditor :-
Internal auditor : Internal auditor is employee of the company.
External auditor : External auditor is an independent person.
4. Qualification :-
Internal auditor : For internal auditor any specific qualification is not
compulsory.
External auditor : For external auditor specific qualification is compulsory.
5. Submission Of Report :-
Internal auditor : Internal auditor has not to submit any report.
External auditor : External auditor submits report to the shareholders.
6. Fixation Of Remuneration :-
Internal auditor : Internal auditor remuneration is fixed by the management
of the company.
External auditor : External auditor remuneration is fixed by the shareholders
of the company.
7. Name Of Remuneration :-
Internal auditor : Internal auditor receives salary.
External auditor : External auditor receives audit fee.
8. Nature Of Checking :-
Internal auditor : Internal auditor checks all the transactions.
External auditor : External auditor may apply test check.
11. Guidance :-
Internal auditor : Internal auditor gives suggestions to the management for
the betterment of the business.
External auditor : External auditor has no need to give suggestions unless he
is asked.
12. Duties :-
Internal auditor : Internal auditor primary duty is to find the frauds and
errors.
External auditor : External auditor has to report about final accounts whether
these are true or false.
13. Removal :-
Internal auditor : Internal auditor can removed by the management.
External auditor : External auditor can be removed by the share holders.
Ans: Audit working papers are those papers which contain essential facts about
accounts, which are being audited. Its defined as the file of analysis, summaries,
comments and correspondence build up by the auditor during the course of audit.
The auditor maintains papers as supporting evidence to the audit work. The
institute of chartered accountants of India states that “an auditor is expected to
maintain evidence of work done by him and his staff”. Usually, audit working
papers contains a copy of the trial balances, schedule of debtors and creditors,
reconciliation statements important correspondence etc.
1. Audit programme
2. Audit notebook
Q.10. explain audit working papers and audit files as vital tools of an audit work?
Ans: Audit working papers are those papers which contain essential facts about
accounts, which are being audited. Its defined as the file of analysis, summaries,
comments and correspondence build up by the auditor during the course of audit.
The auditor maintains papers as supporting evidence to the audit work. The
institute of chartered accountants of India states that “an auditor is expected to
maintain evidence of work done by him and his staff”. Usually, audit working
papers contains a copy of the trial balances, schedule of debtors and creditors,
reconciliation statements important correspondence etc.
1. They show the extent to which accounting principles and auditing standards
have adhered to.
3. They also reveal the efficiency with which the audit work was done.
6. They help the auditor to understand the efficiency of the accounting system,
internal check system etc.
a) To establish the accuracy of the costing data. This is done by verifying the
arithmetical accuracy of cost accounting entries in the books of accounts.
d) To confirm whether the cost statements are drawn from costing records and
exhibit true and fair view of cost of production.
f) To print out the inefficiencies in the area of material labour, and machines
and to assist the management to evaluate suitable measures for controlling
them.
An auditor prepares a plan after the selection of senior and junior staffs allocating
the jobs to them, mentioning when to start, how to do the work etc. This plan is
known as audit program.
An auditor should include all the procedures in written form, objectives of each
sector and all the directions which are to be given to the staffs which helps to
control their works and helps to implement such programs into action. Following
are the facts regarding meaning of audit program:
* Audit program is a detailed work plan which includes the time of doing work and
how to do the works.
* Senior staffs prepare audit program to junior staffs on the basis of nature of
business
Ans: the main differences between management audit and cost audit are as under:
Statutory audit refers to the audit of accounts of a business enterprises carried out
compulsorily under the provisions of a statute or law. It is is the audit carried out
compulsorily under any statute any law.
3.Private audit or Voluntary audit : - Where an audit is not compulsory under any
statute, but is undertaken by the owners voluntarily to get the benefit of audit, the
audit is called private audit. In 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.
2. Final Audit or Annual or periodical audit It is an audit carried out after the
preparation of financial statement. It is an audit where the auditor takes up
his work of checking the books of accounts only at the end of the accounting
year. In this case, the audit work is commenced and completed in a single
uninterrupted session.
6. Complete Audit : - Complete audit is a kind of audit under which all the
records and books of accounts are audited by an auditor.
6. Tax Audit: - It means audit for tax purpose. Audit required to be carried out
of income tax act of 1961. It is conducted by certified Chartered Accountant.
Q2. What is continuous audit and final audit? Or explain continuous audit is a
double edged weapon. What are their merits and demerits?
Errors and frauds can be discovered easily and quickly as the auditor checks 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 quickly.
Since the auditor remains more in touch with the business, s/he is in a position
to know its technical details and hence can be of great help to her/his clients by
making valuable suggestions.
As most of the checking works 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.
