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BHALOTIA CLASSES
9883034569/9330960172
Auditing [5th Semester: Honours & Pass]
Contents:
S.No. Chapters Page Number
1 Syllabus & Content O1- 08
2. Unit 1: Concept, need and purpose of audit (5 + 5) 09-25
3 Unit 2: Audit procedures and techniques (5+ 10) 26-43
4 Unit 3: Auditrisk and intemal control system ((10 marks) 44—52
5 Unit 4A: Vouching (10 marks) 53-61
6 Unit 4B: Verification and valuation (10 mafks) 62-71
7 Unit 5: Company audit ((15 marks) 72-89
8. Unit 6: Audit report and certifi¢afe(10 marks) 90-97
9 Unit 7: Other thrust arees (10'marks) 98 — 106
10. Audit 2019 Hongurs Question Paper 107-108
u Audit 2019 Geaétal Question Paper 109-110
12 Audit 2020° Honours Question Paper 1-112
13, Audit’2020 General Question Paper 113-114
14 Audit 2021 Honours Question Paper 115-116
1S, Audit 2021 General Question Paper 117-117
16. Audit Mock Test Paper: Set 1 118-119
Price: = 120/- Expected Question Pattern:
Group A (3 Questions of 5 Marks each)
(2 Questions with Alternative):
Question 1:
Concept, need and purpose of audit [With Option]
Question 2:
Concept, need and purpose of audit [With Option]
Question 3:
Audit procedures and techniques
Group B (5 Questions of 1@-Marks
each)
(3 Questions with A.iternat
Question 4:
Audit procedures and techniques [With Option]
‘Question 5:
Audit risk and internal control system [With Option]
Question 6:
Vout verification and Valuation [With Option]
Question 7:
Audit report and.ceificate
Question 8:
Other thrust areas
Group C (1 Question of 15 marks)
(1 Question with alternative):
Question 9:
Company audit [With Option} Sth Semester: Honours & General:
Auditing & Assurance: [80 Marks
UNIT —1 CONCEPT, NEED AND PURPOSE OF AUDIT (10 Marks) (5-5)
Definition-Nature-Scope and Objectives of Independent Financial Audit
+ Basic Principles Goveming an Ault, Concept of Aurltors Independence
© Errors and Fraud-Concepts, Means of doing Fraud, Auditor's Responsibility towards Detection and
Prevention of Fraud Difference between Audit and Investigation
'* Classification of Audit- Organization Structure wise (Statutory, Non-statutory); Objective wise (Internal and
Independent Financial Audit); Periodicity wise (Periodical, Continuous, Interim, Final); Technique wise
(Balance Sheet, Standard, Systems, EDP);
+ Standards on Auditing (SA}- Concept and Purpose
(This unit should be studied with SA 200 [REVISED] and SA 240 [REVISED
= CEDUI cI 5. S +105
‘© Auditing Engagement-Audit Planning- Audit Programme (Concept)
‘+ Documentation: Audit Working Paper, Ownership and Custody of Wareiig Papers-Audit file (Permanent
and Current) ~ Audit Note Book- Audit Memorandum.
‘© Audit Evidence —Concept, Need, Procedures to obtain Audit Eviden&
‘* Routine Checking, Test Checking and Auditing in Depth
‘© Concept of Analytical Procedure and Substantive Testing in auditing,
‘+ Audit of Educational Institutions, Hospitals and Hotels
(This unit should be studied with SA 210, $A 230, SA.300, $A 500, SA $20 and SA 530)
‘UNIT— IIL AUDIT RISK AND INTERNAL SpNTROL SYSTEM (20 Marks)
‘Audit Risk—Concept and Types only
‘+ Internal Control- Definition, Objectives
‘+ Internal Check- Definition, Obiéetives
‘+ Internal Audit- Definition -Giyjeetives, Regulatory Requirement, Reliance by Statutory Auditor on Internal
Auditor's Work
(This unit should be studied Fai’ 610)
UNIT —IV: VOUCHING, VERIFICATION AND VALUATION (10 Marks
‘* Vouching: Meaning, Objectives - Difference with Routine Checking ~ Factors to be Considered during
\Vouching - Vouching of Following items: i) Receipts: Cash Sale, Collection from Debtors, Interest and
Dividend from Investment, Sale of Fixed Assets. il) Payments: Cash Purchase, Payment to Creditors,
Payment of Wages and Salaries, Advertisement Expenses, Travelling Expenses, Research and Development
Expenditure, Prepaid Expenses,
‘© Verification and Valuation: Concept, Objectives, Importance, Difference with Vouching, Difference
between Verification and Valuation, Verification of following items: i) Non- Current Assets: Goodwill,
Patent and Copy Right, Leasehold Land, Plant and Machinery, I) Investments il) Current Assets: Inventory,
Loan and Advance, Cash and Bank Balances iv] Non-current Liability: Secured Loan v) Current Liability:
‘Trade Payables (Sundry Creditors).
= 1- Admission going on throughout the year for B.com all semesters. Call Bhalo'
Classes (9883034569): 5Sem Audit (Hons & Pass) (2022-23)
UNIT. V COMPANY AUDIT (15 Marks) (1 Question of 15 Marks)
‘© Qualification, Disqualification, Appointment and Rotation, Removal and Resignation, Remuneration,
Rights, Duties and Liabilities of Company Auditor
‘+ Branch Audit and Joint Audit
‘+ Depreciation — Concept and Provisions of the Companies Act
‘* Divisible Profit and Dividend (Final, Interim and Unclaimed Unpaid): Provisions of the Act, Legal Decisions
and Auditor's Responsibility
UNIT— VI AUDIT REPORT AND CERTIFICATE (10 Marks)
‘+ Definition Distinction between Report and Certificate Different Types of Report
Contents of Audit Report (As per Companies Act and Standards on Auditing)
‘+ Trueand Fair View —Concept
‘+ Materiality — Concept and Relevance
(This unit shoutd be studied with 8 700)
‘UNIT— VII OTHER THRUST AREAS (10 Marks)
‘© Cost Audit—Concepts, Objectives Relevant Provisions of Companies Act
‘+ Management Audit - Concepts, Objectives, Advantages
© Tax Audit—Concepts, Objectives, Legal Provisions
‘© Social Audit ~ Propriety Audit ~ Performance Audit ~ Envirorierit Audit (Concepts only)
Notes:
1) The provisions of the Companies Act, 1956 whici<2ré Still in force would form part of the syllabus till the
time their corresponding or new provisions of the'’ompanies Act, 2013 are enforced.
2) _ If new Laws or Rules are enacted in place-of te existing laws and rules, the syllabus would include the
corresponding provisions of such new{avys ind rules with immediately following Academic Year.
3) Students are expected to develop analytical mind for answering problem based questions along with the
theoretical questions.
