BH6/ACG/UT-I/SKS

UNIT I
INTRODUCTION

1. What is Auditing? Explain the Characteristics /nature of auditing.

Ans. Auditing is the examination of the books, accounts and vouchers of the business. The purpose is
to satisfy that the balance sheet shows a true and fair view of the state of affairs of the business and
the profit or loss derived by the business during the financial period.
The Institute of Chartered Accountants of India has defined auditing as “a systematic and
independent examination of data, statements, records, operations, and performance (financial or
otherwise) for a stated purpose. In any auditing situation, the auditor perceives and recognizes the
propositions before him for examination, collects evidence, evaluates the same and on this basis
formulates his judgment which is, communicated through his audit report."
Thus, auditing is “a systematic examination of the books and records of a business or other
organizations in order to ascertain or verify and to report upon the facts regarding the financial
operations and the results thereof."

Characteristics / Nature of auditing:

(i)Examination: A critical review of the system of book keeping accounting and internal control and
its design and operations in a business enterprise to ascertain its adequacy and appropriateness to
the enterprise.

(ii)Comparison: A Comparison of P & L A/C and Balance Sheet with the underline records to ensure
that they are in agreement therewith.

(iii)Verification: Verification of results shown by P & L A/C and the state of affairs disclosed by the
Balance Sheet.

(iv)Confirmation: Confirmation as to compliance with the statutory requirements relevant to joint

stock companies.

(v)Opinion: Finally, expression of opinion by the auditor by way of report to the client stating
whether in his opinion the accounts present a true and fair view or not.

2. Explain the objectives of auditing.

Ans. The principal objectives of auditing are changing with the advancement of business techniques.
Earlier it was only to check the correctness of receipts and payments, which was extended to
detection of frauds. Again the main objective is not to detection of frauds and errors unless the
auditor is appointed for only this purpose.
The main object of the audit is to find the reliability of financial position and profit & lose.
Therefore the objectives of audit can be divided into.
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(I) Main objectives.

(II) Secondary objectives.
(III) Specific objectives.

(I)Main Objectives: The main object of an audit is to verify and establish that at a given date balance
sheet presents true and fair view of financial position of the business and the Profit & Loss A/C or
Statement gives a true and fair view of profit or loss for the accounting period. It is to be established
that accounting statement satisfies certain degree of reliability.
To judge the accuracy of the books of account, the auditor must.
(i) Assess the system of internal control.
(ii) Verify the accuracy of posting balancing etc.
(iii) Confirm the validity of transaction with supporting documents.
(iv) Ascertain whether distinction has been made between capital & revenue items.
(v) Confirm existence of assets and liabilities.
(vi) Ascertain all statutory requirements of maintenance of books and records have been
complied with.

(II)Secondary / Subsidiary objectives: The secondary objectives of auditing are:

(i)Detection of fraud: When something is being done with intent to deceive, to mislead or to
conceal the truth, it is an art of fraud frauds are more difficult to detect than unintentional errors.
Detection of fraud is one of the principal functions of the auditors.
Frauds may be in the form of misappropriation of cash, misappropriation of goods and manipulation
of accounts.

(ii)Detection of errors: Generally errors may be the result of fraudulent and manipulation of
accounts. Auditor should be very careful because sometimes an accounting manipulation may
appear to be an error. Detection of errors is an important objective of auditor.
Errors may be in the form of errors of principle, errors of commission, errors of omission and
compensating errors.

(iii)Prevention of errors and fraud: Auditor cannot do anything directly to prevent errors and fraud.
After completing the audit work the auditor can advice his client by making suggestion regarding
various ways to prevent errors and frauds in future. The suggestion can be -
(a) Changes in accounting system.
(b) Improvement in internal control system.

(III)Specific Objective: The term audit should not be taken to imply financial audit alone. There will
be specific objective in respect of each type of specific audit. e.g in operational audit of the entity in
order to give expert advice to improve their efficiency. The cost audit is to check the cost records of
the concern to make a report on the ascertainment of cost of production of goods or services.

3. “An auditor is a watch dog” and not a blood hound”. Discuss.

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Ans. In the famous case of Kingston Cotton Industry Mills Company (1896), “an auditor is a watch
dog, not a blood hound”; reference was made by the learned Judge Lopse L J.
An auditor is not bound to be detective or to approach his work with suspicion, or with the foregone
conclusion that there is something wrong. He is a watch dog but not a blood hound. He is justified in
believing pride servants of the company and is entitled to rely upon their representation provided he
takes reasonable care.
The following conclusions can be drawn from the judgment:

(i)An auditor is a watch dog: The auditor must take care of interest of the owners of the business.
The watch dog is kept by the owners to remain alert and inform the owners whenever any suspicion
arises. Same is the position of an auditor; he should make every effort to detect errors and frauds so
that he can protect the interest of his client. All this should be conducted by the auditor honestly
and tactfully

(ii)Auditor is not a blood hound: Duty of auditor is not that of blood- hound. He is fully justified in
believing the tried servants of the company and is entitled to rely upon their representation
provided he takes reasonable care. It is not the part of his duty to harm those who have been found
guilty of committing fraud and errors. He should not have any ill will towards those who are found
responsible for negligence or misappropriation. He shall not harm the persons whose work he is to
certify. The auditor must be systematic, sincere and honest while conducting his work.

4. What are the basic principles of auditing?

Ans. SA- 200 describes the nine basic principles that govern the procedure of auditing. It lists out the
roles and responsibilities of the auditor and his general code of conduct during an audit. We will look
into these principles in brief:

(i)Integrity, Independence and Objectivity: The auditor has to be honest while auditing, he cannot be
favouring the organization. He must remain objective throughout the whole process, his integrity must
not allow any malpractice.

Another important principle is independence. So the auditor cannot have any interest in the
organization he is auditing, which allows him to be independent and impartial at all times.

(ii)Confidentiality: The auditor has access to a lot of sensitive financial information of the organization.
It is important that he respect the confidential nature of such information and documents.
He cannot disclose any sensitive information to any third party unless it is a requirement by law and he
must also be very careful with documents, certificates etc. that the organization entrusts to him.

(iii)Skill & Competence: The auditor must be experienced and trained in the procedures of auditing, i.e.
must be qualified as an auditor. And as a professional, he must be up to date on recent changes,
announcements, rules etc.
If necessary he can undergo training and workshops to stay up to date with the recent auditing and
accounting procedures. For example, after GST was introduced, auditors had to update their
knowledge.
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(iv)Work Performed by Others: The scope of audit at times can be very vast. So an auditor has
employees, delegates and other people who work under him.
However, the auditor will continue to be fully responsible for the work done by these people working
for him. So the auditor must carefully supervise and review such work and be reasonably sure of the
accuracy of such work.

(v)Documentation: In most cases the auditor maintains an audit notebook, an audit plan and auditing
file. It is important the auditor keeps a record of important documents with respect to his audit work, as
it is evidence of the work the auditor has done. And the client is inclined to these documents and files if
he wishes to inspect the work.

(vi)Planning: An audit plan allows the auditor to plan out his work and enables him to be more efficient
and timely. Every audit plan is different as it has to be customized according to the type of organization,
the kind of business they conduct, the scope of the audit, the efficiency of the internal controls etc.

(vii)Audit Evidence: The auditor must collect enough evidence to support his final opinion. This
collection of such evidence is done by compliance and substantive procedures. There are two sources of
this evidence – internal and external. Also, external sources of evidence are always more reliable.

(viii)Accounting Systems and Internal Controls: The auditor has to assure that the accounts of the
organization are accurate and represent a true and fair picture of the financial status of the company.
Also, the auditor must ensure that all material information has been recorded in the accounts. Testing
the internal controls system is also important as it helps determine the same.

(ix)Audit Conclusions and Reporting: After the auditor collects all evidence he must now form his
opinion on the basis of the following criteria,
(a) all relevant accounting standards were applied at all times
(b) financial statements are in compliance with all regulations and statutory requirements
(c) all material information has been disclosed.

5. Explain the techniques of auditing.

Ans. Evidences are very important for an Auditor to form an opinion regarding financial statements.
If Auditor fails to collect proper evidence, it will reduce the reliability of audit report. The method of
collecting evidence is called audit technique.

Following are a few important audit techniques:

(i)Vouching: When the Auditor verifies accounting transactions with documentary evidence, it is
called vouching. Through vouching, the Auditor verifies authority and authenticity of records.

