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Auditing Final Suggestions 2023 by GKJ
Auditing Final Suggestions 2023 by GKJ
SUGGESTIONS
SOLUTIONS
2023 EXAM
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B. Com. (Semester – V)
Auditing Suggested Questions With Answer key for CU Exam, 2023
Group A (5X3=15)
Group B (10X5=50)
Group C (15X1=15)
2. What special steps are involved in conducting the audit of an Educational Institution? (Pg:-28)
4. What steps will you take in conducting the audit of a Hospital? (Pg:-35)
f) The auditor is liable for negligence under the Common Law and for misfeasance under the
relevant statute governing the audit.
Non-statutory Audit:
a. It is voluntary.
f. The auditor is liable for negligence only under the Common Law.
and legality of expenditures, verifying that resources are used for their intended purposes. Propriety
audits help organizations maintain compliance, prevent misuse of funds, and ensure responsible
financial management.
Ans:- Standards on Auditing (SA) are a set of guidelines and procedures established by professional
accounting bodies to govern the conduct of audits. These standards provide a framework for auditors,
ensuring consistency, reliability, and quality in the audit process. SAs cover various aspects, including
planning, risk assessment, evidence gathering, and reporting. Adherence to these standards enhances
the credibility of financial statements, promotes transparency, and helps maintain the integrity of the
audit profession.
16. Discuss the advantages of conducting an audit according to a predetermined audit programme.
Ans:- Conducting an audit according to a predetermined audit program offers several advantages:
17. What do you mean by audit notebook? Discuss the contents of audit notebook. (Pg:-23)
Ans:- Audit evidence is crucial in the audit process as it serves several vital purposes:
a) **Basis for Conclusions:** Audit evidence forms the foundation for auditors’
conclusions and opinions on financial statements. It provides the support and
rationale for the auditor’s assessment of whether the financial information is
presented fairly and in accordance with relevant accounting standards.
b) **Objectivity and Independence:** Audit evidence is an objective source that lends
credibility to the auditor’s findings. It is independent verification of the assertions
made in the financial statements, enhancing the reliability of the audit process.
c) **Risk Assessment:** Evidence helps auditors assess and respond to risks effectively.
By gathering relevant and sufficient audit evidence, auditors can identify potential
misstatements and assess the risk of material error or fraud in financial reporting.
d) **Professional Judgment:** Auditors use their professional judgment to evaluate the
sufficiency and appropriateness of audit evidence. The quality of evidence influences
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the auditor’s ability to draw reliable conclusions and make informed judgments about
the financial statements.
e) **Legal and Regulatory Compliance:** Audit evidence is essential for demonstrating
compliance with auditing standards, legal requirements, and regulatory frameworks. It
provides a documented trail that can be reviewed and scrutinized by relevant
authorities.
f) **Verification of Transactions:** Audit evidence is used to verify the occurrence,
accuracy, and completeness of transactions. This verification is critical in ensuring the
reliability of financial information and detecting any material misstatements.
g) **Informed Decision-Making:** Reliable audit evidence contributes to informed
decision-making by stakeholders. Users of financial statements, including investors,
creditors, and management, rely on audited financial information to make well-
informed decisions about the entity.
h) **Professional Skepticism:** Audit evidence is integral to the application of
professional skepticism by auditors. It encourages a questioning and critical mindset,
ensuring that auditors do not solely rely on management representations but seek
independent and corroborative evidence.
21. What are the various procedures of obtaining audit evidence? (Pg:-24)
22. State the provisions of the Companies Act, 2013 regarding appointment of a company auditor.
(pg:-61)
23. State the circumstances when an auditor of a company may be appointed by:- (i) Board of
Directors (ii) Members of the company, and (iii) Central Government.
- **Routine Audits:** The Board of Directors may appoint an auditor for routine annual audits as
required by corporate governance practices. This is a common practice to ensure regular financial
scrutiny and compliance with regulatory requirements.
- **Interim Audits:** In situations where the Board identifies the need for an interim audit, such as
during a change in management or significant organizational changes, they may appoint an auditor to
assess the financial position before the scheduled annual audit.
- **Annual General Meeting (AGM):** Shareholders, in the Annual General Meeting (AGM), have the
authority to appoint the auditor for the upcoming financial year. This is typically based on the
recommendation of the Board of Directors or the Audit Committee.
- **Extraordinary General Meeting (EGM):** In certain situations, such as the removal of an existing
auditor before the completion of their term, shareholders may appoint a new auditor through an
Extraordinary General Meeting.
- **Special Circumstances:** The Central Government may appoint or authorize the appointment of
an auditor in special circumstances, particularly when there are concerns about the company's
operations, financial stability, or compliance with legal requirements.
- **Public Interest:** When the public interest is at stake, and there are indications of financial
irregularities, the Central Government may exercise its authority to appoint an auditor to safeguard
the interests of stakeholders and ensure transparency.
These appointments are often governed by company law, regulations, and guidelines that define the
roles and responsibilities of auditors in different circumstances. The choice of appointing authority
depends on the nature of the audit and the reasons for initiating it.
24. State the provisions of the Companies Act, 2013 regarding removal of a company auditor. (Pg:-62)
Ans:- Internal audit plays a vital role in the day to day operations and functioning of the company.
Companies Act, 2013 and its rule thereof have prescribed many companies who are mandatorily
required to adopt internal audit system.