— 2- Admission going on throughout the year for B.com all semesters. Call Bhalotia Classes (9883034569): 5Sem Audit (Hons & Pass) (2022-23)
UNIT 5 + 5 = 10 Marks
CONCEPT, NEED AND PURPOSE OF AUDIT
Define auditing, [2020H] [Important >*
State the objectives of an Audit, [2019 P]
Features/Nature of an Audit
Scope of an Audit [2021 H]
‘What is Independent financial audit? [Important]*****
What are the objectives of Independent financial audit as per SA 200? [2020H]
[Important]
7. What are the Basic Principles governing an Audit? (2019H, [2020 P] [2021 H] [2021
pj
8, What do you mean by auditor’s independence? [2020 P]
9. State the importance of Auditor’s Independence. [2019 H]
10, Distinguish between Error and Frand, [Ssem 2019 H]
11, What are the means of doing fraud? [2021 H]
12, Discuss the auditor’s responsibility towards deted
relevant Standard on Auditing. [2021 H] [2019'P]
13. Distinguish between audit & investigation? |2020H] [Important]*****
14. Distinguish between statutory and Non-utatutory audit, [Important] [2021 P]*****
15, Distinguish between Internal and Independent Financial Audit (External Audit)
16. Distinguish between continuolis sudit & periodic audit. [2019 P]**
17, What is Interim Audit? Stat@jts advantages. [2019 P]*
18. Distinguish between intérvmaudit & final audit.
19. What is balance sheet 2mdit? How is it conducted? [2019H]
20, What is standard dindit? What are its advantages and disadvantages?
21, What is systenneudit?
22, What is EDP auditing?
23, Write a short note on Standards on Auditing (SA). [2021 P]
OR
State the purposes of standards on auditing (2020 P] [Imp]***
aver
and prevention of fiaud as per the
- 3- Admission going on throughout the year for B.com all semesters. Call Unit 10 + 5 = 15 Marks
Auditing Procedures and Techniques
24. What is an Audit Engagement?
25. Mention some important items included under Audit Engagement Letter. [2021 H Old]
26. What is audit planning?
27. State the significance of audit planning. [2021 P]
28. What is audit programme? [2020 H]_ [2020 P|
Discuss the advantages of conducting an audit accor
rogramme. [2020 H] [2020 P]
30. Define Audit Working Papers. Who is owner of Audit working Paper? [2019 P] {2020 H]
31, What is an Audit File? How many types of Audit Files are there? What are the
documents maintained in different types of Audit Files? (20207)
32. What Are Permanent Audit File?
33. What Are Current Audit Files?
34. What do you mean by audit notebook? Discuss the cehtails of audit notebook. [2021 P]
35. What is Audit Memorandum?*
36. What do you mean by audit evidence? [2019 H}[2019 P] [2021 H]
‘7. Discuss the importance of audit evidence.Control and Detect Weakness: Auditors will rely on intemal
control in order }oeduce audit risk. Interim audits will allow auditors to spend more time
oninternal cenicol and detect its weakness,
(@ To batance auditor's time: Most auditors will be under pressure during the year-end
closing as the clients will have the same reporting date. By doing the interim, it will help
allow auditors to complete the work as much as possible rather than waiting for the year
end.
— 21- Admission going on throughout the year for B.com all semesters. Call 18. Distinguish between interim audit & final audit.
Final Audit is also known as penodical audit, annual audit or complete audit. This type of audit
is usually done at the end of the financial year when all the accounts have been balanced and
Trading and Profit and Loss Account and the Balance Sheet have been prepared. In the case of
such an audit the auditor visits his client only once a year and goes on checking the accounts
until the audit work for whole of the year is completed. Final Audit ensures smooth flow of
werk, is economical and there is no possibility of friendly-ties between the andits staff and the
clients staff.
An audit conducted in between two anmual audits is called Interim Andit. Its object is to enable
the company to declare an interim dividend, Interim audit involves a complete audit of accounts
for a part of the year i.e. fiom the date of the last Balance Sheet to th®date of the interim
accounting period, interim audit involves a complete audit of accounts prepared and closed for a
part of the year to the date of a set of interim accounts, With intefim audit it becomes easy to
complete the annual audit soon.
‘The main points of distinction are:
Interim audit Final audit.
“An audit conducted in between two annual >] Pinal ‘Auditis also Imown as periodical
audits is called Interim Audit, audit, annual audit or complete audit. This
type of audit is usually done at the end of
the financial year.
Tn a continuous audit, the sweditor makes
frequent as well as surpfise>Visits to the
client’s workplace
In the case of final audit the auditor visits
his client only once a year and goes on
checking the accounts until the andit work
for whole of the year is completed
inerim audit involves a complete audit of
accounts prepared and closed for a part of
the year to the date of a set of interim
accounts,
The final audit is the part of audit testing
conduct at or after year-end. Auditor will
has
perform final testing after client
prepared the financial statement.
The auditor may not require fo have interim
audit.
Auditor must conduct the final audit
otherwise they will not be able to audit the
financial statement,
— 22 - Admission going on throughout the year for B.com all semesters. Call Bhalotia Classes (9883034569): 5Sem Audit (Hons & Pass) (2022-23)
19. What is balance sheet audit? How is it conducted?
[2019H]
Balance sheet audit:
Verification of all items included in the balance sheet combined with the examination of related
income and expenses accounts is known as balance sheet audit. A balance sheet audit is an
evaluation of the accuracy of information found in a company’s balance sheet.
How is it conducted?
The auditor follows the following procedure to conduct balance sheet audit.
Previous Peri ‘omparisons
Aniditors compare figures from the current balance sheet with numbers ficni the previous period
balance sheet. If there are significant differences between the finar(eia) statements, auditors dig
deeper into the records to try to find a satisfactory reason for theehiange
Adequacy of Provisions And Reserves
‘A balance sheet audit includes verification of the coitijany's provisions for depreciation and
other anticipated losses, to ensure they are at reasoitle levels,
When conducting balance sheet audits, the avdite; fooks into the status of credit extended by the
firm to its suppliers and customers. By exainniig related documentation, they gauge whether the
probability of payment for these debtsyis high, doubtful or somewhere in between. Based on this
determination, they check if the provisions set aside by the company for bad debts are sufficient.
Accuracy of Valuations
The transpareney and actenigy of the financial statements are critical in evaluating a company.
Auditors must therefSid &xamine whether the figures assigned to the various headings under the
balance sheet are actuate, They compare the information in the financial statement with third-
party documentation.
Exceptional or Non-Recurring Items
Anuitors also serutinize the balanee sheet for special transactions, one-time significant changes
or other conditions with material effects on the figures. For example, they take note of any
ongoing litigation that may impact the company's assets, liabilities or revenues. They pay special
attention to any extraordinary transactions that cause significant changes to company profits.
— 23 - Admission going on throughout the year for B.com all semesters. Call 20. What is standard audit? What are its advantages and
disadvantages?
Standard audit is “a complete check and analysis of certain items and, contingent upon effective
internal check, appropriate test checks on remaining items, the whole work being in accordance
with general auditing standards quite adequate to justify an unqualified opinion.”
dvantages of Standard Audit:
(a) Andit programme can be suitably designed based on standard audit principle
(b) It influences the nature and extent of documents and evidences to be obtained through
audit procedure
(©) New auditing standards compatible with the changing socio-economic condition of the
country can be developed after the senutiny of the existing auditing standard.