(ii) Inquiry and Confirmation: This is the most commonly employed technique wherein the auditor
obtains evidences through inquiry and confirmation which may take place either orally or in writing.
Auditor collects evidences by seeking information and explanation from the employees and officers
of the organization. The auditor also obtains written confirmation and certificates from third parties.
The examples for inquiry and confirmation are confirming the balances of debtors shown in the
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accounting records with the debtors of the organization, and confirming the bank balances by
obtaining certificate from the banks directly.

(iii)Reconciliation: Reconciliation is a technique used by an Auditor to know the reason of

differences in balances. For example, to know the difference in the bank book of the client and the
bank balance as appeared in the bank statement or pass book, the Auditor prepares the
reconciliation statement. The same method may be used for debtors, creditors, etc.

(iv) Testing: A complete checking of all the transactions is time consuming besides being costly.
Testing is a technique of selecting representative transactions out of whole accounting data to draw
a conclusion about all items.

(v)Physical Examination: Physical examination requires verification and confirmation of the physical
existence of tangible assets as appears in the Balance Sheet like cash in hand, land and building,
plant and machinery, etc. The physical examination is usually accompanied with the examination of
documents as to ownership and valuation.

(vi) Scanning: By scanning of books of accounts, an experienced Auditor can identify those entries
which would require his attention. It is also called scrutiny of accounts.

(vii) Verification of Posting: To verify posting from books of original entry to ledger account and
confirm the balance, an Auditor is required to verify the postings; for example, to verify a sale book,
an Auditor may verify postings from the sale register to the sale ledger. He may further calculate
balances of the sale register and the sale book.

(viii) Observations: Through observation, an Auditor gets an idea about reliability of the process and
the procedure of an organization. Auditor usually adopts observation method to evaluate the enemy
and effectiveness of the internal control measures that are adopted in transactions involving cash,
procedures followed on receipt or issue of material, etc.

(ix) Flow Chart: The Flow Chart technique is used by an Auditor to determine the stages of
transaction and the generation of documents at all levels of transactions.

(x) Computation: An auditor makes appropriate calculations and verifies the accuracy of the
accounting records. For example, the auditor computes the depreciation to be charged for the year,
by taking into consideration the cost of the asset, the date of purchase, the rate of depreciation,
etc., to verify the accuracy of the depreciation charged by the organization.
(xi)Analytical Reviews: It consists of studying significant ratios, co-relating various figures, trends
and analysing different changes. This review procedure is based on the expectations of relationship
among the past and present data. For example, amount of interest paid and payable is correlated
with the amount of loan and interest rate. Total fees or subscription received in a club is correlated
with the total members and rate of subscription.

6. Explain the different classes of audit.

Ans. The audit may be classified into various categories. These are:
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1. Organisation structure based classification

(i)Statutory Audit: Statutory audit is the one which is prescribed under the statute or law and is
conducted as per the requirements laid down by the statute/law. The appointment of auditors,
qualification, disqualification, remuneration, rights, liabilities, etc. are prescribed under the statute.
The companies and corporations, LLPs, cooperative societies, public and charitable trusts and other
statutory bodies are compulsorily required to conduct their statutory audit.
(ii)Private Audit: It is an audit which is optional in nature and is done as per the preference of the
owner. Such type of audit is conducted by proprietorship concerns where the requirement of audit is
not mandatory. A proprietorship concern may like to assess the accuracy of their books of account
and with such idea in background, auditor is appointed, who may not necessarily be the member of
ICAI to get his accounts audited. Generally, following entities undergo private audit:
(a) Sole Traders (b) Partnership Firms (C) Individuals and Institutions (d) Non-Profit Organisations
(iii)Government Audit: Audit of government offices and department is covered under this heading.
A separate department is maintained by government of India, known as Accounts and Audit
Department, who conducted the government audit. This department is headed by Comptroller and
Auditor General of India.

2. Specific objective or dimension based classification:

(i)Independent (External) Audit: Independent audit is conducted to ascertain the true and fair view
of the results of financial operations and financial position of the company. It is conducted by
professionally qualified auditors who are independent of the entity or client.
(ii)Internal Audit: Internal audit is conducted by employees of the organization to enable better
exercise of managerial control. According to Institute of Internal Auditors, "Internal Audit is an
independent appraisal activity initiated within an organisation for review of accountancy, financial
other operations, as a basis for service to the organisation”.
(iii)Cost Audit: According to the Institute of Cost and Work Accountants of England, “Cost Audit is
the verification of correctness of cost accounts and of adherence to cost accounting principles and
plans.”
The idea of this audit is to assess the accuracy of cost accounting system of the organisation and also
to ascertain the extent to which cost accounting systems are being followed in the organisation.
(iv)Management Audit: Management audit is the critical evaluation of all the aspects of the
management. It is done to examine in detail the various plans, policies and actions of the
management. It covers the audit of both management processes as well as management functions.
This audit is not at all compulsory under any law.
(v)Tax Audit: There is always a difference between the profits reportable to shareholders and
taxable profits shown to the taxation department due to different provisions under Companies Act,
2013 and Income-tax Act, 1961. Tax audit is done to ensure the accuracy of the taxable profits
calculated by the entity so that tax liability is calculated properly. This audit is compulsory only for
the persons specified under section 44AB of Income-tax Act, 1961.
(vi)Environment Audit (Green Audit): This audit is conducted with a view to assess the performance
of the company towards safeguarding the environment. It is required only for the industries
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specified in the Environment (Protection) Act, 1986, as they have to submit Environment Audit
report to State Pollution Board.
(vii) Forensic Audit: The term 'forensic' means investigation of crime. So forensic audit means the
audit which is done to check whether any fraud has occurred or not; hence, it involves critical
examination of books of account. This term has gained importance these days because of one of the
requirement of Companies (Auditor's Report) Order, 2003, whereby the auditor has to report
whether any fraud has occurred or not.
(viii) Propriety Audit: The term 'propriety' means meeting the tests of public interest or standards of
conduct. In simple words, propriety audit is done to ensure that expenditure done is not more than
what is required. It means expenditure should be done in such a way as a man of ordinary prudence
would have done in his own case. Public money should not be wasted at all and it should not be
used for the benefit of a particular person.

3. Time based classification:

(i)Continuous Audit: Continuous audit is conducted throughout the year at regular or irregular
intervals by the auditor. “A continuous audit is one where the auditor or his staff is constantly
engaged in checking the accounts during the whole period or where the auditor or his staff attends
at regular or irregular intervals during the period."
(ii)Periodical/Final/Annual Audit: Under this type of audit, the auditor undertakes audit work of the
organisation at the end of financial or accounting year. “Periodical audit is one where the auditor
does not attend until the completion and closure of the financial accounts by the undertaking or
client and the auditor takes the audit task as a whole and the checking is done at one time.
(iii)Interim Audit: Interim audit is conducted between two annual audits to enable the company to
declare interim dividend. It covers only part of the accounting period.
(iv) Balance Sheet Audit: In this type of audit, each of the item of assets and liabilities appearing in
the Balance Sheet such as share capital, creditors, debtors, capital reserve, plant and machinery, etc.
is verified. This type of audit has American origin. This term is not commonly used in India. In India,
the term 'Balance Sheet Audit' is a part of normal audit. The main constraint of this audit is that it
presumes the existence of an efficient system of internal check and internal accounting control
throughout the organisation.

4. Scope based classification:

(i)Complete Audit: In complete audit, the auditor is appointed to check all the transactions, each
and every account and report with the help of documentary evidence. However now-a-days,
auditors go for test checking as it is not feasible to do complete audit owing to a very large number
of transactions.
(ii)Partial Audit: Sometimes, the client may ask the auditor to audit only some of the books instead
of all the books or to audit all the books for part of the year. Such an audit is called as partial audit.
(iii)Detailed Audit: As the name suggests detailed audit means thorough examination. It is difficult
to differentiate between complete audit and detailed audit. The main difference is that if a few
transactions or accounts are examined in detail it is called as detailed audit.
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7. What is Continuous Audit? What are its advantages and disadvantages?

Ans. Continuous audit is conducted throughout the year at regular or irregular intervals by the
auditor. “A continuous audit is one where the auditor or his staff is constantly engaged in checking
the accounts during the whole period or where the auditor or his staff attends at regular or irregular
intervals during the period."

