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SUGGESTION: AUDIT
NILANJAN DUTTA 9831570905

Q:Discuss the Provisions of Companies Act, 2013 in respect of Unpaid Dividend

Provisions of Companies Act, 2013 Regarding Unpaid Dividend
The Companies Act, 2013, outlines specific provisions regarding unpaid dividends, aiming to protect shareholder rights
and ensure transparency.
Transfer to Unpaid Dividend Account:
If a declared dividend remains unpaid or unclaimed for 30 days after its declaration, the company must transfer the
unclaimed amount within 7 days to a special account called the "Unpaid Dividend Account" at a scheduled bank.
This ensures the funds are readily available for shareholders to claim later, preventing their misuse.

Within 90 days of transferring funds to the Unpaid Dividend Account, the company must prepare a statement. This
statement should include:
Names and last known addresses of shareholders with unclaimed dividends.
o Amount of unclaimed dividend for each shareholder.
The statement must be placed on the company's website (if any) and on any other government-approved website for
public access. This transparency measure helps shareholders locate and claim their unclaimed dividends.

Claiming Unpaid Dividend:

Shareholders can claim their unclaimed dividends at any time. They can contact the company's registrar or
transfer agent with relevant documents (shareholding proof, etc.) to claim the amount.
Companies must facilitate the claiming process. They should provide shareholders with clear instructions and
readily address any inquiries or issues.
In one word, the Companies Act, 2013, aims to strike a balance between protecting shareholder interests and ensuring
responsible management of unclaimed dividends. By mandating transparency, facilitating claiming procedures, and
imposing penalties for non-compliance, the Act helps maintain a fair and transparent corporate governance
environment.

Q:Can dividend be paid out of current profit without writing off fictitious assets?
No, a company cannot legally pay dividends out of current profits if it involves writing off fictitious assets. This practice is
prohibited by the Companies Act, 2013, and for good reason:
Reasons why writing off fictitious assets for dividend payment is illegal:
→ Maintaining capital integrity: Companies have a responsibility to maintain their capital, which essentially refers
to the difference between assets and liabilities. Inflating assets by creating fictitious entries misrepresents the
financial health of the company and puts shareholders at risk.
→ Misleading financial statements: Including fictitious assets in the books distorts the true picture of the
company's financial performance. This can mislead investors and creditors, impacting their decisions and
potentially causing harm.
 → Dividend policy compliance: Companies must follow specific guidelines for declaring and paying dividends. These
guidelines ensure that dividends are only distributed from actual profits, not inflated figures resulting from
fictitious assets. Distributing dividends based on false profits violates these guidelines and can attract legal
consequences.
Q:Can Dividend be paid out of Past Reserves?
Yes, a company can pay dividends out of past reserves under certain conditions and regulations.

Types of Reserves:

1. Free Reserves: These are the most readily available reserves for dividend payments, accumulated from past
profits after accounting for necessary expenses and dividends already declared.

2. Capital Reserves: These reserves are created for specific purposes, such as capital redemption or expansion
plans. Using them for dividends is generally prohibited unless specific conditions are met.

3. Other Reserves: Certain reserves, like revaluation reserves or amalgamation reserves, are also not permitted for
dividend payments due to their restricted nature.

Conditions for Paying Dividends from Past Reserves:

a) Profitability: Even though using past reserves, the company must still be in a profitable position and not
experiencing financial difficulties.
b) Solvency: Paying dividends should not jeopardize the company's ability to meet its obligations and remain
solvent.
c) Compliance with Company Law: Specific regulations within the Companies Act, 2013, must be followed. These
include:

o Interim dividends can only be paid out of current profits or surplus in the profit and loss account.

o Final dividends can be paid from past reserves under certain conditions, like inadequacy of current

paying dividends from past reserves is a viable option under specific conditions and legal compliance. However,
companies should carefully consider the financial implications, potential impact on future growth, and shareholder
perception before making such decisions.

Q: Appointment and Removal of a Company Auditor under the Companies Act, 2013
The Companies Act, 2013, outlines specific provisions for the appointment and removal of a company auditor, aiming to
ensure independent and professional audit services.
Appointment:
a) 1st AGM: Every company must appoint an auditor at its first annual general meeting (AGM) and at every
subsequent sixth AGM.
b) First Auditor: The first auditor of a company can be appointed by the Board of Directors within 30 days of the
company's incorporation or by the members at an extraordinary general meeting (EGM) within 90 days of
incorporation.
c) Term: The auditor holds office until the conclusion of the next AGM following their appointment.
d) Eligibility: The auditor must be a chartered accountant or a firm of chartered accountants, with specific
qualifications and experience as prescribed by the National Company Law Tribunal (NCLT).
e) Rotation of Auditors: Companies categorized as public interest entities (PIEs) and those with a public borrowings
of Rs. 50 crore or more are subject to mandatory auditor rotation after five years.
 f) Ratification: Shareholders can ratify the appointment of every auditor at each AGM by passing an ordinary
resolution.

Removal:
1. Section 140: An auditor can be removed before the expiry of their term only by a special resolution of the
company, after obtaining the previous approval of the Central Government.
2. Grounds for Removal: The company can seek the Central Government's approval for removal on grounds such
as:
a. Professional misconduct or negligence.
b. Loss of independence or conflict of interest.
c. Failure to perform duties diligently.
3. Procedure: The company must first pass a resolution to remove the auditor and then apply to the Central
Government in the prescribed form with detailed reasons for the proposed removal.
4. Central Government Approval: The Central Government has the authority to grant or reject the company's
request for removal after considering the reasons and providing the auditor with an opportunity to be heard.
5. Resignation: An auditor can also resign from their appointment by giving due notice to the company and the
Central Government.
the Companies Act, 2013, emphasizes the importance of an independent and qualified auditor in ensuring the financial
health and transparency of a company. The provisions for appointment and removal aim to balance the rights of
shareholders with the need for a robust audit process.

