VVI QUESTIONS & ANSWERS : AUDITING : B.COM.

(H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

(Maker of Accounts Manager)

The Institute of Business Accountants

H.O. : UTTAM NAGAR, NEW DELHI (INDIA)
Run by : D.S.Educational & Social Welfare Trust (Regd.)

AUDITING
SUPER
QUESTIONS + ANSWERS


P.M.Sir
Redefining Accountin Caree - - -
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Q.1 : Define Auditing . What are its features ? Differentiate
between Accountancy and Auditing.

Q. 2 : What informations should an auditor take from

his client before commencing an audit ? Discuss.
OR
What steps would you take before commencing the audit
work of a business ?

Q. 3 : “Accountancy begins where Book-Keeping ends and

Auditing begins where Accountancy ends.” Discuss
this statement.
Q. 4 : “Accountancy is necessity while Auditing is Luxury .”
Discuss this statement.
OR
“Accountancy is necessity while Auditing is luxury.” Do
you agree with this statement? Explain.
OR
“Accounting is necessity, Auditing is a luxury.” Comment.

Q. 5 : What is Auditing ? Explain its Objects.

Q. 6 : State briefly the essential qualities of a successful

auditor

Q. 7 : Define auditing. Highlight on its importance. What are its

limitations ?

Q. 8 : “An Auditor is a watch dog not a blood hound.”

Discuss this statement.
OR
“An Auditor is a watch dog not a bloodhound.”
In the light of above statement, discuss the duties
and liabilities of an2Auditor.
 Q. 9 : “An Auditor is a watching dog not a blood hound.”
Discuss this statement.

OR
“An Auditor is a watching dog not a bloodhound.” In the
light of above statement, discuss the duties and liabilities
of an Auditor.

Q. 1 0 : What is Continuous Audit ? How does it differ from Periodical Audit?

Q.11 : WhatisanAuditProgrammeandhowshoulditbeconstructed? Discuss

its advantages and disadvantages.

Q.12 : What is an Audit Note Book ? What is its utility ? What are its
contents? How far it is useful to an auditor ?
OR
What is an Audit Notebook ? What are its Contents ? Explain its
Advantages and Disadvantages

Q. 1 3 : What do you mean by Internal Check ?What are its features and
objectives ? Diffrentiate between Internal Check and Internal
Audit.

Q.14 : What is InternalAudit ? Differentiate between InternalAudit and

Internal Check.
Q.15 : How can an Auditor be appointed ? Explain.

Q.16 : How would you audit an Educational Institution ?

Q.17 Whatis Audit Programme? Discussitsadvantages anddisadvantages.

Q. 1 8 : What is “Internal Check” ? Discuss its characteristics and advantages.

What is the position of an Auditor in this connection ?
Q. 1 9 : “Vouching is the back bone ofAuditing” Discuss this statement.

OR
“ Vouching is the Essence of Auditing.” Discuss.

OR
Discuss the Importance of Vouching.

Q.20 : What is Vouching ? How would you vouch the Cash Book ?

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

Q.1 : Define Auditing . What are its features ? Differentiate

between Accountancy and Auditing.

ANS. : Meaning and Definition

Auditing is the systematic examination of the books of accounts and the other
documents of the Business Entity or the Company, which is conducted with the
main objective of knowing whether the company’s Financial Statement shows a
True and Fair view of the organization.

1. “An audit is an examination of such records to establish their reliability and the
reliability of statements drawn from them.” —W.H. Hanson

2. “Auditing in its modern concept is a scientific and systematic examination of

books, vouchers and other financial and legal records in order to verify and
report upon the facts regarding the financial condition disclosed by the Balance
Sheet and net income revealed by the Statement of Profit and Loss.” —Ronald
A. Irish

3. “Auditing may be defined as the examination of the books, accounts and

vouchers of a business with á view to ascertaining whether or not the Balance
Sheet is properly drawn up, so as to show a true and fair view of the state of
affairs of the business.” - R. G. Williams,

4. “The main objective of an audit is a study of all the financial and non-
financial performances of an organisation and to evaluate all its financial records
and the details thereof. The auditing process is to gather as much evidence
to assess the financial records to opine on their respective opinions and
judgements.”
-The Institute of Chartered Accountants of India,

Conclusion : Combining all the above definitions, we can define audit as :

“ An audit is a systematic examination of books of accounts, documents and

vouchers of a business with a view to determine the accuracy and reliability of
accounting statements which reflect true and fair picture of the organisation for
a particular period.”
In other words, auditing involves verification of accounting data for the
purpose of reporting on the reliability of the financial statements.

Now a days auditing is not confined to financial accounts. Audit has extended to
different areas.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

CHARACTERISTICS OR FEATURES OF AUDITING :

On the basis of different definitions, the following basic characteristics of

auditing come to light :

1. T here must be an Institution : The work of auditing is done of

an institution, whether it is government, semi-Govt. or non-Govt.

2. An Auditor must be an Independent Person : The core idea of any

audit exercise is an independent evaluation of the available evidence by an
dependent and qualified person.

3. To Examine Truthness and Fairness of Books : Audit is a systematic and

independent examination of the books of accounts to ascertain whether the
Balance Sheet and the Statement of Profit and Loss show a true and fair view
for the financial period.

4. Use of Vouchers : To examine the truthfulness and fairness of the books of

accounts, every transaction should be compared with concerned vouchers. In
other words, there should not be any transaction without voucher and there
should not be any voucher without transaction.

5. To get Necessary Clarification : Sometimes, it is seen that vouchers fail

to make some facts clear then such facts should be cleared by making an
enquiry with the concerned persons.

6. To follow the Principles : During the course of auditing, the auditor has
to follow some basic principles of accounting.

7. Collection and Evaluation of Evidence : Evidence consists of books

of accounts, tax returns, human resource records, etc. In audit, the auditor should
collect relevant evidence to examine the books of accounts.

8. Certain Period : The audit work is concerned with the examination of

books of accounts for a certain period i.e. half-yearly or a yearly.

9. T actfully : An auditor should perform the work of audit tactfully,

otherwise ultimate object cannot be obtained.

10. Report : The last stage in audit work is formulation of opinion by the
auditor which is communicated to the users of information through an Audit
Report.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

DIFFERENCE BETWEEN
ACCOUNTANCY AND AUDITING

Accountancy and Audit are not the same thing. The following are the main
differences between the two :

1. Origin : Accountancy originated in 1494 when Lucas Pacioli invented

double entry system of book-keeping.
On the other hand, auditing originated in 1913 with the formation of Indian
Companies Act, 1913. It got its importance with the formation of the Institute of
Chartered Accountants Act, 1949 and Companies Act, 1956.

2. Nature of Work : Accountancy includes Trial Balance, Trading and Profit &
Loss Account, Balance Sheet and entries for adjustments and rectification of
errors.
On the other hand, auditing examines and verifies the financial records and
statements in order to ascertain whether the financial statements present a true
and fair picture of the concern or not.

3. Beginning and End : Where accountancy ends auditing starts. On the other
hand, when the Auditing begins, the work of Accountancy ends.

4. Rules and Principles : Accountancy is based upon certain rules and

principles everywhere. On the other hand, according to the conditions and
circumstances of the business, an auditor can apply rules and principles with
certain modifications.

5. Qualifications : For accountancy, a person need not be a Chartered

Accountant. He should possess knowledge of accountancy.
On the other hand, to be an auditor, a person must be a qualified Chartered
Accountant having membership of ICAI.

6. K nowledge of Accountancy and Auditing : An accountant

need not have the knowledge of auditing. On the other hand, an auditor should have
complete knowledge of accountancy as well as the work of audit.

7. J ob Performance : An accountant is not allowed to conduct an

audit. On the other hand, an auditor can perform the work of accountant.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

8. Influenced by Others : An auditor enjoys complete independence and his

work is free from any influences. But, the work of an accountant is influenced
by the management.

9. A ppointment : An accountant is appointed by the management,

but an auditor is generally appointed by the shareholders of a Company with
certain exceptions in some other cases.

10. Nature of Payment : Accountant is a permanent employee, gets monthly

salary. On the other hand, an auditor is appointed temporarily for a specific
job, therefore, he is paid remuneration or fee and not salary.

11. E mployer and Employee Relationship : An accountant may or

may not be an employee of the Company but an auditor cannot be an employee of
the Company.

12. R eport : An accountant is not required to prepare a report of the

work done by him but an auditor is required to submit his report to the the top
level management.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

Q. 2 : What informations should an auditor take from his

client before commencing an audit ? Discuss.
OR
What steps would you take before commencing the audit
work of a business ?

ANS. Steps before Commencementof new Audit :

The following steps should be taken by the auditor before commencement of audit
work :
1. Appointment : First of all auditor should confirm his appointment
letter that it is in order from every respect and fulfilling all its legal requirements.

2. Communicate the Previous Auditor : The auditor should communicate in

writing with the previous auditor and ascertain any objection. Such communication
is a professional ethics.

3. Scope of Work to be done : The top most duty of an auditor is to determine

the scope of his duties and responsibilities from the employer.

4. To Study the Nature of the Organisation : It is essential to study the nature of

the organisation, i.e., whether the organisation is profit making or non-profit
making.

5. Object of Audit : The object of audit varies in different institutions.

Therefore, an auditor must be aware of the object of audit of the organisation
whose books of accounts are to be audited by him. This proves helpful in planning
the future course of action.

6. Methods of Maintaining Accounts : Auditor should study the methods of

maintaining accounts. Different systems of keeping books of accounts are
followed by different types of businesses, e.g., Banks, Insurance Companies, Joint
Stock Companies, etc. Hence, the system has to be studied first.

7. Obtaining the List of Books of Accounts : Auditor should also obtain a list of
all the books maintained in the organisation together with the names of the
keepers of such books and their specimen signatures.

8. Technical Aspects : If the business of the organisation is of technical

character, the auditor should get full information about them before the
commencement of audit.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

9. Knowledge of Distribution of Work among the Employees : An auditor

should have correct knowledge of distribution of work among the employees,
i.e., which employee has recorded the transaction ? Who has posted them into
ledger accounts etc.

10. Name of the Officers, their Authorities and Signatures : Auditor should get
the list of the officers of the organisation containing particulars about their names,
duties, powers and their specimen signatures.

11. Examination of the System of Internal Check : The auditor should examine
the system of internal check in operation which will help him in conducting the
audit. Internal check is a device in which the work of of one is automatically
checked by another.

12. Previous Accounting Records and Balance Sheets : It is also advisable

for the auditor to go through the Statement of Profit and Loss and Balance Sheet
of the previous years and look into the various objections, if any, raised by the
previous auditor in his report.

13. To Open a Permanent Audit File : Auditor should open a permanent audit
file where he should keep the details regarding the client’s business i.e., date of
incorporation and commencement of business, particulars of subsidiaries and
associates, list of products manufactured or services provided, method of
production and distribution etc.

14. Copies of documents: The auditor can collect copies of document like
memorandum of association and articles of association. He can examine all such
document for the purpose of audit.

15. Study of Managerial Policies : He should ascertain the accounting and

management policies followed with regard to stock-taking and the basis of
valuation of closing stock.

16. Preparation of Audit Programme : Before the commencement of audit

work, an auditor must prepare Audit Programme. This will ensure whether the
audit work is going on systematically or not.

17. To fix the Date of Commencement of Work : An auditor should fix the date
on which he has to commence the audit work, and inform about this date to the
employer.

18. Certificates of clients: The auditor can obtain certificate from client, the
confirmation of accounts from debtors and creditor is possible. The client can
issue stock valuation certificate for the auditor.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

19. Instructions to the Employer : The auditor should give the following
instructions to the client to make available to his audit staff :
(i) The books of accounts should be totalled up and trial balance and final
accountsshould be kept ready.
(ii) All the vouchers should be serially arranged and filed.
(iii) The list of debtors and creditors should be prepared.
(iv) List of outstanding expenses, prepaid expenses, accrued income, bad and
doubtful debts should be kept ready.
(v) Stock sheet indicating the method of valuation of stock should be drawn-
up.
(vi) List of investments indicating their cost price and market price should
be prepared.
(vii) List of goods returned by different branches, agents, etc. must be made
available.
(viii) Details about fixed capital expenditure should be kept ready.
(ix) Similarly, list of deferred revenue expenditure should be prepared.
(x) List of names of Managers and Managing Directors should be given to
him.
(xi) Method of calculation of depreciation should be drawn-up.
(xii) List of other documents to be submitted to him should also be prepared.

20. Division of the Work of Audit : After giving necessary

instructions to the client and obtaining the above required informations, auditor
will have a complete picture before him concerned with audit work to be
performed by him. He should divide the work among his staff, keeping in view
the ability and expertise of his assistants. Junior assistants should be given the
work of verification and examination of the final accounts.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

Q. 3 : “Accountancy begins where Book-Keeping ends and Auditing

begins where Accountancy ends.” Discuss this statement.