As the auditor visits the clients at regular intervals, the clerks are very regular in
keeping the accounts up-to-date. They will see that there is no in accuracy or
frauds as it would be detected by the auditor at the next visit.
If the auditor pays surprise visit, it will have a considerable moral check on the
clerks preparing the accounts as they do not know when the auditor may pay a
visit to check. Moral check will be more valuable to make staff alert and
careful.
1. Alteration of figures
Figures in the books of account which have already been checked by the auditor
at previous visit, may be altered by a dishonest clerk and the frauds may be
committed.
The frequent visits by the auditor may disturb the work if the client and cause
inconvenience to the latter.
3. Expensive
The audit clerk may lose the thread of work and the queries which s/he wanted
to make may remain outstanding as there might be a long interval between two
visits.
Extensive note taking may be necessary in order to avoid any alteration in the
figures after the audit.
Q3. What are the steps to be undertaken by the auditor before starting the new
audit?
Ans: An auditor must prepare well before he actually commences a new audit. He
has to take certain steps or bear in mind certain considerations before commencing
a new audit. These steps are known as preliminary steps or general steps.
III. Ascertaining the nature of the business undertaken by the client enterprise.
XII. Enquiry about the reason for the change of the auditor.
c) Schedules should be kept for ready reference such as schedules of debtors and
creditors, list of bad and doubtful debts, schedule of investment, schedule of
depreciation etc..
XIV. Division of audit work among the auditors.
Q4 give the meaning of audit note book. What are the contents and merits ?
A note book which is prepared by the audit staff to note down all the uncleared
queries which s/he may find in the course of audit and requires further clarification
and explanation is known as audit note book. Audit note book contains information
regarding day-to-day work performed by the audit staff on any particular date.
Notes about all types of errors, difficulties and uncleared queries or points to be
discussed with the auditor or clients and the points which are to be incorporate in
the report are noted down.
General Information
1. The nature of the business carried on and the important documents relating to
the constitution of the business, i.e. Memorandum Of Association, Articles Of
Association ( in the case of limited companies) and Partnership Deed ( in the case
of partnership firm) and other legal documents.
5. Particulars of the accounting and financial system followed and the internal
check in operation in the business.
3. The 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 Memorandum of Association and other
legal requirements.
4. Extracts from minutes books and contracts and other correspondence with
various government agencies, financial institutions, debtors, creditors etc.
6. The points which needs further explanation and clarification e.g., a change in the
basis of valuation of finished stocks or in the computation of depreciation, etc.
The major points which are detected or found during the course of audit can be
noted in audit note book. So, an auditor can get the following benefits by
maintaining audit note book properly:
All the facts related to audit are noted down in the audit note book. While auditing
the books of accounts of same organization auditor does not need to do the same
work. So, s/he can save time and cost.
If any person files the cases against the auditor charging misfeasance and
negligence, an auditor can present audit note book in the court or concerned
authority and can get clearance against such cases.
Ans: Auditing has become a compulsory task in the business organization. All the
organizations like business, social, industries and trading organizations make audit
of books of accounts. Now-a-days, owner of business and its management are
separate. So, to detect and prevent frauds, auditing has become essential. Its
advantages are as follows:
An auditor's main duty is to detect errors and frauds, preventing such errors and
frauds and taking care to avoid such frauds. Thus, even though all organizations do
not have compulsion to audit, they make audit of all the books of accounts.
An auditor raises questions if accounts are not maintained properly. So, audit gives
moral pressure on maintaining accounts regularly.
Valuation of assets is made by the auditor. On the basis of valuation of assets and
liabilities, businessman can sell his business. It helps to determine the price of
business.
An auditor instructs an accountant in the same way which helps to compare books
of accounts of current year with the accounting of the previous year. So, comparing
the accounts of current with previous years helps to detect errors and frauds.
Valuation of all the assets and liabilities of the business is made by the auditor
while auditing books of account. Such valuation helps to clear the amount of
deceased partner.
If any case is filed against the auditor regarding negligence, auditor can present
audited report as a proof to settle such case. So, it helps to present proof to settle
such cases.
A businessman wants to know profit or loss of his business after a certain period of
time. So, the owner of the business can get information about profit or loss after
auditing the books of accounts.
All the audited statements remain true and correct. Such true and correct account
helps to prepare for the future plans.
Limitations of Auditing
1. All transactions cannot be checked – It is not possible for an auditor to
check each and every transaction; he has to check them on sample basis.
3. Not easy to detect some frauds – It’s not easy for an auditor to detect the
deeply laid frauds which involves acts designed to conceal them such as
forgery, false explanation, and not recording transaction and so on.
5. Rely on experts – The auditor has to rely on experts like lawyers, engineers,
valuers etc. for estimation of contingent liability and valuation of fixed
assets.