Disadvantages of Standard Audit:
(a) Uniform application of standard andit is a remote possibility ax itis very difficult to bring
all the firms under the same footing
(b) Application of standard audit may render some areas m{aiilited. So chance of undetected
errors and fiaud cannot be ruled out,
(© Standard audit may bring rigidity in approach be¢ritse of changing business environment
(d) Setting up standard is contrary to the development of creativity in audit
21. Whats system audit?
Tn practical terms, systems audit vork’means examining the key organizational systems,
practices, procedures, and controls S=pporting efficiency, such as performance measurement and
reporting systems, costing systéts,/and management's systems for benchmarking organizational
performance
The objectives of the sysi2ins audit are:
(a) Improve the ¢o§-benefit ratio of information systems
(b) Increase the safisfaction and security of the users of these computerized systems
(c) Guarantee confidentiality and integrity through professional security and control systems
(@) Minimize the existence of risks, such as viruses or hackers, for example
(e) Optimize and streamline decision making
(® Educate on the control of information systems, since it is a very changing and relatively
new sector, so it is necessary to educate users of these computerized processes.
— 24- Admission going on throughout the year for B.com all semesters. Call 22. What is EDP auditing?
‘Many finns are using Electronic Data Processing (EDP) equipments for their accounting. EDP
auditing has been defined as the process of collecting and evaluating evidence to determine
whether a computer system safeguards assets, maintains data integrity, achieves organisational
goals effectively, and consumes resources efficiently (Weber). The concept of EDP auditing
encompasses the traditional audit objectives of attesting the stated facts with efficieney and
effectiveness.
There have been drastic changes in audit approaches and methodologies as a result of emergence
of CIS (Computer Information System) environment. The selection of one of the approaches
depends upon the knowledge base expertise of Auditors. There are mainly two approaches for
auditing in CIS environment that are as follows
‘A. Black-box Approach (Auditing around the computer)
B. White-Box Approach (Auditing through the computer).
23. Write a short note on Standards on Auditing (SA). [2021 P]
OR
State the purposes of standards on au: ig [2020 P] [Imp]***
Standards on auditing refer to a set of systematic guidelines used by auditors while conducting
audit of company’s accounts.
Standards on auditing provide minimum guidane? for the auditor that helps determine the extent
of audit steps and procedures that should applied to fulfill the audit objective. They are the
criteria or yardsticks against which the quility of the audit results are evaluated.
In India, the Auditing and Assuresi2Standards board (AASB) under the council of Institute of
Chartered Accountants (ICAD-have formulated few Standards
Purposes of standard on auditing:
(a) Enhance qualityanirelevance of auditing practices
(b) Consistency-aivi. comparability in reporting
(c) Uniformity / standardization of practice
(@ Guidance in performing an audit
(e) Strengthen public confidence in auditing and assurance profession
(®) Guidance for audits
(g) Reducing audit risk
(h) Prevention of seams and accounting scandals,
(@) Public confidence in the auditing profession
(i) Rednetion of investor’s risk
— 25 - Admission going on throughout the year for B.com all semesters. Call Unit 10 + 5 = 15 Marks
Auditing Procedures and Techniques
Anditing Engagement-Audit Plenning- Audit Programme (Concept)
Documentation: Audit Woxking Paper, Ownership and Custody of Working Papers-Andit file (Permanent and
Curent) — Andit Note Book- Audit Memorandum.
Ault Evidence ~ Concept, Need, Procedures to obtain. Audit Evidence
Routine Checking, Test Checking and Anditing in Depth,
Concept of Analytical Procedure and Substantive Testing in Auditing,
Auuit of Educational Institutions, Hospitals and Hotels
24, What is an Audit Engagement?
“An audit engagement is an arrangement that an auditor has with a client to perform an audit of
the client's accounting records and financial statements, The thm) usually applies to the
contractual arrangement between the two parties, rather than the-filD set of auditing tasks that the
auditor will perform.
To create an engagement, the two parties meet to discussie services needed by the client. The
patties then agree on the services to be provided, alongwith a price and the period during which
the audit will be conducted. This information is s(@f8@ in an engagement letter, which is prepared
by the auditor and sent to the client, If the ¢liefit’agrees with the terms of the letter, a person
authorized to do so signs the letter and rétuans a copy to the auditor. By doing so, the parties
indicate that an audit engagement Ifas*been initiated. This letter is usefull for setting the
expectations of both parties to the arsangement
25. Mention some important items included under Audit
Engagement Letter. [2021 H Old]
The contents of an@sgagement letter will be decided in the light of the requirements of each
client, but every such etter would normally cover the following matters:
(a) Anditor’s Responsibilities
(b) Management’s Responsibilities
(©) Scope of Audit
(@ Management's Representations
(©) Imegularities and Fraud
() Other services
(g) Fees
(h) Client's Confirmation
— 26- Admission going on throughout the year for B.com all semesters. Call 26. What is audit planning?
‘An audit plan states the overall strategy and detailed steps to be followed in the conduct of an
audit, ‘The plan includes risk assessment procedures, as well as additional procedures to be
followed based on the outcome of the risk assessment. The contents and timing of the plan will
vary from year to year, depending on changes in the circumstances of the client.
‘As per $A300, “Planning an Audit of Financial Statements” states that audit planning is a
continuous process that often begins shortly after the completion of the previons audit and
continues until the completion of the current audit engagement.
‘As per SA 300 ‘Planning an audit of Financial Statements’, audit planning involves following
activities:
(a) Acquiting knowledge of the client’s accounting system, policies and internal control
procedures.
(b) Establishing the desired degree of reliance that ean be placed on {sternal control
(©) Setting the scope, timing and extent of andit procedures to bepplied,
(@ Deciding the analytical procedures to be applied.
(©) Obtaining a general understanding of the legal and-fegilatory framework applicable to
the entity and how the entity is complying with that #amework.
(© Determining the resources to be deployed fos Specific audit areas, such as the use of
appropriately experienced team members/fothigh risk areas or involving of experts on
complex matters
(g) Determining the amount of resourcé} tobe allocated to specific audit areas.
(B) Deciding how such resources ai@ ilshaged, directed and supervised.
27. State the significance of audit planning. [2021 P]
SA 300 points out the following benefits of audit planning:
(a) It helps the auditér!4devote appropriate attention to important areas of the audit.
(b) The potential-piotiems can be identified and resolved on a timely basis
(©) The auditor can properly organize and manage the audit engagement so that it can be
performed in an effective and efficient manner.
(@ Audit planning can assist in the selection of engagement team members with appropriate
levels of capabilities and competence to respond to anticipated risks.
(c) It facilitates the direction and supervision of engagement team members and the review
of their work.
(© It assists, where applicable, in the co-ordination of work done by other auditors and
experts.
— 27- Admission going on throughout the year for B.com all semesters. Call 28. What is audit programme? [2020 H] [2020 P]
‘An audit programme is a detailed, written statement designed by the auditor indicating the work
to be performed by the audit assistants, specifying the time limit for completion of work,
instructions and guidance to the audit staff. In short, it is a tool for planning, directing and
controlling the audit work
‘An audit programme is a detailed plan of the auditing work to be performed. It specifies the
procedures to be followed in the conduct of audit more efficiently. The auditor outlines the
whole procedure of audit from beginning till the finalization of audit report, Audit programme is
generally contained in the audit notebook
Prof. Meigs defines an audit programme as, “an audit programme is astitailed plan of the
auditing work to be performed, specifying the procedures to be followvédn verification of each
item and the financial statements and giving the estimated time requlied”
29. Discuss the advantages of conducting an audit according
to a predetermined audit programme. [2020 H] [2020 P]
‘A pre-determined audit programme has the following advantages
1. Helps in Estimation and Division of Work: Audit Programme helps in estimating
the quantum of audit work in advanfoe ahd also helps in dividing the work among the
audit assistants based on their capabititi
2 Helps in Fixation of Responsi¥ility: It enables to fix responsibility on the audit
assistants by cleatly defining the scope of work.