ANS. BOOK-KEEPING
Book keeping is concerned with the systematic recording of transactions in the
books of original entry and their posting into ledger.
The person doing the work of book keeping is known as “ Book-Keeper.”
Book-Keeping involves the following works :
(1) Journalising : Making Journal entries of business transactions.
(2) Posting Ledger : Transfer of entries from Journal to Ledger.
(3) Totalling : Adding both sides of different ledgers in the book
(4) Balancing : To find out the difference of both sides of a ledger.
Book keeping is generally performed by junior clerks in the books and are
mechanical in nature. The book keeper has only the primary knowledge of rules of
accounting principles can do it efficiently.
In mechanised or computerised accounting, the work
of book-keeping is efficiently performed by computers.
The work of book-keeping is done under the overall direction and supervision
of an Accountant.

ACCOUNTANCY :
Accountancy begins where book-keeping ends. It means, accountant comes with
the picture where book-keeper has done his job. The accountant performs the
following functions:

(1) Checking the work of the book-keeper,

(2) Preparation of trial balance,
(3) Preparation of financial statements e.g. P & L a/c and Balance Sheet,
(5) Passing Adjustment entries,
(6) Developing suitable accounting system to protect assets etc, of business.
(7) Preparing Schedules/Notes to Accounts and ontaining informations required
to satisfy various authorities under various laws like- Income Tax, Sales Tax,
GST and such other laws.

Thus, accountancy is .concerned with classification and summarization of

financial records and it is semi-analytical in nature. Its main object is to compile
and analyse the business records. The accountant has knowledge of book-
keeping and accounting principal and practices.
Thus, it is proved from the various activities performed under
accountancy that ‘Accountancy begins where Book-keeping ends.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

AUDITING :
Auditing is a critical and detailed examination of the accounts prepared by
others. Auditing begins where accounting ends”. The work of Auditing is a
fact-finding technique. The auditor checks the truthfulness of accounts by
verifying and vouching the entries passed by the accountant and final accounts
prepared by accountant.
An auditor has to satisfy himself about the bonafide of
accounts and vouchers. After that the auditor is required to submit his report to
the effect whether or not the Balance Sheet and Statement of Profit and Loss
show a true and fair position of the existing state of affairs of the business
concern.
Thus, on the basis of above discussion, it can be said that
“Accountancy begins where Book-keeping ends and Auditing begins, where
Accountancy ends.”

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

Q. 4 : “Accountancy is necessity while Auditing is Luxury .”

Discuss this statement.
OR
“Accountancy is necessity while Auditing is luxury.” Do you
agree with this statement? Explain.
OR
“Accounting is necessity, Auditing is a luxury.” Comment.

Ans.: According to some businessman, Accountancy is a necessity while

Auditing is luxury. But this statement does not come true and is not acceptable
to the whole business community. This statement is accepted only by small
businessman or by those businessmen who are involved in the operation of
business and take whole of the profit earned from it and, therefore, audit may
not be very much beneficial to them.
However, there are another group of businessman who are
involved in the large-scale businesses (big business) with comparatively huge
amount of capital and employing more number of people. For this group of
businessmen, Auditing is not luxury and the statement does not come true.
“Accountancy is a necessity”
Those days when businesses were carried on in the form of small-scale with little
capital and few number of employees, accounting too was considered to be
luxury. But after Industrial Revolution , there was a tremendous change in the
form and scale of business. Sole Trading, Partnership and Joint Stock
Companies’ form of business organization came into existence, which multiplied
business transactions. This growth in the form of business organization realised
necessity of accounting.
The arguments given ahead can be placed in favour of the
statement, ‘Accountancy is a necessity’ :

1. Limited Memory Power of Human Being: The memory power of human

being is limited. It is not possible to keep in memory all the transactions of a
business, for a long period of time like a computer. Therefore, these transactions
must be recorded in the books of accounts. Hence, accounting is a necessity.

2. Knowledge about Profit or Loss: A businessman invests capital in the

business, does hard labour throughout the year and takes the risk of business. He
necessarily wants to know the result of his business in the form of Profit /Loss.
This can be possible by preparing Statement of Profit and Lass, which requires
accounting records.Thus, accountancy is necessary.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

3. Knowledge of Economic Position of Business: Financial position of the

business can be obtained through Balance Sheet if proper accounting records
maintained. Thus, accountancy is necessary.

4. Proof in the Court of Law: Proper Books of Accounts serve as a good

evidence in the the Courts of Law for settlement accounts in case financial
dispute withany party. Thus, accountancy is necessary.

5. Need on Admission of a New Partner : Valuation of goodwill is required in

case of admission of a new partner. Profit is the main base for the valuation of
goodwill and ascertainment of profit is based on accountancy. Hence,
accountancy is a necessity.

6. Necessity on the Death or Retirement of a Partner : Accountancy proves to

be helpful in case of the death of a partner to settle his account. Thus,
accountancy is necessary.

7. Helpful for Adjudication as Insolvent : If a businessman is unable to

discharge his liabilities, he can produce his books of accounts for the
satisfaction of Court. Thus, accountancy is necessary.

8. Helpful in the Determination of Various Taxes : Proper and correct

accounting records help the tax authorities for the assessment and recovery of
tax.Thus, accountancy is necessary.

9. Safety from Fraud and Forgery : With the help of proper maintenance
of accounting records, stock can be verified and fraud and forgery can be detected
if so. Thus, accountancy is necessary.

10. Helpful in getting Loans : Any business may require to take loan. Any loan
granting institution or person, wants to know about the financial position of the
business. Balance Sheet and Profit & Loss serve this purpose. Thus,
accountancy is necessary.

11. Comparative Study of the Business : Sometimes, the comparative study of

the operation of business has to be made with some specific objective.In absence
of proper records such comparison cannot be possible. Thus, accountancy is
necessary.

12. Helpful in Preparing Future Plan : To plan about the future, accounting is a
must.In the absence of financial records, the businessman shall not be able to
make proper and correct decision relating to future plans. Thus, accountancy is
necessary.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

13. Helpful in Determining the Selling Price of the Business : Whenever a

businessman wants to sell out his business, proper accounting records help
him in determining the selling price. Thus, accountancy is necessary.

14. Helpful in getting Licence : Those businessmen who want to enter in

foreign trade, they need import and export licences. For this purpose, they will
have to produce their books of accounts. Thus, accountancy is necessary.

15. Other Advantages : In addition to the above stated advantages, maintenance

of proper books of accounts has certain other advantages which depend upon
the nature and circumstances of the business organisation.

Conclusion
On the basis of above discussion, it can be said that accountancy is required for
every business for its effective operation and control. Therefore, accountancy is
a necessity.

“AUDITING IS LUXURY”
Whether auditing is luxury or not, we have two opinions in this regard–
(i) Opinion of the small businessmen, and (ii) Opinion of the big businessmen.

(I) Opinion of Small Businessmen: From this point of view auditing is luxury.
The arguments given below can be given in support of this opinion:

1. More Expensive: Qualified Chartered Accountants charge high

remuneration for their auditing work, it is more expensive for small businesses
while legally not required. Thus, auditing is luxury.

2. Alternative Use of Auditing: Small businessmen can make alternative for the
work of audit, which proves to be economical. They can prepare the books of
accounts themselves. They can get the accounts audited by an ordinary
accountant.In this situation, appointment of a CA for auditing is luxury.

3. Difficulties in Fulfilling the Formalities: A businessman has to observe a

number of formalities for the work of audit. All these formalaties or
informations are not much use for small businesses. Therefore, auditing is
luxury for small businesses.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

4. Wastage of Time: For the purpose of auditing a businessman has to prepare

many schedules and supply various types of information and explanations, these
require much time. Therefore, auditing can be said to be luxury for small
businesses.

5. Fulfillment of Prestige Only: For a small businessman, auditing is only a

matter of prestige and not a requirement.Hence,auditing is considered as luxury.

6. Decrease in the Efficiency of Employees: During the course of auditing the

employees are called upon by the auditor most frequently for the clarifications of
even very small matters and as a result they lose concentration in their jobs.
Hence,auditing is considered as luxury.

On the basis of above arguments, it can be said that for small businesses, auditing
is luxury but it would be wrong to say that auditing is luxury for big businesses.

(II) For Big Business, Auditing is not Luxury :

1. It Increases the Efficiency of Employees: The efficiency of employees

increases because they know, if the work is not done perfectly or there are some
errors in their work, these errors are likely to be detected by the auditor.

2. Less Probability of Fraud: Employees know, if they are involved in any

fraud, it will be detected by the auditor and consequently they may be punished.
Therefore, they try to refrain themselves from doing so.

3. Increase in the Efficiency of Management: The auditor also points out

efficiency or inefficiency in the course of management audit. Thats why, they
try their level best to improve efficiency. Due to this reason, management audit
has become more popular.

4. Helpful in the Development of Business: Due to the effect of auditing, all the
activities of the business concern become prompt which leads to the fast
development of the institution. All levels of employees perform their best for
the institution.

5. Prompt Decision at the Time of Insolvency: At the time of insolvency prompt

decision is taken by the court o the basis of audited books of accounts. In the
absence of audited books of accounts, there may be wastage of time and money
both.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

6. Base for Future Planning: By making comparative study of the audited final
accounts of different years, a businessman can draw an effective future plan to
speed up the overall efficiency of the institution.

7. To Protect the Interests of the Shareholders: In the case of joint stock

companies, if the books of accounts are not audited, not only the shareholders
but the interest of the country will suffer. This is the reason why the Companies
Act, 2013 has made audit compulsory.

Conclusion:
On the basis of the above arguments, it can be said that accounting is necessary
for businesses of all size and auditing is luxury for all small businesses but
necessity for big and businesses.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

Q. 5 : What is Auditing ? Explain its Objects.

ANS.
“ An audit is a systematic examination of books of accounts, documents and
vouchers of a business with a view to determine the accuracy and reliability of
accounting statements which reflect true and fair picture of the organisation for
a particular period.”
In other words, auditing involves verification of accounting data for the
purpose of reporting on the reliability of the financial statements.

“The main objective of an audit is a study of all the financial and non- financial
performances of an organisation and to evaluate all its financial records and the
details thereof. The auditing process is to gather as much evidence to assess
the financial records to opine on their respective opinions and judgements.”
-The Institute of Chartered Accountants of India,

“An audit is an examination of such records to establish their reliability and the
reliability of statements drawn from them.” —W.H. Hanson

OBJECTIVES OF AUDIT
The objective of an audit is to express an opinion on financial statements, to give
the opinion about the financial statements, the auditor examines the financial
statements to satisfy himself about the truth and fairness of the financial position
and operating results of the enterprise.
The main objective of auditing is to examine the
documents concerned with accounting so that their truthfulness and
completeness can be judged. Thus, expression of opinion about the truthfulness
and fairness of financial statements became the Primary Object of an audit and
the detection and prevention of frauds and errors is considered to be the
Secondary Object.

The objects of audit may be classified in the following categories :

(I) Primary Objects

(1) Examination of Accounting Books,
(2) Verification of Financial Statements.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

(II) Secondary Objects

(1) Detection of errors,
(2) Detection of frauds,
(3) Prevention of errors and frauds,
(4) Creation of healthy environment,
(5) Fulfilment of the order of Act,
(6) To satisfy the Government authorities.
(7) Advice to the Managers,
(8) Moral effect on the Employees.

(III) Social Objects

(1) Protection to shareholders,
(2) To stop evasion of tax,
(3) To stop capital erosion,
(4) Measurement of fair wages for labourer,
(5) Reasonable prices for consumers,
(6) Fair return and justice to the investors,
(7) Evaluation of social cost and benefit.

I. PRIMARY OBJECTS
1. Examination of Accounting Books : The main object of audit is to examine
accounting books. Here, examination means to compare the records with
vouchers on the basis of which records have been made. As every record must
be supported by voucher, and every voucher must be recorded.
Thus, to examine the accounting books is the primary object of an
audit so that the truthfulness of accounting books can be known.

2. Verification of Financial Statements : The second part of primary objects of

an audit is to establish that the Balance Sheet is properly drawn up and shows a
‘true and fair’ view of the state of affairs of the business and the Statement of
Profit and Loss also discloses a ‘true and fair’ picture of the business.

An auditor, in order to satisfy himself about the accuracy of the books of

accounts, should examine the following :

(i) Examining the system of internal check.

(ii) Checking the arithmetical accuracy of the books of accounts by the
verification of posting, casting and balancing, etc.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

(iii) Verifying the authenticity and validity of transactions with vouchers.

(iv) Properly distinguish between capital and revenue transactions.
(v) Confirming the existence and value of assets and to verify liabilities.
(vi) Verifying whether all the statutory requirements are fulfilled or not.

Proving truth and fairness of operating results presented by income statement

and financial position presented by the balance sheet.

II. SECONDARY OBJECTS

The work of audit is done to fulfil the following objects :
1. Detection of Errors : Errors are generally committed innocently. But an
auditor should be very careful about it.

Errors are of various types. Some of them are:

(i) Errors of principle.