Q: Discuss the qualification and disqualification of a company auditor as per the Companies
Act, 2013.
Qualifications and Disqualifications of a Company Auditor under the Companies Act, 2013
The Companies Act, 2013, lays down specific criteria for who can and cannot be appointed as a company auditor. This
ensures the necessary skills and independence required for conducting reliable financial audits.
Qualifications:
• Section 141: Only a chartered accountant in practice or a firm of chartered accountants can be appointed as a
company auditor.
• Chartered Accountant: The individual must be a member of the Institute of Chartered Accountants of India
(ICAI) and fulfill all the eligibility requirements set by the Institute.
• Firm of Chartered Accountants: The firm must be registered with the ICAI and have a majority of its partners
who are qualified chartered accountants.
• Additional Requirements: The Act may prescribe further qualifications and experience for auditors based on the
company's size, type, and public interest status.
Disqualifications:
• Section 141(3): Several factors can disqualify an individual or firm from being appointed as a company auditor.
These include:
a) Employment elsewhere: Individuals employed full-time outside the firm cannot be appointed as
auditors.
b) Holding multiple appointments: Individuals or firms cannot audit more than 20 companies at the same
time.
c) Relation with the company: Individuals related to directors or key managerial personnel of the
company are disqualified.
d) Previous conviction: Individuals convicted of financial or fraud-related offenses within the past 10 years
are disqualified.
e) Personal bankruptcy: Individuals declared bankrupt are disqualified.
 f) Loss of independence or conflict of interest: Any situation that compromises the auditor's
independence or creates a conflict of interest disqualifies them.
• Section 144: The Act also empowers the Central Government to disqualify an auditor based on specific grounds,
such as professional misconduct, negligence, or failure to perform duties diligently.
Q:Can dividend be paid out of current revenue profit before writing of depreciation?
No, a company cannot legally pay dividends out of current revenue profit before writing off depreciation. This is due to
several key principles of accounting and corporate governance:
1. Matching principle: The matching principle requires expenses incurred in generating revenue to be recognized in
the same accounting period as the revenue. Depreciation is an expense associated with the wear and tear of assets used
to generate revenue, so it must be recognized in the same period as the revenue generated.
2. True and fair view: Financial statements should present a true and fair view of the company's financial position and
performance. Excluding depreciation would overstate the company's profit and present an inaccurate picture of its
financial health.
3. Sustainability of dividends: Dividends should be paid out of sustainable profits, meaning profits that are expected
to continue in the future. Depreciation is a recurring expense, and ignoring it could lead to unsustainable dividend
payments in the long run.
4. Legal and regulatory requirements: In many jurisdictions, including India with the Companies Act, 2013, there are
specific regulations prohibiting the payment of dividends out of profits before providing for depreciation.
Therefore, while a company may have sufficient current revenue profit to cover a dividend payment, it must first
account for depreciation before determining the available profit for distribution. This ensures responsible financial
management, protects shareholder interests, and helps maintain a healthy and sustainable financial foundation for the
company.
5.Retain the profits: The company can reinvest the profits in its operations, allowing for future growth and expansion.
6.Utilize reserves: If the company has reserves built up from past profits, it can consider distributing dividends from
those reserves.

Q:The rights and powers of a company auditor under the Companies Act, 2013:
Rights of a company auditor:
→ Right of access to information and records: The auditor has the right to access all books of accounts, vouchers,
and other relevant documents of the company at any time. This includes the right to visit the company's
premises and meet with its employees.
→ Right to receive information and explanations: The auditor has the right to request any information or
explanation from the company's directors or officers that they believe is necessary for the performance of their
duties.
→ Right to attend meetings: The auditor has the right to attend any meeting of the company's board of directors or
general meeting of shareholders. They may also speak at these meetings on matters relating to the accounts.
→ Right to report to the shareholders: The auditor has the right to prepare a report on the company's financial
statements, which must be presented to the shareholders at the annual general meeting. This report must
express an opinion on whether the financial statements give a true and fair view of the company's financial
position and performance.
Powers of a company auditor:
• Power to require explanations: The auditor has the power to require the company's directors or officers to
provide explanations for any matters that they believe may affect the company's financial statements.
• Power to appoint additional auditors: The auditor has the power to appoint additional auditors to assist them in
the performance of their duties.
 • Power to report to the regulators: The auditor has the power to report to the regulators if they believe that the
company is not complying with the Companies Act, 2013, or other relevant laws.
the rights and powers of a company auditor are designed to ensure that they can perform their duties effectively and
independently. This helps to protect the interests of the company's shareholders and other stakeholders.

Q: Provisions regarding remuneration to company auditors are outlined in the Companies

Act, 2013
a) Section 142(1): Remuneration includes not just fees payable for the audit but also:
a. Expenses incurred by the auditor in connection with the audit.
b. Any facility extended to the auditor (e.g., travel, accommodation).
b) Exclusions: Remuneration does not include payments for any other service rendered by the auditor at the
company's request.
c) Determining Remuneration:
d) Shareholders' Approval: The auditor's remuneration must be fixed by the company's shareholders at its general
meeting or in a manner determined therein. This ensures transparency and shareholder involvement.
e) First Auditor Exception: The Board of Directors can fix the remuneration for the first auditor appointed by them.
f) Factors to Consider:
g) Nature and size of the company: Larger and more complex companies may require more extensive audits,
justifying higher fees.
h) Scope of the audit: Additional procedures like due diligence or forensic investigation may warrant increased
compensation.
i) Auditor's experience and expertise: Experienced and highly qualified auditors may command higher fees.
j) Market rates for similar services: Fees should be competitive but not unreasonably low to avoid compromising
auditor independence.
Q: Discuss the provisions regarding depreciation to be provided by companies act 2013
The Companies Act, 2013, doesn't directly specify the depreciation rates or methods to be used by companies. However,
it outlines certain provisions regarding depreciation that guide companies in accounting for the wear and tear of their
assets:
1. Depreciation as an Expense:
Section 123(5) requires companies to provide for depreciation on their assets before determining the profit or
loss for the year. This ensures that the expense associated with the gradual decline in asset value is recognized
in the same period as the revenue generated from using those assets.
2. Useful Life and Residual Value:
a) Schedule II of the Act provides a list of various asset classes with their respective useful lives. These are the
estimated periods over which the assets are expected to remain operational and generate economic benefits.
b) The Act also allows companies to consider residual value, which is the estimated salvage value of the asset at
the end of its useful life. This value is deducted from the original cost of the asset to determine the depreciable
base.
3. Depreciation Methods:
a) Companies are free to choose any method of depreciation recognized under generally accepted accounting
principles (GAAP) in India. These methods typically include straight-line,reducing balance, and units of
production methods.
b) The chosen method should be applied consistently over the useful life of the asset, unless there are justifiable
changes in circumstances.
4. Disclosures in Financial Statements:
 Companies must disclose the depreciation method used, the useful life and residual value of each asset class,
and the amount of depreciation charged for each class in their annual reports. This transparency allows
investors and other stakeholders to assess the company's financial health and future profitability.
5. Penalties for Non-Compliance:
Failure to comply with the provisions regarding depreciation can attract penalties under Section 147 of the Act.
This emphasizes the importance of accounting for depreciation accurately and transparently.