3. _Helps in Future Planing; Audit programme serves as a basis for planning the audit
work for subsequerfJeat
4. Serves asa Guilie; It serves as a valuable guide for the audit staff in execution of
the audit wor for succeeding years
ValuableEvidence: It serves as an evidence for the work done as initials of those
who have done the particular work are appended to it, The auditor ean produce the
audit programme as a proof when a charge of negligence being brought upon him.
6. Uniformity: It provides for uniformity in audit work as the same work will be done
every year,
7. Continuity: When an audit staff goes on leave others can continme the work by
referring to the audit programme, hence, audit programme provides for continnity of
work.
8 Coordination: If facilitates coordination and helps in supervising the work of the
audit staff
— 28 — Admission going on throughout the year for B.com all semesters. Call 30. Define Audit Working Papers. Who is owner of Audit
working Paper? [2019 P] [2020 H]
‘Audit working papers are used to document the information gathered during an audit. They
provide evidence that sufficient information was obtained by an auditor to support his or her
opinion regarding the underlying financial statements.
According to SA 230 “Audit Documentation”, audit working papers are written records of
evidence obtained by the auditor in the course of audit, They also document methods and
procedures followed by the auditor and the conclusions he has arived at, The summary of
important matters identified by the auditor which require exercise of judgement together with the
auditor’s conclusions are included in working papers.
Contents of Audit working papers:
The forms of documentation that may be contained within the worldig papers include the
following
(a) Checklists of standard investigation items that were combieted, and by whom
(b) Copies of correspondence
(©) Documentation of the assertions investigated and Sapporting evidence found
(@ Extracts from the corporate minutes of the client
(©) Flowcharts of a client's key transaction prsoasies
() Narrative discussions of issues found.
(g) Organization charts
(i) Questionnaires for which the cl{enh provided answers
Ownership of Audit working papers
The working papers are thé iyalters documented by the auditor. So they are his property.
Although, the client may,eluisn them as a record of his business matters, the auditor carmot part
with them as his conclisions are based on them and as they provide evidence of the audit work
cattied out according fd the basie principles.
The legal observation in the case of Sockockinsky Vs Bright Grahame & Co. is that “The
working paper belongs to the auditor not to the client, as the auditor is an independent contractor
and not the agent of the client”
Similarly the Court of Appeal in the case of Chantrey Martin & Co, Vs Martin held that “The
working papers prepared by the auditor are the property of the auditor”
Thus, the working papers are the property of the auditor. They are not a part of, nor substitute
for, the client’s accounting records.
— 29- Admission going on throughout the year for B.com all semesters. Call 31. What is an Audit File? How many types of Audit Files are
there? What are the documents maintained in different
types of Audit Files? [2020 P]
Audit Fi
An audit file is a collection of audit working papers in a folder or other storage media, Similarly,
some audit firms may use physical audit files, while others may keep them electronically.
Auditing standards do not have specific requirements for physical or eleetronie storage
However, they do require auditors to keep an audit file regarding their clients.
Audit files contain records that comprise the audit documentation for a specific client, Therefore,
it is critical for anditors to have a separate audit file for each engagement. I-contains a collection
of all the evidence and documentation for a specific service. However, soin® information may be
common across various engagements for the same client. In such’
permanent audit file along with a current audit file
52 auditors may keep a
Types of Audit Files
There are two types of Audit files. (a) permanent audifilé (b) current audit file
Contents of Permanent Audit File
A permanent audit file contains informatiqn’on the following:
(a) The legal and organizationél/framework of the client's entity, for example,
the Memorandum of Assoti#tion (MOA) and Articles of Association (AOA) in the case
ofa company
(b) Extracts or copies “of sential legal papers, agreements (e.g. loan agreements), and
minutes that ma}\2 important and relevant for the audit
(©) A record of thestudy and evaluation of the internal control system of the entity
(@ The letter of engagement
(e) A list of client’s investments
(© An analysis of critical ratios concerning the performance of the business and their trends
(g) Copies of the audited financial statements of the previous year (or years)
(h) Notes regarding significant accounting policies being followed by the company
(@ Important audit observations made in the earlier financial years
(i) Details of leases, if any
— 30- Admission going on throughout the year for B.com all semesters. Call Contents of Current Audit File
A current audit file contains information on the following:
(a) Ananalysis of business transactions and ledger balances
(b) Overall Audit plan, risk assessments, and Audit programme
(©) Conclusions obtained on important audit issues
(@ Copies of financial statements and the audit report
(e) Workings of the entity’s trial balance and worksheets
(®) Details of adjusting journal entries and reclassification entries
(g) Record of test of controls carried out and substantive tests
(h) A record of queries raised during the course of the audit and their clearance, with notes
for future reference (if, any).
G) A record of results of audit tests on transactions and ledger balanegs and conclusions
reached
32. What Are Permanent Audit File?
‘A permanent audit file is an audit file that anditors keep for Goaltahuing audit engagements, This
file usually includes documents that auditors use contim@nily. The information within this file
rarely changes. Permanent audit files may include engagSsient letters, memorandums, long-term
contracts, board meeting minutes, ete.
For auditors, itis crucial to keep permanent inioziuttion about clients. It not only aids them with,
understanding the client but can also help therivin future engagements, Usually, these files do not
change @ lot. However, auditors may sdi.cew information about the client that is long-term to
these, These files do not include a r2cor’of the client’s current audits.
33, Wiiat Are Current Audit Files?
‘A current audit file is.a\file that stores information related to a specific engagement. In most
external audits, it ingiil@e information regarding every period’s audit, For example, auditors will
have a separate audit file for every quarterly audit they perform for a specific client. Current
audit files usually inelude information that varies fiom one year to another, Therefore, it may
contain general ledgers, management accounts, supporting documents, financial statements, etc.
‘The current audit file for a client will include information about any specific engagement for that
client, This information does not involve permanent or long-term information about the client. It
also consists of records related to audit planning and audit programs for each year. On top of
that, it will also consist of internal control documents for the client
— 31- Admission going on throughout the year for B.com all semesters. Call 34, What do you mean by audit notebook? Discuss the
contents of audit notebook. [2021 P]
Audit Notebook
Audit Note Book is a register maintained by the audit staff to record important points observed,
errors, doubtful queries, explanations and clarifications to be reeeived from the clients. It also
contains definite information regarding the day-to-day work performed by the audit clerks
In short, audit note book is usually a bound note book in which a large variety of matters
observed during the course of audit are recorded.
The note book should be maintained clearly, completely and systematically. It serves as
authentic evidence in support of work done to protect the auditor ageitsh any legal charge
initiated against him for negligence. It is of immense help to the audit&r'in preparing the audit
report. It also acts as a valuable guide for conducting audit for fats Years
Contents of Audit Note Bool
The following matters should have been incorporated tinan Audit Note Book
1. Alist of the account books normally used-and maintained.
2. Names of the principal officers, theiduties and responsibilities.
3. Nature of business carried on aad important documents relating to the constitution of
business like Memorandum of-Association, Articles of Association, Partnership deed
ete,
Extracts of minutes viewing the relationship of certain
| account balances to other balances. Examples of accounts that iia be reasonable tested are: |
| (a) Raw material consumption to production quantity |
| (b) Interest expenses against interest bearing obligations» |
! (c) Wastage & scrap % against production and 1a¢-miaterial consumption (quantity) !