(ii) Errors of omission.
(iii) Errors of commission.
(iv) Compensating errors.

2. Detection of Fraud : Frauds are those mistakes that are committed knowingly
with some vested interest in the direction of top-level management. An auditor should
detect such frauds using skill, knowledge, and facts.
Management commits frauds to deceive taxes, to show the
effectiveness of management, to get more commission, to sell a share in the
market, or to maintain the market price of the share, etc.
Such Frauds are as follows:
(i) Misappropriation of cash.
(ii) Misappropriation of goods.
(iii) Manipulation of accounts or falsification of accounts without any
misappropriation.

3. Prevention of Errors and Frauds : Prevention of errors and frauds is the

responsibility of management. Audit is not expected to prevent errors and
frauds. But audit definitely casts a moral check on the em- ployees of the
organisation. The fact that the accounts will be audited and errors and frauds are
likely to be detected, acts as a moral check on the employees and curbs
fraudulent intentions. So, audit undoubtedly is a preventive check also. By
compliance tests, the auditor identifies the loopholes and the weak areas of the
internal control system, and the auditor can suggest the management to plug
those loopholes. In this way an audit prevents errors and frauds to a certain
extent.

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4. Creation of Healthy Environment : When employees know that their work

and activities are to be examined by some experts (auditors), they become
serious towards their duties and as a result the possibility of errors and frauds is
minimised. Thus, the auditor creates healthy environment of honesty,
responsibility and truthfulness in the business.

5. Fulfilment of the Order of Act : Audit also gives emphasis on the fulfilment
the laws under which the Company has to work.

6. To Satisfy the Government Authorities : The object of audit is also to satisfy

Government authorities in respect of the books of accounts and the statements
prepared by the organisation. Therefore, income-tax and GST are computed by
the concerned authorities as they trust on audited books of accounts.

7. Advice to the Managers : During the course of audit an auditor comes across
various shortcomings and errors. Hence, the auditor should give advice to the
management regarding these shortcomings and errors. Although it is not the
statutory duty of the auditor to provide information to the management but in
practice, the auditor gives suggestions regarding important matters to the
management.

8. Moral Effect on the Employees : The work of audit creates fear in the minds
of the employees that errors and frauds committed by them would be detected
by the auditor which may create adverse situation for them. As a result the
employees get moraly upgraded and discharge their duties honestly and
effectively.

III. SOCIAL OBJECTS

Social objectives of an audit can be discussed under the following heads:
1. Protection to Shareholders : Auditors are the representatives of the
shareholders, naturally it is the duty of an auditor to see whether the interest of
the shareholders is protected or not.

2. To Stop Evasion of Tax : Another vital social object of an audit is to see that
the national interest is protected. The national interest can be protected only
when cases of evasion of taxes are prevented.

3. To Stop Capital Erosion / Reduction : Capital erosion arises when high rate
of corporate tax is paid, dividend is paid out of inflated profit etc. In order to
stop capital erosion of the business, which is one of the social objectives of an
audit.

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4. Measurement of Fair Wages for Labourer : Measurement of fair wages come

under the purview the social object of an audit to see whether the wages for
labourers are fair or not.

5.Fair Return and Justice to the Investors : The fair return of a particular
Company can be judged with the rate of return of similar type of other Company
or industry. Return is an element of Government revenue.

Conclusion
The auditors should always keep in mind primary and secondary or subsidiary
objectives in mind while conducting audits as it will help them express their
opinion over the true and fair view of the organisation’s financial position.

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Q. 6 : State briefly the essential qualities of a successful

auditor .

Ans.: An auditor being a high level officer has to perform complex functions.
Therefore, he must have all the qualities of head and heart as is required by the
nature of his job. He must be a man of character and good behavior. He must also
be a hard working person so as to do the work himself and get the work done
through his assistants. The qualities of an auditor are of two types:
(I) Acquired Qualities and (II) Born Qualities

(I) Acquired Qualities: Those qualities which are acquired by an

individual after gaining knowledge through formal study and training are known
as acquired qualities. For attaining the competency to be a professional auditor an
individual must be a qualified Charted Accountant. It is expected from an auditor
the following acquired qualities:

1. Knowledge of Book-Keeping, Accountancy and Auditing: An

auditor must have thorough and upto-date knowledge of accounting and
auditing principles, practices, techniques and procedures. As accounting is a
changing technique, he should be fully aware of the new changes and
developments in the field of accounting.

2. Knowledge about the working of Business: The auditor should

know the technical details about the working of the business or the industry or
trade carried on by his client, only then he would be able to judge whether the
profit of the business and its financial position are truly reflected in the financial
statements.

3. Knowledge of Language: An auditor should possess good knowledge

of various languages like Hindi, English, Odiya, Marathi etc. which are used for
maintaining books of accounts and practiced as a medium of conversation, in the
areas where the auditor has to perform his work. It is essential for efficient conduct
of audit and preparation of audit report.

4. Knowledge of Economics: He should also be familiar with the principles

of economics and the various economics laws. It is necessary because a business
has to work within some specific social and economic environments which have
definite effect on the business. Functions like valuation of stock, charging
depreciation on fixed assets, verification of the valuation of various assets, etc.
are closely linked to economic laws.

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5. Knowledge of Business Laws: An auditor should be proficient in various

business acts and laws, such as, Contract Act, Sale of Goods Act, Insolvency Act,
Income Tax Act, Sales Act, Partnership Act, Factory Act, Company Act, etc. to
discharge his duties properly.

6. Knowledge of Audit Case Laws: He should have good knowledge of the

audit case laws and important decisions, both past and present, which have gone
a long way in defining the duties and liabilities of an auditor under varying
circumstances.

7. Technical knowledge: He must have thorough knowledge of the technical

and other details of the business so that he can elicit necessary information from
the employees of his client.

8. Knowledge of other subjects: The work of auditing requires the

knowledge of various other inter-related subjects such as industrial management,
financial management, tax laws, cost accountancy, material management,
production management etc. such knowledge helps the auditor to discharge his
duties efficiently.

(II) Born Qualities :

Those qualities which are inherited by an individual by the virtue of his birth are
known as Born Qualities. These qualities are also referred as ‘God Gifted ’
qualities. An auditor should posses the following born qualities:

1. E fficient: An auditor should be efficient to perform the complex

work of auditing even in adverse situations. If an auditor lacks this quality he may
not be able to verify the truthfulness and fairness of the books of accounts with
accuracy.

2. Honesty: An auditor must be an honest person. He should not certify any

transactions as correct unless he himself is sure that it is true. He must exercise
reasonable care and skill.

3. Speak Truth : An auditor should be habituated to speak truth. Only then he

can avoid verifying false facts. His love for truth will prevent him from doing any
act which is wrong or false.

4. Tactful: An auditor must be tactful so as to effectively deal with the client

and get necessary explanations for his audit work.

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5. C ommon Sense: He must be a person of good common sense to

deal with the employees who might be more experienced and clever than him.
Well executed schemes of fraud cannot be discovered unless the auditor
possesses a high level of common sense.

6. S ecrecy: An auditor should not disclose the secrets of his client

otherwise he will have to make good the loss suffered by his client due to his act.
Therefore, an auditor should maintain maximum level of secrecy.

7. Courteous and well-behaved : An auditor should be courteous and well

behaved while dealing with his clients. He should try to win the confidence of
his clients and their employees so as to get their whole hearted co-operation
which is quintessential (best of all) in discharging his duties efficiently.

8. I mpartial: An auditor should be impartial. He must not be unduly

influenced by anyone while discharging his duties and responsibilities. In case
he finds something suspicious. He should thoroughly examine the matter to find
the truth without favouring any individual or party.

9. Cautions and Vigilant: The work of an auditor requires extreme caution

and vigilance on the part of the auditor. Any failure in this regard while
examining the books of accounts and verifying its truthness and fairness will lead
to improper findings. This might stand not only against the interest of the client
but to his own interest as well.

10. P atience: An auditor should avoid doing things in hurry. He should

conduct the work of audit with due patience, leaving minimum or no scope for
error on his side.

11. Not to be suspicious : An auditor should not be suspicious or prejudiced.

He should not start his work with the suspicion of things or people being wrong.
Justice Lopes said, “ an auditor is neither a detective nor he works with the
assumption that there must be some mistake”.

12. Prudence: If an auditor is asked to give advice on matters relating to

finance or to suggest improvement in the accounts, although not within his
sphere, an auditor must be prudent and practical.

13. Reasoning : An auditor should always be prepared to hear arguments

and must act reasonably. He should be able to distinguish between right and
wrong and act logically under various circumstances.

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14. A bility to Correct Oneself: An auditor should have the ability

to accept his mistakes and correct himself on time. He should believe in ever
learning process. This will help him in discharging the audit work effectively.

15. A bility to write Report: An auditor should be able to write the

audit report to the shareholders clearly, correctly, concisely and forcefully. It is art
which is possible through honest effort and practice.

16. P rudence : If an auditor is asked to give advice on matters relating

to finance or to suggest improvement in the accounts, although not within his
sphere, an auditor must be prudent and practical.

17. Reasoning : An auditor should always be prepared to hear arguments

and must act reasonably. He should be able to distinguish between right and
wrong and act logically under various circumstances.

18. Ability to Correct Oneself : An auditor should have the ability to accept
his mistake and correct himself on time. He should believe in ever learning
process. This will help him in discharging the audit work effectively.

19. A bility to write Report : An auditor should be able to write the

audit report to the shareholders clearly, correctly, concisely and forcefully. It is art
which is possible through honest effort and practice.

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Q. 7 : Define auditing. Highlight on its importance. What are its

limitations ?

ANS. Meaning of “Audit”

The term ‘Audit‘ comes from the the Latin word “Audire” which means “to
hear.” Hence, an auditor is a person who hears or listens.

“ An audit is a systematic examination of books of accounts, documents and

vouchers of a business with a view to determine the accuracy and reliability of
accounting statements which reflect true and fair picture of the organisation for
a particular period.”

“An audit is an examination of such records to establish their reliability and the
reliability of statements drawn from them.” —W.H. Hanson

IMPORTANCE OF AUDIT
1. Audit satisfies the owner about the working of the business operations and the
functioning of its various departments.
2. The audit helps in the detection and prevention of errors and frauds.
3. The audit helps in maintaining the records and verification of books of the
books of accounts.
4. The independent opinion of the auditor is extracted through auditing which is
extremely essential for the management of the company.
5. The audit establishes a moral check on the staff of the business so that they
became aware of not committing any irregularity. This makes the staff more
active and responsible.
6. Audit protects the interests of the shareholders by assuring them that their
accounts are being managed properly and their interests will not suffer under
any circumstances.
7. Audit creates confidence among stakeholders such as creditors,
debenture holders, and banks, etc.
8. Audited statements ensure compliance with legal requirements.
9. Auditing reinforces and strengthens Internal control and provides
suggestions necessary in the internal control system.
10. Audited financial statements enable easy access to loans because it provides
a crystal clear image to the banks.

CONCLUSION
The basic function of auditing is to ascertain the authenticity of books of
accounts prepared by the accountant. It is a well-known saying that “where the
function of Accountant ends, the audit begins to determine the true and fair
picture of such accounts.”

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

LIMITATIONS OF AUDITING
1. It is only Test Check : Since the number of transactions is very
large, it is not possible for the auditor to check each and every transaction. Hence,
only test checking is done by him.

2. B ased on Internal Check and Control : Efficiency and

effectiveness of auditing is largely dependent upon an efficient internal check
and internal control system. In case these are not efficient, the auditor cannot
audit the books of account properly.

3. Lack of Independence : In theory the auditor is appointed by the

shareholders. However, in practice he is appointed by the management i.e.
the shareholders having majority shares. As a result the auditor is hardly
independent and cannot report fairly.

4. P ost-mortem Techniques : Auditing begins where accountancy

ends. The auditor may not be able to discover systematic manipulation in the
books of account at the beginning stage.

5. D ependence on Inside Information : An auditor has to depend

on various persons of the enterprise to seek information, clarifications and
explanations. If the persons involving in manipulation, the informations, etc.
may not be reliable.

6. . E fficiency of Management : An Auditor does not comment on

the efficiency of management working in client organization; it is not possible
through audited financial statements.

7. Faulty Techniques : Where there is use of faulty techniques which are

inconsistent with nature of business, methods of book-keeping and accountancy,
audited accounts do not show real condition and fair view.

8. F aulty External Evidence : External evidences may not always

be wholly reliable. For example, valuer may go wrong in valuing the assets. In
these circumstances even audited books of account may not be authentic.

Thus, it can be conluded from the above discussions that that auditing is a must
for every business concern. So, it should be done by an expert and open-
minded auditor. Keeping in view these things, Indian Companies Act, 2013
has provided for compulsory auditing for every Company by an independent
and qualified auditor.

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Q. 8 : “An Auditor is a watch dog not a blood hound.” Discuss

this statement.

