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    BHALOTIA CLASSES 9883034569/9330960172 Auditing [5th Sem Pass Important Qns] [2023-24] Content: S. Chapters Page Number 1 Syllabus & Content O1- 06 2 Unit 1: Concept, need and purpose of audit (5 +5) 07-11 3 Unit 2: Audit procedures and techniques (5+ 10) 12-18 4 Unit 3: Audit risk and internal control system (10 marks) 19-23 5 Unit 4A: Vouching (10 marks) (may Leave this chapter) 24-27 6 Unit 4B: Verification and valuation (10 marks) 28-32 7 Unit 5: Company audit ((15 marks) 33-39 8. Unit 6: Audit report and certificate (10 marks) 40-42 5 Unit 7: Other thrust areas (0 marks) 43-46 10. Expected Question pattem 41-47 u Audit: Mock Test Paper Set A 48-49 12 Audit 2022 to 2019 Honours & Pass Question Paper 50-64 Follow the BHALOTIA CLASSES channel on WhatsApp: https://whatsapp.com/channel/0029VaHYVOMF1YIM1 es6uUl19 i Do Chapters & Questions in following order of importance (Qn no. from Bhalotia study Mat) Unit 7: Other thrust areas (10 marks): Qn 124, Qn 125, Qn 128, Qn 120 Unit 6 Audit report and certificate (10 marks): Qn 110, Qn 113, Qu 116 Unit 4B: Verification and valuation (10 marks}: Qn 83 (a, fk, ¢, i), Qn80, Qn 81, Qn 82 Unit 3: Audit risk and internal control system (10 marks): 65 + 67, 5S +56, 68, 60, 62, 63 Unit 2: Audit procedures and techniques (10+ 5= 15 Marks): 51, 33, 47, 46,31+32, 34, 39 Unit 5: Company Audit (15 Marks): _84 + 85. 88, 98, 106, 107, 86 of audit (5+ 5=10 Marks): 8, 12, 14, 16, 7,6 May leave this chapter): 69+ 71, 72,73, 70 Do Chapters & Questions in following order of importance (For Last Day Revision) Unit 7: Other thrust areas (10 marks): Qn 124, Qn 125, Qn 128 Unit 6: Audit report and certificate (10 marks); Qn 110, Qn 113, Qn 116 Unit 4B: Verification and valuation (10 marks): Qn 83 (a. £ k) ‘Unit 3: Audit risk and internal control system (10 marks):_65 + 67 Unit 2: Audit procedures and techniques (10 + 5= 15 Marks): 51, 33,47 ‘Unit 5: Company Audit (15 Marks): _84 +85, 88 of audit (5+ $= 10 Marks): 8.12, 14, 16_7,6 Study Materials also available for all subjects @ 150/subject ii | Bhalotia Classes (9883034569): 5Sem Audit (Pass Imp Qns) (2023-24) | HIGHLIGHETED: 1** IMPORTANT (99%) RED: 2"! IMPORTANT (67%) BLUE: 3" IMPORTANT (33%) ADMISSION GOING ON FOR B.com Crash course: PER SUBJECT: = 750 ALL SUBJECTS: = 2000 SYLLABUS OF OLD BATCH HAS BEEN COMPLETED. NOW RESTART CLASSES FROM THE VERY BEGINNING. CONTACT 9883034569 Follow the BHALOTIA CLASSES channel on WhatsApp: https://whatsapp.com/channel/0029VaHYVOMF1YIM1es6u U19 For All updates & Exam time free Marathon Subscribe: https://Avww.youtube.com/@ Bhalotiaclasses Contact_9883034569/9330960172 for Details. (10 am to 7pm) [= 1= Audit Crash Course @ & 750. All Subjects @ & 2000 only. Contact office. ] UNIT - | CONCEPT, NEED AND PURPOSE OF AUDIT (10 Marks) (5 + 5) (BHALOTIA) ‘© Definition-Nature-Scope and Objectives of Independent Financial Audit ‘© Basic Principles Governing an Audit, Concept of Auditor's Independence «Errors and Fraud-Concepts, Means of doing Fraud, AUB RSS Waa SIGH a PSUR «+ Classifcation of Audt- Organization Structure wise (SRINGAINGRSSLURSHI Objective wise (Itemal and Independent Financial Audit); Periodicity wise (Periodical, Continuous, Interim, Final) + Standards on Auditing ($A) Concept and Purpose (This unit shouldbe studed with SA 200 [REVISED] and SA 240 [REVISED) UNIT I! AUDIT PROCEDURES AND TECHNIQUES (15 Marks) (5 + 10) (BHALOTIA) ‘© Auditing Engagement-Audit Planning- Audit Programme (Concept) ‘© Documentation: Audit Working Paper, Ownership and Custedy of Working Papers-Audit fle (Permanent and Current) ~ Audit Note Book- Aut Memorandum, ‘+ Audit Evidence —Concept, Need, Procedures to obtain Audit Evidence ‘+ Routine Checking, Test Checking and AUditingin Depth + Audit of Educational Institutions, Hospitals (This unit should be studied with SA 210, SA 230, SA 300, SA 500, SA £20 and SA $30) UNIT - III AUDIT RISK AND INTERNAL CONTROL SYSTEM ((10 Marks) (BHALOTIA) ‘* Internal Control- Definition, Objectives ‘* Internal Check- Definition, Objectives ‘+ Internal Auit- Definition, Objectives, lance by Statutory Autor on internal Auditors Work (This unit should be studied with SA 610) UNIT ‘+ Vouching: Meaning, Objectives -— Factors to be Considered during Vouching - Vouching of Following Items: i) Receipts: Cash Sele, Collection from Debtors, Interest and Dividend from Investment, Sale of Fixed Assets.) Payments: Cash Purchase, Payment to Creditors, Payment of Wages and Salaries, Advertisement Expenses, Traveling Expenses * Verification and Valuation: Concept, Objectives, Importance, Difference with Vouching, Difference between Verification and Veluation, Verification of following items: j) Non- Curent Assets: GBBAWil, Patent and Copy Right, Plant and Machinery) i) Investments ii) Current Assets: Inventory, Loan and Advance, Cash and Bank Balances) Non-current Laity: Secured Loan v) Curent Labi: Ta BAVA (SURG) CGH, UNIT - V COMPANY AUDIT (15 Marks) (1 Question of 15 Marks) (BHALOTIA) ‘© Qualification, Disqualification, Appointment and Rotation, Removal and Resignation ‘© 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 Bhalotia Classes (9883034569): 5Sem Audit (Pass Imp Qns) (2023-24) UNIT — VI AUDIT REPORT AND CERTIFICATE (10 Marks) (BHALOTIA) ‘Definition = Distinction between Report and Centficate- Different Types of Report ‘+ Contents of Audit Report (As per Companies Act and Standards on Auditing) ‘© True and Fair View — Concept © Materiality— Concept (This unit should be studied with SA 700) UNIT — VII OTHER THRUST AREAS (10 Marks) (BHALOTIA) ‘+ Cost Audit Concepts, Objectives Relevant Provisions of Companies Act '* Management Audit - Concepts, Objectives, Advantages * Tax Audit—Concepts ‘© Social Audit ~ Propriety Audit ~ Performance Audit ~ Environiehit Audit (Concepts only) TOPICS NOT IN PASS COURSE SYLLABUS UNIT—1 CONCEPT, NEED AND PURPOSE OF AUDIT (BHALOTIA) Difference between Audit and Investigation ‘Technique wise (Balance Sheet, Standard, Systems, EDP) UNIT —II AUDIT PROCEDURES AND TECHNIQUES (BHALOTIA) ‘Concert of Analytical Procedure and Substantive Testing in Anditing, Autit of Hotels UNIT— II AUDIT RISK AND INTERNAL CONTROL SYSTEM (BHALOTIA’ Ani Risk — Concept and Types only UNIT=IV: VOUCHING, VERIFICATION AND VALUATION (10 Marks) (BHALOTIA) Difference with Routine Checking ‘Vouching of Following Items: Research and Development Expenditure, Prepaid Expenses, ‘Verification and Valuation of Leasehold Land, UNIT. V COMPANY AUDIT (15 Marks) (BHALOTIA) Remuneration, Rights, Duties and Liabilities of Company Auditor Admission going on & Notes also available for Accounting & Finance group (All Subjects) Marketing Groups (All Subjects) Taxation Group (All Subjects) E Business Group (All Subjects) Join telegram: https://t.me/CU_bcom 5sem Join telegram: https://t.me/bhalotia = 3- Audit Crash Course @ & 750. All Subjects @ % 2000 only. Contact office. UNIT 5 + 5 = 10 Marks] [BHALOTIA’ CONCEPT, NEED AND PURPOSE OF AUDIT ‘6 What are the objectives of Independent financial audit as per SA 200? [2081, 2211, 22P] 7. What are the Principles governing an Audit? (VVI) [19H (20 P] [21H] 21P]**#*+** 8. What do you mean by auditor's independence? [20 P, 22H] (Important for Pass)*** 12, Discuss the auditor's responsibility towards detection and prevention of fraud as per the relevant Standard on Auditing. (2021 H] [2019 P| 14. Distinguish between statutory and Non-statutory audit. [Important] [2021 PI***** 16. Distinguish between continuous audit & peri audit. [2019 P]** Unit Il: (10 + 5 = 15 Marks) [BHALOTIA] Auditing Procedures and Techniques 31. What is audit programme? [2020 H] [2020 P] 32. Discuss the advantages of conducting an a programme. [2020 H] [2020 P] according to a predetermin 33. Define Audit Working Papers. Who is owner of Audit working Paper? [2019 P] [2020 H] 34. 