Advantages of Continuous Audit:

(i)Complete checking of all records: Since the audit is carried out throughout the year. Sufficient
time is available for detailed checking. Any enquiry and doubt arising in course of audit can be
tackled in a better way.

(ii)Proper planning: Auditor can plan his audit work in a systematic manner. He can evenly spread
his work throughout the year. It will improve the efficiency of auditor.

(iii)Preparation of Interim Accounts: Interim accounts can be prepared without much delay. It will
help the board of directors to declare interim dividends.

(iv)Early detection of fraud and error: The work auditor becomes easier for detecting fraud and
errors otherwise it will involve more time.

(v)Up-to-date Accounts: The efficiency of accounts staff will increase and their work will be up-to-
date and accurate.

(vi)Valuable suggestions: Continuous audit will help auditor to understand the technicalities of
business. This will help auditor to make suggestions for the improvement of business.

(vii)Early presentation of Accounts: Audited accounts can be presented just after the end of
financial year.

(viii)Moral Check: Continuous audit provides preventive and moral check against frauds.

Disadvantages of Continuous Audit:

(i)Expensive: It is an expensive system it may not suit the budget of small organizations.

(ii)Dislocation of routine work: Frequent visits by auditor may dislocate the smooth flow of office
work.

(iii)Alteration of figures: After the accounts have been audited the figures may be fraudulently
altered by the staff.

(iv)Losing link in the audit work: As the work is not completed continuously, the auditor may lose
continuity and certain questions and inquiries may be left unanswered.
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(v)Monotony: The work of auditor may become mechanical.

(vi) Frequent visits by auditor may provide scope for unhealthy relationship between him and clerks.

8. Distinguish between continuous audit & periodical audit.

Ans.
Basis Continuous Audit Periodical Audit
1.Continuity of (i)The auditor’s staff visits & checks the (i)The auditor’s staff visits the business
Visit accounts frequently only once in a year after the Accounts
are closed.
2. Efficiency (ii)The clients staff become more (ii)It may not be so because client’s
efficient & regular staff knows that audit work will
commence only of the close of
financial year.
3.Commencement (iii)Continuous audit comes to an end (iii)Periodical audit commence after
with close of accounting period. the accounts are closed.
4.Time of (iv)Immediately after the transaction is (iv)Audit staff checks & verifies the
Checking recorded audit staff check & verified it transaction after it is recorded.

5.Cost of audit (v)It is very expensive (v) It is economical.

6. Suitability It is adopted in big organisation. It is suitable for all concern.

9. Distinguish between internal audit and independent/ external audit.

Ans.
Basis Internal Audit External Audit
1.Appointment Internal auditor is appointed by the External auditor is appointed by the
management of the company. shareholders of the company
2.Legal Position Legally internal audit is not compulsory. External audit is compulsory by law.
3. Status of Internal auditor is employee of the External auditor is an independent
Auditor company. person.
4. Qualification For internal auditor any specific For external auditor specific
qualification is not compulsory. qualification is compulsory.
5. Submission Internal auditor has not to submit any External auditor submits report to
of Report report. the shareholders.
6.Remuneration Internal auditor remuneration is fixed by External auditor remuneration is
the management of the company. The fixed by the shareholders of the
remuneration of internal auditor is called company. The remuneration of
salary. external auditor is called audit fee.
7. Kinds of Internal audit is kind of continuous audit. External audit is conducted after the
Audit preparation of final accounts.
8. Duties Internal auditor primary duty is to find External auditor has to report about
the frauds and errors. final accounts whether these are true
or false.
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10. Distinguish between Statutory of Audit and Non-Statutory Audit.

Ans.
Basis Statutory of Audit Non-Statutory Audit
1.Nature It is compulsory in nature. It is voluntary in nature.
2. Scope The scope of work, rights and duties of The scope of work is determined by
auditor are determined by the statue. the client.
3.Reporting The audit report prepared is meant for The audit report is meant for the
the purpose of shareholders etc. purpose of management.
4.Qualification The qualification of auditor is prescribed. The qualification is not prescribed.
He must be Chartered Accountant

11. What is Audit Planning? What are the steps involved in audit planning?
Ans. Any activity undertaken without a plan is bound to be ineffective. Therefore, every audit should
also be carefully planned. SA 300 relates to audit planning. It states, “Audit Planning refers to the
planning by the auditor made to enable him to conduct an effective audit in an efficient and timely
manner.” In simple words, audit planning means developing an overall strategy for the effective
conduct and scope of the examination.
As per the SA 300 (earlier AAS 8) on planning an audit of financial statements, the following steps are
involved in audit planning:
(i)Planning an audit involves establishing the overall audit strategy for the engagement and
developing an audit plan.
(ii) Audit plan is more detailed than overall audit strategy that includes the nature, timing and extent
of audit procedures to be performed by engagement team members.
(iii)Once the overall audit strategy is established, an audit plan should address various matters which
are identified in the overall audit strategy, considering the need to achieve the audit objectives
through efficient use of auditor's resources.
(iv) In developing the overall plan, various important matters must be considered: terms of
engagement; nature and timing of reports; applicable legal or statutory requirements; accounting
policies adopted by the client; identification of significant audit areas; setting of materiality levels,
etc.
(v) To obtain a level of knowledge of client's business that will enable the auditors to identify events,
transactions and practices that, in their judgment, may have a significant effect on financial
information.
(vi) Engagement partner and other key members of engagement team shall be involved in planning
the audit, including planning and participating in the discussion among engagement team members
so as to enhance effectiveness and efficiency of planning process.
(vii) To plan the nature, timing and extent of direction and supervision of engagement team
members and review of their work. Auditor shall document overall audit strategy, audit plan and any
significant changes made during audit engagement to the overall audit strategy or audit plan, and
reasons for such changes.
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(viii) Audit planning ideally commences at the conclusion of previous year's audit, and along with
related programme, it should be reconsidered for modification as the audit of their compliance and
substantive procedures. For an initial audit, auditor may need to expand the planning activities
because the auditor does not ordinarily have previous experience with the entity that is considered
when planning recurring engagements.

12. What is Audit programme? Explain the advantage and disadvantages of audit programme.

Ans. An audit programme is a set of policies and procedures that dictate how auditing is to be
implemented. It is a detailed plan of work or outline of procedures to be followed by the auditor for
carrying out an audit work. In simple words, “Audit Programme is auditor’s plan of action”.
It comprises the whole procedure and technique of audit from preliminary stage of audit till
finalization of audit report.
According to Professor Meigs “An audit programme is a detailed plan of the auditing work to be
performed, specifying the procedures to be followed in verification of each item in the financial
statements and giving the estimated time required.”
Thus audit programme is an outline of how the audit is to be conducted by the audit staff, who will
do, which work and within what time.

Advantages of audit programme:

(i)Guide to work: Audit programme is a guide which directly or indirectly directs to perform and
work by the auditor and its audit staff.

(ii)Systematic work: The entire audit work can be performed systematically so that the attention is
directed for all significant areas.

(iii) Saving in time and labour: It saves time and labour by avoiding unnecessary enquires on which
attendance since the programme directs the enquiries as a routine work.

(iv)Monitoring and control: It will be easier for the auditor to control the progress of work at any
point of time if there is a good audit programme.

(v)No omission of work: As there is detail planning of work in the programme, there is little chance
of work being overlooked.

(vi)Permanent record: It serves the objective of keeping permanent record of the audit work.

(vii)Guide for next year’s audit programme: It serves as a guide for audits to be carried out in the
succeeding years.

(viii)Guide to new staff: It serves as a guide for new audit staffs in respect of their duties.

Disadvantages of audit programme:

(i)The task becomes mechanical; as a result initiative and efficiency are adversely affected.
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(ii)The task may be finished hurriedly to complete it within the scheduled time.
(iii)It does not serve any purpose in the audit of a small organization.
(iv)Uniformity of the audit program cannot be applied extensively, as the nature of work in the audit
of different organization cannot be exactly the same.
(v)It tends to introduce rigidity.
(vi)Inefficient audit assistance may also take shelter behind the programme.