! (@) Work-in-progress based on material issued !
' (e) Sales discounts and commission against sale Volume. '
' (f) Rental revenues based on occupancy‘of premises '
| 3. Ratio Analysis: This technique is sed Yor studying the relationship between financial statement |
' amounts, Commonly used ratios ares '
| (a) Income or loss as a percentage bf sales |
| (0) Gross profit ratio |
(c) Accounts receivable euniover
(@) Inventory tumover
/ (©) Leverage ratios /
' (8) Liguidhty ratioe '
' 4. Sources of Information: Following sources of information may be used for analytical review: '
| (a) Interim financial information |
/ (b) Budgets |
| (©) Non-financial information e.g, employee morale, Government policy. threat from other products ete |
(@) Confirmation from bank, debtors and creditors
| (e) VAT retum |
(Board minutes
| S, Common size Analysis: Common size analysis which is done by expressing each item of balance sheet
| as a percentage of total assets and each item of income statement as a percentage of total sales is an |
| useful tool of analytical procedure, |
| — 37- Admission going on throughout the year for B.com all semesters. Call | 44, What is Substantive audit procedure? [2021 H]
Substantive audit procedures are the method or audit tests designed by an auditor to evaluate the
financial statements of the company, which require an auditor to create conclusive evidenee for
verifying the completeness, accuracy, existence, occurrence, measurement, and valuation (audit
assertions) of the financial records of the business.
The intention behind performing the Substantive procedures by an auditor is to check that there
is no material misstatement in the business’s financial records, ic., they are complete, accurate,
valid, and all the material information is disclosed. The method followed includes testing the
account balances, examining the general entry, and other adjustments made while preparing
the company’s financial statement. It also includes making inquiries about suspicious
transactions. Some examples can be external party confirmation like confirming the company’s
bank balance from the Bank directly, performing a physic?) inventory count,
confirming accounts payable from creditors of the business, ete
45. What special steps are involved in conducting the audit of
an Educational Institution? [2029 H] [2021 P] ****
The audit process of an educational institution comprises(ot the following aspects
A. Preliminary Matters
1. Study the Trust Deed or Regulations in thease’of school or eollege
2. Evaluate the internal control system.
3. Go throngh the minntes of the meetiigs of the managing committee or govemning body
B. Income
1. Check names enteredin the Student's Fee Register with respective class registers
2. Check fees received by eénipiring counterfoils of fees book with the collection recorded in
the Fee Register and t1ac8 the entries in the Cash book
3. Examine whether elf voncessions have been granted as per rules.
A. See that arrear ies which are imecoverable have been written off under the sanction of
appropriate auificrity.
5. Confirm that late fines have been either collected or waived under proper authority
6. If the Institute is having hostel facility, then examine the statement reconciling the total
hostel charges recoverable with the amounts actually received
Examine the entries in the cash book in respect of donations and legacies with reference to
the counterfoils of receipts issued to doners
8. Verify interest and dividends received during the year with reference to the secwities in
which investments have been made
9. Verify the grants received with reference to the sanction letters and examine whether
conditions specified therein have been duly complied with,
— 38 - Admission going on throughout the year for B.com all semesters. Call ] Bhalo'
Classes (9883034569): 5Sem Audit (Hons & Pass) (2022-23)
C. Expenditure
Examine whether salaries and allowances paid are as per the terms and conditions of
appointment of each category of staff.
Check the computation of gross salary payable and deduction in respect of provident fund,
income tax ete
Vouch the payinent of salaries with reference to acknowledgement fiom employees and
entries in the bank statement.
Examine that scholarships to students have been granted as per rules and under proper
authorization.
Vouch all capital expenditures confirming that established noms have been followed in
their incurence and they have the sanetion of competent authority.
Vouch in the usual manner all establishment expenses and enquire into any heavy
expenditure under any head.
Examine the payments on account of expenditure on hostel facilitie’s including those on
repairs, maintenance, electricity, water charges etc. in the usuel ‘aieminer. Similarly, examine
the payment relating to purchase. consumption, stock of food grains ete.
Examine payments made out of various grants received \¥om Governmen¥U.G.C. with
reference to supporting vouchers, entries in the eash‘ook, minutes of the Goveming Body
and utilization certificates, if any, furnished to aulities.
Assets and Liabilities
awe
Conduct physical verification of fixed asSet® as shown in the assets Register
Examine whether adequate depreciatifiatias been properly charged on fixed assets.
Carry out physical verification of iitvestments
Examine artear student fees by reconciling total fees received during the year and total fees
receivable as per the applifable fee structure
Confirm that the reff taxes deducted fiom the income from investment has been duly
Claimed since the ingtinitions are generally exempted fiom payment of income tax.
See all the liabilities in respect of purchase of assets, maintenance expenses, food grains and
provisions hive been duly provided.
‘Statement of accounts
The annual statements of accounts of an Educational Institution generally consist of Income &
Expenditure Account and Balance Sheet. Confirm that they have been prepared as per generally
accepted accounting principles. Also see that separate statement of accounts have been prepared
as regards Poor Boys Fund, Games Fund, and Capital Fund ete.
— 39- Admission going on throughout the year for B.com all semesters. Call | Bhalotia Classes (9883034569): 5Sem Audit (Hons & Pass) (2022-23) |
46. Prepare an audit programme in respect of a Nursing
| Home/Hospital. [2019 H] [2020 P] [2021 H] |
OR
: What steps will you take in conducting the audit of a Hospital? :
i ‘Keeping in mind the nature of hospital to be andited, the auditor will look into the following matters |
‘A. Preliminary Matters:
| 1. Enquiry about the nature of hospital: The auditor should first study the relevant |
documents to ascertain its ownership pattern, nature i.e., whether profit seeking or not,
| capacity, different types of activities performed etc. |
2. Evaluation of internal control: The auditor will evaluate internal control system involving
maintenance of records and documents, safeguarding of assets, purchase of assets,
/ authorisation of transactions, division and rotation of duties etc.
| 3. Study of the minute book: He should go through the minutes;oPimeetings of Board of
| Directors or the Managing Committee and note down resolutions concerning financial
/ matters such as acquisition of assets, engagement of staffpirivestment, fees, expansion of /
| facility for treatment ete |
4, Study of accounting system: The accounting systey\.Ftaintained should be studied and
audit procedure to be followed should be decidec.
B. Receipts:
1. Vouching of collection from patients! The auditor should check the collection from
patients as entered in the cash book’wi reference to Patient Register, receipt counterfolls
and other evidences. The auditor (ill check the bill register to see whether all charges have
been computed correctly as péy"Yate chart, period to stay of patient, category of bed,
ine used, time taken(by patient in the operation theatre, medical materials used etc. |
2. Free bed facility: The euditor will see that free bed facility has been provided to deserving
| patients as per ruled an? regulations, |
3. Reimbursement(ffom Insurance Company: The auditor will vouch the reimbursement of
medical expenses from the insurance company in case of cash less admission health
Insurance, Will also vouch the collection from patient over the limit sanctioned by TPA
with réiafence to necessary supporting documents. |
4, Legacies’ and donations: All the legacies and donation will be vouched with reference to
letters, counterfoil of receipts etc. the auditor will also see that donations received for
some specific purposes have been utilised accordingly.
| 5. Receipt of Grant: The auditor will verify grants received from Government with reference |
to the sanction letters and examine whether conditions specified therein have been duly
complied with.