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] 39. What is Audit Memorandum? g? Wha 47. What do you mean by auditing in depth? (2021 P]** {99% 51, What special steps are involved in conducting the audit of an Educational Institution? 2020 H] [2021 P] [2022 P] (Very Imp for all)**** [99% | Bhalotia Classes (9883034569): 5Sem Audit (Pass Imp Qns) (2023-24) | Un 10 Marks) [BHALOTIA AUDIT RISK & INTERNAL CONTROL SYSTEM 36. What are the objectives of internal control system? [2020 H] [2020 P] [Important]** 60. What is internal audit? [2019 H] [2019 P] [2021 H] [99%] 62. Distinguish between internal control svstem & internal check system. [Important] ****** 63. Distinguish between internal check system and Internal audi 65. 1s it compulsory for every company to have an internal audit system? [2019 H]* [99%] 67. State with references to the relevant SA to what extent should a statutory auditors rely upon internal audit. [2019 H] [2020 P] [2021 H] (Very Important for All)******** [99% | 68. 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. Unit IV A: VOUCHING (10 Marks) [BHALOTIA’ 69. What is Vouching? [2019 P] 70. What are the objectives of vouching? 71. State the essential factors to be considered for vouching. [2019 P] 72. "In vouching payments, the auditor does not merely seek proof that money has been paid away." Critically examine the statement. [2022 Hons] 73, *Vouching is the essence of auditing.’ Do you agree with this statement? Justify your view (2020 H] UNIT IV B (10 MARKS): VERIFICATION & VALUATION (In option of Vouching) 80. Distinguish between Vouching of transactions and Verification of _assets_and liabilities. [20 P| 81, What are the differences between verification and valuation of assets? [202] H] ‘82. “Verification includes valuation” - Comment 83. How would you verify the following assets & liabilities a) Goodwill [2019 P] [2020 HJ [2021 P] [2022 H] [99% (e) Plant and Machinery [2019 H] [2021 P] [99% (QAnvestments {2019 P] 12020 11) 12021 PL 12022 1} (i) Debtors [2019 H] (important for all) {) Trade Pavables (Sundry Creditors) [2020 11] [99%] [ Bhalotia Classes (9883034569): SSem Audit (Pass Imp Qns) (2023-24) | Unit V: Company Audit (Marks 15 84. State the qualification of a company auditor as per companies act, 2013. [2019H, 2019P, 2024PL limportant]*#** (99% 85, Discuss the disqualification of a company auditor as per the companies act, 2013. [2019 P, 20247 limportant]**** (99% 86. State the provisions of the Companies Act, 2013 regarding appointment of a company auditor. [2021 H] [2020 P, 2022P} 88. State the provisions of the Companies Act, 2013 regarding removal of a company auditor. 2021 Hj [2020 P] (important for 98. What ate the provisions of the Companies Act, 2013 regarding depreciation to be provided in the accounts? [2021 H] [2021 P] 98. Can lend be paid out of Capital?** 107. What d ‘idend? Discuss the provisions of the Companies Act, HAEEEHE weno eee e2 990%, you mean by Interim d 2013 regarding Interim dividend, Unit VI: [BHALOTIA] Audit Report and Certificate ((Marks 10) 110. Distinguish between ‘Auditor’ s report” and ‘Auditor’ certificate’. [2020 H] ****199%. 113. State the contents of an Audit Report as per relevant standards on Auditing (SA 700)."* 116. Discuss the term ‘True and Fair View’ under the Companies Act, 2013. Discuss how far auditor’s duties have increased as its consequences. [20 H] [21 PI Unit 7: Other Trust Areas (Marks 10) ‘Write Short Notes on any two (out of 3) 120. Write Short Notes on Management audit? [2021 H]*** 24. Write a short note on tax audit [19P, 20H, 20 P, 21 P, 2211] [99% ]***###* 125, Write a short note on Social Audit [19 H] [19 P] [20 H] [20 P] [21 P] [22H] [99%]*#*##% 28. Write a short note on Environment audit [19 P] [20H] [21 Pl: [99%]=***#** 6. What are the objectives of Independent financial audit as per SA 200? [2020H, 2022 H, 2022 Pass] ‘As per SA 200, Overall Objective of Independent Ai (a) To obtain reasonable assurance that financial statements are free from Material ist Mismanagement resulting from either due to fraud or error enabling Auditor to express an opinion on whether financial statements are prepared in all material respects as per applicable Financial reporting framework. (b) To Report on Financial Statement & Communicate as required by Standard of Auditings. (c) The objective of independent audit is to report u/s 143(2) to Members of Company on Account examined by him & Financial Statement to be laid in AGM. (d) To ensure that his opinion on Financial Statement is reflecting the True & Fair view. (e) The objective of independent audit to State in his Report u/s 143(2) whether A/c examined by him & Financial Statement give True & Fair view. (f) Audit evidence to reduce Audit Risk to Acceptable low level & consider SA 500 7. What are the Basic Principles governing an Audit? [2019H, [2020 P] [2021 H] [2021 P] [very Important for all]********** SA-200 depicts the nine essential rules that administer the method of auditing. It rattles off the roles and obligations of the evaluator or auditor and his overall set of accepted rules while condueting an audit or review, The basic principles as stated in this guideline are: Al Integrity, Independence, and Objectivity: ‘The inspector must be candid while during the audit process, he can’t be inclining toward the association, He should stay objective all through the entire cycle, and his trustworthiness should not petit any negligence Bl Confidentiality: The auditor comes across a great deal of sensitive monetary data of the association. It is significant that he regards the classified genre of such data and archives. C1 Skill and Competence: The examiner should be capable and prepared in the strategies of anditing, for example, he should be qualified as an examiner, Furthermore, as an expert, he should be aware and upgrade on the latest changes, declarations, rules, and so forth. D| Work Performed by Others: The extent of an audit on occasion can be extremely immense, So an auditor can utilise his representatives, delegates, and others who work under him. EL Documentation: Much of the time, the examiner keeps a review notepad, a review or audit plan, and an evaluating document or an audit file F] Planning: A review plan pemnits the inspector to arrange his work and empowers him to be more proficient and ideal. G) Audit Evidence: The auditor should gather sufficient proof to help him in his last assessment. This assortment of such proof is finished by substantive and consistency systems, H] Accounting Systems and Internal Control: The inspector needs to guarantee that the records of the association are exact and address a valid and reasonable image of the monetary status of the organisation. TAudit Conclusions and Reporting: ‘After the examiner gathers all proof, he should now shape his viewpoint based on the accompanying. standards 8. What do you mean by auditor’s independence? [20P, 22H] (Important for Pass)****** (BHALOTIA) (9883034569) “Auditor's independence means ability of the auditor to express opinion on the financial statements