13. What are the points to be considered while preparing an audit programme?

Ans. Audit programme is a detailed outline of a written plan of whole procedure for conduct of an
audit. The auditor should keep the following points in mind while preparing an audit programme.
(i) The terms and condition of his appointment.
(ii) Time for completion of audit work.
(iii) The nature of the business of the client’s firm.
(iv) The scope and limitation of his work.
(v) The internal control system in the firm and extent of reliance on it.
(vi) Availability and efficiency of audit staff/ assistant.
(vii) Allocation of work among the staff.
(viii) Sequencing of work.
(ix) The responsibility of the auditor and his staff as to the work to be done.
(x) Flexibility for providing scope for changes.

14. What is audit notebook? What are the contents elements of audit notebook?

Ans. Audit note book is a diary or register maintained by audit staff to note errors, doubtful quarries
and difficulties. The purpose is to note down various points which need to be either clarified with
the client or the chief auditor. The audit note book is also used for recording important points to be
included in the Auditors Report. It is a complete record of doubts and their clarification.

Contents of an audit note book:

The contents of an audit notebook may be discussed under the following heads:
(i) General information.
(ii) Special information.

General Information:
(a) Nature of the business.
(b) Important provisions effecting the account and audit, incorporated in Memorandum. Articles
etc.
(c) List of the books maintained.
(d) Names of the principal officers, their dates and responsibilities.
(e) Accounting system follows.
(f) Extend and scope of internal control in operation.
(g) General accounting policies followed for income recognition, depreciation, inventory valuation
etc.
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Special Information:
(a) Date of commencement of audit work.
(b) Technical terms used in the business.
(c) Quarries which require further information & explanation.
(d) Particulars of the missing vouchers, the duplicates of which have to be obtained.
(e) Mistakes and errors discovered.
(f) Totals or balances of important ledger account balances.
(g) Notes and quarries which might be required at the subsequent audit.
(h) Points which have to be incorporated in the audit report.
(i) Special points requiring consideration at the time of verification of final account.
(j) Suggestions made by the audit staff for improvement.
(k) Date wise progress of audit work.

15. Briefly explain the advantages and disadvantages of audit notebook.

Ans. Advantages:
(i)It ensures uniformity and helps in knowing the amount of work performed.
(ii)Important matters relating to the audit work may be easily recalled.
(iii) Facilitates a preparation of the audit report.
(iv)In case the assistant in-charge is changed, no difficulty is faced in continuing the incomplete
work.
(v)The responsibility for errors undetected can be fixed on clerk concerned.
(vi)The audit notebook shows the extent of the interest and pains taken by the audit staff. It helps in
their appraisal.
(vii)It ensures that audit programme has been sincerely followed. Deviations can be noted.
(viii)It is reliable evidence in the court of law if an auditor has to defend himself.

Disadvantage:
(i)It leads to development of a fault-finding attitude in the mind of audit staff.
(ii)It may create misunderstanding between the client’s staff and audit staff.
(iii)Another disadvantage of the audit notebook is that if it is prepared carelessly or negligently it can
become a proof against the auditor that his work was careless or negligent.

16. What is internal control? State its objectives. Briefly explain the elements or characteristics or
principle of internal control.

Ans. Internal control as a broad term with a wide coverage . It covers the control of the whole
management system. The control may be financial and/ or non-financial; it means internal control
involves a number of check and controls exercised in a business to ensure its efficient and economic
working. It has become one of the basic and essential factors for efficient and effective
management.
Internal control includes not only internal check and internal audit but the whole system of controls,
financial and otherwise, established by the management in order to carry on the business of the
company in an orderly manner, to safe guard its assets and to secure as far as possible the accuracy
and reliability of records.
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Objectives:

(i)To encourage adherence to prescribed policies: The system of internal control is introduced to
provide reasonable assurance that the various plans, policies and procedures laid down by the entity
are being followed.
(ii)To avoid frauds and errors: The main objective of any control system is to detect and prevent
frauds and errors by keeping an inherent check.
(iii)To promote operational efficiency: The internal controls within an organization, prevent
unnecessary duplication of efforts, protect against waste and discourage any inefficient use of
resources of the organization.
(iv)To safeguard assets and records: The other important objective of internal control system is to
safeguard the assets and records from unauthorized access, use and disposition.
(v)To provide accurate and reliable data: The internal control system ensures that all the
transactions are recorded in the correct amount, in the appropriate account and in the accounting
period to which they relate.
(vi) To assist in timely preparation of Financial Information: Information is of no use if it is not
provided in time. Internal control system facilitates timely preparation of financial statements

Elements/ Characteristics/ principles: An effective or a good system of internal control should have
the following characteristics which can be abbreviated as CROSSASIA for memory.

(i)Competent and trust worthy personnel: Personnel are the most important element of any system
of internal control. If employees are competent and trust worthy, some of the other characteristics
can be absent and reliable financial statements can still result. On the other hand if the other
characteristics are strong, incompetent or dishonest people can reduce the reliability.

(ii)Records, financial and other organizational plans: Documents performed the function of
transmitting information throughout the client’s organization and between different organizations.
The document must be adequate to provide reasonable assurance that all assets are property
controlled and all transactions correctly recorded.

(iii)Segregation of audits: For the prevention of both intentional and un-intentional errors, following
types of segregation of duty should be taken care of.
(a) Separation of operational responsibility from record -keeping responsibility i.e. to ensure
unbiased information, record keeping is typically included in a separate department under the
controllership function.
(b) Separation of the custody of assets from accounting i.e. to protect the firm against fraud, it is
required that the custody of assets and their accounting should be done by separate persons.

(iv)Supervision: Director should review the company’s financial operation and position at regular
and frequent intervals. Comparison with results for previous period indicates differences deviation
that call for further examination.
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(v) Authorization-written: If control, is to be satisfactory, every transaction must be properly

authorized. If any person in an organization could acquire or expand assets at will, complete chaos
would result.
Authorisation can be of two types.
(a) General.
(b) Specific.

(vi) Sound practices: Sound practices of administration require that established procedures, policies
and delegation of responsibility should all be in black and white. This helps in avoiding questions,
attempts to shift responsibility for unsatisfactory performance etc.
(vii) Internal audit: Internal audit is a part of the whole system of internal control. It should operate
independently of the internal check and in no circumstances; it should divert any one of
responsibilities placed on him.

(viii)Arithmetic and accounting controls: Chart of accounts i.e. balance sheet and income statement
is an important control because it provides the framework for determining the information
presented to management and other financial statement users. Chart of account or financial
statement should be prepared in accordance with the generally accepted accounting principles.

17. Briefly explain the limitations of internal control.

Ans. Standard Auditing (SA) – 315 issued by the ICAI highlight certain inherent limitations of internal
control:
(i)Operation of the internal control system involves expenditure of time and money.
(ii)Internal controls are concerned more with transactions of a routine nature, so unusual an
irregular transactions may be overlooked by the internal control system.
(iii)The possibility of human error may weaken the internal controls system.
(iv)Possible collusion between persons operating the internal control and the employees of the
client’s enterprise or outside parties may render the controls ineffective.
(v) The possibility that a person responsible for exercising control could abuse his authority.
(vi)Manipulation by the management may defeat the objectives of internal control.

18. Briefly explain the scope/ area of Internal control.

Ans. The term internal check / control are a broad term with a wide coverage. The main divisions or
areas which are generally covered by a well developed system of internal control may be
summarized as below:

(i)General Financial Control: It is concerned with an efficient system of accounting, adequate

supervision, recording and duplicating system.

(ii)Cash control: It includes proper control for receipts, payments and balances held. Due safe guards
must be exercised to avoid misappropriation of cash.
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(iii)Control over trading transactions: This area deals with an efficient system of control over both
purchases and sales transactions. Proper procedures should be laid down for acquisition, handling
and accounting of goods purchased as well as for recording and handling of goods sold.

(iv)Control over employee’s remuneration: This area concerns itself with the preparation and
maintenance of records for remuneration to employees, methods of payment etc. Proper control
must be exercised over this aspect so as to avoid defalcation and misappropriation of cash payment
to be made to the employees.

(v)Capital expenditure control: The expenditure is kept under proper control. It should be properly
sanctioned and used for the purposes intended for feedback reports must be prepared and
submitted to the management in this regard.

(vi)Others: These include:

(a) Maintenance of staff relationship.
(b) Stock maintenance.
(c) Control over investments.

19. What is internal check? State the objectives of internal check.

Ans. Internal check is a valuable part of internal control. The entire system of accounting needs to be
organized in such a manner that it may ensure some sort of check without incurring additional
financial burden.
It is an arrangement of the duties of members of staff in such a manner that the work performed by
one person is automatically and independently checked by the other. Each employee operates
independently but it does not involve duplicating the work of other.