6. Other incomes: The auditor should check collection of other income by way of rent from
| properties, dividend, interest on securities etc. with reference to agreements, Properties |
and Investment Register etc.
| me
| — 40- Admission going on throughout the year for B.com all semesters. Call | Bhalotia Classes (9883034569): 5Sem Audit (Hons & Pass) (2022-23)
«
D.
FE
Expenditure:
1. Vouching of salaries: The auditor should vouch salaries and allowances with references to
terms and conditions of appointment of each category of staff namely doctors, nurse,
medical staff, administrative staff and other categories of employees of the hospital.
2. Accounting of various deductions: The auditor will see that deductions from salary towards
provident fund, income tax, group insurance etc. have been properly accounted and
deposited with the concerned authorities in time.
3. Capital Expenditure: Vouching of all capital expenditures should be done confirming that
established norms have been followed and they have the sanctions of competent
authority.
4, Established Expenses: He will vouch in the usual manner all establishment expenses. He
will compare the different heads of expenses with budgets and figures of last year. Any
unusual variation should be enquired into.
5, Purchase of Provisions: Examine the payment relating to purchase of medicines, foodstuff,
and different medical items etc.
Assets and liabil
ies:
1. Verification of cash and investment: The auditor(wili carry out physical verification of
‘cash and various investments as laid down in thé Investment register.
2. Verification of fixed assets: The auditor wil! conduct physical verification of fixed assets
as shown in the assets register.
3. Depreciation: The auditor will seeythat-depreciation at appropriate rate has been
-en off against all fixed assets.
4, Examination of stock: He will-see whether the stock of medicine, foodstuff and other
materials are properly mairtzined. He will ensure that any difference found in physical
verification from stock révords has been properly adjusted,
5. Provisioning of liability--The auditor will ensure that all the liabilities in respect of
purchase of assets, jfiedicines, maintenance expenses, foodgrains etc. have been duly
provided,
6. Verification \of capital: Capital introduced during the year by partners or by
sharehéidaty’ by way of subscribing shares should by checked based on various
docuplents like agreement, board's meeting etc.
Financial statement:
The auditor will see whether financial statements comprising of income and expenditure
account or statement of profit and loss, balance sheet and cash flow statement have been
prepared properly and according to the generally accepted accounting principles.
‘Submission of audit report:
‘At the end, the auditor will submit his report expressing opinion about the reliability and
fairness of financial statements,
— 41—
Admission going on throughout the year for B.com all semesters. Call Bhalo'
Classes (9883034569): SSem Audit (Hons & Pass) (2022-23) |
t 47. Prepare an audit programme in respect of a Hotel t
i [Important]**** |
‘An Anditor should consider the following points while conducting Audit of Hotels ~
(A) Detail of Applicable Law
For audit of hotels, itis very crucial and important for an Auditor to go through the Iaws normally applicable
tothe hotel industry
‘The Companies Act, 2013 may also be applicable to hotels in case if the status of hotel is like a company,
| ‘Whereas, the Income Tax Act, 1961 will be levied in all the cases imespective of whatever the status of that |
hotel is,
@) Preliminary Matter:
© An Auditor should determine the scope of his audit from his letter of appointment. It should be seen
Whether he Is asked to express his opinion on financial statements GPiy\\or some additional
responsibility being assigned to him.
* An Auditor should obtain list of books of accounts, documents and rejisters maintained by hotel.
He should see whether relevant hotels have independent status,er 4 art of chains of hotels.
+ An Auditor should study the Memorandum of Articles and the Menlorandum of Association.
| ‘© Heshould obtain the title deed and other related documents to Verify the land and building. |
| © He should also obtain Minutes of meeting of the Bosfil's! Directors to note down the important |
| decisions relating to accounts, finance and audit. |
(C) Receipt
| In order to conduct andit of a hotel, an Auditor shéui’ study, verify and vouch books of accounts, keeping in. |
mind the different points of sale.
| (2) Revenue from Room Rent |
/ (b) Revenue from Food & Beverages (Restaurants) /
| (c)_ Revenue from Food & Beverages (Room Service) |
| {d) Food & Beverages Revénue from Minibar |
| (e) Revenue from Banquets |
| (f) Revenue from Busivess Centre |
| (@) Arcade Reves
(h) Revenue from’Car Hire
| (i) Revenue from Telephone & Internet |
(i) Revenue from Housekeeping
| (k) Revenue from Laundry |
(I) Revenue from Beauty Parlors and Health Clubs
| (mn) Revenue from Sale of Scrap and Disposal of Empties |
| — 42 - Admission going on throughout the year for B.com all semesters. Call | Bhalo'
Classes (9883034569): SSem Audit (Hons & Pass) (2022-23) |
| {D) Audit of Expenses |
‘An Anditor needs to consider the following points and verify the Revenue from Expenses —
| (a) An Auditor should verify the appointment letter, policy of increment, time record, salary register, |
‘cash book and bank book to verify the salary payments of employees.
| (b) He should verify all purchases through requisition slip, quotations, purchase order, inward register, |
quality control verification record and stock ledger.
{c)__ Every purchase should be passed by appropriate authority in this regard.
(a) Vouching should be done properly and should be verified with documentary evidences.
(e) An Auditor should apply all other precautions and experience to audit the expenses as he does in
i any other industries. i
(f) Verification of purchases, consumption and stocking is very crucial in hotel industry and itis a real
i challenge for an Auditor to verify all these very carefully. An Auditor should apply all his experience i
and knowledge to do audit of it.
2) Assets and liabilities:
{a) Verification of cash and investment:
(b) Verification of fixed assets:
{c) Depreciation:
(d) Examination of stock
(e) Provisioning of liability:
| (f) Verification of capital: |
F) Financial statement:
| ‘The auditor will see whether financial stateme‘ts, comprising of income and expenditure account or |
statement of profit and loss, balance sheet ani?”eash flow statement have been prepared properly and
| according to the generally accepted accounting yinciples |
| (G) Submission of audit repor |
| At the end, the auditor will subnit'his veport expressing opinion about the reliability and fairness of financial |
| statements. |
| — 43 - Admission going on throughout the year for B.com all semesters. Call | Unit I 10 Marks) '
AUDIT RISK & INTERNAL CONTROL SYSTEM i
Anlt Risk — Concept and Types only, Intemal Control- Definition, Objectives, Internal Check- Definition, |
Objectives, intemal Audit- Definition, Objectives, Regulatory Requirement, Reliance by Statulory Auditor on
Intemal Auxitor’s Work
48. What do you mean by audit risk? Discuss the different
types of audit risk as per the relevant Standard on Auditing t
(SA). [2021 P] [2021 H] i
What is Audit_risk?