Q: Can dividend paid out of capital? Is there any exceptions?

No, in general, dividends cannot be paid out of capital under the Companies Act, 2013, or other established accounting
principles. This principle protects investors and creditors by ensuring that dividends are distributed from actual profits
earned through the company's operations, not by depleting its capital base.
Here's why paying dividends from capital is prohibited:
✓ Maintaining capital integrity: Capital represents the company's net assets, which are the difference between its
assets and liabilities. Paying dividends from capital would essentially reduce the company's available resources
and potentially jeopardize its ability to meet its obligations.
✓ Misrepresentation of financial health: Distributing dividends from capital creates a misleading picture of the
company's profitability. Investors and creditors rely on accurate financial statements to make informed
decisions, and using capital for dividends distorts this information.
✓ Legal and regulatory compliance: The Companies Act, 2013, expressly prohibits companies from paying
dividends out of capital except under specific, rare circumstances and with prior approval from the Central
Government.
However, there are a few limited exceptions where paying dividends from capital may be permitted:
• Capital surplus arising from revaluation of assets: If a company revalues its assets upwards and the resulting
revaluation surplus exceeds the total accumulated losses, a portion of the surplus can be distributed as
dividends with prior approval from the Central Government.
• Winding up of a company: In certain circumstances during the winding-up process, the liquidator may distribute
capital back to shareholders after satisfying all creditors' claims.
These exceptions are rare and require specific legal procedures and approvals to ensure they are handled responsibly.

Q: What is Audit program? What is significance of the Audit Planning?

An audit program is a detailed plan outlining the steps an auditor will take to examine a company's financial statements
and other relevant records. It serves as a roadmap for the audit process, ensuring a thorough and efficient review of the
company's financial health and compliance with regulations.
Here's a closer look at what an audit program entails:
Components of an Audit Program:
➢ Objectives: Clearly identifies the specific goals of the audit, such as verifying the accuracy of financial
statements, assessing internal controls, or complying with specific regulations.
➢ Procedures: Outlines the detailed steps the auditor will perform to achieve each objective. These can
include tests of controls, substantive procedures on transactions and balances, analytical procedures, and
inquiries.
➢ Timing: Specifies the timeframe for completing each audit procedure, ensuring efficient time management
and completion within deadlines.
➢ Resources: Determines the personnel and resources required for each audit step, considering the
complexity of the task and required expertise.
➢ Documentation: Defines the documentation format for recording audit findings, observations, and evidence
gathered throughout the process.
Benefits of an Audit Program:
 a) Improved Efficiency: Provides a clear roadmap for the audit team, minimizing confusion and redundancy while
maximizing efficiency.
b) Consistency: Ensures all areas are adequately addressed and procedures are consistently applied across the
audit, leading to reliable and trustworthy findings.
c) Quality Control: Helps maintain audit quality by providing a framework for monitoring progress, documenting
decisions, and detecting potential errors or omissions.
d) Communication: Facilitates communication between the audit team and stakeholders, including management,
investors, and regulators, by providing a clear outline of the audit scope and methodology.
Types of Audit Programs:
• Compliance Audits: Focuses on verifying adherence to specific regulations or internal policies.
• Operational Audits: Evaluates the effectiveness and efficiency of an organization's operations.
• Financial Statement Audits: Aims to express an opinion on the fairness and accuracy of the financial statements.

Audit planning is the essential foundation for a successful audit. It's the meticulous process of setting the course and
laying the groundwork for the entire audit engagement. Just like a builder needs a blueprint before constructing a
house, an auditor needs a well-defined plan to effectively assess and report on a company's financial health.
Significant:
1. Improves Efficiency and Focus:
• A well-planned audit identifies key areas and risks to prioritize, preventing wasted time and effort on irrelevant
details.
• Resources are allocated efficiently, ensuring sufficient attention is given to crucial areas without over-auditing
low-risk areas.
2. Enhances Audit Quality and Reliability:
• Planning helps ensure all necessary procedures are conducted, reducing the chance of overlooking critical
information or mistakes.
• Consistency in approach is maintained throughout the audit, leading to more reliable and defensible findings.
3. Minimizes Risks and Surprises:
• Potential risks and challenges are identified and addressed upfront, allowing for adjustments in the plan if
necessary.
4. Facilitates Communication and Collaboration:
• The plan serves as a clear communication tool, ensuring everyone involved understands the audit objectives,
scope, and procedures.
5. Increases Stakeholder Confidence:
• A well-planned audit demonstrates professionalism and thoroughness, building confidence in the audit process
and its findings.
audit planning is not just a formality; it's the backbone of a successful audit engagement. By investing time and effort in
planning, auditors can ensure they conduct an efficient, effective, and reliable audit that meets the needs of all
stakeholders.

Q: Notes on Test checking, Audit note book, Audit memorandum.

