FACULTY OF COMMERCE

T.Y.B.Com Sem: 6
Auditing 2
UNIT 1: AUDIT OF JOINT STOCK COMPANIES
Q1. CHOOSE THE CORRECT ALTERNATIVE
1. Which of the following is incorrect, while taking into account certain points before starting an
audit of a Joint Stock Company?
(a) To inform about his appointment to previous auditor
(b) To get information about type of business of company and its technical details.
(c) To be acquainted with the books of accounts and registers of the company.
(d) To satisfy himself that his appointment is properly made by Board of directors.
2. Which of the following is not included in guiding principles of issuing bonus shares?
(a) Bonus shares cannot be issued out of reserves created by revaluation of fixed assets.
(b) Bonus shares cannot be issued in lieu of dividend.
(c) Bonus shares cannot be issued till partly paid up shares are converted into fully paid up
(d) There must be a gap of more than one year between 2 bonus issue.
3. Which of these clauses is not included in the Memorandum of Association?
(a) Name Clause (b) Office Clause (c) Liability Clause (d) Dividend rights of
shareholders
Of legal provision of issuing shares at discount, which of the following is not included?
(a) Maximum rate of discount has to be 10%.
(b) Resolution must be passed in the General Meeting.
(c) Approval of Company Law Board must be obtained.
(d) Atleast 1 year must have passed since commencement of business.
4. Which of the following is not included in the provisions for issue of shares at a premium?
(a) Special resolution must be passed in general meeting of the company.
(b) Premium received must be transferred to “Securities Premium A/c”
(c) Amount of share premium can be utilized for issuing fully paid bonus shares.
(d) Amount of share premium can be utilized for writing of preliminary expenses.
5. Which is true in respect of issue and redemption of preference shares.
(a) A company can redeem pref. Shares at anytime at its own will.
(b) Before redemption, approval of SEBI is required.
(c) Before redemption, shares must be fully paid.
(d) On redeeming such pref. Shares, share capital is considered as reduced.
6. While conducting audit of forfeited shares, following item is irrelevant among the items to which
the auditor should pay attention.
(a) Whether the company has given notice to shareholders to make payment of calls in arrears
within 14 days.
(b) Whether a resolution has been passed in the board meeting for forfeiting shares.
(c) Whether all provision of the Companies Act as regards forfeiture are complied with.
(d) Whether there is a provision in the Articles to forfeit shares.
7. Which of the following is incorrect as regards Share Transfer Audit?
(a) Signatures of both parties, the seller and the buyer must be there on the transfer document.
(b) The shares of a company, which are not listed on a recognized stock exchange cannot be
transferred.
(c) The transfer document must be presented to the company within 12 months of affixing stamp
on it.
(d) If one company holds 10% or more of the equity share capital of another company and if it
wants to get more shares of the second company to be transferred in its name, it has to get the
sanction of the Central Government.

8. The qualified report of the company does not include:

(a) The fact that the financial statements are not prepared according to generally accepted
accounting principles.

(b) The fact that explanations to queries raised by auditor have not been received by the auditor
from management.

(c) The fact that some Indian Accounting Standards have not been complied with.