Audit risk is the risk that auditors issued the incorrect audit opinion tosihe audited financial
statements. For example, auditors issued an unqualified opinion othe audited financial
statements even though the financial statements are materially misstaied. In other words, the
material misstatements of financial statements fail to identify or-deiect by auditors,
Different types of audit risk |
As per SA 315, The audit risks model can present atditrisk as to the combination of inherent
risks, control risks, and detection risks, Inherent and control risks have come from clients, |
whereas detection risks are control by auditors.CATD6f these three risks are discussed below: |
Here is the formula: |
Audit Risks = Inherent risks * Control visks * Detection sisks
Inherent Risks:
Inherent risk refers to thesyisiethat could not be protected or detected by the entity’s intemal
control, This risk could\Kappen due to the complexity of the client’s nature of business or
transactions. i
Control Risks: |
Control risk or internal control risk is the risk that cusrent internal control could not detect or fail
to protect against significant error or misstatement in the financial statements. |
Detection Risk: i
Well, detection risk is the risk that the auditor fails to detect the material misstatement in the i
financial statements and then issued an incomeet opinion to the audited financial statements. ‘The
common cause of detection risk is improper audit planning, poor engagement management, !
wrong audit methodology, low competency, and lack of understanding of audit clients. |
— 44- Admission going on throughout the year for B.com all semesters. Call | 49. Define Internal Control. [2020 H] [Important]**
‘As per SA-315, the intemal control may be defined as “The process designed, implemented and
maintained by those charged with governance, management and other personnel to provide
reasonable assurance about the achievement of an entity’s objectives.”
Internal control refers to the set of prineiples, procedures, and practices companies define to
ensure they keep a check on risk-causing factors and rectify the same to avoid losses or frauds. It
plays a significant role in guaranteeing accountability of companies, which remain under
controlled supervision for correctness and reliability
Internal Control can be defined as a system designed, introduced and maintained by the
‘company’s management and top-level executives, to provide a substantial degree of assurance in
achieving business objective, while complying with the policies and tay, safeguarding the
assets, maintaining efficiency and effectiveness in regular operations,ahd@réliability of financial
statements.
50. What are the objectives of internal control system?
[2020 H] [2020 P] [Irapertant]**
Following are the objectives of Intemal control system!
1, To enstwe that the business transaction’ tae place as per the general and specific
authorisation of the management
2. To make sure that there is a sequéiial and systematic recording of every transaction,
with the accurate amount in tieiespective account and in the accounting period in
which they take place. Ityconiinms that the financial statement fulfils the relevant
statutory requirements.
3. To provide security 15 the company’s assets from unauthorised use, For this purpose,
physical security systems are used to provide protection such as security guards, anti-
theft devices, cutvéillance cameras, ete
4. To compare iti@ assets in the record with that of the existing ones at regular intervals and
report to the those charged with governance (TCWG), in case any difference is found.
5. To evaluate the system of accounting for complete authorisation of the transactions
6, To review the working of the organization and the loopholes in the operations and take
necessary steps for its correction.
To ensure there is the optimum utilization of the firm’s resources, ie. men, material,
machine and money.
8, To find out whether the financial statements are in alignment with the accounting
concepts and principles.
— 45- Admission going on throughout the year for B.com all semesters. Call Bhalo'
Classes (9883034569): SSem Audit (Hons & Pass) (2022-23) |
t 51. State the advantages of Internal control system. [2019 P] t
i ‘An audit control system can give the following advantages: |
1, Detection of Errors and Frauds: Internal control systems are structured in such a way
| that work done by one employee in a process is checked by another without knowledge of |
the former, In such an environment, any fraud committed is brought to light unless there
is collusion among fraudsters
Time Saving: Auditor can test check or sample check the transactions to ensure
reliability, and accuracy of entties in the books. Hence, he can complete his audit work
| and prepare financial statements within the prescribed time. |
3. Minimum Scope for Errors and Frauds: Bach employee does only a limited work
| assigned to him, moreover, consciousness of his work being independently checked by |
/ another keeps him to be always alert at work. In such a context, chances for commission
/ of error or fraud are lesser
| 4, Operational Efficiency: It facilitates fixation of accountability, error-free work
| performance, accuracy reliability and authenticity of entrie},and eradicate inefficiency,
| fraud, theft, etc. Moreover, this system enables th? inanagement to assess the
| performance of employees. All these collectively contr:bute to enhance the operational
| efficiency of organization as a whole. i
| 52. State the Disadvantages of Internal control system. |
[2044.7]
| ‘An audit control system can give the follovdng linitations or disadvantages: |
i 1, Organizational Structure: Deficiéacies in organizational structure make internal control i
ineffective.
| Size of the Organization: $inall organizations have very low levels of internal control, |
| which are almost negiigible due to more interference by owners and management. |
| 3. Unusual Transactions: The internal control procedures normally fail to keep a check |
| ‘on unusual traniactions |
| 4. Costly: The “implementation of internal control procedures and processes involves |
| incurring costs in terms of time, effort and resources. |
Abuse of Power: Members at the top-level management may override or interfere with
i control i
Collusion of two or more People: It may lead to internal controls being over- ridden.
| Obsolescence: Control system may become redundant with passage of time if not |
| updated with change in the size and nature of business |
8. Human Error: Internal control fails as there are possibility of human errors.
' 9. Frequent follow-up measures: Follow-up procedures need to be frequent to ensure its '
i effectiveness, which is extremely time-consuming. i
| — 46- Admission going on throughout the year for B.com all semesters. Call | 53. What do you mean by internal check system? What are its
objectives?
Internal Check is an integral function of the internal control system. It is an arrangement of
Guties of the staff members in such a way that the work performed by one person is
automatically and independently checked by the other
Objectives Of Internal Check
Following are the main objectives of Intemal Check ~
(a) To protect business fiom carelessness, inefficiency and fraud.
(b) To ensure and produce adequate and reliable accounting information.
(©) To keep moral pressure over staff.
(@ To minimize the chances of errors and fiauds and to detect them easily on early stage if it
is committed.
(©) To divide the work in such a way that no business transaction should Be left unrecorded.
(® To fix the responsibility of every clerk according to the divisien YF work.
54, What is internal audit? [2019 H] [20719 P] [2021 H]
Internal audit is a process through which the companies getto know the loopholes in the system
and improve the respective aspects for making businesses dane efficient
Internal audit refers to an independent service to,evaiuate an organisation’s internal controls, its
corporate practices, processes, and methods, Af.iiiémal audit helps in securing compliance with
the various laws applicable to an organisefio?. An organisation can prepare its accounts and
records as per the applicable legal requirménts and reporting
55. State ‘ha objectives of internal audit.
‘The main purpose or objective of an Internal Audit are as follows:
(a) Proper ControlsTe-keep proper control over the organization is one of the main
objectives of an iniernal Audit
(b) Perfect Accounting System: The accounting system of the organization is thoroughly
checked by an Internal Audit.
(c) Review of Business: The financial and operational aspects of a business is to be checked
by the Internal Audit.
(@ Asset Protection: Intemal Audit process performs the valuation and verification of an
asset.