without any influence from parties that have an interest in the results published in the financial statements of the entity. It implies that the auditor's judgement on the authenticity of the financial statements is not subordinate to the wishes of directors or other parties, mote specifically company managers/directors or to his own self-interest. Auditor independence is part of the foundation of the auditing profession. An independent, reliable, and ethically sound audit gives a company credibility and allows the public to trust in the accuracy of te results and the integrity of the accounting profession. Independent auditors are certified public accountants or chartered accountants, who examine the financial records of companies with which they are not afliliated. This means they have no financial interest in the business being audited. They are also not linked to any parties who may have an interest in or might be harmed by the results of an audit or its publication. By being independent, an auditor is more qualified to approach the audit process objectively and perform the task with integrity. An independent audit offers company shareholders an expert, unbiased opinion. The audit will determine the accuracy of the company’s annual accounts as a fair refleetion of its financial position, Independent auditors are often used to avoidconflicts of interest and to protect shareholders and potential investors in public companies 12. Discuss the auditor’s responsibility towards detection and prevention of fraud as per the relevant Standard on Auditing. [2021 H] [2019 P] (BHALOTIA) (9883034569) SA 240 deals with the auditor’s responsibilities towards frauds in the financial statement audits. Tt explains how the material misstatements in the financials due to fraud can be identified, assessed and appropriate procedures to detect can be implemented. As pet SA 240 Following are the Auditor’s responsibilities towards detection and prevention of fraud (@) Obtain reasonable assurance that the financial statements are free from material misstatements. (b) Maintain professional skepticism throughout the audit. (©) Should know that Risk of non-detection of management frand is greater than of employee fraud (@ Must be aware Risk of non-detection of faudulent material misstatement is higher than the misstatement due to error. However Auditor is not responsible for the Prevention and Detection of Fraud, Management has the Primary responsibility for the prevention and detection of fraud and not the auditor. Management should take all necessary steps for fraud prevention and deterrence through implementing policies and controls. 14. Distinguish between statutory and Non-statutory audit. [Important for all] [2021 P]***** (BHALOTIA) (9883034569) Statutory audit is authorised and governed by law ora statute, whereas the audit got done voluntarily and without any legal or statutory force is non-statutory. Examples of statutory audits are the audits of companies, banks, insurance, charitable trusts, corporate bodies and co-operative societies, Examples of non-statutory audits are the audits of partnership firms and individual proprietary concerns. ‘The main points of distinction are: Point of Difference statutory Audit non-statutory Audit @ Legal obligation _| Ttis compulsory. Ttis voluntary, (@ Nature and Scope | The relevant statute or law | The employer or partners determine of audit determines the scope of work the scope of work Gi) Appointment of |] The aucitor is appointed by the | the sole-tader himself in the case of Auditor shareholders in the general meeting. | soje-tracing business, appoints and in But in specific cases, the board of | case of partnership firm, the partners directors or the Central Government | seyoint an auditor, appoints an auchtor (8) Qualification [The academic or professional [Tye auditor need not possess any qualification is prescribed for the | academic or -—_~professional auditor qualifications (®) Organisation of — | The auditor usually conducts his work | The auditor conducts his work of audit Audit Work of audit on the basis of Companies | according to the instructions given in the ‘Act, Memorandum, Articles, | agreement with the owner or the partners Prospectus and Directors’ Minute | as the case may be Book, ete. (W) powers rights [The statute dictates the powers, [The agreement between an auditor and duties rights and duties of an auditor ‘and firm decides these matters (wil) Independence |The auditor has independence in [The guditor does not enjoy such status and in mental attitude. independence (vill) Liability ofthe | The auditor is able for | Tye auditor is liable for negligence auditor negligence under the Common | oniy ander the Common Law Law and for misfeasance under the relevant statute governing the audit (9) Submission of [The auditor is required to submit his | The auditor submits his report to the report written report to the shareholder employer. 16. Distinguish between continuous audit & periodic audit. [2019 P] (BHALOTIA) (9883034569) The following points will summarize the key differences between continuous audit and periodical audit Basis. Continuous Audit Periodical Audit ‘A continuous audit is conducted | A periodical audit is conducted at the Conduet throughout the year. end of the year. Detailed checking of each and every = It involves detailed checking of | transaction is not possible. Hence, — the books of account. there is a chance that some errors may be lefl undetected Cost Is more expensive Itis less expensive. ‘continuous aucit helps in the | C842" Pesiodieal audit, early detection Enos and of errors is not possible sinee books eatly detection of errors and fraud are examined only after they are fraud 5 5 completed. Ina continuous audit, the auditor | In a periodical audit, the auditor visits Auditor’s makes frequent as well as | the client just once a year and takes up visits suprise visits to the dlient’s | the audit work when all accounts are workplace balanced and completed. The audit work is cared out Be MAE NOES GCE NS | the audit work is started after the Audit work | and when the accounts are being accounts are prepared. prepared. It is most convenient for big | It is most convenient for small Convenience enterprises businesses. Time . Continuously done Smaller requised Performed | The firms internal audit team or External auditors w with the aid of technology Unit 10 + 5 = 15 Marks Auditing Procedures and Techniques 31. 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, itis 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, Andit programme is generally contained in the audit notebook. Prof. Meigs defines an audit programme as, “an audit programme is a detailed plan of the auditing work to be performed, specifying the procedures to be followed in verification of each item and the financial statements and giving the estimated time required.” 32. 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 advance and also helps in dividing the work among the audit assistants based on their capabilities. 2. Helps in Fixation of Responsibility: It enables to fix responsibility on the audit assistants by clearly defining the scope of work 3. Helps in Future Planning: Audit programme serves as a basis for planning the audit work for subsequent year 4. Serves asa Guide: It serves as a valuable guide for the audit staff in execution of the audit work for succeeding years 5. Valuable Evidence: 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 can 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 continue the work by referring to the audit programme, hence, audit programme provides for continuity of work Coordination: If facilitates coordination and helps in ama work of the audit staff. 