In auditing, test checking, also known as selective verification or sampling, is a technique used to review a
representative portion of a large population of transactions or records to draw conclusions about the entire population.
It's a crucial tool for auditors to efficiently assess the accuracy and completeness of financial records without examining
every single item.
1. Define the population: The auditor identifies the group of transactions or records they want to assess, such as
all sales invoices for a specific period.
 2. Determine the sample size: The auditor uses statistical methods to calculate an appropriate sample size that
represents the entire population with a desired level of confidence and accuracy.
3. Select the sample: The auditor chooses the sample items using a random or stratified sampling method to
ensure unbiased selection. Random sampling involves selecting items at random without any specific criteria,
while stratified sampling involves dividing the population into subgroups (e.g., by customer type) and then
selecting a proportional sample from each subgroup.
4. Perform detailed testing: The auditor performs detailed testing on the selected sample items, which could
involve verifying the accuracy of recorded amounts, vouching supporting documentation, and assessing internal
controls.
5. Project findings: Based on the results of the testing on the sample, the auditor draws conclusions about the
entire population. If the sample is representative and the testing was performed correctly, the findings can be
extrapolated to the entire population with a reasonable degree of certainty.
Advantages of test checking:
• Cost-effective: Examining a small sample is significantly less time-consuming and expensive than reviewing every
item.
• Efficient: It allows auditors to focus their efforts on areas with higher risk or potential issues.
• Scalable: It can be applied to large populations of data, making it suitable for large companies with complex
transactions.
Limitations of test checking:
• Sampling error: There is always a risk that the sample may not be truly representative of the entire population,
leading to inaccurate conclusions.
• Requires expertise: Selecting the appropriate sample size and performing valid statistical analysis requires skill
and experience.

An audit notebook is a crucial tool used by auditors to document their observations, findings, and procedures
throughout the audit process. It serves as a comprehensive record of the audit evidence gathered and helps ensure the
audit is conducted in a thorough and organized manner.
What's included in an audit notebook:
➢ General information: This includes details about the audit engagement, such as the client name, audit period,
and team members involved.
➢ Audit objectives and scope: The specific goals and areas of focus for the audit are clearly outlined.
➢ Risk assessment: Identified risks and potential areas of concern are documented, guiding the audit procedures.
➢ Audit procedures: The specific steps taken to test controls, verify transactions, and analyze financial statements
are recorded.
➢ Observations and findings: Any discrepancies, errors, or unusual circumstances encountered during the audit
are documented with detailed notes.
➢ Supporting evidence: Copies of relevant documents, confirmations, and other supporting materials are attached
or referenced.
➢ Discussions and conclusions: Notes on discussions with management, clarifications sought, and final conclusions
reached on specific issues are recorded.
Importance of an audit notebook:
• Documentation: Provides a well-organized record of the audit process, ensuring transparency and
accountability.
• Evidence: Serves as primary evidence of the audit work performed and supports the auditor's conclusions.
• Review and communication: Facilitates review and discussion of findings within the audit team and with
management.
• Defense: Can be used as evidence in legal proceedings if the auditor's work is challenged.
Types of audit notebooks:
• Physical notebooks: Traditional bound notebooks offer a tangible and secure record.
 • Electronic notebooks: Software tools offer digital storage, searchability, and easy collaboration.
The audit notebook is a vital tool for conducting a thorough and effective audit. It ensures proper documentation,
evidence gathering, and communication throughout the process, ultimately contributing to the reliability and
defensibility of the audit findings.

An audit memorandum, also known as an audit report or audit summary, is a formal document prepared by the
auditor at the conclusion of an audit engagement. It serves as a concise and informative summary of the audit findings
and recommendations for the client, stakeholders, or regulatory bodies.
Audit memorandum includes:
a) Introduction: Briefly introduces the audit engagement, including the client name, audit period, and auditor
team.
b) Scope of the audit: Defines the areas covered by the audit, including financial statements, internal controls, or
specific compliance requirements.
c) Audit procedures: Summarizes the key procedures performed by the auditor to test controls, verify transactions,
and analyze financial statements.
d) Findings: Presents the key findings of the audit, including any identified errors, discrepancies, or potential risks.
This may include both material and immaterial findings.
e) Conclusions: Expresses the auditor's opinion on the fairness and accuracy of the financial statements or the
effectiveness of internal controls.
f) Recommendations: Provides suggestions for improvement to address any identified issues or strengthen
internal controls.
g) Appendices: May include supporting documents, schedules, or detailed explanations of specific findings.
Importance of an audit memorandum:
• Communication: Clearly communicates the audit results to the client, stakeholders, and regulators.
• Transparency: Provides a transparent record of the audit process and findings.
• Accountability: Holds the auditor accountable for their work and ensures proper documentation.
• Decision-making: Helps management and stakeholders make informed decisions based on the audit findings and
recommendations.
Q: Differences between internal control and internal check.

Q: "In a sound system of internal check, the work of one is checked indirectly by the work of
another," along with a clear example:

The statement highlights the fundamental principle of internal checks—ensuring that no single individual has complete
control over a transaction or process. It's designed to prevent errors, fraud, and inefficiencies by creating a system
where multiple individuals are involved, each performing a specific task and verifying the work of others.
Example:
Consider the process of issuing a purchase order in a company:
1. Requesting department: Initiates a purchase requisition for needed goods or services.
2. Purchasing department: Creates a purchase order based on the approved requisition.
3. Receiving department: Receives the goods and checks them against the purchase order for quantity and quality.
4. Accounting department: Matches the purchase order, receiving report, and vendor invoice before processing
payment.
Internal checks function in this example:
 • Segregation of Duties: Each step is handled by different individuals, preventing any single person from
manipulating the process from start to finish.
• Documentation: Purchase requisitions, purchase orders, receiving reports, and invoices serve as a trail of
evidence for verification and accountability.
• Authorization: Purchases require approval from authorized personnel, ensuring adherence to budgets and
preventing unauthorized spending.
• Supervision: Managers or supervisors oversee the process, reviewing documentation and addressing any
discrepancies.

Q:Is it compulsory for every company to have an internal audit system?