OR
“An Auditor is a watch dog not a bloodhound.”
In the light of above statement, discuss the duties and
liabilities of an Auditor.

ANS.
“AUDITOR IS A WATCHDOG, NOT A BLOODHOUND ”
The duty of an auditor with regard to the detection and prevention of fraud and
error has been a matter of discussion for a long time. It has been laid down by
several legal decisions and has been considered in many professional
pronouncements. In this context, we are trying to throw light on some of these
decisions and discuss the meaning of the famous quote “Auditor is a watchdog,
not a bloodhound”.

The legal perspective on

“Auditor is a watchdog, not a bloodhound”
In the last century, the way an auditor’s duty is perceived with regard to the
detection and prevention of fraud and error has undergone many changes.
Initially, it was more to do with the decision given in the Kingston Cotton Mills
Co. case (1896). In that case, the learned Judge Lopes categorically defined an
auditor’s duty by stating that an auditor is a watchdog, but not a bloodhound.
Unless doubtful situations are there, the auditor is totally justified in relying
upon the management and employees are honest.

An auditor is not expected to act as a detective or approach his or her work with
undue suspicion or having preconceived notions in mind. He is not a bloodhound,
but he is a watchdog. This statement means the following:

 In the case of a limited company, an auditor is appointed by the company’s shareholders.

He is expected to work on their behalf in the role of a watchdog and should look after their
best interests.

 Unlike a bloodhound, the auditor’s main duty is towards verification of the client’s books
rather than detection. During the course of his audit, if he finds something suspicious, he
should extend his audit procedures to examine the matter in detail and should communicate
the same to the shareholders. However, in the absence of any such suspicious circumstances, he
is completely justified in relying upon the representations made by the client’s staff and
management. When it comes to fraud and error, he has to exercise reasonable care only.

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Later, in the case of Westminster Road Construction and Engineering Co.

(1932), it was pointed out that an auditor should adopt necessary audit
procedures to confirm the facts stated through management representations.
Hence, it broadened the scope of an auditor’s duty with regard to the detection
and prevention of fraud and error.

Further, in some other cases, this scope was all the more extended to include the
auditor’s accountability not only towards shareholders but also towards third
parties provided that his negligence is proved. Hence, for the first time in the
case of Hedley Byrne & Co Ltd v Heller & Partners Ltd (1963), the liability of
auditors towards third parties was recognized.

Professional perspective
SA 240 entitled “The Auditor’s Responsibility to Consider Fraud and Error in an
Audit of Financial Statements” gives guidance on the responsibility of an auditor
for identifying fraud and error and reporting on them.

According to SA 240, an auditor conducts a financial audit of an entity in order

to obtain a reasonable assurance (and not absolute assurance) that its financials are
free from any fraud/error and material misstatements.

In addition, He must always be alert to any signs of misstatement. If there are

any doubtful situations, the auditor should extend his proce- dures to confirm or
dispel that doubt. However, it should be noted that he is not responsible for the
subsequent discovery of frauds as long as he undertakes adequate audit
procedures.

The auditor is liable for failure to detect fraud only when such failure is
substantially due to a lack of reasonable care and skill being exercised on his
part.

Status of the auditor: “Auditor is a

watchdog, not a bloodhound”
The point now arises as to what an auditor’s true status in a corporation is.
Clearly, an auditor has legal standing. To put it another way, a company auditor is a
statutory auditor since he is appointed strictly according to the law’s regulations.
The following principles determine the status of an auditor in a company:
(1) An agent: The auditor is an agent of the company’s members as signed to
execute tasks.

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(2) Not an advisor: An auditor is not a company advisor. It is not his

responsibility to advise the board of directors or the shareholders.

(3) Not a detective: An auditor is neither a detective nor a company

employee. He (the auditor) is a watchdog, not a bloodhound. He does not need
to be overly suspicious in his work.

(4) Not to discover frauds: It is not the auditor’s responsibility to uncover

scams that have been carefully planned and committed. He can rely on the
honesty of the company’s employees and management.

(5) Not to guarantee : The opinion of an auditor on the financial statements

of the company does not imply an inherent assurance of correctness of books of
accounts.

(6) An officer: Although an auditor is not an employee of a company, he is

treated as an official of the company under many provisions of the Companies
Act.

CONCLUSION :
By combining the above legal and professional perspectives, it can be seen that
the auditor’s roles and responsibilities have been extended and made stricter
over time. He is required to maintain an attitude of professional at all times,
should confirm the representations made by management, and remain alert to
any signs of misstatement.

It is his duty to exercise all reasonable care to ensure that the financial
statements are free from fraud. But unless he has been negligent in his approach,
he can’t be held liable for non-detection of misstatements.

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Q. 9 : “An Auditor is a watching dog not a blood hound.” Discuss

this statement.

OR
“An Auditor is a watching dog not a bloodhound.” In the
light of above statement, discuss the duties and liabilities
of an Auditor.

ANS. (Revised) :
“AUDITOR IS A WATCHDOG, NOT A BLOODHOUND ”
‘‘AN AUDITOR IS A WATCH DOG, BUT NOT A BLOOD HOUND’’
OR
DUTIES OF AN AUDITOR AS REGARDS TO ERRORS AND FRAUDS

(I) STATEMENT RENDERED (USED)

“An auditor is a watchdog and not a bloodhound”. This statement was rendered by a
learned Justice Lopes in the case of Kingston Cotton Mills Company (1896). The facts
of the case were, that the management of the company increased the profits by
manipulating stock-in-trade. The auditor included the whole amount of stock-in-trade in
the list of the assets on the basis of certificate obtained from the manager of the company,
without making physical verification of the stock. The question before the Court was
whether the auditor was guilty of carelessness by not verifying the stock physically and
believing on the certificate furnished by the manager of the company. Explaining the
duties of an auditor, Justice Lopes stated “The duty of an auditor is to observe that much
care and competence which is expected from a qualified, careful and experienced auditor
under the similar circumstances. What is reasonable skill, care and competence depends
upon the facts of the individual case. It is not necessary for an auditor to be a detective.
He should not discharge his duties with suspicion in his mind that account books must
have some errors and frauds. And he stated “an auditor is a watchdog and not a
bloodhound.”

(II) CHARACTERISTICS OF A WATCHDOG AND THE AUDITOR The first

part of the statement is, ‘Auditor is a watchdog’. The main characteristics of a
watchdog is that he does not allow any person to do some loss to his master. And if any
person tries to put the master to any loss, it barks and informs the master about the
unforeseen acts of the third party. Thus, it is clear from the statement that the watchdog
neither tries nor barks on each and every person. It does not try to bite the person who
comes nearer and does not harm. The watchdog barks upon such a person who wants to
create nuisance or loss to its master. Thus, a watchdog remains faithful to its master and
discharges its duties honestly. The auditor’s duty in the same manner is to discharge his
duties towards his employer carefully, faithfully and honestly. He should always take
due care to protect the interest of his employer.

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(III) CHARACTERISTICS OF A BLOODHOUND AND THE AUDITOR The

second part of the statement is, “An auditor is not a bloodhound”. The characteristic of
a bloodhound is to see with suspicion and treat as an enemy any person who comes
nearer his master. Therefore, it not only barks upon such person but also tries to injure
him. The auditor should not act and follow a bloodhound. He should find out the error
and frauds. He should not treat the employees responsible for such error and fraud as
enemies, rather show love and co-operation towards them. If he is suspicious about
any employee he should not act with an intention to harm him. He should state the fact
in his audit report. He should discharge his duties soberly and tactfully.

(IV) DUTIES OF AN AUDITOR IN THE LIGHT OF ABOVE STATEMENT Though the

statement of Justice Lopes is small, but it is full of substance. If we go through the
statement carefully, it would be evident that Justice Lopes speaks a lot in a nutshell. On
the basis of above statement, the duties of an auditor can be elucidated as follows :

1. An Auditor Should Not be Suspicious :

A watchdog does not presume that every visitor to his master is a thief or a person to
harm his master. Similarly, an auditor should not approach his work with a presumption
that there are elements to harm his employer or he should not discharge his duties with
suspicion in his mind that the account books must have some errors and frauds. On the
other hand, a bloodhound presupposes the existence of a prey. He goes out to search the
prey (Shikaar) with a suspicious notion. Therefore, an auditor should not approach his
work with the presumption that errors and frauds exist in the account books.

2. A n Auditor should Believe the Trustworthy Employees :

A blood-hound always sees everybody with suspicious eye, but a watchdog inkle
mistrust on trustworthy employees of his master. Similarly, an auditor should have faith
in the employees in whom the employer has full faith and confidence.

3. An Auditor should Not Guarantee Correctness :

As, a watchdog does not guarantee that he shall detect every thief or harmful person. It
is possible that he may not be able to catch the theft committed cunningly in a well-
planned manner, but a bloodhound is expected to do so in all cases. Like a watchdog an
auditor cannot guarantee to detect each and every error and fraud in the books of
account.

4. An Auditor is a Watchdog, Not a Stray Dog of the Street : There is a lot

of difference between a watchdog and a stray dog (Awaara kutta) of the street. A
watchdog is more faithful, trained and efficient but the street dog lacks these traits.
Similarly, an auditor being a man of specialised knowledge and experience of
accountancy and relevant subjects, he can trace out many errors and frauds with his
expertise.

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5. An Auditor is Not a Detective : A bloodhound or spy-dog gets hold upon the

culprit with his smell-sensitivity but a watchdog may or may not. An auditor works as a
watchdog. He may detect the frauds or may note them as well.

6. A n Auditor must be Honest : A watchdog performs his duty faithfully

and honestly. He alarms his master if a thief is in sight. Similarly, an auditor should
perform his duties carefully, faithfully and honestly like a watchdog. Whenever, he
comes across any irregularities during the course of audit he must alarm his employer.

7. Discharging Duties with Reasonable Care and Skill : A watchdog

watches and warns his master with reasonable care and skill. Watchdog cannot have a
sound sleep at night and becomes alert even at the slightest patting (Haath ki thapaki).
Similarly, an auditor should perform his duties with due care, skill, vigilance and be
cautious at the slightest irregularity or frauds.

8. He should Not Check only Arithmetical Accuracy : A watchdog does not

watch a portion of master’s premises but he keeps vigilance all-around. Likewise an
auditor should not check only arithmetical accuracy rather he should check all types of
accuracies prevailed in books of account.

On the basis of above discussions, it can be said that an auditor shall not be held
responsible if he is not able to detect the frauds committed in a pre-planned manner by
the trustworthy employees of the organisation.

Conclusion
It should not be concluded that an auditor will always work like a watchdog and never
act as bloodhound. The conclusion is that normally an auditor should perform his duties
like a watchdog. But, if he senses irregularities and embezzlements, he should play the
role of bloodhound and not relent until he checks from top to bottom. Justice Lopes
stated further in his judgement, “If there is any thing calculated to excite suspicion,
he should probe it top to bottom, but in the absence of anything of that kind,
he is only bound to be reasonably cautious and careful”.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

Q. 1 0 : What is Continuous Audit ? How does it differ from Periodical Audit?

Meaning : C ONTINUOUS AUDIT

Continuous Audit is an audit in which detail examination of transactions, books of
accounts with supporting vouchers and documents is done by the audit staff
continuously throughout the year or at regular intervals, say, fortnightly, monthly or
quarterly. This audit is also known as Detailed Audit or Running Audit.

In brief, continuous audit means wherein the audit work starts right from the
very beginning of the year and continues throughout the year.

CONTINUOUS AUDIT AND PERIODICAL AUDIT

DIFFERENCES

Following are the main differences between Continuous Audit and the
Periodical Audit:
Continuous Audit Periodical Audit
1. Meaning Continuous audit is an audit,which is Periodical audit is an audit which
conducted continuously throughout the year commences after closing of accounts
at regular or irregular intervals during the and preparation of final accounts.
financial year.

2. Nature In continuous audit, book keeping work and In periodical audit, audit work is taken
audit work continue together and these are up only after all book-keeping and
simultaneously checked. accounting works completed.

3.Audit Report When continuous audit is undertaken, Under periodical audit, audit work
audit report can be submitted quickly after takes a long time to be completed,
the preparation of final accounts. audit report also gets delayed.

4. Extent of In continuous audit, detailed checking of Under periodical audit, detailed

Checking accounts is possible. checking of accounts is not possible.

5. Detection of Under continuous audit, errors and frauds But, as detailed examination is not
errors & frauds can be detected quickly and possible in periodical audit, errors and
accordingly,corrective action can also be frauds may remain undetected.
taken.

6. Suitability Continuous audit is suitable for big Periodical audit is suitable for small and
organisations. medium-sized organisations.

7. Expensive Continuous audit is quite expensive. Periodical audit is more expensive than
continuous audit.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

8. Audit Link Under continuous audit, the auditor fails In periodical audit, useful audit link can
to maintain audit link due to in- tervals be maintained.
taken by the auditor.

9. Work Division In continuous audit, the auditor can Under periodical audit, distribution of
properly distribute the work among his work among audit staff becomes a
staff. problem.