33. Define Audit Working Papers. Who is owner of Audit working Paper? [2019 P] [2020 H] (Important for All)******** ‘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 ate 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 amtived at. The summary of immpoxtant 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 working papers include the following: (a) Checklists of standard investigation items that were completed, and by whom (b) Copies of correspondence (©) Documentation of the assertions investigated and supporting evidence found (d@) Extracts from the corporate minutes of the client (©) Flowcharts of a client's key transaction processes (© Nanative discussions of issues found (g) Organization charts (h) Questionnaires for which the client provided answers Ownership of Audit working papers ‘The working papers are the matters documented by the auditor. So they are his property. Although, the client may claim them as a record of his business matters, the auditor eamot part with them as his, conclusions are based on them and as they provide evidence of the audit work carried out according to the basie principles ‘The legal observation in the case of Sockockinsky Vs Bright Grahame & Co. is that “The working paper belongs to the anditor 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. 34.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] (BHALOTIA) (9883034569) 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 electronic 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 auditors to have a separate audit file for each engagement. It contains a collection of all the evidence and documentation for a specific service. However, some information may be common across various engagements for the same client. In such case auditors may keep a permanent audit file along with a current audit file. Types of Audit Files ‘There are two types of Audit files. (a) permanent audit file (b) current audit file Contents of Permanent Audit Fi A permanent audit file contains information on the following: (a) The legal and organizational framework of the client’s entity, for example, the Memorandum of Association (MOA) and Articles of Association (AOA) in the case of a company (b) Extracts or copies of essential legal papers, agreements (¢.g., loan agreements), and minutes that may be important and relevant for the audit (© A record of the study and evaluation of the internal control system of the entity (@) The letter of engagement (©) 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) (i) Notes regarding significant accounting policies being followed by the company @) Important audit observations made in the earlier financial years G) Details of leases, if any Contents of Current Audit File A current audit file contains information on the following: (a) An analysis 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 (©) Workings of the entity’s trial balance and worksheets (f) Details of adjusting jownal entries and reclassification entries (g) Record of test of controls carried out and substantive tests (i) A record of queries raised during the course of the audit and their clearance, with notes for future reference (if, any) (@ A record of results of audit tests on transactions and ledger balances and conclusions reached 39. What is Audit Memorandum? (BHALOTIA) (9883034569) ‘Audit memorandum means —amemorandum or lelfer issued during the couse of —andit for eliciting information, confirmation of facts or any other matter considered nec officer in conduct of audit wy by the audit The final step in the audit process is the audit memorandum which summarizes each phase of the audit and gives recommendations for changes that will improve the accuracy of the records and profitability of the company. Writing an audit memorandum requires in-depth knowledge of the business and the attention to detail required to compare records with reality. The contents of audit memorandum are as follows (@) The plant and office location, (b) Sources of raw-material and their price trend. (©) Names of responsible officers and nature of their responsibility (@) The adequacy of books of account maintained by the client. (© A brief resume of net worth of the firm, (f) Types of subsidiary companies and how they are operated and controlled. (@) Different policies of the company as to advertisement, costing methods, effectiveness of internal control system, y) Investment policy, adequacy of reserve and the purposes of contingency reserve. 46. What is test checking? What are the Precautions to be taken in Adopting Test Checking Techniques? [22H] or Test checking is based on presumption. What is that presumption?** or What factors are to be considered before applying test checking? [2021 P] [Old] Test checking in Audit means checking a few transactions selected at random from a large number of transactions. It is also known as “Selective Verification” or “Sampling Process” ‘As per SA 530 “Andit Sampling”, the auditor should select sample item in such a way that the sample can be expected to be representative of the population. It should be ensured that all items in the population have an equal opportunity of being selected. Test checking is adopted to avoid unnecessary exercise of going through each and every transaction. Based on the result of verification of a few representative transaction only, the auditor forms his opinion about the fairness of financial ‘statements. ‘While applying test checks the auditor should take the following precautions 1, As far as possible sample transactions should be selected from every book 2. The selection of transactions should be so distributed that the work of almost all the clerks of the client is checked 3. The items should be selected at random, As fraudulent manipulations are common during the first and last months of the period under audit, the entries made during these petiods should be checked thoroughly. 5, In the selection of entries and accounts for applying test checks, care should be taken to check the diferent portions of the work at each andit. 6. Cash book and pass book should be checked thoroughly, 7. The auditor should select the transactions on his own. He should not consult the staff of the client while selecting the transactions If the auditor exercises the above safeguards with care and caution, the results are bound to be encouraging and satisfactory, 47. What do you mean by auditing in depth? [2021 P] (imp)** ‘Auditing in-depth reftis to an examination of a few selected transactions irom the beginning to the end through the entire flow of the transaction. While auditing in depth, the auditor reviews all the accounting and operational aspects of the transaction from the origin to the end. This enables the auditor to have an overall view and evaluate the procedures throngh selected transactions. In other words, it is a method of auditing under which a few selective transactions are thoroughly examined to arrive at accuracy of the accounting data. The auditor adopts this technique to evaluate the operation of intemal control and internal check system. Advantages Disadvantage: 1. Quick completion of audit work 1. Possibility of wrong selection of items 2. Saves cost and time 2. Unsuitable for small business concerns 3. Safeguards against manipulation of 3. No objective method accounts 4, Helpful in planning the audit 4, Based on intuition 51. What special steps are involved in conduct Educational Institution? [2020 H] [2021 P] (Very Imp for all)**** ‘The audit process of an educational institution comprises of the following aspects A. Preliminary Matters 1. Study the Trust Deed or Regulations in the case of school or college 2. Evaluate the internal control system. 