Audit working papers are those papers which contain essential facts about
accounts, which are being audited. Its defined as the file of analysis, summaries,
comments and correspondence build up by the auditor during the course of audit.
The auditor maintains papers as supporting evidence to the audit work. The
institute of chartered accountants of India states that “an auditor is expected to
maintain evidence of work done by him and his staff”.
Usually, audit working papers contains a copy of the trial balances, schedule of
debtors and creditors, reconciliation statements important correspondence etc.
1. They show the extent to which accounting principles and auditing standards
have adhered to.
2. They provide the required support for the auditors report.
3. They also reveal the efficiency with which the audit work was done.
6. They help the auditor to understand the efficiency of the accounting system,
internal check system etc.
Working papers should be clear complete, and contain the necessary information so
that they may be of maximum utility. They should be properly organized,
documented and signed. In this regard its said hat “an auditor is often judged by
the quality of the working paper prepared by him under his guidance”.
working papers are confidential documents hence he should not disclose the facts
to others. Doing so results in professional misconduct. Working papers should be
preserved properly because they are important documents.
Q7. What is audit programme? what are its merits and demerits?
An auditor prepares a plan after the selection of senior and junior staffs allocating
the jobs to them, mentioning when to start, how to do the work etc. This plan is
known as audit program.
An auditor should include all the procedures in written form, objectives of each
sector and all the directions which are to be given to the staffs which helps to
control their works and helps to implement such programs into action.
* Audit program is a detailed work plan which includes the time of doing work and
how to do the works.
All the directions which are to be given to assistant are clearly stated in the audit
program which helps to complete the task in time. Audit program also helps to
conduct the audit of the business in coming years which saves time and labor.
All the responsibilities of auditor are divided among the number of staffs
considering their skill and intelligence which helps to complete the work of audit
properly. Similarly, the works are divided among the assistant staffs on the basis of
their caliber which helps to increase efficiency.
An auditor can compare the work performed by the assistants on the basis of audit
program which helps to control their work if there are any deficiencies.
Works are divided among the assistant staffs; so there is no any chance of leaving
non audited statements. If the work of audit is performed on the basis of audit
program every year, uniformity can be maintained in the work of audit which helps
to compare the report of various years.
Work of assistant is clearly defined in the audit program and assistant puts
signature in the completed work. So, if any work is left out, assistant can be made
liable for such work.
Auditor can present audit program as proof if he/she has been accused of
misfeasance or negligence and can get clearance from such accusation. Audit
program can be presented in the court also.
All the staffs should perform task within the limitation given in audit program. So,
staffs can not use their knowledge and caliber which harasses to them.
Nature and size of business differs. So, the program which is prepared at the
beginning of the year remains unsuitable. Different organizations may have their
own problems. So, similar type of program may not be applicable to all.
Staffs of the client get information about the audit program in advance which
increases the chance of committing frauds. Similarly, it harasses the audit staffs so
they perform the work of audit carelessly which also increases the chance of
committing frauds.
Small concern has less transactions and work of audit can be completed in short
period of time. So,audit program is not essential to audit such concern.
New techniques and technologies are used in the work of accounting. Such
technology creates the problem in the work of audit but such problems and
remedial measures are not included in the audit program.
Q8. What are the advantages and disadvantages of management audit?
2. Scope of management audit is vague. So, it does not help to achieve specific
goal.
INTERNAL CONTROL
Ans. Internal check means a system under which the work 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 clerks join hands in defrauding their employees.
(iii) To prepare final accounts with ease and efficiency as an efficient system
can make accounts more reliable.
(i) Assets Protection: the assets are the backbone of any business. These are
in the custody of some specific officers of the business. The internal
control system checks the valuation and protects the assets of the
business.
(ii) Prevention of errors: the purpose of internal control is to prevent errors.
(iii) Accurate record: the main object of internal control is to maintain all
records and transactions of business according to the generally accepted
accounting principle.
(i) The management can determine the total amount of work. The whole
work is divided among departments. The heads of such department are
responsible for the completion of work according to time table.
(i) It is an expensive system for a small scale concern, and hence it cannot
afford in all divisions of organization.
(ii) The auditor’s work may become very difficult, if the system is defective
and unorganized.
Q11. Write any two differences between internal check and internal auditing?
Ans. The two differences between internal check and internal auditing are:
(ii) To help an independent audit i.e. the external auditor can rely on
internal auditor and there is no need of cent percent checking.
Ans. Wage payment is a payment to a person for service rendered..the amount paid
periodically, especially by the day or week or month, for the time during which
workman is at job.
Ans. Control is wider term and will include all types of management controls. It is
a means of assisting modern business management in discharging its function.
Internal control is a means by which an organisation’s resources are directed,
monitored, and measured. It plays an important role in detecting and preventing
fraud and protecting the organisation’s resources, both physical and intangible.