(d) The fact that the auditor has not received his fees.
9. If auditor gives a qualified report, following consequences will result:
(a) Board of Directors have to resign.
(b) Central Government may impose a fine on directors
(c) The recognised stock exchange on which company’s shares are listed would revoke listing.
(d) The Board of directors have to give reply to such qualifications in its Board’s report.
10. Which of the following matter is not true as regards Auditor’s certificate?
(a) The auditor’s certificate has to be included in the prospectus to be issued by the company.
(b) Auditor has to give certificate as regards the share issued, total amount received etc.
(c) Auditor is required to issue auditor’s certificate every year, as in case of Audit report.
(d) Auditor’s Certificate is to be attached to the application for Import license.
Q2. DO AS DIRECTED:
1. The percentage of dividend on capital should not be more than 4 %.
2. Is there any minimum time lag to be kept between 2 bonus issue - NO
3. The % of underwriting commission on shares and debentures is 5 % and 2.5 % respectively
4. Can Securities Premium be utilized to convert partly paid up shares into fully paid up as bonus?
- NO
5. After the end of the financial year, final accounts of the company should be presented in the
Annual General Meeting within 6 months.
6. Unpaid dividend should be transferred to a special unpaid dividend account after 30 days of
declaration of dividend.
7. The auditor is expected to address his report to shareholders of the company
8. Profit & loss A/c and Balance Sheet of the Company must show true & fair view.
9. Where books of accounts are not maintained as per law, the auditor will issue a qualified report.
10. Report is a statement of collected and considered facts.
Q3. ANSWER THE FOLLOWING:
1. When can a qualified audit report be given?
Ans: A qualified report can be given in the following circumstances
(a) P/L A/c does not give true & fair view.
(b) Balance Sheet does not give true & fair view.
(c) Where books of accounts are not maintained as per law.
(d) Defect or deficiency is found on examination of accounts.
2. Mention two auditor’s duties regarding memorandum of association.
Ans: (a)The auditor should check for all the particulars of clauses of the memorandum namely the
Name Clause, Office Clause, Object Clause, Liability Clause, Capital Clause and Association
Clause.
(b) The auditor should examine that the objects of the company are not ultra vires the company. If
any discrepancy is found, he should bring it to the notice of the shareholder.
3. Mention provisions of the Companies Act regarding the minute books.
Ans: There are 3 types of minute books namely- (a) Shareholder’s minute books (b) Director’s
minute book (c) Committee’s minute books. Minutes must be entered within 30 days of the
conclusion of the meeting concerned. Every page of the minute book should be consecutively
numbered signed by the Chairman. Last page must be dated and signed.
4. Mention the purposes for which securities premium account can be utilised.
Ans: Securities Premium A/c can be utilised for the following purposes:
(a) In issuing fully paid bonus shares.
(b) In writing off preliminary expenses
(c) In writing off expenses of commission paid or discount on issue of share/debentures.
(d) In providing for premium payable by the company on the redemption of any redeemable
preference shares/debentures.
5. Mention any 2 duties of auditor regarding issue of shares at discount.
Ans: The auditor should check that-
1. Every prospectus relating to the issue should contain particulars of the discount allowed on
shares.
2. The discount amount is written off as early as possible as a matter of expediency.
6. Mention any 2 duties of auditor regarding bonus shares.
Ans: The auditor should check that-
1. Whether the Articles of Association authorise such issue.
2. The minute books for the Board of Directors and shareholders should be inspected to see that
the issue of bonus shares is properly authorised by the resolutions of the directors and shareholders.
7. Mention the types of audit report?
Ans: There are 2 types of audit report namely clean report and qualified report.
8. What is clean report?
Ans: When the auditor gives a report without showing any defect in it, it is called a clean report.
9. What is a qualified report?
Ans: When an auditor shows any defect in the report, then it is called a qualified report.
10. What are the basic elements of an auditor’s report?
Ans: As per Auditing and Assurance Standards (AAS) 28, an auditor’s report should contain 1.
Title 2. Addressee 3. Opening or Introductory paragraph 4. Scope paragraph 5. Opinion Paragraph
6. Date of Report 7. Place of Signature 8. Auditor’s Signature.
Unit 2 INVESTIGATION AND AUDIT PROGRAMME
Q1. CHOOSE THE CORRECT ALTERNATIVE
1. Which one of the following is not required to be considered for ‘Investigation in case of
suspected fraud?
(a) The nature of fraud suspected;
(b) The period of investigation to be covered.
(c) Qualifications of directors of the company;
(d) Embezzlement of cash to be examined
2. Which one of the following examination is required to be made in case of
Misappropriation of Cash Receipts'?
(a) Verification of entries made in the Stock Register;
(b) Thorough verification of transactions relating to cash sales
(c) Management's credit worthiness and reputation in the market should be examined
(d) Examination of the dividend declared by the company during the last few years.
3. Which one of the following points is not relevant in relation to ‘Investigation' when there
is considerable reduction in the Gross Profit?
(a) Examination of the reasons for reduction in the percentage of gross profit;
(b) Reduction in the price of raw materials
(c) Reduction of sale price due to competition;
(d) A substantial increase in wages, carriage inward etc.
4. Fraud can be done through,
a) Misappropriation of goods
b) Misappropriation of cash
c) Misappropriation of accounts
d) All of the above.