Objectives:
(i) To exercise moral pressure over staff.
(ii) To ensure that the accounting system produces reliable and adequate information.
(iii) To provide protection to the resources of the business against fraud, carelessness and
inefficiency.
(iv) To distribute the work in such a manner that no business transaction is left unrecorded.
(v)To allocate duties and responsibilities of each clerk in such a way that he may be held responsible
for particular fraud or errors.
(vi) To minimise the chances of errors, frauds or irregularities in the business.
(vii) To increase the efficiency of clerks because the allocation of duties is based on the principle of
division of labour.
(viii) To detect error and frauds easily. It is committed because in an efficient internal check system
there is a provision for independent checking.

20. Briefly explain the essential characteristics/ principles of a good system of internal check.

Ans. The following are the essential characteristics of a good system of internal check:
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(i) Responsibility: Responsibility of each individual must be properly defined and fixed. The work of
the business should be allocated among various class in such a manner that their duties and
responsibilities are clearly and judiciously divided.

(ii) Completion: The work should be divided in such a way that no single person is allowed to
complete the work solely by himself from the beginning to the end. However there should be no
duplication of work.

(iii)Rotation of employees: A good of internal check should not allow persons having custody of
assets to have access to the books of accounts. A system of transfer or rotation of employees from
one seat of work to another must be followed by the business.

(iv)Automatic check: A good system of internal check must be provided for an automatic checking of
the work of one clerk by another.

(v)Reliance: No clerk of the business should be relied upon too much.

(vi)Safeguards: Safeguard should be prescribed to keep unused cheque books, files and securities
etc.

(vii)Supervision: A strict supervision should be exercised to ensure the prescribed internal checks
and procedures are fully operative.

(viii)Formal sanction: No deviation should be allowed from the established procedures till it is
formally sanctioned by the top official.

(ix)Periodical review: The system of internal check should be reviewed from time to time to
introduce improvement.

21. Briefly explain the advantages & Disadvantages of an efficient system of internal check.

Ans. Advantages:
(i)For the Business:
(a)Proper division of work: Internal check entails a proper and rational distinction of work among
the members of staff of the enterprise keeping in view their individual qualifications, experience &
area of specialization.
(b)Detection of errors & frauds : Since no individual workers is allowed to handle a job completely
from the beginning to the end , & the work of each clerk is automatically checked by the other, this
helps in the early detection and discovery of errors & fraud.
(c)Increased efficiency: Coupled with economy a good system of internal check increases the
efficiency of work among the staff and leads to an overall economy.

(ii)For the auditor:

(a)Quick preparation of final Account: The Profit & Loss Statement or Account & Balance Sheet are
prepared without any loss of time.
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(b)Convenience to auditor: When an organization is operating a system of internal check the

statutory auditor may conveniently avoid detailed checking of the transactions. He may apply a few
tests here and there and can relief himself from detailed checking.

(iii)For the owner:

(i)Accuracy of the accounts can be relied upon: If there is a good system of internal check the owner
of the concern may rely upon the genuineness and accuracy of the accounts.
(ii)Increase in profits: Overall efficiency and economy in operation results in more profits thus
ensuring larger dividends for the owners or shareholder.

Disadvantages: Dependence on each other proofs fatal in the quick disposal of the work. If one
person is absent, the day to day work will be seriously disrupted.
The following are some of the more disadvantages of internal check system.

(i) Costly for small business : A system of internal check is quite expensive specially for small
business houses .

(ii) Quality sacrificed for promptness: In an internal check system, quality of work declines because
the clerks of the business attach greater importance to become quick and do not care if in the
process their work gets sub-standardized.

(iii)Carelessness: The responsible officers may believe, though not always, that under a sound
system of internal check nothing can go wrong.

(iv)Collusion: The purpose of an internal check may not be achieved if good relation among the staff
does not exist.

(v)Disorder in the working of a business: In the absence of a properly organized system of internal
check there will be chaos and disorder in the working of a business.

(vi)Risky for an auditor: If the auditor does not apply test and procedures of his own and if he relies
on the output of the system his work cannot be free from irregularities if the system itself proves to
be defective.

22. What internal audit? State the objectives of internal audit.

Ans. Internal audit is conducted by employees of the organization to enable better exercise of
managerial control. According to Institute of Internal Auditors, "Internal Audit is an independent
appraisal activity initiated within an organisation for review of accountancy, financial other
operations, as a basis for service to the organisation”.
According to Watter B. Meigs “Internal audit consists of a continuous, critical review of financial &
operating activities by a staff of auditors functioning as fulltime salaried employees”.

Objectives:
BH6/ACG/UT-I/SKS

(i) To comment on the effectiveness of the internal control system in force and to suggest ways &
means to improve upon the system.
(ii) To verify the correctness, accuracy and authenticity of the financial accounting records presented
to the management.
(iii) To facilitate the early detection and prevention of frauds.
(iv)To assure that the international accounting standards or the standard accounting practices are
followed by the organization.
(v) To take up an investigation at the special request of the management.
(vi) To ensure that the assets of the organization are adequately safeguarded and properly
accounted for.
(vii) To ensure that the organization incurs liabilities in respect of its valid and legitimate activities.
(viii) To ensure that the acquisition and disposal of assets under proper authority.

23. Distinguish between internal check and internal audit.

Ans.
Basis Internal Check Internal Audit.
(i)Meaning Internal check is an arrangement of Internal audit is an independent
duties allocated in such a way that the appraisal of the operation and records
work of one person is automatically of the company.
checked by another person.
(ii)Object The purpose of internal check is to The purpose of internal audit is to
prevent or minimize the possibilities detect the errors & frauds which have
of errors , frauds or irregularities. already been committed.
(iii)Need for For internal check, no new For carrying out internal audit a
separate staff appointment is made. separate staff of employees is engaged
for the purpose.
(iv)Timing of Internal check is in operation during Internal audit starts when the
work the course of transactions. accounting process of different
transactions is finished.
(v)Scope of work The scope of internal check is very The scope of internal audit is
limited. comparatively broad.
(vi)Device / Internal check is a device for doing the Internal audit is a device for checking
Method work. the work.
(vii)Discovery In Internal check the errors & frauds In Internal audit errors & frauds are
are discovered during the course of detected after the completion of work.
work.
(viii)Involvement A large number of employees are A much smaller number of persons are
needs for the implementation of needed for its implementation.
internal check system.

24. Distinguish between internal control and internal check.

Ans.
Basis Internal Control Internal Check
1. Meaning It consists of the whole system of It is an arrangement of duties among the
BH6/ACG/UT-I/SKS

controls, financial or otherwise, employees in such a manner that the

established by the management to work done by one employee is
ensure smooth functioning of business of automatically checked by other
the company. employee.
2. Scope It is wider in scope and application. It It is a narrower in scope and application.
includes internal check.
3. Objective The main objective is safeguarding of The main objective of internal check is
assets accuracy of records and adherence prevention of errors and frauds and
to management policies. fixation of responsibilities.
4. Flexibility Internal control system is more flexible as It is less flexible. It more or less remains
it is reviewed for the change in stable.
circumstances.

25. What is vouching? State the Features of vouching.

Ans. Vouching is a technique in which an auditor verifies authenticity and authority of transactions
recorded in the books and on the basis of which submits a report, indicating that accounts are
correct, free from errors or fraud and complete.
Vouching is not only examining the documentary evidence but sometimes auditor to go behind
recorded evidence to eliminate any possibility of fraud.
According to J.R. Baltiboi, “Vouching means tasting the truth of items appearing in the books of
original entry”.

Feature:

(i)Vouching is a technique used by an auditor to judge the truth of entries appearing in the books of
accounts.

(ii)It may be referred as to very essence of auditing. It is a device used to prove that various
transactions for the period are fairly, truly and sincerely reflected in the books.

(iii)It is checking the accuracy of entries made in financial books with the help of available
documentary evidences.

(iv)It is to be seen that no transaction has been omitted and all the transaction have recorded
properly.

(v)Vouching is the backbone of auditing. If vouching is done intelligently and faithfully, it will be a
help in establishing reliability of profit and loss a/c and balance sheet.

(vi)Vouching indicates that a particular asset must be possessed by the concern.