3. Go throngh the minntes of the meetings of the managing committee or goveming body B. Income 1. Check names entered in the Student’s Fee Register with respective class registers 2. Cheek fees received by comparing counterfoils of fees book with the collection recorded in the Fee Register and trace the entties in the Cash book, 3. Examine whether all concessions have been granted as per rules. 4, See that anear fees which are irrecoverable have been written off under the sanction of appropriate authority 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 entties in the cash book in respect of donations and legacies with reference to the counterfoils of receipts issued to doners 8, Verily interest and dividends received during the year with reference to the securities 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. . Expenditure 1. 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. 3. Vouch the payment of salaries with reference to acknowledgement from employees and entries in the bank statement. 4, Examine that scholarships to students have been granted as per rules and under proper authorization. 5. Vouch all capital expenditures confinming that established noms have been followed in their incurrence and they have the sanction of competent authority 6. 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 facilities including those on repairs, maintenance, electricity, water charges ete. in the usual manner, Similarly, examine the payment relating to purchase, consumption, stock of food grains etc. 8. Examine payments made out of various grants received from Government/U.G.C. with reference to supporting vouchers, entries in the eash book, minutes of the Governing Body and ulilization, certificates, if any, furnished to authorities D. Assets and Liabilities 1. Conduct physical verification of fixed assets as shown in the assets Register 2. Examine whether adequate depreciation has been properly charged on fixed assets, 3. Carry out physical verification of investments 4, Examine arrear student fees by reconciling total fees received during the year and total fees receivable as per the applicable fee structure 5. Confirm that the refund of taxes deducted from the income fiom investment has been duly claimed since the institutions are generally exempted from payment of ineome tax. 6. See all the liabilities in respect of purchase of assets, maintenance expenses, food grains and provisions have been duly provided. E. Statement of accounts The anmal statzments 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. Unit 10 Marks) AUDIT RISK & INTERNAL CONTROL SYSTEM 55. Define Internal Control. [2020 H] [2022 H]** (BHALOTIA) ‘As pa SA-315, the internal control may be defined as “The process designed, unplemented 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 principles, 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 laws, safeguarding the assets, maintaining efficiency and effectiveness in regular operations and reliability of financial statements 56. What are the objectives of internal control system? [2020 H] [2020 P] [Important]** (BHALOTIA) (9883034569) Following are the objectives of Intemal control system: 1, To ensure that the business transactions take place as per the general and specific authorisation of the management. 2, To make sure that there is a sequential and systematic recording of every transaction, with the accurate amount in their respective account and in the accounting period in which they take place. It confirms that the financial statement fulfils the relevant statutory requirements 3. To provide security to 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, surveillance cameras, etc. To compare the 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, To evaluate the system of accounting for complete authorisation of the transactions. 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, i.e, men, material, machine and money 8, To find out whether the financial statements are in alignment with the accounting concepts and principles, au 60. What is internal audit? [2019 H] [2019 P] [2021 H] Internal audit is a process through which the companies get to know the loopholes in the system and improve the respective aspects for making businesses more efficient. Internal audit refers to an independent service to evaluate an organisation’s internal controls, its corporate practices, processes, and methods. An internal audit helps in securing compliance with the various laws applicable to an organisation. An organisation can prepare its accounts and records as per the applicable legal requirements and reporting. 62. Distinguish between internal control system & internal check system. [Important]** (BHALOTIA) (9883034569) The following are the differences between Internal check & Internal Control system: S.No Basis Internal Check Internal Control 1 Meaning A system of allocation of It consists of all the methods responsibility, division af work, | and procedures adopted to assist and methods of recording in achieving the objective of transactions, whereby the work | efficient conduct of business. of an employee is checked It includes internal check and continuously by another. internal audit. 2 Scope toperatesin rontine todouble | In internal control systems, check every part ofa transaction | work of one person is at the time of occurrence and automatically checked by recording of the same. another. 3. Objective Its objective is to ensure that —_| Its object is to ensure no one employee has exclusive _| adherence to management control over any transaction or _| policies, safeguarding of assets, group of transactions and their | prevention and detection af recording in the books. frauds and errors, accuracy and completeness of accounting records, 4, — | Pointof Time | Methods of recording In internal control systen Thrust of System transactions are devised where work of an employee is checked continuously by correlating it with the work of athers. ‘The thrust of internal check system is to prevent errors, checking is done simultaneously with the conduct of work. Every transaction is checked as soon as it is entered. ‘The thrust of internal control lies in fixing of responsibility and division of work to avoid duplication. Cost Invelved It isa part of internal control and a method of division of work, therefore does not add to the cost. ‘The system proves to be costly in case of small businesses because more number of employees are engaged. Report ‘The summary of day to day transactions work as report to the senior. Internal control provide for built in MIS reports. 