10. Moral Check Continuous audit casts a good moral Periodical audit casts a compara-
check upon the client’s staff who have to tively low moral check up on the
do their duties properly and in time. accounts staff as the auditor does not
visit the client’s offices during the
financial year.

11. Good Advice As the auditor and his staff visit the In periodical audit, the auditor and his
client’s organisation throughout the year, assistants visit the client’s only
they come to know the details about the once.Due to a short visit and busy
organisation. This enables the client to get period of audit, the auditor will not
useful advice from auditor. give his client appropriate advice.

12. Chances of Under continuous audit, as aresult of good Under periodical audit, the chances of
Un- healthy relationship between audit staffs and unhealthy collusion are very low.
Collusion organisation personnel,unhealthy collusion
may develop between them.

13. Chances of In continuous audit, there are chances of On the other hand, the chances of loss
Work break loss of the thread of work, because of long of thread of work is not possible in
interval by two visits. periodical audit.

14. Dependence In case of continuous audit, too much Under periodical audit, the client with
on Auditor dependence on auditor makes the the aid of his personal staff prepares
client’s staff inefficient and lazy. the books of accounts. No dependence
on auditor arise.

15. Mechanical As the auditor under continuous audit has Uner periodical audit, the auditor has
and Boring to visit the same organisation, the work of to visit more organisations, hence, no
audit becomes mechanical and question of mechanical and
monotonous. monotonous.

16. Innovation Under continuous audit, innovational on The auditor seldom finds sufficient
research aptitude can be developed within time to concentrate their thoughts and
the audit. ideas in developing research aptitude.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

Q.11 : WhatisanAuditProgrammeandhowshoulditbeconstructed? Discuss

its advantages and disadvantages.

Ans. MEANING :
An audit programme is a detailed plan of the auditing work to be performed. It
specifies the procedures to be followed in the conduct of audit more effi- ciently. The
auditor outlines the whole procedure of audit from beginning till the finalization of
audit report. Audit programme is generally contained in the audit notebook.

Definition by some authors :

“Audit programme is a detailed plan of the auditing work to be performed,
specifyingthe procedures to be followed in verification of each item in the
financial statements and giving the estimated time required.”
—Prof. Meigs
“The objective of preparation of an audit programme is to bring out uniformity
in the audit work and to ascertain that the whole work of accounting has been
audited. The programme is called Audit Programme. The staff of the auditor
completes the work assigned to him and puts his signature on the work
completed by him.”—Walter W. Bigg

“The audit programme is an outline of all procedures to be followed in order to

arrive at an opinion concerning a client’s financial statements.”
—Howard Stettler

On the basis of above definitions, we can say :

“An audit programme is a written plan of actions designed by the auditor, to see
that all the books of accounts have been audited properly, the work is over in
time, and there is uniformity in the audit work. Every person entrusted with the
part of the audit work has to put his signatures of the part of the work completed
by him.”

PREPARATION/CONSTRUCTION OF AUDIT PROGRAMME

An audit programme is a written scheme prepared by the auditor to distribute the work
to be followed during audit. The preparation of such programme in- volves only three
things. They are :
(i) How much work is to be done ?
(ii) Who is going to do a particular portion of the work ?
(iii) What is the duration of time by which the work is to be finished ?
The audit programme ensures a complete grip of the auditor over his staff, for it not only
specifies the work to be done by each of them within alloted time, but also records the
actual performance, i.e. the work actually done and the time taken to do the work.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

ADVANTAGES OF AUDIT PROGRAMME

The advantages of an audit programme have been enlisted below :
1. Proper Division of Work : The most important advantage of an audit
programme is that audit work is divided amongst the audit staffs effectively.
With the help of audit programme, the auditor can divide the whole work of audit
among his staff on the basis of competence, ability and experience of his staff.

2. Determination of Responsibilities : Audit programme clarifies as to which

work is to be performed by whom and within what time period. Thus, the
person who is involved in finishing a particular work within a specified time,
becomes accountable towards its performance.

3. Increase in the Efficiency of the Employees : Division of labour,

determination of responsibilities, fear of auditor, these all factors increase the
efficiency of the audit staffs. Thus, possibility of errors and negligence is
minimised.

4. Time Saving : In the audit work, the period of completion of work is

predetermined and hence, employees are bound to finish their work within the time
alloted which ultimately saves time.

5. Facility of Changing the Work : In case, an employee or member of staff of

the auditor goes on leave in between or before the completion of the audit work,
the work of such person can be easily entrusted to some one else, without
disturbing the whole audit programme.

6. Uniformity in Audit Work : Audit programme is usually prepared on the

basis of audit work of previous years. Thus audit programmes brings uniformity
in the audit work.

7. Knowledge about the Progress of the Work : The performance of the

assignment entrusted to a particular member of the staff, can be reviewed, its
progress can be judged.

8. Base of the Future Audit Plan : Audit programme is a useful basis for
planning the audit programme for subsequent year.

9. Self-defence (Proof in the Court) : In case, the auditor is charged of

negligence by his client and a suit is filed against him to this effect, audit
programme serves as an evidence in the Court.

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10. Early Completion of Audit Work : Audit programme helps in the smooth
conduct of the audit work and helps in its early completion.

11. Satisfaction of Complete Checking : When the audit work is over according
to the audit programme, the auditor is satisfied that the whole audit work is
completed in time and nothing is left out, from being audited.

12. Guidance : Audit programme is a kind of guidance to the auditor for the
work, he has to perform and an assurance to the auditor that the junior will not
overlook essential points while checking the accounts.

13. Control Over Work : In audit programme it is clearly mentioned that which
work will be performed by whom and by what time. Hence, control over work
is quite possible by the auditor.

14. Evaluation of Works Performed : If the speed to finish the work is slow, it
will take more time to complete the work and as a result cost of production will
increase. On the other hand, if the work is done fastly there may arise chances to
commit errors. Thus, evaluation is done in this way and in adverse situation steps
are taken to keep it under control.

15. Helpful in the Preparation of Audit Report : The audit programme after
completion of work becomes a sort of progress chart and the auditor can
easilyproceed to prepare and sign the final audit report.

DISADVANTAGES OF AUDIT PROGRAMME

In spite of various advantages, an audit programme suffers from the following
disadvantages :

1. It makes the Audit Work Monotonous : A written and detailed audit

programme lists the audit procedures in detail. As a result, the work becomes
mechanical and monotonous.

2. Lack of Elasticity : This is an age of change. Daily new problems arise under
the changed circumstances. Such problems are not covered by these audit
programmes, because these programmes cannot be changed easily.

3. Loss of Initiative : Audit pro-gramme limits the interest and zeal of the audit
staff. The audit staff have to follow the audit programme given by their boss
(auditor). The staff cannot make any suggestion.

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4. Less Chances of Detection of Errors and Frauds : Audit programme

affects adversely the objects of auditing. An employee of the auditor does audit
work as per the audit programme, he has limited time at his disposal and he fails
to detect the cleverly committed errors and frauds by the employees of the
organisation.

5. Expensive : Audit programme though beneficial is expensive. Therefore,

it is not suitable for small business concerns.

6. Difficulties in Incorporating New Technique : The audit staff tends to go

ahead with the work as per audit programme and therefore, there is no room for
adopting new techniques.

7. Waste of Time : If the audit assistants due to their efficiency complete the
audit work before time, they will still work to kill time.

8. Defending Deficiencies : Inefficiency on the part of an audit staff finds a ready

excuse, as the staff can defend by showing the audit programme.

9. Incomplete : The audit programme is incomplete even if it is well drawn-up,

as it may not cover everything that might come up during the course of audit.

10. Rigidity : Each business may have a separate problem of its own, a rigid
programme cannot be laid down for each type of business.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

Q.12 : What is an Audit Note Book ? What is its utility ? What are its
contents? How far it is useful to an auditor ?
OR
What is an Audit Notebook ? What are its Contents ? Explain its
Advantages and Disadvantages

Ans. AUDIT NOTE-BOOK

MEANING :
In other words, “Audit Note-Book is a book in which all such points which occur
during the course of audit, i.e. important queries, their replies, informations sought
but not replied or given in time, or unsatisfactory replies received etc. are
recorded.”

Notes about all types of errors, difficulties, and uncleared queries or points to be
discussed with the auditor or clients and the points to be incorporated in the
report are noted.

SPECIMEN OF ENTRIES IN AUDIT NOTE BOOK

Voucher A/ c Debited Rs. Query Solution to Query
50 Advertisement 30,000 M.D.Sanction Required Sanction obtained

155 Rent 25,000 Rent bill and Receipt Receipt and bill obtained
Required

160 Stores 60,000 Invoice Required Copy of Invoice obtained

120 Machinery 90,000 Board sanction Required Sanction obtained verified

with Minutes of meeting.

140 Travelling 75,000 Sanction and bill required Sanctioned obtained but bill
missing.

USES OR IMPORTANCE OF AUDIT NOTE BOOK

1. Audit note book can be used as reliable evidence in the Court of law in case of dispute or
if the auditor is charged with negligence.
2. It is useful for drawing the audit programmes.
3. This note book can be used to facilitate the auditor to know the actual volume of work
performed by his/her audit staff.
4. It also helps the auditor for correlating the audit work if the related assistant is
not present.
5. It also records different queries that came up during the course of the audit and their
state of disposal.
6. Further, with regard to disposed queries, explanation received and evidence
encountered, would be recorded and those queries which are not disposed of would
be noted for the purpose of follow up.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

CONTENTS OF AN AUDIT NOTE-BOOK

The following informations must be recorded in an Audit Note-book :
(1) Name of the business,
(2) Organisational structure of the business,
(3) The nature of business,
(4) Important provisions of Articles of Association, Memorandum of Association
and Partnership Deed concerned with the work of audit,
(5) List of books maintained by the organisation,
(6) Accounting methods followed and shortcomings therein.
(7) Irregularities, if any, found during the course of audit,
(8) Names of key officials and their rights, duties and responsibilities,
(9) Details of internal control system followed by the enterprise,
(10) List of missing vouchers and receipts,
(11) Querries requiring explanation or clarification,
(12) Progress of the audit work,
(13) Books and records not available for audit work,
(14) Points to be incorporated in audit report,
(15) Dates of commencement and completion of audit work,
(16) Balances of important Ledger Accounts,
(17) Important matters for future reference,
(18) Important contracts held with the clients,
(19) The mistakes in errors discovered,
(20) The technical terms used in business,
(21) Any matter which requires discussion with the senior or with the auditor,
(22) Bank Reconciliation Statement,
(23) Summary of adjustments, closing and contra entries advised to client,
(24) Suggestions made to the client,
(25) Any other matter that may be useful.

USEFULNESS / ADVANTAGES OF
AUDIT NOTE BOOK TO AN AUDITOR
In case of failure to apply reasonable care, the liabilities of the auditor of a
company in relation to his work have been expressly specified in several laws
including the Companies Act 2013 and are also recognized by pronouncements
of the Courts.

This Note-book acts as valid proof in support of the auditor’s work in order to
protect him from any legal action that may be brought against him for
negligence. It is also extremely beneficial to the auditor in the preparation of the
audit report. Moreover, it also serves as a useful reference for performing audits
in the future.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

ADVANTAGES OF AUDIT NOTE-BOOK

The main advantages of audit note-book are as follows :

1. Proof in the Court of Law : In case the auditor faces charges of neligence
in the Court of law, the auditor can produce this audit note-book as an evidence.

2. Knowledge about the Progress of Audit Work : An auditor can get an

idea of the progress of the audit work through audit note-book.

3. It Helps in Future Planning of Audit Work : If the auditor has to take-up

the audit work of the same Company in future, he can commence the audit work on
the basis of this audit note-book. Earlier audit shall guide him in planning his
audit work now.

4. Helpful in Preparing Audit Programme : Since, the most of the

important and main informations are recorded in this note-book, it proves to be
highly useful in preparing and carrying out audit programme.

5. I t Records Helpful Matters : Audit note-book enables the audit

staff to record important matters which are necessary for an efficient and effective
audit. In absence of it, they may forget such points.

6. Quality of Audit Work : It improves the quality of audit work as the audit
staff can learn more from the earlier audit note-books which in turn decreases
deficiency and increases the quality of audit work.

7. N o risk of Changing Figures : Danger of changing figures in case

of continuous audit can be avoided with the help of audit note-book.

8. . P reparation of Report: In addition, this book assists in gathering

the information needed to prepare the audit report. Before writing and
concluding the audit report, an auditor reviews the audit note book.

9. . F ixing responsibility: It shall help to fix the responsibility of the

concerned audit assistant who is tasked with verifying a certain area of accounts
during the course of the audit and particularly, for non-detection of fraud and error
in that area.

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DISADVANTAGES OF AUDIT NOTE-BOOK

Inspite of the above advantages of audit note-book, it suffers from

thefollowing :
1. Helpless in Defending Auditor : If the audit note-book is not prepared
carefully,the auditor cannot defend himself in a suit filed against him for
negligence.