No, it is not compulsory for every company to have an internal audit system. Whether a company requires an internal
audit depends on several factors, including its size, industry, and legal requirements.
Company Size:
• Large companies: Many large companies, regardless of industry, choose to implement internal audit systems
due to the complexity of their operations and the need for strong internal controls.
• Small and medium-sized enterprises (SMEs): Smaller companies may not have the resources or need for a
dedicated internal audit function, but they may still employ internal controls within their operations.
Industry:
• Highly regulated industries: Certain industries, such as financial services and healthcare, are subject to stricter
regulations that may require internal audit systems for compliance purposes.
• Unregulated industries: Companies in less regulated industries may have more flexibility in deciding whether or
not to implement an internal audit system.
Legal Requirements:
• Specific regulations: In some countries or jurisdictions, certain types of companies may be legally required to
have an internal audit system. For example, in India, companies exceeding specific thresholds in terms of
turnover, capital, or deposits may be required to have internal audits.
• Listing requirements: Companies listed on stock exchanges may face additional requirements or
recommendations from listing authorities regarding internal audit functions.
the decision of whether or not to implement an internal audit system is a complex one that should be based on a
company's individual circumstances and needs. While it is not mandatory for every company, internal audits can offer
significant benefits in terms of risk management, governance, and operational efficiency.

Q:What is Internal Audit Systems:

An internal audit system is a framework within an organization that provides independent and objective assurance on
the effectiveness of internal controls, risk management, and governance processes. It helps ensure the organization's
objectives are achieved, resources are used efficiently, and operations adhere to relevant laws and regulations.
Features of an Internal Audit System:
a) Independence: Internal auditors should be independent from the departments and functions they audit to
ensure objectivity and unbiased assessments.
b) Risk-based approach: Audits should focus on areas with the highest potential risk of errors, fraud, or
inefficiencies.
c) Methodology: A structured audit methodology should be followed, including planning, risk assessment, testing
of controls, analysis of findings, and reporting of results.
d) Documentation: All audit procedures and findings should be documented for transparency and accountability.
e) Communication: Effective communication of audit findings and recommendations to management and
stakeholders is crucial.
Benefits of a Strong Internal Audit System:
a) Improved risk management: Identifies and mitigates potential risks before they cause significant damage.
 b) Enhanced governance: Ensures compliance with laws, regulations, and ethical standards.
c) Increased efficiency and effectiveness: Helps optimize operations and resource allocation.
Components of an Internal Audit System:
• Internal Audit Charter: Defines the scope, authority, and responsibilities of the internal audit function.
• Internal Audit Department: Comprised of qualified professionals who perform audits and report findings.
• Audit Plan: Outlines the specific audits to be conducted during a given period.
• Audit Methodology: Defines the procedures and techniques used for conducting audits.
• Audit Reporting: Provides clear and concise communication of audit findings and recommendations to
management and stakeholders.
Considerations for Implementing an Internal Audit System:
• Company size and complexity: Larger and more complex organizations typically have a greater need for internal
audit functions.
• Industry regulations: Some industries may have specific requirements for internal audit systems.
• Cost-benefit analysis: The costs of implementing and maintaining an internal audit system should be weighed
against the potential benefits.
• Qualified personnel: Recruiting and retaining qualified internal auditors is crucial.

Q: Differences between Vouching and Verification

Q: Vouching of
1. Cash Sales/ cash purchase
2. Payment of wages
3. Travelling expenses
4. Prepaid expenses
5. Research and development expenses
6. Collection from debtors/ Payment to creditors
7. Sale of fixed assets
8. Interest from investment

Q: What is Audit report? What are its features? What do you mean by audit certificates?
An audit report is a formal document summarizing the findings and conclusions of an audit engagement. It serves as a
crucial tool for communication, accountability, and transparency within a company or organization. An audit report is a
critical document that summarizes the audit process and delivers valuable insights to stakeholders. It plays a vital role in
ensuring transparency, accountability, and informed decision-making within any organization undergoing an audit.
Features:
• Introduction: Briefly outlines the audit engagement, including the client, audit period, and scope.
• Procedures: Summarizes the key procedures performed to test controls, verify transactions, and analyze
financial statements.
• Findings: Presents the key results of the audit, highlighting any identified errors, discrepancies, or potential risks.
This may include both material and immaterial findings.
• Conclusions: Expresses the auditor's professional opinion on the accuracy and fairness of the financial
statements or the effectiveness of internal controls.
• Recommendations: Provides suggestions for improvement to address any identified issues or strengthen
internal controls.
Importance:
• Communication: Clearly conveys the audit results to stakeholders, including management, investors, and
regulators.
• Transparency: Provides a clear understanding of the audit process and its findings.
 • Accountability: Holds the auditor responsible for their work and ensures proper documentation.
• Decision-making: Helps stakeholders make informed decisions based on the audit findings and
recommendations.

"Audit certificate"
"audit certificate" often refers to the formal document expressing the auditor's opinion on the fairness and accuracy of a
company's financial statements. This document attached to the financial statements and includes:
o Statements on the scope of the audit: What areas were examined and the procedures used.
o Findings and conclusions: Whether the financial statements are in accordance with generally accepted
accounting principles (GAAP) or other applicable standards.
o Auditor's opinion: This can be an "unqualified opinion" (meaning the statements are fairly presented), a
"qualified opinion" (raising specific concerns), an "adverse opinion" (stating significant inconsistencies),
or a "disclaimer of opinion" (unable to form an opinion due to limitations).

Q: State the Contents of an Audit Report as per Companies Act, 2013 and
Relevant Standards:
The contents of an audit report are prescribed by both the Companies Act, 2013, and the relevant auditing standards
issued by the Institute of Chartered Accountants of India (ICAI). Followings are to be consider
• Name of the company and its registered office: Identifies the entity being audited.
• Financial statements covered: Specifies the specific financial statements audited (e.g., balance sheet, profit and
loss account, cash flow statement).
• Reporting period: Indicates the period covered by the audit.
• Auditor's name and address: Identifies the independent auditor or audit firm responsible for the report.
Scope of the Audit:
• Basis for the audit: Mentions the auditing standards and principles applied (e.g., International Standards on
Auditing (ISAs)).
• Limitations: Discloses any limitations encountered during the audit that might affect the scope or conclusions
(e.g., access to records, management representations).
Opinion:
• Auditor's opinion on the financial statements: This is the core of the report, expressing whether the financial
statements are presented fairly in all material respects in accordance with the applicable financial reporting
framework (e.g., Indian Accounting Standards (AS)).
Basis for Opinion:
• Key audit procedures performed: Summarizes the significant audit procedures conducted to test the controls,
verify transactions, and analyze financial information.
• Reasons for the opinion: Provides justification for the expressed opinion, especially if qualified or adverse.
Conclusion:
• Date of the report: Indicates when the audit was completed and the report issued.
• Auditor's signature and stamp: Provides legal and professional authentication of the report.