5. Which one of the following points is not relevant in relation to ‘Investigation' when there
is considerable increase in the Gross Profit in spite of steady sales figure?
(a) The stock might have been overvalued:
(b) Sometimes the purchases are omitted from being recorded in the books;
(c) If the wages have increased, the same should be inquired into;
(d) The sales and purchase invoices should be compared with those of
earlier years.
 6. Which one of the following points is not relevant while conducting an investigation on
behalf of a creditor or a bank granting loan?
(a) Examine the purpose of loan;
(b) Examine the securities offered
(c) Get details regarding loan application rejected in the past;
(d) Carry out, in detail, the valuation of stock and other assets of the prospective
borrower.
7. Which one of the following points is not relevant in relation to investigation when there
is considerable increase in gross profit inspite of steady sales figure?
a. Examinations of reasons for increase in the percentage of goods profit
b. Increase in the price of raw materials
c. Closing stock might have been overvalued.
d. The purchases are omitted from being recorded in the books.
8. Which one of the following points is not relevant to the ‘vouching of cash receipts' in
case of audit programme of a hospital run by a charitable trust?
(a) Income from subscriptions membership fee and donations should be verified with
counterfoils of receipts,
(b) The auditor should compare current years grants received from local body with
that of the previous year to report any fall in it;
(c) Bill register and receipts for payment of amount due from patients should be checked
with entries in cash book;
(d) The incomes from interest and dividend should be verified with interest and dividend
warrants.
9. Which of the following statement is not correct in the context of an audit programme?
(a) The auditor should examine the constitution and the regulations of the institution,
(b)The vouching of cash receipts should be done with reference to relative documentary
evidence
(c) He should see that the allocation of incomes and expenses into capital and
revenue should satisfy the clients’ needs.
(d) The title deeds of the assets and other documentary evidence should be examined to
ascertain the ownership of the assets.
10. Which of the following is not correct statement?
(a) Investigation is compulsory
(b) Audit is compulsory
(c) Bothe a & b
(d) None of the above
Q2. DO AS DIRECTED:
11. Which of the Accounting system adopted is not required to be obtained before
preparing audit programme?
12. Disqualification of Directors of the company is not required to be considered for
‘Investigation in case of suspected fraud.’
13. First time banks were nationalized in the year 1969
14. Accounting system is important to frame for audit program
 15. The auditor of a Nationalised Bank should see that his appointment approved by the
Board of Directors according to his choice. (False)

16. The auditor of a Nationalised Bank should see that his appointment approved by the
Board of Directors according to his choice. (False)

17. Whether the capital expenditure is properly recorded or not; is not correct in relation to
preparation of an audit programme of a manufacturing company. (True)

18. Auditing is compulsory while investigation is not. (True)

19. Investigation can be spread in more than one year. (True)

20. Interest on NPA assets is not allowed to be credited to Profit and Loss account unless
already been received. (True)

Q3. ANSWER THE FOLLOWING:

21. Which provisions of the acts affect the audit of bank?
Banking regulation Act, 1949; Companies Act 2013 & Banking companies
(Acquisition and Transfer and Undertaking) Act 1970
22. What are important for preparing audit Programme;
(a) Constitute and Provisions
(b) Accounting system
(c) System of Internal Check
23. What is investigation?
Investigation means examination of accounts and records for some special purpose.