63. Distinguish between internal check system and Internal audit. [2019 P] [2021 P] (important)** (BHALOTIA) (9883034569) The following are the differences between Internal check & Interal Audit system evaluation of BASIS FOR COMPARISON 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 | Work performed by the checked by another person. employees is examined by a separate group. Commencement | Commences fromthe momenta __| Once the transaction has of Work transaction is entered. been recorded in the books. Involved Accounting and clerical accuracy _| Effectiveness of management control Performed by Existing staff A specially dedicated team of auditors Cost Involvement Economical Comparatively Expensive Thrust of System | Prevention 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. 65. Is it compulsory for every company to have an internal audit system? [2019 H]* (BHALOTIA) (9883034569) ‘No it is not compulsory for every company to have an intemal audit system, As per the Companies Act 2013, following class of companies shall have to mandatorily appoint internal auditor. 1. Every Listed Company 2. Every Unlisted public company if during the preceding financial year, it satisfies any of the below mentioned conditions: ‘+ tumover of 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 rupees one Inmdred 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 rupees one Immdred crore or ‘more at any point of time, 67. State with references to the relevant SA to what extent should a statutory auditors rely upon internal audit. [2019 H] [2020 P] [2021 H] (very Important for all)****#***###*##* Statutory auditor can rely on the work of Intemal 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 intemal 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 intemal 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 intemal audit work, he has to carry out the general evaluation of the intemal audit function considering the organizational status, nature and depth of coverage of intemal auditor, technical competence and whether the audit work was carted out with due professional care. Where, following the general evaluation, the statutory auditor intends to rely upon specific internal audit work as a basis for modifying the nature, timing and extent of his procedures, he should review the internal auditors! work, taking into account the following factors: (a) The scope of work and related audit programmes are adequate for the statutory auditor's purpose. (0) The work was properly planned and the work of assistants was properly supervised, reviewed and documented 68. In a good system of Internal check, the work of one is checked indirectly by the work of another" — Explain and di: the statement with examples. Interral check is a method! of organising the accounts system of a business concem or a factory where the duties of different clerks are arranged in such a way that the work of one person is automatically checked by another and thns the possibility of fraud, or error or inregulatity 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 carried to the ledger by another clerk; the statement of account relating to this transaction is sent to the customer by third clerk and so on, Thus the same transaction has passed through three different hands and the work of one is checked automatically by the other. Itis a kind of division of labour. This minimises the possibilities of frauds and emors unless all the three join hands in defrauding their employer. ‘The essential elements of an intemal check are @ Instituting of checks on day-to-day transactions, (b) These checks operate continuowsly as a part of routine system. (© Work of each personis made complementary to the work of another. ‘The objective of such allocation of the duties is that no one has an exclusive control over any transaction. An example of internal check is the system of encashment of cheque in bank. When a cheque is presented to bank for encashment, one person issues a token, then he verifies the balance in the ledger book and makes entry. One officer then verifies the signature and authorises payment. The cashier then makes payment. Thus the entire system is so designed that no single person can verify record and make payment Sometimes to enhance the efficacy of Internal check system duties among staff members are interchanged. They are also encouraged to go on leave so that in the absence of an individual frauds and errors, if committed by him, can be brought to light On the basis of the above, it may be concluded that the internal check means a system by which the work is divided among the employees in such a manner that not a single individual is allowed to carry on the whole function from the beginning to the end and the work of an individual is automatically checked by another cuss | Bhalotia Classes (9883034569): 5Sem Audit (Pass Imp Qns) (2023-24) | U \V_A: VOUCHING (10 Marks) 69. What is Vouching? [2019 P] (BHALOTIA) (9883034569) "Vouching is concemed with examining documentary evidence to ascertain the authenticity of entries in books of entries in books of accounts. It is an inspection by the ancitor of an evidence supporting and substantiating the transaction made in the books. Itis a technique used by the auditor to judge the truth of entries appearing in the books of accounts, All accounting entries must be supparted by a document. It is not only examining the documentary evidence but sometimes anditor has to go behind recorded evidence to eliminate any possibility of fiaud According to Spicer and Peglar, “Vouching may be defined as the examination by the auditor of all documentary evidence which is available to support the authenticity of transactions entered in the clients? records”, According to Dicksee, “vouching consists of comparing entries in books of aecount with documentary evidence in support thereof”. According to Taylor and Perry “Vouching is the examination of the evidence offered in substantiation of entries in the book including in such examination the proof, so far as possible, that no entiies have been omitted from the books” 70. What are the objectives of vouching? (BHALOTIA) Following ate the objectives of Auditing: (a) Toensure recording of all transactions. (>) To verify that all transactions recorded in the books of aecounts are supported by a documentary evidence, (©) To verily the validity of the vouchers which support the entiies and to ascertain whether these are authentic, addressed to the business and properly dated. @ — Toverify that no fraud or ertor has been committed while recording the transactions in the books of accounts (©) Toensure that the vouchers have been processed carefilly through various stages of internal check system (® To verify whether every transaction recorded has been adequately authenticated by a responsible person. (@) To know that while recording the transaction whether distinction has been made between capital and revene items (h) To ensure whether accuracy has been observed while totaling, carrying forward and recording and amount in the account. (i) To verify that all the transactions connected with the business have been recorded in the books of accounts. () To check vouchers which support entries are legal, valid, authentic, addressed to the business and propetly dated (&)— Tohave greater precision in reporting the financial information as true and fair ) —Toensure reliability of figures entered in the books of accounts, (i) To confirm that no transaction has been recorded in the books of accounts which are not related to the entity under audit. 