Q: What is Negative Report & Window Dressing

An adverse or negative report will be given by the auditor only when he has sufficient and strong ground to form such
opinion. That the accounts & financial statements, taken as a whole, do not represent a true & fair view of the financial
position of the company.

A company can use window dressing when preparing financial statements to improve the appearance of its
performance or liquidity. In this case, window dressing may consist of changing asset depreciation or valuation policies,
making short-term borrowings, or engaging in sales and leaseback transactions at the end of a period. By doing so,
management embellishes the company's results or liquidity and obtains some benefits.

Q: Define Audit committee? What are its Scope?

An Audit Committee consists of three to five members formed to serve as communication link among various
departments. Audit Committee has a fourfold relationship and therefore has to interact with management, internal
auditor, statutory auditor and the public. The Scope of Audit Committee can be discussed as follows: -
(i)Review of annual financial statements before submission to the Board of Directors.(ii)Selection of the Statutory
Auditor
(iii) Act as lies on between the Statutory Auditor and Board of Directors (iv) Administrative control of the internal
control functions through the feedback between the Internal Auditor and the Audit Committee.
(v) Over seeing internal central operation. (vi) Over seeing internal audit operations and feedback between internal
audit committee and developing the internal auditing authority through broad based internal audit programming.
(vii) Review and approval of financial information for publication (viii) Review proposed changes in accounting system
and procedures. (viii) Help resolve differences between management, internal and statutory auditor.
(ix) Report on the audit committee acting in the Annual Reports of Board of Directors. (x) Ensure reliability of
organisation’s financial statements and operational activities. To be effective and purposeful, the audit committee
should maintain the following:-
(a) Audit Committee should have the independence of management, Statutory Auditor and Internal Auditor. The Board
of Directors allows full freedom to the audit committee to investigate into any areas of operation.
(b) The relation between the audit committee and management should be cordial and congenial towards optimum
efficiency and healthy growth of the organization.
(c) There should be a regular line of communication through occasional meetings with the management.
(d) There should be good communication relationship interwoven among management, internal auditor and statutory
auditor.

Q: Distinguish Between Qualified Report and Adverse Report

Qualified Report Adverse Report

i. A Qualified Audit Report is one an Auditor gives An Adverse Report is given when the concludes
an opinion subject to certain reservations. that based on his examination, he does not
agree with the affirmations made in the Financial
Statements / Financial Report.

ii. The Auditor's reservation is generally Stated The Auditor states that the Financial Statements do
as: "Subject to the above, we report that the not present a true and fair view of the state of affairs
Balance Sheet shows a true and fair view." and working results of the organisation.

iii. The accounts present a true and fair view The accounts do not present a true and fair view
subject to certain reservations. on the whole.
iv. A Qualification is made in the Audit Report An Adverse Report is given when the Auditor
when the Auditor has reservation on specific has his reservations on the true and fair view
item(s) of material nature. presented by the Financial Statements.

Q: What do you mean by Unqualified Audit report?

An opinion is said to be unqualified, when the Auditor concludes that the Financial Statements give a true and fair view
in accordance with the financial reporting framework used for the preparation and presentation of the Financial
Statements. Or,
The Auditor gives a Clean or Unqualified Report, when he does not have any significant reservation in respect of matters
contained in the Financial Statements.
An Unqualified Opinion indicates the following -
(a) The Financial Statements have been prepared using the Generally Accepted Accounting Principles, which have been
consistently applied,
(b) The Financial Statements comply with relevant statutory requirements and regulations, and
(c) There is adequate disclosure of all material matters relevant to the proper presentation of the financial information,
subject to statutory requirements, where applicable.
(d) Any changes in the accounting principles or in the method of their application, and the effects thereof, have been
properly determined and disclosed in the Financial Statements.
For issuing an Unqualified Audit Report, the Auditor has to satisfy himself that -
i. Evidence: Reasonable evidence is obtained in support of transactions recorded in the books of
account.
ii. Standards: Accounting entries passed in the books of account are in conformity with the generally applicable
accounting principles and Accounting Standards followed consistently.
iii. True and Fair: The Financial Statements prepared represent a true and fair summary of the transactions that took
place during the year.
iv. Classification: The process of classification and aggregation followed in the preparation of the Financial Statements
is fair and it does not hide a material fact nor does it highlight something, which may distort the real state of affairs.
v. Format: The form of Financial Statements is in accordance with the form prescribed by law, if any.
vi. Free of Misstatements: There are no material misstatements in the Financial Statements. No material transaction
recorded in the books of account is illegal or beyond the legal competence of the Company.

Q: Write Notes on Significance of “True and Fair View” Of company report.