24. What should be investigated on behalf of an intending purchaser of a business’?

Where the business is to be purchased from a company, Article of Association,
Memorandum of Association should be verified.
25. Write at least one way with regard to 'Investigation when fraudulent manipulation of
accounts is suspected'?
The profit can be inflated by treating capital expense as revenue expenses.
26. Write types of fraud,
(a) Embezzlement of cash (b) Misappropriation of Goods (c) Manipulation of
accounts
27. Mention the reasons for manipulation of account.
(a) Showing less profit (b) Showing more Profit
28. Write scope of investigation?
The scope of investigation is flexible and may be limited or extensive.
29. What is audit programme?
 A plan for carrying out audit work prepared by the auditor is called audit programme.
30. Can audit programme be uniform for all types of business?
No, audit programme keep on changing depending upon types of business.

UNIT 3: DIVISIBLE PROFIT

Q1. CHOOSE THE CORRECT ALTERNATIVE
1. Which of the following is correct?
(a) Profit means excess of assets over liabilities
(b) The Companies Act has defined ‘profits’ as the excess of all types of incomes over all types of
expenses incurred during the accounting period.
(c) if profits are understated, the shareholders will be deprived of dividends to which they
are entitled
(d) By showing more profits secret reserves will be created.
2. Which of the following statements is not a consequence of over valuation of profits?
(a) It may result into payment of dividend out of capital.
(b) This will protect the interest of the debenture-holders and creditors.
(c) More profits will attract more tax liabilities
(d) It will result into more payment of managerial remuneration-if based on profits.
3. Which of the following statements is not a consequence of understatement of profits?
(a) The understatement of profits will amount to tax evasion.
(b) The managerial personnel and employees will get less remuneration and bonus if profit is
understated.
(c) The Profit & Loss A/c will not exhibit ‘true and fair view’ of the results and the Balance Sheet
will not exhibit true and fair state of affairs of the Business.
(d) By showing less profit, secret reserves will be utilised for paying dividend.
4. Which of the following is not a guiding principle in computing divisible profits?
(a) The reputation of the company must be maintained by any means
(b) The generally accepted principles of Accountancy should be followed
(c) The regulations of the Memorandum and Articles of Association must be complied with.
(d) The provisions of the Companies Act must be strictly complied with.
5. Which of the following statements is correct?
(a) When the rate of proposed dividend is between 15% and 20% of paid up capital, the profit to
be transferred to reserves must not be less than 10% of the profits.
(b) When the rate of proposed dividend is between 10% and 12.5% of paid up capital, the
profit to be transferred to reserves must not be less than 2.5% of the profits.
(c) If there are past losses, then it must be written off first before declaring any dividend out of
current year’s profits.
(d) An auditor is not responsible to check that the dividend is declared out of capital profits or
revenue profits.
6. Which of the following statements is not correct?
(a) if the Articles provide that the profits should be computed in a prescribed manner, then unless
provisions are ultravires the Companies Act, the profits must be computed in that manner only.
(b) The directors may in that discretion, transfer whole of the profits for the year to reserves and
the shareholders cannot compel them to distribute the dividend.
(c) Providing depreciation on fixed assets is mandatory while depreciation on current assets
is voluntary
(d) The judicial pronouncements of various courts help to ascertain the restrictions and limitations
on the distribution of divisible profits.
7. Which of the following statements is not correct?
(a) The Board of Directors can declare interim dividend.
(b) Dividend cannot be declared from profits prior to incorporation.