71. State the essential factors to be considered for vouching. [2019 P] (BHALOTIA) (9883034569) ‘Vonehing helps to prove the tuith and faimess of account by detecting errors and frauds, So, while conducting the test of vouchers, following factors are to be taken into consideration: Anauditor should check the records whether they are supported by evidential documents or not. 1. All the documents related fo income and expenditures are to be separated and separate files should be maintained, Ifnot, anditer should ask to do so An auditor should use special sign in tested vouchers so that they cannot be used again. 3. While vouching, an auditor should cheek whether the general principles of accounting have been followed ornot and clear cut demarcation of capital and revere is made or not. 4. Whether the documents presented for testing are related to the current year or not 5. All the documents which ate presented for auditing must be authorized by the concerned authority. An auditor should check whether it is done or not. 6. Ananditor should ask duplicate copies of missing vouchers, but if important vouchers have been missed ‘and auditor is not satisfied with the reasons presented, s/he should write in report to this fact. If an auaitor finds the correction in the evidential document, then such figures should be verified with documents and to be noted down in audit note book for consideration while prepasing report. 8. All the documents are to be reviewed before closing the work of audit which helps to check again those facts where special sign is given. 72. "In vouching payments, the auditor does not merely seek proof that money has been paid away." Critically examine the statement. [2022 Hons] (BHALOTIA) (9883034569) “In vouching payments the auditor does not merely seek proof that money has been paid away"? Introduction Vouching is a process where an auditor validates transactions or events by examining supporting documents, ‘When it comes to vouching payments, the auditor investigates payments made by the company to ascertain their accuracy and legitimacy. In a business concem, cash book is kept up to represent receipts and installments of cash. It is an essential monetary book for a business concem. Blunders and fakes emerge for the most part regarding receipts and installments of cash by making misappropriations wherever conceivable. Subsequently the reviewer should see ‘whether the sum fotal of what receipts have been recorded in cash book and:no imaginary installment shows up ‘on the installment side of Vouching cash book Proof of payment Vouching payments may invelve checking bank statements, cancelled checks, and receipts to ensure that payment has been made. However, the auditor's job does not end there E ‘The auditor goes beyond checking for proof of payment to examine the underlying transactions, This helps to verify that the payment was made for a legitimate business pumpose and that it was authorized by the appropriate personnel ination of under! transac Review of internal controls The auditor also reviews the company’s internal controls to ensure that there are adequate procedures in place to prevent fiandulent payments or unauthorized expenditures. This includes verifying that there is segregation of Gulies, proper approval processes, and appropriate documentation for all transactions Identification of errors Through vouching payments, the auditor may also identify errors such as double payments, overpayments, or incorrect account postings. This helps the company to correct these errors and prevent them from occurring in. the fimmre, Conclusion In summary, vouching payments is not just about checking for proof of payment. It involves examining the underlying tansactions, reviewing intemal controls, identifying errors, and ensuring that payments were made for legitimate business puposes. 73. ‘Vouching is the essence of auditing.’ Do you a: statement? Justify your view. [2020 H] ‘Vouching is the process of examination of all available documentary evidences to verify the genuineness, authority and authenticity of transactions entered in client's books. Vouching is the essential part of auditing. In fact, “it constitutes the foundation upon which the superstructure of auditing is erected.” ‘The factors that make vouching the essence of auditing can be brought out as under 1. Basic Evidence: Vouching is a substantive audit procedure designed to obtain evidence to verify the accuracy and validity of data produced by the accounting system. 2. Genuineness of transactions: The transactions do not take place in the presence of auditor. So, the auditors, through vouching, try to establish the genuineness of transactions. 3. Propriety of transactions: Through vouching, the auditor goes to the root of transactions to ree with this substantiate their propriety. It helps him determine whether transactions have been carried out in the best interest of the entity. 4, Substantial accuracy: Substantial accuracy as opposed to arithmetical accuracy of transactions is determined by vouching. It is applied by the auditor to test the authority, regularity and truthfulness of entries in the accounts. 5. Detection and prevention of frauds and errors: Vouching is an analytical exercise; it is critical and investigates. It requires application of professional skepticism and judgement on the part of the auditor. So complex error and ingeniously made fraud can be detected by vouching. 6. Successful and logical completion of audit: The success of audit depends upon the efficacy of vouching, A casual and careless conduct of vouching will expose the auditor to legal action if he fails to detect material errors and fraud. 7. Basis for verification: /ouching is also the basis of verification of assets and liabilities stated in the balance sheet. For verification they are traced from underlying books of accounts and relevant iB. jon on financial statements: The auditor satisfies himself about the source documents. Examination of these source documents constitutes vouc 8. Basis of expression of of accuracy, validity and authenticity of transactions recorded in the books of accounts through the process of vouching, 9, Internal control cannot make Vouching redundant: In an organization with sound internal control system, the auditor can rely on the internal control and can reduce the extent of vouching, Henee, it is said that vouching is the backbone of audit, Without vouching, financial audit remains incomplete UNIT IV B (10 MARKS): VERIFICATION & VALUATION 80. Distinguish between Vouching of transactions and Verification of assets and liabilities. [2020 P] [Important]***** Vouching is the soul of Auditing because it foams a base for an effective audit procedure. Voushing means “to vouch” Le. examine the vouchers. On the other hand, Verification means “to verify” the assets and liabilities of the business. Both the two terms are the first two steps of Auditing, infact vouching helps in the process of verification Vouching implies the act of checking the vouchers, to identify the authenticity of the transactions recorded, Conversely, Verification alludes to a process, adopted by the auditor to examine the assets and liabilities ‘The differences between vouching & verifications are as follows: BASIS FOR VOUCHING, VERIFICATION, COMPARISON Meaning Vouching means checking the | Verification means a process to accuracy of the transactions | substantiate the validity of assets and recorded in the books of |{liabilities appearing in the Balance accounts. Sheet. Basis Documentary Evidence Observation and Documentary Evidence Examination of | Items of Profit & Loss account | Items of Balance Sheet Carried out by Audit clerks Auditor Time Horizon Year-round At the end of the financial year Objective To examine the comectness, | To confizm the ownership, possession, validity and completeness of | existence, valuation and disclosure of the transactions, the items appearing on the Balance Sheet. 