(vii)Vouching is done for the transactions of whole year.

(viii)Vouching does not primarily concern with valuation.

26. State the objectives of vouching.

Ans. The main objectives of vouching are:

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(i) To examine that all the transaction which is connected with the business has been recorded in the
books of accounts properly.

(ii) To verify that all transactions recorded in the books of accounts are supported by documentary
evidence.

(iii) To examine vouchers which support the entries are legally valid from the point that they are
authentic, addressed to the business and properly dated.

(iv) To verify that no fraud or error has been committed while recording the transactions in the
books of accounts.

(v)To ensure vouchers have been processed carefully through various stages of internal check
system.

(vi) To ensure every transaction recorded has been adequately authenticated by a responsible
person.

(vii) To check whether distinction has been made between capital and revenue items while recording
the transactions.

(viii) To see whether accuracy has been observed while totalling, carried forward and recording an
amount in the account.

27. Explain the importance of vouching.

Or
“Vouching is the backbone of auditing” – explain.
Or
Explain why vouching in called the essence of auditing?

Ans. Auditing is a systematic process of objectively obtaining and evaluating evidence regarding
economic events ascertaining the truthfulness and fairness of the results and communicating the
same to the interested users. Vouching is essence of auditing. It is called so because of the role
played by it in achieving the objects of auditing and its contribution towards the successful conduct
and completion of audit. The success of an audit largely depends upon the intelligence and care with
which vouching has been done, as vouching being the very basis of an audit. It is the vouching on the
basis of which an auditor satisfies himself:
1. That the documentary evidence of sufficient validity is in order.
2. That the transaction did in reality take place as stated.
3. That it has been properly authorized by a competent official.
4. That it has been worthy and exclusively related to the business.
5. That it has been properly recorded in the books of account.
In the words of Dr. Paula, Vouching is in fact essence or backbone' of auditing, as it is one of the
most powerful tools in the hands of auditor. It constitutes the foundation upon which the super
structure of auditing is erected.
BH6/ACG/UT-I/SKS

As in accounting, passing an original entry is very important if this is done in a wrong way any further
work done will also be wrong or defective similarly in the process of auditing vouching plays the
same role, it is the essence of auditing. It acts as a foundation, on which the whole of auditing
structure is built up.

The success of an audit will depend on the efficiency with which vouching has been applied during
the process of auditing. The assessment of accounting work is done by the auditors on basis of his
finding in course of vouching.

According to Section 143 of the Companies Act, 2013 the auditor has to report that Balance Sheet
and Profit and Loss Account give true and fair view of financial position and operations of the
company respectively, and they have been correctly drawn up. Only after properly carrying out
vouching, the auditor can say that the books of account are correct. Unless the books of account are
correct, i.e., transactions are properly entered in the books, the Balance sheet and Profit and Loss
Account cannot be drawn correctly.
From the above discussion, it is clear that vouching is the foundation stone and one of the most
important steps of auditing. It has been rightly remarked that vouching is the essence or backbone
of auditing

28. What points must be kept in mind by auditor while examining the vouchers?

Ans. The following points must be kept in mind by auditor while examining the vouchers:

1. The vouchers (A voucher is a documentary evidence of a financial transaction, date of financial

transaction as well as the amount involved in the financial transaction. Other necessary papers
related with the transaction are also annexed along with the voucher) should be serially numbered
and should be arranged in the chronological order (date wise). This helps not only in saving time but
also ensures continuity of the transactions.
2. The date of voucher should tally with the date of entry in the books of account.
3. The voucher which has already been checked should be marked so that duplicate vouchers shall
not be produced. The documentary evidences annexed along with the voucher shall also be marked
to avoid their re-occurrence.
4. If there is any duplicate voucher, the auditor should thoroughly investigate as it reflects some
fraud on the part of company or the concerned accounts officer.
5. The auditor should also ensure that the vouchers have been properly stamped if the amount of
consideration involved is 5000 or above. One-rupee stamp should be affixed by the payee along with
his signature on the stamp.
6. The nature of financial transaction should be assessed to ensure that it relates to the business of
the concerned organization.
7. An auditor should also ensure that there should be no inter-mixing of revenue and capital
expenditure, as it will have serious repercussion on the profitability of the company.
8. An auditor should ensure that the amount written in words should match with the amount
written in the figures.
BH6/ACG/UT-I/SKS

9. The expenses involving time period such as rent, rates etc., should also contain the details of the
period for which these payments are being made and the auditors should carefully examine it.
10. The consideration involved in the transaction should be properly verified with the documents
attached with the vouchers and the name of the payee shall also be verified from the attached
documents.

29. Under what circumstances will an auditor refuse to accept a voucher while vouching the
accounts? What consideration shall be taken by auditor for missing vouchers?
Ans. An auditor may refuse to accept the vouchers in the following circumstances
(a) The amounts written in words do not match with the amount written in figures.
(b) The date of voucher does not match with the date of entry in the books of account.
(C) The amounts mentioned in the voucher do not correspond to the entry made in the journal.
(d) The voucher has not been properly stamped if the amount of consideration involved is 75000 or
above.
(e) If the payment made does not correspond to payment in the regular course of business.
(f) If the voucher has not been endorsed or authorized by a competent authority, it would amount to
irregular payment.
(g) If the voucher is mutilated and any senior officer has not initialled the same, then it should not be
accepted.
Missing Vouchers
While vouching, if a number of vouchers or supporting documentary evidences are not available the
entries made in the books of account, such non-availability of vouchers is called as missing vouchers.
It may be deliberate or accidental. In other words, it may be innocent misplacement or indicative of
a big fraud.
But the auditor should make a list of such missing vouchers and he should try to locate such
vouchers or should find the reasons behind such non-availability. The auditor should follow the
following audit procedures to find out these missing vouchers:
(i)The auditor should insist on getting fresh evidences for the transactions recorded in the books.
(ii)He should find out the evidences supporting the details of missing voucher.
(iii) He should ask for and seek the explanations from the employees of client.
(iv) He should report accordingly in his report.

30. What are the duties of auditor in connection with vouching of cash book?

Or

What are the points to be considered by an auditor while vouching the cash receipts and cash
payments?
BH6/ACG/UT-I/SKS

Ans. Vouching of Cash Receipts (Debit Side of Cash Book)

The cash receipt which are placed on the debit side of cash book for following items:

(i)Opening Balance of Cash Book: Opening balance of cash book represents cash in hand at the start
of the year and should verified from the balance sheet of last financial year.

(ii)Cash Sales: The auditor should keep in the following points while vouching the cash sales:

(a)The auditor should examine the efficiency and adequacy of internal checks and internal controls
already in practice.
(b) The auditor should check the duplicate copies of the cash memo with the salesmen’s
copies/summaries.
(c) If any cash memo is cancelled, then all the copies including the original copy cancelled should be
preserved.
(d) The entire sale proceeds should be deposited in bank so the counterfoils of pay-in-slips can serve
as evidence.

(iii)Cash Received from Debtors: Consider the following points for verification of cash received from
debtors:

(a)The carbon copies or counterfoils of cash receipt book should be verified.

(b)Cash receipt should be serially numbered.

(c)Cash received should be entered on the same date when the cash is actually received.

(d)The discount allowed to customers should be properly authorized by a responsible officer.

(e)Correspondence with customer and ledger account should be tallied.

(iv)Rent Received: The auditor should keep in the following points while vouching the rent received:

(a) To check rental agreement or lease deed.

(b)In case where the rental income is received from more than one property, separate account for
each property should be maintained.

(c)The Auditor should verify that the rent for all the twelve month is received or not.

(d)The amount of rent should be verified from the rent deed or the lease deed.

(e) If TDS (Tax Deducted at Source) is deducted by the party, there should be proper accounting of
TDS.

(v)Sale of Investments: The auditor should keep in the following points while vouching the sale of
investment:

(a)To check bank statement if the sales proceeds have reached the bank account.
BH6/ACG/UT-I/SKS

(b) To verify broker commission, note or debit note, if investments are sold through broker.

(vi)Sale of Fixed Assets: The auditor should keep in the following points while vouching the sale of
fixed assets:

(a) To check minutes of the meetings of the Board of Directors.

(b) Sale agreement or sale contract.

(c) Verification of agent account if sale is made through an agent.

(d)Profit or Loss on sale of fixed assets should be booked to revenue account.