(c) No dividend can be declared without providing for depreciation on fixed assets.
(d) The members of the company have the power in General Meeting to raise the rate of dividend
being declared by the board of directors
8. The details of Profit & loss of a Company for 3 years are given below:
Year P&L before Depreciation Depreciation as Unabsorbed
depreciation Provided per law depreciation
2006 -21,000 -2,100 -7,000 -28,000
2007 -3,500 -3,500 -10,500 -14,000
2008 +42,000 -4,200 -14,000 +28,000
Ascertain the Profit available for dividend during the year 2008.
(a) Rs.28,000 (b) Rs.10,500 (c) Rs.14,000 (d) Rs.5,600
9. The details of Profit & loss of a Company for 3 years are given below:
Year P&L before Depreciation Depreciation as P&L after
depreciation Provided per law depreciation
2009 -60,000 -6000 -48,000 -66,000
2010 -30,000 -6000 -40,000 -36,000
2011 +1,40,000 -20000 -44,000 +1,20,000
Ascertain the Profit available for dividend during the year 2011.
(a) Rs.8,000 (b) Rs.4,000 (c) Rs.6,000 (d) Rs.9,000
10. The details of Profit & loss of a Company for 3 years are given below:
Year P&L before Depreciation as Unabsorbed
depreciation per law depreciation
2009 -150,000 50,000 20,000
2010 -1,20,000 60,000 10,000
2011 +2,80,000 80,000 NIL
Ascertain the Profit available for dividend during the year 2011.
(a) Rs.98, 000 (b) Rs.94, 000 (c) Rs.96, 000 (d) Rs. 90, 000
Q2. DO AS DIRECTED
1. The profit that is to be distributed among the shareholders as per prescribed rate of dividend is
called Divisible profit
2. Unpaid dividend should be transferred to a special unpaid dividend account after 30 days of
declaration of dividend.
3. Current year’s profit of a Company is Rs.4,00,000. If Company decides to declare a dividend
on share capital @ 13.5%, then the amount required to be transferred to General Reserve is
Rs.20,000
4. The Board of Directors can declare interim dividend. True/False
5. The rate of interest cannot exceed 4 % per annum or such order rate prescribed by Central
Government by notification in official gazette when interest is paid out of capital under section
208.
6. Arrears of depreciation is deducted from current year’s profit, while computing the divisible
profit.
7. The Lower of the two amounts namely, loss made in the previous years or the amount of
depreciation must be deducted from current year’s profit, while computing divisible profit.
8. The Articles of Association are of paramount importance when considering the question of
divisible profit.
9. While computing divisible profit it is not necessary to provide for depreciation. True/False
10. The losses made in the previous years, must be added to the current year’s profit, while
computing divisible profit. True/False
Q3. SOLVE THE FOLLOWING
1. The details of Profit & loss of a Company for 3 years are given below:
Year P&L before Depreciation Depreciation as Unabsorbed
depreciation Provided per law depreciation
2009 -60,000 7,500 30,000 -22,500
2010 -30,000 15,000 22,500 7,500
2011 +1,50,000 45,000 45,000 -
Ascertain the Profit available for dividend during the year 2011.
ANS: Rs.52,500
2. The details of Profit & loss of a Company for 3 years are given below:
Year P&L before Depreciation as Unabsorbed
depreciation per law depreciation
2009 -56,000 28,000 21,000
2010 -28,000 21,000 7,000
2011 +1,40,000 42,000 NIL
Ascertain the Profit available for dividend during the year 2011.
ANS: Rs.49,000
3. The details of Profit & loss of a Company for 3 years are given below:
Year P&L before Depreciation as Unabsorbed
depreciation per law depreciation
2009 -1,20,000 60,000 45,000
2010 -60,000 45,000 15,000
2011 +3,00,000 90,000 NIL
Ascertain the Profit available for dividend during the year 2011.
ANS: Rs.1,05,000
4. The details of Profit & loss of a Company for 4 years are given below:
Year P&L before Depreciation as P&L after
depreciation per law depreciation
2008 -20,000 -11,000 -31,000
2009 +10,000 -14,000 -4,000
2010 +12,000 -17,000 -5,000
2011 +65,000 -20,000 +45,000
Ascertain the Profit available for dividend during the year 2011.
ANS: Rs.25, 000
5. The details of Profit & loss of a Company for 4 years are given below:
 Year P&L before Depreciation as P&L after