2. Audit Staff ’s Negligence may be Concealed : The audit staff may

indulge in preparing audit note-book to conceal its own negligence.

3. Lack of Secrecy : Audit note-book may be misused to disclose confidential

informations about the client.

4. A udit Work with Suspicion : It may make the audit staff to

start their work with suspicion. Thus, an auditor may not act as a watch dog but
a blood hound. The audit staff may try to find faults with everything. It may
create misunderstanding between the client and the audit staff.

5. D ependency of Audit Staff on Client’s Staff : It may make

audit staff over dependent upon client’s staff for its preparation. Thus, it may
endanger the efficiency and effectiveness of audit work.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

Q. 1 3 : What do you mean by Internal Check ?What are its features and
objectives ? Diffrentiate between Internal Check and Internal
Audit.

INTERNAL CHECK
MEANING : Internal Check System is a system of detecting errors and frauds in
which no single person is allowed to handle a transaction completely from the
beginning to the end. The work is divided in such a way that the work of one
employee is automatically checked by the work of other employee. There is little
possibility of fraud unless there is collusion between all the employees doing the
work.

With the introduction of internal check system possibilities of errors and frauds
are reduced to the minimum. It is because errors or frauds committed by one
employee are likely to be detected by other employees. Thi system is also named
as ‘internal preventive control system’.

“A system of internal check is an arrangement of staff duties, whereby no one

person is allowed to carry through and to record every aspect of a transaction so
that without collusion between two or more persons, fraud is activated and at
the same time the possibilities of errors are reduced to the minimum.” —Spicer
and Pegler

‘‘An internal check means practically a continuous internal audit carried on by

thestaff itself, by means of which the work of each individual independently
checked by other member of the staff.’’ —De Paula

FEATURES / CHARACTERISTICS OF AN
EFFICIENT INTERNAL CHECK SYSTEM
Characteristics of an efficient internal check system are as follows :
1. Proper Distribution of Work : The entire work of the organisation should
be distributed among the concerned employees on the basis of their ability,
efficiency and willingness to work.

2. Priority to Accounting Machines : As far as possible, mannual

accounting work should be replaced by accounting machines.

3. Proper Maintenance of Wages and Salaries Records : Accounting

records concerned with wages and salaries should be maintained properly. It should
be kept in mind that the employees recording wages and salaries should not
disburse the amount. It should be done by other employees.

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4. C hange in Work of Employees : As far as possible, the work of

employees should be rotated after some time. This will have moral impact upon the
employees.

5. Correspondence with Debtors and Creditors : The debtors and creditors

of the organisation should also be contacted through correspondence from time to
time.

6. S anctioning of Overtime Payments : Overtime payments

should be properly recorded. These payments should be sanctioned by proper
authority. The person recording such overtime payments should not be
authorised to disburse the same.

7. Restricted Use of Articles : Articles from the store can be taken out only
after prior permission of the senior officer.

8. R ight to Open Important Letters : Only a senior officer should

be authorised to open important letters. Every person should not be allowed to
handle it.

9. Use of Self-Balancing System of Ledgers : Self-balancing of ledgers

should be practised in the accounting system of the organisation. In the internal
check system, this method should be incorporated.

10. Promt Deposit of Receipt in the Bank : Those employees who are
engaged in receipt of cash and check should be instructed to deposit the same in
the bank account daily.

11. Receipt and Payments by Different Persons : Duties relating to

receipt and payments of cash be assigned to different persons and not to onlyone
person.

12. P roper Control over Purchase and Sales : Proper and

adequate control should be excercised on purchase and sales of the enterprise.
The price of the articles to be sold should be fixed up before sales and price tags
be attached to these articles. The Purchasing fficer should also be instructed to
make purchases within the sanction.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

OBJECTIVES OF INTERNAL CHECK

An ideal system of internal check may achieve the following objectives :

1. T o make Possible Early Detection of Errors and Frauds :
The most important objective of an internal check system is early detection of
errors and frauds and to minimise their chances.

2. To Increase the Efficiency of Employees : Under internal check

system, the work is distributed among the employees on the basis of their
interest and ability which increases their efficiency. a

3. To Fix Responsibility : Under internal check system, work is divided

among the employees in such a way that the responsibility is fixed on a
particular individual for particular part of work.

4. To Reduce Auditor’s Burden : In case there is efficient internal check

system, the auditor’s burden is reduced considerably.

5. Early Preparation of Final Accounts : In case the internal check system is

efficient and effective, the accounts of such organisation will be up-todate;
hence finanal accounts can be prepared in time.

6. Moral Pressure on the Client’s Staff : In case of an efficient internal

check system, all the employees entrusted with the completion of the work,
perform their part of the work honestly and carefully thus, there is a moral
check or influence on the employees of the organisation.

7. P romptness in Work : Since a part of the work is done by one

employee, he attains specialisation in the performance of that work and thereby
work is completed promptly.

8. R ecord of Every Transaction : Under this system, every

transaction is recorded and possibility of its omission is reduced to zero.

9. Simplicity in Auditing : Internal check simplifies the audit work. Since the
work done by each employee is formalized. This results in reducing the errors and
the auditor can easily rely upon the account book.

10. To Increase the Profitability : By preventing errors and frauds and

increasing efficiency of clerks, a good internal check system increases the
profitability of business.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

DIFFERENCE BETWEEN INTERNAL CHECK AND INTERNAL AUDIT

The main difference between these two terms are as follows :
Internal Check Internal Audit
1. Meaning : Internal check is the organisation Internal audit is continuous audit of
of staff for checking the work of one by accounts by the employees of the
the other business concern.

2. Object Internal audit aims to detect errors and

Internal check aims at preventing er- rors
and frauds. frauds which have already been
committed.
3. Nature
Internal check consists of a set of rules Internal audit involves thorough
of procedure which area part of accounting examination of the accounting trans-
system. actions and system of accounting. In
internal audit only checking is done.
4. Scope
The scope of internal check is limited. The scopeof internal audit is com-
paratively broad. Its main object is to
prevent errors and frauds.
5. Appointment
No one member is employed in the case In internal audit, the process of
of internal check as duties are so auditing is carried by special staff
assigned that these involve cross appointed for this purpose.
checking.
6. Procedure
In Internal check entries are passed in On the other hand, in internal audit, the
such a way that the work of one clerk is work of a clerk is checked auto-
checked by the other at the time of the matically by another clerk. .
making of the entries.
7. Detection of
Frauds and While in the case of internal check any On the other hand, in internalaudit, any
Errors error or fraud is detected at the time of error or fraud isdetected at the end of
inter checking audit work.
8. Period
The work of internal check is a Internal audit begins where accounting works
continuous process. come to an end.
9. Suggestions
Under internal check system, no In case of internal audit,suggestions are
suggestion is provided to the manage- also provided to the management of the
ment. organisation.
10. Work by
CA Iinternal check is performed by the On the other hand, in case ointernal
employees of the organisation. CA is audit there may or may not be a CA
not involved inthis work. involved.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

Q.14 : What is InternalAudit ? Differentiate between InternalAudit and

Internal Check.

ANS. INTERNAL AUDIT

Meaning :Internal Audit implies an audit of the accounts by the employees of the
business. The work is done by a separate set of staff who may or may not have
professional audit qualifications. The function of an internal auditor is practically the
same as that of an auditor.

‘‘Internal audit may be defined as the staff function of organised investigation and
appraisal of accounting, financial and operating activities within a company for the
purpose of aiding top management in efficient administration of the enterprise.’’ —
Prof. Meigs

‘‘An independent appraisal involving specialised application of the techniques of

auditing in accordance with the specific needs of the enterprise.’’
—Chartered Accountant of India

Thus, Internal Audit not only encompasses checking matters relating to pure finance,
but also reviews and undertakes a critical appraisal of the policies and procedures of
the company.
It is clear from the above above definition that :
(i) Internal audit is a technique of management control system.
(ii) Through it, other techniques of control are evaluated and examined.
(iii) Its main object is to assist management and to keep assets protected.
(iv) Under it, the work of evaluation and examination is performed by the staff of
the enterprise.

OBJECTIVES AND FUNCTIONS OF INTERNAL AUDIT

1. To Review Compliance with Policies, Plans, Procedures, Laws and Regulations;

2. To Review the Organisational Structure
3. To Review Management Information System;
4. To Determine and Report on Appropriateness of Internal Controls;
5. To Review Accomplishment of Goals and Objectives ;:
6. To Make Special Investigation on behalf of Management; :
7. To Protect Assets of the Enterprise ;
8. To give Important Suggestions;
9. To Improve Work Standard ;

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

DIFFERENCE BETWEEN
INTERNAL AUDIT AND INTERNAL CHECK
The main difference between these two terms are as follows :

Internal Audit Internal Check

1. Meaning Internal audit is continuous audit of Internal check is the organisation of staff
accounts by the employees of the for checking the work of one by the
business concern. other.

2. Object Internal audit aims to detect errors and Internal check aims at preventing er- rors
frauds which have already been and frauds.
committed.

3. Nature Internal audit involves thorough Internal check consists of a set of rules
examination of the accounting trans- of procedure which area part of accounting
actions and system of accounting. In system.
internal audit only checking is done.

4. Scope The scopeof internal audit is com- The scope of internal check is limited.
paratively broad. Its main object is to
prevent errors and frauds.

5. Appointment In internal audit, the process of auditing No one member is employed in the case
is carried by special staff appointed for of internal check as duties are so
this purpose. assigned that these involve cross
checking.

6. Procedure On the other hand, in internal audit, the In Internal check entries are passed in
work of a clerk is checked auto- such a way that the work of one clerk is
matically by another clerk. . checked by the other at the time of the
making of the entries.

7. Detection of On the other hand, in internalaudit, any While in the case of internal check any
Frauds and error or fraud isdetected at the end of error or fraud is detected at the time of
Errors audit work. inter checking

8. Period Internal audit begins where accounting The work of internal check is a
works come to an end. continuous process.

9. Suggestions In case of internal audit,suggestions are Under internal check system, no

also provided to the management of the suggestion is provided to the manage-
organisation. ment.

10. Work by On the other hand, in case ointernal Iinternal check is performed by the
CA audit there may or may not be a CA employees of the organisation. CA is
involved. not involved inthis work.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

Q.15 : How can an Auditor be appointed ? Explain.

ANS. A PPOINTMENT OF AUDITOR

Although audit of sole trading business and partnership firm is not compul- sory even
then, audit is of not less importance for these organisations too.

Any individual trained to review and verify accounting data and recognised as a
Chartered Accountant (CA) under the Chartered Accountant Act, 1949 is deemed to be
an auditor. Every company needs to appoint an auditor as per the provisions of the
Companies Act, 2013.

SOLE TRADING BUSINESS

Appointment : There is no legal provision regarding the appointment of an auditor in
Sole Trading business. It is done on the basis of agreement held between the owner of
the business and the auditor. This agreement may be in oral or writing, but written
agreement is always preferred. In case of written agreement clear-cut scope is decided.

PARTNERSHIP FIRM
Appointment of Auditor : Like the Sole Trading business, there is no statutory
requirement for the audit of a partnership firm. The audit of such concerns also takes
place by agreement between the firm and the auditor. A written agreement is always
preferred. It is also advisable to have a written agreement between the parties.

COMPANY
According to the Companies Act, 2013, every company has to compulsorily get its
account audited by a qualified auditor. Under the Act, provisions have been made for
the appointment, removal, remuneration, rights and duties of the auditor. These
provisions are applicable to all types of companies, be it a private company, a public
limited company, a Govt. company or a licensed company.

Appointment of Auditor : The provisions regarding the appointment of auditors are

contained in the Section 139 of the Companies Act, 2013. A brief summary of these
provisions have been given below :

(A) Appointment of First Auditor :

1. In Case of Non-Government Company [Sec. 139(6)] :
. Appointment by the Board of Directors within 30 days of the date of registration
 If the Board fails to appoint the auditor within stipulated time, the Board shall
inform the members of the company.
 The members of the company shall appoint the first auditor at an
Extraordinary General Meeting (EGM) within 90 days.
 The first auditor shall hold office till the conclusion of the first AGM.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

2. In Case of a Government Company [Sec. 139(7)] :

 This section includes a Government company, or any other company owned or
controlled, by the Central Government or the State Government.
 The appointment of first auditor in such companies is done by the Comptroller and
Auditor-General of India (CAG) within 60 days of registration.
 If CAG fails to appoint the auditor within stipulated time, the Board of
Directors shall appoint the auditor within the next 30 days.
 Failing to appoint the auditor within 30 days the Board shall inform the members
of the company who shall appoint the auditor.
 The first auditor shall hold office till the conclusion of the fist AGM.

(B) Appointment of Subsequent Auditor :

. In Case of a Non-Government Company [Sec. 139(1)] :

 Every company shall, at the fist AGM, appoint an individual or a firm as an
auditor,
 The tenure of the auditor so appointed will be from the conclusion of that meeting
till the conclusion of its sixth AGM.