When an audit of accounts by an independent expert assures the outside users that the accounts are proper and
reliable, then is said to True and Fair. The outsiders can rely on the accounts if the auditor reports that the accounts are
true and fair. The accounts are said to be true and fair:
1. When the profit and loss shown in the profit and loss account is true and fair, and
2. Also when the value of assets and liabilities shown in the balance sheet is true and fair.
What constitutes true and fair is not defined under any law. However the following general guidelines may be laid down
in connection with true and fair.
a) Conform to accounting principles: The books of accounts must be kept according to the normally accepted
accounting principles such as the concept of entity, continuity, periodical matching of costs and revenue, accrual and
double entry system etc. b) No window dressing or secret reserves: The accounts must show the financial
position and the profit or loss as they are. I.e. there is neither an overstatement nor an understatement. There should be
in other words neither window dressing nor secret reserves. In window dressing the accounts are made in such a way as
to show a much better condition than the actual condition. The profit and the net worth are overstated the
accounts are said to show true and fair view when the accounts show only the actual conditions as it is. i.e. the profit
and the net worth are shown as they are. In order to show a true and fair view the auditor should ensure that: 1. the final
accounts agree with the books of accounts.2. The provision for depreciation is proper3. The closing stock is physically
verified and valued properly. 4. Intangible assets like goodwill, patents, preliminary expenses or other deferred revenue
expenses are written off properly. 5. Proper provision is made for bad and doubtful debts.6. Capital expenses is not
treated as revenue expenses and vice versa 7. Capital receipts are not treated as revenue receipts.8. Effect of changes in
rate of foreign exchange on value of assets and liabilities is recorded in the books properly. 9. Contingent liabilities are
not treated as actual liabilities and vice versa. 10. Provision is made for all known losses and liabilities11. A reserve is
not shown as a provision and vice versa 12. Cut off transactions are recorded properly, so that all sales invoices are
matched with goods delivered and all purchase invoices are matched with goods received.

Q: Define CARO. State the Matters / Contents of Company Auditors Report Order.
CARO - COMPANIES (AUDITOR’S REPORT) ORDER, 2003 issued by the Central Government as per the power granted
under section 227(4A) of the Companies Act, 1956 is applicable to an auditor report submitted after 31st December
2003. Till date revised CARO in parallel to Companies Act, 2013 has not been come into the picture. Hence the existing
CARO, 2003 is applicable as of now.
According to 143, the auditor is required to report on certain matters only if he is not satisfied after his examination of
the accounts but after this new order, the auditor has to make a statement on each of the specified matters likewise in
case of Govt. companies, this order is in addition to the directions of the Comptroller and Auditor General in India.
This new order is applicable to every company except,
(a) Banking Company as defined u/s 5(c) of the Banking Regulation Act, 1949,
(b) Insurance Company as defined u/s 2(21) of the Companies Act, 1956, [Insurance Company has not been defined
under Companies ACT, 2013].
(c) Company licensed to operate u/s 8 of the Companies Act, 2013 and
(d) Private Limited Companies subject to the following condition Aggregate of Paid Up Capital and Reserves should not
exceed 50 Lakhs. Loan outstanding from any Bank or Financial Institution should not exceed 25 Lakhs. Turnover should
not exceed ` 5 crores.
The order is applicable to foreign Companies incorporated outside India but having a place of business
within India. The branches of the Companies liable to this order also come under the purview of this order.

Q: What is Audit in Depth:

Audit in depth means the examination of the system applied within a business entailing the tracing of certain
transactions from their origin to their conclusion investigating at each stage the records created and their appropriate
authorization. It is a method according to which a few selected transactions are subject to a thorough scrutiny in
forming an opinion as regards the accuracy of the data so scrutinized.
Under this type of audit, the auditor examines thoroughly selected transactions right from their origin to the
conclusions. All records and documents pertaining to the transactions are checked in detail. The basic purpose of this
type of audit is to see whether the system of internal check or control system is effective. This type of audit enables the
auditor to suggest to the management a better procedure for recording the transactions to avoid any loop holes for
committing frauds.

Q: What is analytical procedure? State With the help of an example. State the circumstances
when an auditor relies on it.
Analytical procedures are evaluation techniques that involve analyzing plausible relationships among financial and non-
financial data for identifying potential misstatements or unusual fluctuations that require further investigation.
Example:
• Analyzing gross profit margin: An auditor might compare a company's current gross profit margin to its historical
margins, industry benchmarks, and any known changes in costs or pricing. Significant deviations could indicate
potential misstatements in revenue recognition or cost accounting.
Circumstances when auditors rely on analytical procedures:
1. Planning:
o Understanding the business and identifying areas of risk.
o Determining the nature, timing, and extent of other audit procedures.
2. Substantive procedures:
o Gathering evidence to support the fair presentation of financial statements.
o Testing for material misstatements in accounts and transactions.
3. Overall review:
o Assessing the overall reasonableness of financial statements.
o Identifying any unusual fluctuations or inconsistencies requiring further investigation.
Types of analytical procedures:
• Trend analysis: Examining changes in account balances or ratios over time.
• Ratio analysis: Comparing relationships between financial data items (e.g., current ratio, debt-to-equity ratio).
• Comparisons: Benchmarking against industry averages, prior periods, or expectations.
• Regression analysis: Using statistical techniques to model relationships between variables.
It's important to note that analytical procedures alone don't provide sufficient audit evidence. They need to be
combined with other audit procedures, such as testing of controls and substantive tests of details, to form a reliable
opinion on the financial statements.

Q: What are the duties of an Auditor regarding missing voucher?

When an auditor encounters missing vouchers during an audit, their duties involve a specific set of steps aimed at
determining the legitimacy of the transactions and ensuring the accuracy of the financial statements.
Investigate the missing vouchers:
a) Inquire with management: The auditor should first inquire with management about the reason for the missing
vouchers. They should obtain a clear explanation and any available backup documentation related to the
missing documents.
b) Trace the transaction: This involves examining the related records, such as cash receipts or disbursements
journals, bank statements, and other supporting documents, to trace the transaction and verify its existence.
c) Assess materiality: The auditor needs to assess the materiality of the missing vouchers. If the transaction
amount is significant, additional scrutiny will be necessary.
d) Confirmations: Obtain confirmations from third parties like vendors or customers involved in the transactions to
verify their authenticity.
e) Analytical procedures: Analyze trends and ratios in relevant accounts to identify any unusual patterns or
inconsistencies that might point to missing vouchers.
f) Test internal controls: Review the company's internal controls around voucher issuance and recordkeeping to
identify any weaknesses that might have contributed to the missing vouchers.