depreciation per law depreciation
2008 -50,000 27,500 -77,500
2009 +25,000 35,000 -10,000
2010 +30,000 42,500 -12,500
2011 +1,62,500 50,000 +1,12,500
Ascertain the Profit available for dividend during the year 2011.
ANS: Rs.62,500
Unit 4 CONTEMPORARY ISSUSES AND RECENT TRENDS IN AUDITING
Q1. CHOOSE THE CORRECT ALTERNATIVE
1. Which of the following is not considered as “objects of cost Audit”?
(a) To verify that cost of production of goods
(b) To present financial statement
(c) To detect error and fraud
(d) None of the above
2. Management auditor reports to;
(a) the management
(b) the shareholders
(c) the company law board
(d) none of the above
3. Cost auditor reports to;
a) the management
b) the shareholders
c) the company law board
d) to the central Govt. with copy to the company
4. Tax audit may be undertaken of the accounts of the following assesse;
(a) Company
(b) Professional
(c) Solo proprietor
(d) All of the Above
5. Tax audit is first introduced with effect from;
(a) Assessment Year 1984-85
(b) Assessment Year 1985-86
(c) Assessment Year 1986-87
(d) None of the Above
6. The primary object of the tax audit u/s 44AB is;
(a) To assist the tax authorities in assessing the correct income of the assesse
(b) To assist management in computing tax liability accurately
(c) To assist management in regard to effective tax planning
(d) All of the above
7. Which of the following section deals with qualification of cost auditor,
 (a) Section 233B(1)
(b) Section 233B(4)
(c) Section 233B(5)
(d) Section 233B(6)
8. Cost auditor is appointed by
(a) The shareholders
(b) The board of director
(c) The central govt.
(d) None of the above
9. The cost audit report is to be submitted within;
(a) 120 days from the close of the company’s financial year to which the cost audit report
relates
(b) 180 days from the close of the company’s financial year to which the cost audit report
relates
(c) 90 days before the annual general meeting
(d) 60 days before the annual general meeting
10. The concept of management audit was coined in
(a) USA
(b) UK
(c) India
(d) None of the above
Q2. DO AS DIRECTED
11. Audit of cost Accounts is known as Cost Audit
12. Tax auditor in case of a public limited company is appointed by Board of directors.
13. Cost Audit is correctness of costing system and determination of true cost of production.
14. Management audit is a process of examination and evaluation of performance of managerial
function. (True)
15. Management audit is compulsory by law. (False)
16. Management audit begins where financial audit ends. (True)
17. Tax auditor in case of a public limited company is appointed by shareholders. (False)
18. Two or more chartered accountants can be appointed as joint auditors for carrying out the tax
audit. (True)
19. Tax auditor need not necessarily be a chartered accountant. (False)
20. Management audit is statutory requirement. (False)
Q3. SOLVE THE FOLLOWING

21. Who appoints cost auditor?

Cost auditor is appointed by board of directors with prior approval of Central Govt.
22. What is management audit?
 Management audit is a process of examination and evaluation of performance of
managerial function.
23. What is cost audit?
Verification of cost accounts and records with a view to ascertain the true cost of
production.
24. Write any objective of the management audit.
To appraise and enhance operational efficiency.
25. What is efficiency audit?
Efficiency audit is concerned with evaluation of plans and their results to ensure that they
have been carried out efficiency.
26. Write any advantage of cost audit.
Help in determining true cost and fair selling price.
27. Write duration to submit the cost audit report.
One hundred twenty days from the close of the company’s financial year to which the
cost audit report relates.
28. What is management audit report?
Report about the auditor’s opinion regarding management efficiency and operation is
known as management audit report.
29. Who cannot be tax auditor?
Relative of director, relative of employee, chartered accountant u/s 44AB, accountant of
the business
30. What can be the base for cost audit?
Cost statement can be the base of cost audit.