(e) Authorization of sale of fixed assets.

(f) Sale proceed of fixed assets should be credited to fixed assets account after deducting expenses
on sale of fixed assets if any.

(vii)Interest and Dividend Received: The auditor should keep in the following points while vouching
the interest and dividend received:

(a)Verification of the dividend warrant letter along with the covering letter for verification of
dividends in case of dividends received through cheque.

(b) Verification of bank statement, if the dividend is directly credited to the bank account.

(c) Interest on security can be vouched from the securities schedule.

(d) Interest on fixed deposit can be verified from bank statement and TDS certificates.

(e)All interest received and accrued should be properly accounted for in the books of accounts.

(viii)Commission Received: The auditor should keep in the following points while vouching the
commission received:

(a) Verification of agreement on the basis of which the commission is received.

(b) Calculation of the commission receivable.

(c)The commission received should be verified from counterfoils, bank statements, cash receipts,
etc. and the provision for commission receivable should be rightly accounted for in the books of
accounts.

(d)Commission receivable on “sale of goods sent on consignment” should be verified from sale
account.

(e)Profit on sale on hire-purchase should be duly calculated on the basis of instalment received
during the year.

Vouching of Cash Payments (Credit Side of Cash Book)

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All the payment made to creditors, expenses incurred in cash and all other payments done appear
on the credit side of cash book and the Auditor is required to vouch cash payments because
chances of cash misappropriation are very high.

Following points need to be considered for different types of cash payment:

(i)Opening Balance: The opening balance of cash book can never be credited because cash of
company cannot be in negative but the credit bank balance represents the overdraft account from
bank or utilization of cash credit limit as sanctioned from bank.

(ii)Cash Purchases: The auditor should keep in the following points while vouching the cash
purchases:

(a) The auditor should check the internal control system in operation.

(b) The auditor should make routine checking, He should also verify whether the entries in cashbook
and stock ledger are correctly made or not.

(c) The auditor shall check the cash memo or invoice issued by the supplier to verify the payment of
such purchases.

(iii)Payment to Creditors: Payment to creditors may be examined by the following:

(a)Receipt issued by the creditors.

(b)If the creditor is paid amount as full and final settlement, the balance amount, if any stands in the
ledger account of the creditor; this amount should be credited to discount received.

(c)If any advance payment is made to creditor that should be clearly mention.

(d) Statement of account of creditor.

(iv)Payment of Salaries: Depending upon the adequacy of internal control system in an organization
Auditor will decide his audit Program. It is very important for Auditor to check the following:

(a)Attendance record of employee and salary register.

(b) Appointment letter of new employees.

(c)Comparison of current month salary with last month’s salary and if there is any abnormal change
in amount, Auditor should verify the same.

(d) Alteration in amount of deductions on account of advance, loan, fine, funds, insurance, TDS, etc.

(v)Payment of Wages: At the time of vouching of wages paid, the Auditor should keep in mind the
following points to avoid misappropriation of cash:

(a)Names of workers included in the wage sheet should be compared with workers register.

(b)Wages paid and calculated for the various months should be compared.
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(c) At random the checking of wages calculations should be made.

(d)Auditor should see the proper record is maintained for unpaid wages.

(e)Deductions for any advance taken by the workers should also be verified.

(f)Deductions made from the wages should be entered in the proper account.

(g)Special attention should be given to the payments made to casual workers.

(vi)Purchase of Plant and Machinery: The Auditor should pay attention to the following:

(a)Purchase invoice of machinery.

(b)Freight inward charges, installation charges, erection and commissioning charges should be
capitalized.

(c) Treatment of Excise duty according to the excise rules.

(vii)Purchase of Land & Building: Purchase of Land and Building can be vouched as follows:

(a) Study of Lease hold agreement, if land is purchased on lease hold basis.

(b)Payment should be as per lease term.

(c)All the expenses incurred to acquire lease hold property should be debited to respective property
account.

(d)Auditor should study the conveyance deeds in case property is purchased under free hold basis.

(e)For verification of payment, the Auditor can check the payment receipt and the conveyance
deed.

(viii)Rent Paid: Consider the following points for the verification of rent by the auditor:

(a)Rent Deed.

(b)Rent receipt from Land lord.

(c) Provision for un-paid rent at the end of the year.

(ix)Insurance Premium: Consider the following points for the verification of Insurance Premium:

(a)Insurance policy issued by the Insurance Company.

(b)Insurance premium receipt

(c)Insurance premium should not be related to any official of the company.

(x)Income Tax: Consider the following for the verification of Income:

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(a)Advance Tax Challan

(b)Self-Assessment Tax challan

(c)Income Tax demand notice

(d) Assessment order.

31. Explain how you will vouch the following:

(i) Credit Sales. (ii) Sales Returns. (iii) Credit Purchases. (iv)Purchase Returns.

(i)Credit Sales: The auditor should keep in the following points while vouching the commission
received:

(a) The auditor should examine the internal control system in force.
(b) Credit sales can be verified by reference to the purchase orders received from customer and
copies of invoices issued to them.
(c) Goods sold should be normally dealt in by the company and sales should relate to the period
under audit,
(iv) Goods sold on "sale or return” basis should be recorded separately.
(v) If goods are sold on consignment basis, then it should not be treated as sale unless Consignee
sells the goods. In this case, copies of Performa Invoice and Account Sales will serve as evidence.

(ii) Sales Returns: The auditor should keep in the following points while vouching the sales returns:

(a) The auditor should examine the entries in Sales Return Book with respect to good received note.
(b) Examine credit notes and entries in customer's account.
(c) If there are large sales returns in the beginning of year, it may be the reversal of fictitious sales
shown in the last year to show high revenue. The auditor should scrutinize these aspects also.

(iii)Credit Purchases: The auditor should keep in the following points while vouching the credit
purchases:
(a) Credit Purchases can be verified by reference to the purchase requisitions and purchase orders
placed with the suppliers.
(b) The auditor can also examine the entries in purchases book with reference to purchase invoice
and goods received note.
(c) The auditor can verify the statement of account of suppliers and correspondence with them from
time to time.
(iv)Purchase Returns: The auditor should keep in the following points while vouching the purchases
returns:
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(a) The auditor should verify the internal control system and cut-off procedures employed in the
organization.
(b) The auditor should see the entries are correctly made in purchase returns book and suppliers
account.
(c) The auditor should check the goods returned note and debit notes issued

32. What do you mean by verification? State the objectives of verification.

Ans. Verification' means confirming or proving the truth. It refers to the procedures normally carried
out at the year-end to confirm the existence, ownership and possession of assets and liabilities at
the Balance Sheet date.
An auditor has to express his opinion whether the balance sheet represents a true and fair view of
the state of affairs of the enterprise. For forming this opinion, auditor does not merely see the
arithmetical accuracy and authenticity of the transactions in the books of account by vouching, but
also has to see that the assets/liabilities as shown in the balance sheet actually exist. It is through
verification that the auditor satisfies himself as to the existence, ownership and possession of the
asset.
According to Spicer and Pegler "The verification of assets implies an enquiry into the value,
ownership and title; existence and possession: the presence of any charge on the assets".
Objectives of Verification
The main objectives of verification are as follows:
(i) Existence: To ensure that asset or liability exists on the Balance Sheet date.
(ii)Ownership: To certify the ownership of assets by examining the title deed.
(iii)Possession: To ascertain that assets are in the possession of the client.
(iv)Purpose and Authority: To ensure that assets have been acquired or liabilities a incurred for the
business purpose and under proper authority.
(v)Lien of Charge: To ensure that assets are free from any charge/lien and if there is any change, to
ensure its adequate disclosure.
(vi)Completeness: To ensure that all assets and liabilities are shown in the Balance Sheet; no
asset/liability is left out.
(vii)Valuation: To ensure that assets or liabilities are correctly valued and shown at their appropriate
value in the Balance Sheet.
(viii)Disclosure: To ensure that the assets or liabilities are disclosed in the Balance Sheet as per
statutory requirements and accounting principles.
33. Distinguish between vouching and verification.

Ans.

Basis Vouching Verification.