(©) Keep a Check on Errors: There will be mistakes in financial records and is checked at
the end of a financial year. But with Internal Audit, the mistakes are spotted and rectified
immediately
(© Detection of Fraud: This is another main purpose of Internal Audit
— 47- Admission going on throughout the year for B.com all semesters. Call Bhalo'
Classes (9883034569): SSem Audit (Hons & Pass) (2022-23) |
t 56. Distinguish between internal control system & internal t
i check system. [Important]****** i
The following are the differences between Internal check & Intemal Control system’
S.No Basis Internal Check Internal Control
| 1 Meaning A system of allocation of It consists of all the methods |
| pai pea i airismat weds, | aiid petcsdiinad adojted ta eit i
and methods of recording in achieving the objective of
i transactions, whereby the work | efficient conduct of business. |
| of an employee is checked It includes internal check and |
| continuously by another. internal audit. i
! 2. Scope Itoperatesin rontine to double _| In internal control systems, !
| aabenypattenmacion, |sanateun peat. |
| at the time of occurrence and automatically bhbcked by |
recording of the same. another,
i 3. ‘Objective Hs objective isto ensure thar | Its pats to ensure i
no one employee has exclusive | edihe
control over any transaction or
| group of transactions and their
bce to management
policies, safeguarding of assets,
itevention and detection of |
recording in the books. frauds and errors, accuracy and
| completeness of accounting i
| records. |
| 4 Methods of reconting In internal control system, |
| transactions ate devised where _ | checking is done simultaneously |
{ work ofan dmplayee is checked | with the conduct of work. Every {
| continudusly by correlating it __| transaction is checked as soon !
| withthevork of others. as itisentered. |
| 5. | Thrust of stu thrust of internal check | ‘The thrust of internal control |
System system is to prevent errors lies in fixing of responsibility
| and division of work to avoid |
duplication.
! 6. | Cost Involved | Itisapart of internal contral | The system proves to be costly |
' and a method of division of in case of small businesses |
| work, therefore does not add to | because more number of |
| the cost. employees are engaged. /
i 7. | Report ‘The summary of day to day Internal control provide for i
| transactions work as report to _| built in MIS reports. |
| the senior. i
| — 48 — Admission going on throughout the year for B.com all semesters. Call | Bhalotia Classes (9883034569): 5Sem Audit (Hons & Pass) (2022-23)
57. Distinguish between internal check system and Internal
audit. [2019 P] [2021 P]**
The following are the differences between Internal check & Internal Audit system:
BASIS FOR
CORO ERO INTERNAL CHECK INTERNAL AUDIT
Meaning Internal Check is a system, wherein | Internal Audit is the
division of work and allocation of | ongoing critical examination
responsibilities are organized in of the financial and
such a manner that the work of one | operational activities of the
employee is spontaneously looked | concern, by.an internal
over by another. auditor.
Method Work of one person is automatically | Workpérformed by the
checked by another person. employees is examined by a
separate group.
Commencement | Commences from the moment 4, Once the transaction has
of Work transaction is entered. been recorded in the books.
Involved Accounting and clerical Effectiveness of
evaluation of management control
Performed by Existing staff A specially dedicated team
of auditors
Cost Involvement | Econornical Comparatively Expensive
Thrust of System |.Rrevention of errors and frauds Detection of errors and
frauds
Tool for Arrangement of the work Examination of the work
Time of Checking | Checking is performed Examination of the work
simultaneously when the work is __| takes place after the work is.
performed. completed.
Report Summary of day to day transactions | Submits his/her report to
acts as a report to the supervisor. _| the management.
— 49- Admission going on throughout the year for B.com all semesters. Call 58. Distinguish between Internal Control and Internal Audit.
[2020 H}*
The following are the differences between Internal control & Internal Audit system:
BASIS FOR
COMPARISON INTERNAL CONTROL INTERNAL AUDIT.
Meaning Intemal Control refers to the methods | Internal Audit alludes to the
and procedures implemented by the
management to control the operations,
80 as to assist in achieving the business
objective
auditing program adopted by the
firm, to review its financial and
operating activities by the
professional.
‘What is it?
System
Activity
Verification
One person's work is verified by
another
Each aidvery component of work
is pentied.
Time of checking | As soon as the transaction is recorded JSheeking is done after the work is
checking is performed, performed.
Objective To ensure compliance with managainent | To detect fraud and error.
policies,
59.Is it compulsory for every company to have an internal
audit system? [2019 H]*
‘No it is not compulsory for every ceslipany to have an intemal audit system. As per the Companies Act
2013, following class of companies shail have to mandatorily appoint internal auditor
1. Every Listed Company.
2. Every Unlisted publidvompany if during the preceding financial year, it satisfies any of the
below mention=@ccnditions:
+ tumovece? rupees two hundred crore or more
‘+ paid up share capital of rupees fifty crore or more.
‘© outstanding loans or borrowings from banks or PFI exceeding mpees one hundred crore or
‘more at any point of time.
‘© outstanding deposits of rupees twenty five crore or more at any point of time.
3. Every private company if during the preceding financial year, it satisfies any of the below
mentioned conditions:
‘+ tumover of rupees two hundred crore or more
‘+ outstanding loans or borrowings from banks or PFI exceeding mpees one hundred crore or
‘mote at any point of time.
— _50- Admission going on throughout the year for B.com all semesters. Call 60. State with references to the relevant SA to what extent
should a statutory auditors rely upon internal audit. [2019 H]
[2020 P] [2021 H]*
Statutory auditor can rely on the work of Infernal Auditor but statutory auditor has the sole
responsibility for the expression of his audit opinion. His liability does not extinguishes when he
is using the work of internal auditor. SA 610 deals with this issue
SA 610 Using the Work of Internal Auditors deals with the external auditor’s responsibilities in
relation to the internal auditor’s work if the internal audit function is likely to be relevant to the
audit.
Where the external auditor intends to rely upon the specific internal audit work, he has to carry
out the general evaluation of the internal audit fiction considering the Organizational status,
nature and depth of coverage of internal auditor, technical competehe!-ind whether the audit
work was carried out with due professional care.
Where, following the general evaluation, the statutory etter intends to rely upon specific
internal andit work as a basis for modifying the nature, luttihg and extent of his procedures, he
should review the intemal auditors’ work, taking into decotnt the following factors:
(a) The scope of work and related audit progfatiiiaes are adequate for the statutory auditor's
purpose
(b) The work was properly plannéd sid the work of assistants was properly supervised,
reviewed and documented
(©) Sufficient appropriatocvidence was obtained to afford a reasonable basis for the
conclusions reachits
(@) Conclusions réached are appropriate in the circumstances and any reports prepared are
consistent with the results of the work performed.
(©) Any exceptions or unusual matters disclosed the internal auditor's procedure have been
properly resolved. The statutory auditor should also test the work of the internal auditor
on which he intends to rely. The nature, timing, and extent of the external auditor's test
will depend upon his judgment.
— 51- Admission going on throughout the year for B.com all semesters. Call 61.In a good system of Internal check, the work of one is
checked indirectly by the work of another" — Explain and
discuss the statement with examples. [Imp]**
Infernal check is a method of oiganising the accounts system ofa business concem or a factory where the
Gulies of different clerks are amanged in such a way that the work of one person is automatically checked
by another and thus the possibility of fraud, or error or irregularity is minimised unless there is collusion
between the clerks
For example, the receipt of cash is entered by the cashier on the debit side of the cash book; this entry is
camtied to the ledger by another clerk; the statement of account relating to this transaction is sent to the
customer by a third clerk and so on, Thus the same transaction has passed through thee different hands
and the work of one is checked automatically by the other. It is a kind of Giyision of labour. This
minimises the possibilities of frauds and errors unless all the three join hands.in dediauding their employer
‘The essential elements of an intemal check are
(@ lnsttuting of cheeks on day-to-day transactions.
(b) These checks operate contimiously as a part of routine systen
(© Work of each persons made complementary to the work of another.
‘The objective of such allocation of the duties is that noone has an exclusive control over any transaction,
An example of internal check is the
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