2. In Case of a Government Company [(Sec. 139(5)) ]

 CAG shall appoint the auditor of the company within a period of 180 days from the
commencement of the financial year.
 The auditor shall hold office till the conclusion of the AGM.

Filling of a Casual Vacancy [Sec 139(8)]

Casual vacancy arises when an auditor duly appointed ceases to act on account of death,
resignation, ill-health, dissolution of the firm of auditors, etc.

Re-appointment of Auditor [Sec. 139(9)]

A retiring auditor may be re-appointed at AGM, if :
(a) he is not disqualified for re-appointment;
(b) he has not given the company a written notice of his unwillingness to be re-
appointed; and
(c) a special resolution has not been passed at that meeting appointing some other
auditor or providing expressly that he shall not be re-appointed.

Purpose for Appointment of Auditor

The purpose of the auditors in the company is to protect the interests of the
shareholders. The auditor is obligated by law to examine the of Accounts kept by
the directors and inform them of the true financial position of the company. Auditor
gives his independent opinion to the owners or shareholders of the company to protect
and keep the company in a safe.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

Q.16 : How would you audit an Educational Institution ?

REVISED ANS.
AUDIT OF EDUCATIONAL INSTITUTIONS
Audit of books of educational institutions i.e. Schools, Colleges, Universities etc is
known as audit of educational institutions. This is not a legal compulsion but tending to
the increasing utility of auditing. This type of audit comes under the category of special
audit.
Generally, the procedures for auditing is same like other audit even auditor need to
follow other steps.

(1) B y Laws of Educational Institution :

Read thoroughly “ The Trust Deed or MOA” of educational institution to know what
all activities are allowed and what not.

(2) Gverning Laws of Educational Institution :

Try to understand by which law such Schools or Colleges are governed like- Society
Act, Trust Act or any other Act or Laws.

(3) Last Year’s Audit Report :

Analyse last year’s Audit Report along with Financial Statements to understand
“comment or observation” raised by previous auditor.

(4) Standard Operating Procedures (SOPs) :

Read SOPs of School or Colleges to understand the working culture.

(5) Board Minutes :

Read Board Minut to understand what all decisions are taken by Management and
justification for the same.

(6) Checking of Tuition Fee of School or College :

This is one of the most important aspect of educational audit. Such fee must be
reconciled with number of students available from Attendance Register. Fees which
are due but could not receive, must duly account for as “Accrude Income”

(7) Audit of Admission Fee of School and College :

This is the ontime fee that educational institution received from students. Such fee must
be reconciled with Admission and registration number of the students. Total admission
count can be taken from such register and any due amount should be notified to the
Management.

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(8) A udit of Examination Fee :

Such fee must be reconciled with number of Results announced or Marks Sheet printed. A
sample test checking to be carried out.

(9) A udit of Donation received :

This is one of the most important aspects of audit of eductaional
institution.Auditor must ensure the donation in cash will not be allowed if it exceeds
over 2 lakhs from single student.

(10) ) Audit of teachers Salary :

Independent confirmation will be obtained from certain teachers for their monthly
salary and can be reconciled from Salary Sheet.

(11) A udit of Sports Equipments and similar aspects :

A physical verification be carried out for high value of sports equipment. Any dispoal
of such equipment should be duly accounted for along with reason of disposal.

(12) )A udit of Building Fund or other similar Funds :

Any utilisation of such funds must be duly approved by Board.

(13) )C hecking of PF and ESI :

Auditor has to ensure that all such dues are duly reconciled with the number of
employees deployed in the organiastion.

(14) )C hecking of Grants received from Government :

These transactions are of high value and requires special attention. Auditor has to
ensure that Educational Institutions duly compiled with conditions which are linked with
Government Subsidy. It should also be checked whether such Government Grant are
Revenue in nature or has to be capitalised.

CONCLUSION :
Apart from above mentioned points, an auditors should also have to ensure that
applicable Accounting Standards are duly followed. There would not be any breach
from Internal control lays down by the Management of Educational Institution. Auditor
should also keep in mind Standard on Auditing issued by the Institute of Chartered
Accountants of India.

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VVI QUESTIONS & ANSWERS : AUDITING : B.COM. (H) : PART - 1 : PAPER- 2 : JPU: LNU: PU: RU : MAGADH & OTHER UNIVERSITIES

Q.17 : Whatis Audit Programme? Discussitsadvantages anddisadvantages.

Ans. MEANING :
An audit programme is a detailed plan of the auditing work to be performed.
It specifies the procedures to be followed in the conduct of audit more effi- ciently.
The auditor outlines the whole procedure of audit from beginning till
the finalization of audit report. Audit programme is generally contained in the audit
notebook.
Definition by some authors :
“Audit programme is a detailed plan of the auditing work to be performed,
specifyingthe procedures to be followed in verification of each item in the financial
statements and giving the estimated time required.”
—Prof. Meigs
“The objective of preparation of an audit programme is to bring out
uniformity in the audit work and to ascertain that the whole work of accounting
has been audited. The programme is called Audit Programme.
The staff of the auditor completes the work assigned to him and puts
his signature on the work completed by him.”—Walter W. Bigg
“The audit programme is an outline of all procedures to be followed in order to
arrive at an opinion concerning a client’s financial statements.”
—Howard Stettler

On the basis of above definitions, we can say :

“An audit programme is a written plan of actions designed by the auditor, to see
that all the books of accounts have been audited properly, the work is over in
time, and there is uniformity in the audit work. Every person entrusted with the
part of the audit work has to put his signatures of the part of the work completed
by him.”

ADVANTAGES OF AUDIT PROGRAMME

The advantages of an audit programme have been enlisted below :
1. Proper Division of Work : The most important advantage of an audit
programme is that audit work is divided amongst the audit staffs
effectively. With the help of audit programme, the auditor can divide the whole
work of audit among his staff on the basis of competence, ability and experience
of his staff.

2. Determination of Responsibilities : Audit programme clarifies as

to which work is to be performed by whom and within what time period. Thus,
the person who is involved in finishing a particular work within a specified
time, becomes accountable towards its performance.

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3. Increase in the Efficiency of the Employees : Division of labour,

determination of responsibilities, fear of auditor, these all factors increase the
efficiency of the audit staffs. Thus, possibility of errors and negligence is
minimised.

4. Time Saving : In the audit work, the period of completion of work is

predetermined and hence, employees are bound to finish their work within the time
alloted which ultimately saves time.

5. Facility of Changing the Work : In case, an employee or member of staff of

the auditor goes on leave in between or before the completion of the audit work,
the work of such person can be easily entrusted to some one else, without
disturbing the whole audit programme.

6. Uniformity in Audit Work : Audit programme is usually prepared on the

basis of audit work of previous years. Thus audit programmes brings uniformity
in the audit work.

7. Knowledge about the Progress of the Work : The performance of the

assignment entrusted to a particular member of the staff, can be reviewed, its
progress can be judged.

8. Base of the Future Audit Plan : Audit programme is a useful basis for
planning the audit programme for subsequent year.

9. Self-defence (Proof in the Court) : In case, the auditor is charged of

negligence by his client and a suit is filed against him to this effect, audit
programme serves as an evidence in the Court.

10. Early Completion of Audit Work : Audit programme helps in the smooth
conduct of the audit work and helps in its early completion.

11. Satisfaction of Complete Checking : When the audit work is over according
to the audit programme, the auditor is satisfied that the whole audit work is
completed in time and nothing is left out, from being audited.

12. Guidance : Audit programme is a kind of guidance to the auditor for the
work, he has to perform and an assurance to the auditor that the junior will not
overlook essential points while checking the accounts.

13. Control Over Work : In audit programme it is clearly mentioned that which
work will be performed by whom and by what time. Hence, control over work
is quite possible by the auditor.

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14. Evaluation of Works Performed : If the speed to finish the work is slow, it
will take more time to complete the work and as a result cost of production will
increase. On the other hand, if the work is done fastly there may arise chances to
commit errors. Thus, evaluation is done in this way and in adverse situation steps
are taken to keep it under control.

15. Helpful in the Preparation of Audit Report : The audit programme after
completion of work becomes a sort of progress chart and the auditor can
easilyproceed to prepare and sign the final audit report.

DISADVANTAGES OF AUDIT PROGRAMME

In spite of various advantages, an audit programme suffers from the following
disadvantages :

1. It makes the Audit Work Monotonous : A written and detailed audit

programme lists the audit procedures in detail. As a result, the work becomes
mechanical and monotonous.

2. Lack of Elasticity : This is an age of change. Daily new problems arise under
the changed circumstances. Such problems are not covered by these audit
programmes, because these programmes cannot be changed easily.

3. Loss of Initiative : Audit pro-gramme limits the interest and zeal of the audit
staff. The audit staff have to follow the audit programme given by their boss
(auditor). The staff cannot make any suggestion.

4. Less Chances of Detection of Errors and Frauds : Audit programme

affects adversely the objects of auditing. An employee of the auditor does audit
work as per the audit programme, he has limited time at his disposal and he fails
to detect the cleverly committed errors and frauds by the employees of the
organisation.

5. Expensive : Audit programme though beneficial is expensive. Therefore,

it is not suitable for small business concerns.

6. Difficulties in Incorporating New Technique : The audit staff tends to go

ahead with the work as per audit programme and therefore, there is no room for
adopting new techniques.

7. Waste of Time : If the audit assistants due to their efficiency complete the
audit work before time, they will still work to kill time.

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8. Defending Deficiencies : Inefficiency on the part of an audit staff finds a ready

excuse, as the staff can defend by showing the audit programme.

9. Incomplete : The audit programme is incomplete even if it is well drawn-up,

as it may not cover everything that might come up during the course of audit.

10. Rigidity : Each business may have a separate problem of its own, a rigid
programme cannot be laid down for each type of business.

Conclusion :
Auditing is a tool used by many businesses today to make sure they are
operating in accordance with the law and also to get an idea of how healthy their
company is. It is used to help understand the cost and performance of existing
investments. Auditors also provide advice on how to improve future
investments.The success of a project depends on the insights that are gained
during an audit. Auditors can find many advantages using these insights to make
better decisions. They can also uncover some disadvantages which could change
or even eliminate the investment altogether.

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Q. 1 8 : What is “Internal Check” ? Discuss its characteristics and advantages.

What is the position of an Auditor in this connection ?

ANS. INTERNAL CHECK

MEANING : Internal Check System is a system of detecting errors and frauds in

which no single person is allowed to handle a transaction completely from the
beginning to the end. The work is divided in such a way that the work of one
employee is automatically checked by the work of other employee. There is little
possibility of fraud unless there is collusion between all the employees doing the
work.

With the introduction of internal check system possibilities of errors and frauds
are reduced to the minimum. It is because errors or frauds committed by one
employee are likely to be detected by other employees. Thi system is also named
as ‘internal preventive control system’.

“A system of internal check is an arrangement of staff duties, whereby no one

person is allowed to carry through and to record every aspect of a transaction so
that without collusion between two or more persons, fraud is activated and at
the same time the possibilities of errors are reduced to the minimum.” —Spicer
and Pegler

‘‘An internal check means practically a continuous internal audit carried on by

thestaff itself, by means of which the work of each individual independently
checked by other member of the staff.’’ —De Paula

FEATURES / CHARACTERISTICS OF AN
EFFICIENT INTERNAL CHECK SYSTEM
Characteristics of an efficient internal check system are as follows :
1. Proper Distribution of Work : The entire work of the organisation should
be distributed among the concerned employees on the basis of their ability,
efficiency and willingness to work.

2. Priority to Accounting Machines : As far as possible, mannual

accounting work should be replaced by accounting machines.

3. Proper Maintenance of Wages and Salaries Records : Accounting

records concerned with wages and salaries should be maintained properly. It should
be kept in mind that the employees recording wages and salaries should not
disburse the amount. It should be done by other employees.

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4. C hange in Work of Employees : As far as possible, the work of

employees should be rotated after some time. This will have moral impact upon the
employees.

5. Correspondence with Debtors and Creditors : The debtors and creditors

of the organisation should also be contacted through correspondence from time to
time.

6. S anctioning of Overtime Payments : Overtime payments

should be properly recorded. These payments should be sanctioned by proper
authority. The person recording such overtime payments should not be
authorised to disburse the same.

7. Restricted Use of Articles : Articles from the store can be taken out only
after prior permission of the senior officer.

8. R ight to Open Important Letters : Only a senior officer should

be authorised to open important letters. Every person should not be allowed.

9. Use of Self-Balancing System of Ledgers : Self-balancing of ledgers

should be practised in the accounting system of the organisation. In the internal
check system, this method should be incorporated.

10. Promt Deposit of Receipt in the Bank : Those employees who are
engaged in receipt of cash and check should be instructed to deposit the same in
the bank account daily.

11. Receipt and Payments by Different Persons : Duties relating to

receipt and payments of cash be assigned to different persons and not to onlyone
person.