81. What are the differences between verification and valuation of assets? [2021 H] (BHALOTIA) (9883034569) Though the Verification and valuation of assets and liabilities are interchangeably used by many but they are different from each other. There are a few points that differentiate the verification and vahuation of assets and liabilities, which are discussed below: ERIFICATION VALUATION ‘Verification of assets and liability is done for | Whereas valuation is used for finding out the comect the purpose of checking the existence, value of the asset and liabilities. ownership, and acquisition of assets Verification of assets and liabilities is, ‘Valuation of assets is done throughout the year conducted at the end of the year Verification is performed by the auditor of the | Valuationis done by the authonty in the company or| company. by the board Tn the case of verification, in the end, any Kind | In the case of the valuation of assets and liabilities, a of cettificate is not issued. certificate of valuation is provided Verification is examining the possession of | In the case of valuation, itis about estimating the assets actual worth of the assets and liability in monetary terms, which the company shows on the balance sheet The verification process does not require any | But in the process of valuation, expert knowledge is Kind of expert knowledge fiom the auditor. | requized. Verification is objective as it depends on the _ | The process of valuation is subjective in nature as it physical examination and documentary needs documentary evidence and a certificate that evidence. thas been issued by the experts ‘Verification is conducted after valuation ‘Valuation precedes the verification process. 82. “Verification includes valuation” - Comment ‘Asset valuations a necessary component of the verification process. Ascertaining the existence, ownership, possession, comect valuation, and adequate disclosure of an asset are all part of the verification process. While valuation is solely concemed with ascertaining the accuracy and propriety of the value of various assets displayed on the balance sheet. ‘As a result, verification is a broader term that involves the valuation of assets, But the approach to valuation is more specific. It is an element of the verification process. Hence one of the main elements of verification is valuation. Valuation is the process of determining the correct value of assets on a specific date. It is the act of determining the value of assets and critically examining these valnes in accordance with generally accepted accounting standards. The auditor should take utmost care to ensure that assets that do not exist are not included in the Balance Sheet and that those that do exist are not over-valued or undet-valued, Hence Verification includes Valuation. 83. How would you verify the following assets & liabilities [Important]***** (BHALOTIA) (9883034569) ‘a) Goodwill [19 P] [20 H] [21 P] [22 Hons’ for pass) ‘Goodwill is an intangible asset. Its value depends on the eaming capacity of the business. According to Accounting Standard 10, the accounting for goodwill should be recorded in the books only when some consideration in money or money’s worth has been paid for it. While verifying goodwill, the auditor should keep the following points in consideration. (a) Examine the method of valuation of goodwill. (b) If the business has been purchased, the agreement regarding purchases of business should be studied, (©) Incase of partnership firm, the partnership deed should be studied. (@) Unless goodwill has been purchased, it should not been shown in the Balance Sheet. (©) The method of writing off goodwill should be studied ( Ifno arrangement has been made regarding writing off goodwill, then it should be shown in the Balance Sheet at the cost price (@) If the auditor has any suspicion about goodwill, he should clearly mention about this doubt in his report e) Plant and Machinery [19 H] [21 P] [Important for all]***** Usually the money spent on the acquisition of plant and machinery is shown in one account ie. Plant and Machinery Account. The auditor should check the balance sheet with the help of ledger accounts and ensure that the asset is clearly stated. The asset is to be verified and the entries relating thereto have to be vouched by reference to the original invoices, correspondence etc. (@) The auditor should examine the plant register in which particulars about the cost, records about sales provision for depreciation ete are available. (©) Ifa part of the asset has been purchased during the year, the purchase should be vouched by reference to the invoice to the relevant vouchers. (©) Ifa part of the asset is sold out, it should be seen that the necessary entries have been passed at proper places. Profit or Loss arising out of the sales hus been duly recorded. (@) To see the mortgage or charge on the asset, the auditor should look to the details given in the plant register. (©) Plant and Machinery is to be valued at its going concern value. It should be shown in the Balance Sheet at cost less depreciation. (Depreciation is deducted from cost and repairs and renewals are charged to revenue account (g) This is the usual practice but if revaluation method is adopted for its valuation the auditor should examine the valuation sheet. (f) Investments [19 P] [20 H] [21 P] [22 Hons] (imp for Pass)** ‘A company may utilize its surplus resources in investments. The major task of the auditor is to verify the existence of such investments and to ensure that they are shown in the Balance Sheet at the correct value. The process of verification and valuation of investments include the following consideration by the auditor, (a) The company should maintain a schedule of investments showing the name of the investments, date of acquisition of securities, their face value, cost price, book value, paid up value, market value, rate of interest, tax deductions ete at the date of the balance sheet. ‘The lists of investments should be tallied with the Investment Account. (b) He should examine the authority and related procedure for making purchase of such investments Every sale and purchase of investments should be sanetioned by a competent authority. (© The payment of purchase price of investments should be examined with the help of related Receipts and Investments Accomnt, The value of the investments at the date of purchase can be obtained fiom the share market. (@) The examination of value or cost of investment can be examined with the letters in the name of the broker and the allotment papers of shares and debentures (©) He should ensure that the investments actually exist with the firm or the company, If investments have been given away as seourity, the certificate regarding this should be obtained by the other party Investments with fixed nature should be shown at cost price and ewrent investments at cost or market price, whichever is less. (® Proper vouching is done for entries in the cash book or bank pass book in respeet of securities sold during the year. Total amount of investments shown in the Balance Sheet consisting of

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