Q: What is audit with disclaimer

An audit with a disclaimer of opinion is a type of audit report where the auditor is unable to express an opinion on
whether the financial statements are presented fairly, in all material respects,
Here's when a disclaimer of opinion is issued:
• Scope limitations: The auditor was unable to gather sufficient appropriate audit evidence due to:
o Restrictions imposed by management or circumstances.
o Unavailability of records or information.
o Significant uncertainties about the entity's ability to continue as a going concern.
• Lack of independence: The auditor's independence was impaired, compromising their ability to express an
unbiased opinion.
Key features of an audit with disclaimer:
• No opinion: The auditor does not express an opinion on the fairness of the financial statements.
• Explanation of reasons: The report clearly states the reasons for the disclaimer, providing details about the
scope limitations or lack of independence.
• Emphasis of matter paragraphs: The report may include additional paragraphs to highlight specific matters of
concern or uncertainty related to the financial statements.

Q: “Vouching of Transactions Is the Essence of Audit” Discuss.

Voucher is the evidence for the support of a transaction in the books of accounts. It may be in the form of bills, receipts,
requisition forms, agreements, bank deposit slip etc. The act of examining documentary evidence in order to ascertain
the accuracy of entries in the account books is called “Vouching”. It is substantive audit procedure which is done to
verify the genuineness and validity of a transaction recorded in the books. In simple words, vouching means a careful
examination of all original documents such as bills, invoices, statements, receipts, correspondence, minutes, resolutions
and contracts etc. with a view to ascertain the accuracy of the entries in the books of accounts. Vouching is the act of
checking essential documents to find out errors and frauds and to know the accuracy and reliability of transactions
recorded in the books of accounts. Thus, it is important for an auditor due to the following reasons:
1. To detect errors and frauds: The main aim of auditing is to detect errors and frauds and providing reasonable
assurance about the true and fairness of. results presented by income statement and balance sheet. Vouching is only
the way of detecting all sorts of errors and frauds. Hence, it is the backbone of auditing.
2. To know other facts: Auditing not-only checks the accuracy of books of accounts but also checks whether all
transactions occurred during the year have been recorded; whether transactions have been properly authorized;
whether a transaction is recorded in the proper account; whether all transaction took place during the relevant period;
whether all transactions have been classified and disclosed in accordance with recognized accounting policies and
practices. All these facts can be found with the help of vouching. Therefore, vouching is essential for auditing. Therefore,
it can be said that vouching of transactions is the essence of audit because without the work of vouching, the work of
auditing cannot be performed.

Q: Explain-“Valuation is a Part of Verification”

Verification means the proof of existence or confirmation of assets and liabilities on the date of balance sheets.
Verification usually indicates verification of assets of any organization, which can be done by the examination of value,
ownership, existence and possession of any assets. So it is a process which includes:
(i) Valuation of assets at its proper value,
(ii) Ownership the title of the assets,
(iii) Confirmation about the existence of the assets and the assets are free from any charge or mortgage. On the other,
valuation of assets and liabilities means the examination of the accuracy and propriety of the valuation of those assets,
and liabilities which are shown in the balance sheet of any concern at the end of the financial year.
So, valuation is an operation which includes:
(i) Obtaining all the necessary information regarding valuation,
(ii) Analyzing all the figures available,
(iii) Confirming the fact that the valuation is being determined on the basis of generally accepted conventions and
counting principles,
(iv) Ensuring the consistency of the methods followed for the valuation from year to year and (v) Obtaining an opinion
regarding the accuracy of valuation. So, valuation of assets and liabilities is a part and parcel of verification without
proper valuation verification is not possible.
Q: What do you mean by audit working paper? Can auditor keep audit working paper by
himself?
An audit working paper is a document created by an auditor during the audit process to record the evidence obtained,
procedures performed, and conclusions reached for each aspect of the audit. It essentially serves as the behind-the-
scenes story of how the auditor arrived at their final opinion on the financial statements.
It includes
a) Descriptive title: Clearly identifies the subject matter of the paper.
b) Dates: Records the timeframe covered by the procedures performed.
c) Procedures performed: Details the specific audit tests conducted, such as reviewing transactions, testing
controls, or performing analytical procedures.
d) Evidence obtained: Documents the supporting information gathered, such as copies of invoices, contracts, or
bank statements.
e) Analysis and conclusions: Explain the auditor's findings and assessments based on the evidence and procedures
performed.
f) Auditor's signature: Indicates who is responsible for the content of the paper.

Auditor cannot keep working papers solely by themselves: Audit working papers are considered the property of
the client, not the auditor. This is because they document the client's financial records and the audit engagement
performed by the auditor.
: While the client owns them, the auditor has the responsibility to safely store and maintain the working papers for a
specific period as per professional standards and legal requirements.
The client has the right to access and review the working papers, but may be subject to certain limitations under specific
circumstances, such as confidentiality agreements or ongoing legal proceedings.
audit working papers are crucial documents in the audit process, but their ownership and access are important
considerations to ensure transparency and accountability throughout the engagement.

Q: What are the consideration that an auditor keep in mind before commencing Audit?
Before commencing an audit, an auditor needs to consider several crucial factors to ensure a successful and efficient
engagement. Here's a breakdown of some key considerations:
1. Client and Engagement:
Client acceptance: Assess the client's financial health, reputation, and any potential risks associated with the
engagement. Engagement terms: Clearly define the scope of the audit, audit objectives, fees, and communication
protocols with management.
2. Planning and Risk Assessment:
Gain a thorough understanding of the client's industry, operations, internal controls, and accounting practices.
Identify and assess potential risks of material misstatements in the financial statements, considering inherent and
control risks. Develop a comprehensive audit plan that outlines the audit procedures to be performed, timing, and
personnel involved.
3. Internal Controls:
Assess the effectiveness of the client's internal controls over financial reporting to determine the level of reliance on
substantive procedures. Perform specific tests of key controls to assess their design and operating effectiveness.
4. Analytical Procedures:
Analyze trends and relationships within the financial data to identify potential areas of risk or unusual fluctuations.
Benchmark the client's financial performance against industry averages to identify any significant deviations.
5. Communication and Documentation:
Maintain open communication with management throughout the audit process, discussing findings, concerns, and
potential adjustments.