12. P roper Control over Purchase and Sales : Proper and

adequate control should be excercised on purchase and sales of the enterprise.
The price of the articles to be sold should be fixed up before sales and price tags
be attached to these articles.

ADVANTAGES OF INTERNAL CHECK

Under the system of internal check, errors and frauds are minimised to a
sufficient extent. For the convenience of the study, the advantages of internal
check are classified under the following heads :

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1. Advantages to the Organisation :

(i) Prevention of Errors and Frauds ;
(ii) Fixation of Responsibility ;
(iii) It Increases the Efficiency of the Clerks ;
(iv) Economical ;
(v) Moral Influence on the Employees ;
(vi) It Increases the Profit of the Business ;
(vii) It Reduces the Work Load of Auditor;

2. Advantages to the Auditor :

(i) No Need of Extensive Checking
(ii) Easy Approach towards Test Checking

3. Advantages to the Shareholders :

4. Advantages to the Government :

RESPONSIBILITY OR POSITION OF AN AUDITOR

REGARDING INTERNAL CHECK SYSTEM
1. To Obtain Written Statement : An auditor should obtain a written statement
about the working of the Internal Check from the business concern.

2. T o Examine the System in Operation: The auditor should carefully

examine the existence and operation of the internal check system.

3. T o Identify the Weakness: The auditor should identify the weakness

of the system which will result in occurrance of errors and frauds taking place.

4. To Suggest for Improvements : If the system of internal check is ineffective,

the auditor should make suggestions to strengthen the system of internal check.

5. To Analyse the Extent of Reliance : The auditor should carefully analyse the
extent to which he can rely on the effectiveness of internal check. If the system of
internal check is effective, he can check sample transactions thus devoting his attention
on other important audit work.

If the auditor decides to rely on the internal check system, he can reduce the extent of
detail checking of the transactions and can apply test checks on a relatively smaller
sample for a particular class of transaction.

To conclude, one can say that an efficient internal check system helps an auditor to a
great extent in the conduct of his work but it does not reduce his legal liability.

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Q. 1 9 : “Vouching is the back bone ofAuditing” Discuss this statement.

OR
“ Vouching is the Essence of Auditing.” Discuss.

OR
Discuss the Importance of Vouching.

ANS. VOUCHING
Meaning:
Vouching is the Essence of Auditing. It is an important part of Auditor’s duty to certify
a s correct the transactions recorded in the books of accounts. The Accountant of the
business is responsible for passing the entries in the books of prime entry. For every
entry in the books of account. There must be some document or voucher in support of
the entry made. This means there can be no entry in the books of account without
supporting document and there can be no document without an entry in the books of
account.

When the Auditor verifies the authority and authenticity of the entries made in the
books of account and certifies that the accounts are complete, correct and free from
errors or frauds, it proves that the entries passed in the books of prime entry are properly
made, are supported by proper documentary evidence and are in order . This is known
as Vouching.

DEFINITION OF VOUCHING
The term ‘vouching’ has been defined by different authors as follows : ‘‘Vouching is
the testing of the truth of the items appearing in the books of original entry.’’ —J. R.
Batliboi

‘‘Vouching is a technical term, which refers to the inspection of documentary evidence

supporting and suspecting a transaction.’’ —Ronald A. Irish

‘‘By vouching is meant the verification of the authority and authenticity of

transactions as recorded in the books of accounts.’’ —R. B. Bose

‘‘Vouching is an examination of the underlying evidence which is in support of the

accuracy of transaction.” —Arther W. Holmes

By analysing the above definitions, it can be said that vouching consists of checking the
entries in the financial books with the help of available documentary evidence i.e.,
vouchers, invoices, contracts, receipts, minutes, statements and correspondence, etc. For
each entry, it is to be ascertained that it is properly authorised and no transaction has
been omitted from recording in the books of accounts.

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IMPORTANCE OF VOUCHING
OR
VOUCHING IS THE BACK BONE OF AUDITING
OR
VOUCHING IS THE ESSENCE OF AUDITING
Vouching is the basis of auditing. The complete frame of audit is based on vouching
and so vouching acts as a pillar of auditing. Since vouching is related to the
examination of books of accounts with the help of vouchers and other valid
documents, if this work is done with care, skill and intelligence, errors and frauds can
be easily detected.

Explaining the importance of vouching, De Paula said, ‘‘Vouching is the part and
parcel of auditing and the whole success of an audit depends upon the intelligence and
thoroughness with which this part of the work is done’’.

IMPORTANCE:
Vouching is the act of checking evidential documents to find out errors and frauds and
to know the authenticity, accuracy and reliability of books of accounts. Thus, it is
important for an auditor due to the following reasons:

1. Vouching is equally important as passing of original entry in the books of accounts.

If, original entry is wrong, it will affect every process of accounting entry and its
impact will be till the end result.
2. Efficiency of vouching will decide the success of audit.
3. . Any errors and frauds are easily detectable if vouching is conducting in
searching and intelligent manner.
4. Intelligent and faithful vouching will establish reliability on financial statements, i.e., Profit
and Loss account and Balance Sheet of any organization.
5. If adequate internal control system exists, the Auditor may choose to do test checking
instead of complete vouching.

VOUCHING IS THE BACK BONE OF AUDITING

OR
VOUCHING IS THE ESSENCE OF AUDITING
Some learned people have considered vouching as the basis of the complete process of
audit, which seems to be true. According to them :
‘‘Vouching is the essence of auditing’’ or ‘‘Vouching is the back bone of
auditing’’ which indicates the importance of vouching. The fact in support of these
statements is that :

1. Vouching is a primary work of Auditing :

The work of audit is performed on the basis of vouchers and voucher which indicates
the importance of vouching. In absence of vouchers and vouching, audit work can not
be imagined.

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2. Vouching is the foundation of Auditing :

Vouching is the foundation of auditing. For example, if the foundation of a building is
strong, then certainly the building would stand for a long period on that foundation and
vice-versa. In the same way, if the work of vouching is properly done then the work of
audit will also be perfect and the chances of errors and frauds in the books of accounts
will be minimised and as a result the business may continue for a long period with
effective performance otherwise it may be closed sooner.

3. Vouching is the Essence of Auditing :

This statement has been given by R. B. Bose. According to him, with the help of
vouching only an auditor can make complete verification of the books of accounts, and
on the basis of which he can make audit work more reliable.

4. V ouching is the Soul of Auditing :

When there is soul in the human body only then its importance exists. In absence of
soul, human body becomes importanceless. In the same way, vouching is the soul of
auditing because it is vouching on the basis of which the work of audit proceeds ahead.

5. V ouching is the Back Bone of Auditing :

This statement can be proved on the basis of the following facts :

(i) As human beings are able to stand with the help of back bone, in the same
wayvouching acts as a back bone and provides great support in the process of audit. If
vouching is weak, the work of audit cannot be conducted efficiently, and the auditor
too fails in achieving his goals. Thus vouching acts as back bone for audit.

(ii) As a man with strong back bone walks, runs, moves according to his desire, in the
same way audit depends on vouching for attaining desired aims and thus, vouching
acts as a back bone for audit.

(iii) We cannot imagine a healthy man with weak back bone. He cannot either stand or
move and work properly. In the same manner, in the absence of vouching, the auditor
cannot state properly that the books of accounts and statements reveal the true and fair
view of financial state of business, because there are greater chances of frauds and
informations at the preliminary stage.

CONCLUSION :
Lastly, it may be concluded that without vouching auditing is like a human body
without back bone. Therefore, we can say that for efficient audit, vouching is a must or
vouching is back bone of auditing or vouching is the essence of auditing.

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Q.20 : What is Vouching ? How would you vouch the Cash Book ?

ANS. VOUCHING
Meaning:
Vouching is the Essence of Auditing. It is an important part of Auditor’s duty to certify
a s correct the transactions recorded in the books of accounts. The Accountant of the
business is responsible for passing the entries in the books of prime entry. For every
entry in the books of account. There must be some document or voucher in support of
the entry made. This means there can be no entry in the books of account without
supporting document and there can be no document without an entry in the books of
account.

When the Auditor verifies the authority and authenticity of the entries made in the
books of account and certifies that the accounts are complete, correct and free from
errors or frauds, it proves that the entries passed in the books of prime entry are properly
made, are supported by proper documentary evidence and are in order . This is known
as Vouching.

VOUCHING OF THE CASH BOOK

Cash book is the most important financial book of a business concern. Mostly errors
and frauds arise in connection with receipt and payments of cash by means of
misappropriation. Therefore, vouching of cash book should be done very carefully and
properly. Vouching of Cash Book includes both vouching of Receipts and vouching
of Payments.

I. VOUCHING OF RECEIPT SIDE OF CASH BOOK While

vouching the receipt side of Cash Book, an auditor may have to face difficulties. The
business concern while receiving cash, issues the receipt and the parties making payment
do not issue any voucher to the business concern under audit. The auditor while
vouching the receipt side of the cash book should keep in mind the following points :

1. To Examine the Internal Check System : Before starting vouching of cash

transactions, the auditor must examine the system of internal check in respect of cash
receipts and cash payments. After the auditor is satisfied that there is good internal
check system practised in the concern, he should start vouching the debit side
(payment side ) of cash book.

2. T o Examine the Procedure of Providing Receipt : The auditor

should also examine the system of giving receipt of the cash received by the concern.
This will help him whether receipts are issued for all cash receipts.

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3. R econciliation of Rough Book with Cash Book : The auditor should

compare the rough cash book with the cash book. In case, he fails to do so, he will be held
responsible for negligence in case any fraud is detected lateron.

4. System of Depositing Cash in Bank : The auditor should also examine the
system adopted by the concern for depositing the cash receipts in its bank. Payin-slip
book will help him in ascertaining whether all the cash received by the concern has
been deposited in the bank and on what dates, as these slips do have the signature of an
employee of the bank who has received cash.

5. O bservance of Specific Principles of Receipts : If the business

concern has framed certain rules for dealing with the cash receipts, the auditor should
see whether those rules have been fully followed by the concern or not.

II. VOUCHING OF PAYMENT SIDE OF CASH BOOK OR

‘‘IN VOUCHING PAYMENTS THE AUDITOR DOES NOT MERELY SEEK PROOF
THAT MONEY HAS BEEN PAID AWAY’’

While vouching the payment side of cash book the auditor should deal with great care
and caution. He should see that for the payment of every transaction, authentic vouchers
are available or not. There is enough scope of making frauds and other misappropriations
regarding cash payment. For example, to show more payment of cash than actual
payment to be made, payment not made to the correct person, making fictitious
payments, etc.

At the time of vouching any payment, the auditor confirms such payment through
authentic and valid proofs or vouchers. The person who receives the payment, issues a
printed receipt. The auditor, while checking such vouchers should also see the rules and
laws laid for the purpose of payments. In relation to the vouching of payments, it is said
that, “In vouching payments the auditor does not merely seek proof that money has
been paid away” . It means that the auditor should not only see that the payment has
been done but it is his duty to examine the various aspects of payments which are
discussed below :

1. Payment should be Authentic : In vouching payments the auditor should seek

proof that payment has been done by the order of authorised person or not. Every
institution has internal laws, written orders and proposals according to which payment is
made.

2. To Check the Reality of the Payments : While vouching payments the auditor
should certainly confirm whether the payments have been made actually or it is shown
fictitious. To clarify the real situation the auditor can correspond with the concerning
party.

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3. S tudy of Payment Period : The auditor should also see that the payment
shown is related to the period for which the audit is being conducted or not.
Sometimes, payments relating to the previous or next year is made in the current year
and in such cases the chances of frauds and defalcations are more. So the auditor should
be very careful in studying the payment period.

4. Accuracy of Payment : The auditor should see that the amount paid should not
vary with the amount to be actually paid. For example, if Mr. A was to be paid a sum
of ‘ 10,000 but he has been paid ‘ 12,000, there is a chance of defalcating the excess
amount of ‘ 2,000 paid to Mr. A. So auditor should be very careful in this regard.

5. Payment done is concerned with the Business or Not : The employees

sometimes show payments in the books which are not at all concerned with the
business. Such payments are usually related to personal expenditure. Therefore, the
auditor should cautiously check the relation of each and every payment with the
business.

6. P ayment has been done to the Right Person or Not : The auditor
should also see whether the payment has been done to the right person or not.

7. Due Date of the Payment : The auditor should verify that the payment has been
made on the due date or not. The reason for variation in the dates of payment should
be clarified by the auditor, if any.

8.Truthness of the Voucher : There are greater chances of frauds in the vouchers.
Therefore, the auditor should tally the particulars of the vouchers with the entries made
in the cash book to ascertain whether the vouchers produced are true or not.

10. Truthfulness of the Payment : The auditor should also see that the payment
made by the firm are true and fulfills the object of the organisation. Rules and laws
should be followed by the firm in this regard.

CONCLUSION :
After studying the above facts, it can be concluded that in vouching payments the
auditor should not only see that the payments have been made but also the other
aspects which have been stated above.

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