(i)Nature of Vouching examines the entries relating Verification examines the assets and
work to transaction recorded in the accounts liabilities appearing in the Balance Sheet.
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books.
(ii)Basis Vouching is based only on documentary Verification is based on physical as well as
examination documentary examination.
(iii)Time Vouching is done throughout the year Verification is done at the end of the year
when the Balance Sheet is prepared.
(iv)Valuation Vouching does not include valuation. Verification includes valuation.
(v)Personnel Vouching is done by juniors like the Verification is done by auditor himself.
clerks or audit clerks.
(vi)Scope Vouching is the detailed checking of Verification includes not only the checking
records to ascertain the authority of a of records but also physical examination
transaction. and valuation of assets.

34. Write note on procedure involved in verification of following:

(i) Land and building (ii) Plant and Machinery (iii) Furniture (iv) Patents and Trade Marks (v)
Investment, (vi) Book debts (vii) Stock in trade (viii)Cash-in-Hand (ix)Cash at Bank

Ans. (i) Land and Building: For verification of land and building auditor should distinguish between
the freehold property and leasehold property:

Freehold land and building: Auditor should take the following step to verify the freehold property:

(a)The auditor should examine the title deeds, to ensure that they are in the name of the client.

(b)The title deeds should cover all the land and buildings shown in the books of account.

(c)Any addition or sale, during the year should be carefully examined.

(d) Incase of sale , auditor should see that any profit or loss there on has been adjusted properly in
the accounts.

Leasehold land and building: Auditor should take the following step to verify the leasehold property:

(a)He should inspect the lease agreement to find out value and duration.

(b)The auditor should see that the lease agreement is registered with the registrar.

(c) Auditor should see that the terms and conditions of the lease are properly complied with.

(d)He should also examine the last receipt of the payment of rent.

(c)Incase the property is sub-let; the auditor should examine the agreement with sub-lessee.

(ii) Plant and Machinery: Auditor should take the following step to verify the plant and machinery:

(a)The auditor should call for the plant register or detailed breakup schedule of plant and machinery.

(b)In the case of a company, the management is duly found to physically verify the plant machinery
and the auditor should ask for the related working papers for his examination.
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(c)The additions and disposals during the year should be verified with reference to the purchase
invoices and other appropriate documents.

(d)The auditor should verify some of the important item of plant and machinery on test check basis.

(iii)Furniture (Fixture/ fittings/ office equipments):

(a)They may be verified with the help of invoices obtained from the supplied as personal inspections
may not always be possible.

(b)Normally, Furniture stock Register is maintained in the business. The auditor should see that on
the date of the balance sheet, the furniture stock register has been properly balanced and the
balance is shown clearly therein.

(c)Any expenditure incurred for obtaining these assets should be capitalized.

(d)Any additions or sales during the year should be carefully scrutinised and it should be seen that
only genuine additions or deductions have been made in the accounts.

(iv) Patent and Trademark:

Patent: A patent is an official document, which secures to an inventor exclusive write for years to
make use or sell his invention.

The auditor should examine the patents with the help of certificates which have granted such patent
rights. The auditor should also ensure that the patents are registered in the name of the clients.

Trade mark: Trademarks can be verified by examining the assignment deed duly endorsed by the
office of the Registrar of Trade Marks. Incase they have been purchased from others, the auditor
should vouch the expenditure incurred in connection with their acquisition for e.g., registration fees,
payments made to designers etc.

(v)Investment: Investment means investment in the form of share stocks, debentures and other
securities including government bonds. For verification of investment an auditor may employ the
following procedures.

(a) Inspect whether the investments made are within the authority of the entity.

(b) Inspect the investment register with reference to relevant documents.

(iii) Examine the adjustment made in cost of acquisition or sale value of the securities.

(iv) Carryout a physical examination of the securities if possible.

(v)Examine statements and certificates issued by depository or custodian for the scripts held by
them.

(vi) Book debts (Debtors): The auditor should undertake the following procedure for verification of
book debts:
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(i) Obtain a schedule of debtors duly signed by a responsible officer and examine the schedule with
individual accounts of debtors appears in the debtors ledger.

(ii) Inspect the relevant documents such as invoice , transporters receipts etc. for each debtor .

(iii)Vouch collection of accounts receivable subsequent to the balance sheet date.

(iv)Re-compute the provision for bad and doubtful debts and compare it with previous periods.

(v)Examine the relevant correspondence for bad debts written off with the debts concern.

(vi) Examine memorandum record for subsequent recovery of bad debts.

(vii)Stock in trade: The auditor should proceed for the verification of stock in the following manner:

(a) He should review and be familiar with the procedure and arrangements for the maintenance of
stock records & find out any discrepancy therein.

(b)He should examine how effectively the management controls the receipts and issues of stock.

(c) He should secure a copy of the client’s physical stock taking instructions in advance of the actual
stock taking and see whether these contain adequate safeguards against possible errors and frauds.

(d) He should test some of the items of the stock with the stock records with regard to quantity and
value.

(e) He should examine and find out that no goods which do not belong to the client have been
included in the stock.

(viii)Cash-in-Hand: Cash includes cash-in-hand, petty cash balance in hand, cash with agents, cash at
branches, etc. The auditor should consider the following points while verifying cash in hand:
(a) Physically count the cash-in-hand on the date of the Balance Sheet.
(b) Properly check all the cash-balances, if any, simultaneously as far as practicable to avoid any
substitution.
(c) The auditor should undertake surprise check of cash.
(d) If there is any difference in actual cash in hand and cash balance as per books of account, the
auditor may ask for the explanation from the management.
(ix)Cash at Bank: The auditor should consider the following points while verifying cash at bank:
(a) The auditor shall obtain a certificate from bank for cash lying in different accounts like saving
account, current account and fixed deposit account.
(b) The auditor shall examine bank reconciliation statement in case of difference between balance as
per book and balance as per bank column of cash book.
(c) Cheques beyond 3 months period may be inquired by the auditor.
(d) The auditor shall see that post-dated cheques issued or received have not been accounted for
payment or receipt for the period under audit.
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(e) The cash at bank shall be properly disclosed in the Balance Sheet but it should not include stale
and dishonoured cheques.
(x)Sundry Creditors: While verifying sundry creditors, the auditor should note the following points:
(a) The auditor should vouch the Purchase Book and Purchases Return Book with the help of
invoices, credit notes, etc., and the same should be examined by checking posting into the ledger
(b) The bills paid should be tallied with the entries passed in the cashbook.
(c) Ensure that goods purchased have actually been received by inspecting Good Inward Book.
(d) The auditor shall ensure that the cash payments made to the creditors subsequent to the Balance
Sheet date to find any error.
(e) The purchase invoices pertaining to a few weeks before the close of financial period should be
examined by auditors.
(f) The auditor should obtain confirmation from creditors to tally their balances as appearing in the
books of account.
(xi)Share Capital:
(1) If it is the first year of the existence of the company, then
(a) The Memorandum of Association and the Articles of Association should be examined by the
auditors.
(b) The Cashbook, Pass Book, and Director's Minute Book should be examined to ascertain the
number of shares, the various classes of shares, the amount received thereon and the amount due
from the shareholders.
(c) The contract between the vendors and the company should be examined by the auditor if some
shares have been allotted to the vendors.
(2) If it is not the first year of a company, then
(a) It should be observed that the share capital of the company should be same as in the previous
year unless there is some alteration or addition by fresh issue.
(b) The provisions of the Companies Act, 2013 should be complied in case of reduction of capital.

35. Distinguish between accounting and auditing.

Ans.
Basis Accounting Auditing
1.Nature It is constructive in nature as it is It is analytical in nature and is
concerned with completion of concerned with checking and
accounting information for preparing verification of financial statements.
profit & loss a/c and balance sheet.
2.Scope Its scope is restricted to preparation of It is determined by the agreement
financial statement and their between auditor and his client.
interpretation
3.Qualification No formal qualification has been An auditor must be a qualified
recommended. chartered accountant.
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4.Object The main object is to find out The main object is to ascertain truth
operating results and financial and fairness of financial statement and
position of the business. comment thereon.
5.Commencement It starts where book keeping ends. It starts where accounting ends.
6.Basis of The accountant is paid monthly salary. The auditor gets a fixed amount as per
remuneration agreement with his client.
7.Appointment The accountant is employee of the The auditor is an independent outsider
business. appointed on a contractual basis for a
year.
8.Responsibility Accountant is responsible to the Auditor is responsible to the
management. shareholders.
9.Duration The accounting work is conducted The audit may be conducted at the end
throughout the year. of the year or throughout the year.