Applicability of Internal audit under the Companies Act, 2013 Provisions of section 138 of the
Companies Act, 2013 read with rule 13 of the Companies (Accounts) Rules, 2014 prescribes the
internal audit in specified companies. Accordingly, the following companies are required to undertake
internal audit –
a) All types of listed companies that are registered should follow the applicability of internal
audit.
b) Every unlisted public company that has an annual turnover of 200 crore rupees or more than
200 crore rupees should follow the applicability of an internal audit.
c) Every unlisted public company that has paid a share amount of 50 crore rupees or more than
50 crore rupees should follow the applicability of an internal audit.
d) Every unlisted public company that has an outstanding deposit of 25 crore rupees or more
than 25 crore rupees at any time should follow the applicability of an internal audit.
e) Every unlisted public company that has received alone of hundred crore rupees or more than
100 crore rupees from many banks or public financial institutions at any point in time should
follow the applicability of an internal audit.
f) Every private company that has an annual turnover of 200 crore rupees or more than 200 crore
rupees should follow the applicability of an internal audit.
g) Every private company that has received alone of hundred crore rupees or more than 100
crore rupees from many banks or public financial institutions at any point in time should
follow the applicability of internal audit.
26. State with references to the relevant SA to what extent should a statutory auditors rely upon
internal audit?
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Ans:- The extent to which a statutory auditor should rely upon the internal auditor is guided by
professional standards and considerations related to competence, objectivity, and the specific
circumstances of the audit engagement.
a) 1. **Assessment of Internal Audit Function:** - The statutory auditor should assess the
competence and objectivity of the internal audit function. This involves evaluating factors such
as qualifications, experience, and organizational independence.
b) 2. **Understanding Internal Audit Work:** - The statutory auditor should have a clear
understanding of the nature, scope, and objectives of the internal audit function’s work. This
understanding helps in determining the relevance and reliability of internal audit findings.
c) 3. **Coordination and Communication:** - Effective communication and coordination
between the statutory auditor and the internal audit function are essential. This ensures that
the statutory auditor is aware of the internal audit’s scope, findings, and any issues identified
during the internal audit process.
d) 4. **Extent of Reliance:** - The statutory auditor may choose to rely on the work of the
internal auditor to varying degrees based on the assessed competence and objectivity of the
internal audit function. While reliance is permissible, the statutory auditor should not solely
rely on the internal auditor’s work. Independent procedures and testing should be performed
to obtain sufficient and appropriate audit evidence.
e) 5. **Additional Testing and Procedures:** - Even when relying on the internal auditor’s work,
the statutory auditor may perform additional testing and procedures. This ensures a
comprehensive and independent audit process and helps address any limitations or risks
associated with the internal audit work.
f) 6. **Nature of Internal Audit Findings:** - The statutory auditor should evaluate the nature
and significance of the internal audit findings. If internal audit identifies areas of potential risk
or concern, the statutory auditor may adjust their audit approach accordingly.
g) 7. **Documentation:** - Proper documentation of the statutory auditor’s reliance on internal
audit work is essential. This documentation should outline the procedures performed, the
extent of reliance, and any additional testing conducted.
h) 8. **Regulatory and Professional Standards:** - The statutory auditor should adhere to
relevant regulatory requirements and professional auditing standards governing the use of
internal audit work.
27. “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.
Ans:- The statement “In a good system of internal check, the work of one is checked indirectly by the
work of another” emphasizes the importance of incorporating checks and balances within an
organization’s internal control system. This approach helps ensure accuracy, reliability, and integrity in
financial and operational processes. Let’s explore and discuss this concept with examples:
a. **Separation of Duties:**
i. **Example:** In the finance department, the responsibility for approving
invoices and the authority to make payments should be segregated. The
employee who approves an invoice should not be the same person authorized
to process the payment. This separation ensures that one person’s work
(approving invoices) is indirectly checked by another person’s work (processing
payments).
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By implementing these internal checks, organizations create layers of accountability and reduce the
risk of errors, fraud, and misstatements. The principle is to ensure that multiple individuals are
involved in critical processes, indirectly checking each other’s work, and thereby enhancing the overall
integrity of the organization’s operations.
29. How would you verify the following assets & liabilities:-
a) Goodwill (Pg:-55)
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30. State the qualification of a company auditor as per Companies Act, 2013. (Pg:-60)
31. Discuss the disqualification of a company auditor as per the Companies Act, 2013. (Pg:-60)
32. Explain the provisions of the Companies Act, 2013 for declaration and payment of dividend.
(Pg:-66)
35. Can dividend be paid out of current profit without making good past losses? (Pg:-70)
36. Can dividend be paid out of current profit without writing off fictitious assets? (Scanner pg:-55)
37. Can dividend be paid out of current revenue profit before writing of depreciation? (Pg:-69)
41. Discuss the significance of the term ‘True and Fair View' under the Companies Act, 2013. Discuss
how far auditor's duties have increased as it’s consequences? (Pg:-90 & 64)
Unit – 1
Concept, Need and Purpose of Audit
Introduction of Auditing:
The term Audit is derived from the Latin Word ‘Audire’ which means to hear.
In old days whenever proprietor suspected of any fraud or error. Certain people were appointed to
hear verbal evidence of transaction (Barter System).
Audit can be defined as the independent examination of the financial statement of the entity whether
profit oriented or not with a view to express the opinion whether they shows true or fair view or not.
The auditor should comply with the following basic principles while carrying out his audit assignment:
1. Integrity, Objectivity and Independence: The auditor should be straight forward, honest and
sincere in his work. He should have the ability to act with integrity and he should maintain
impartiality during his audit.
2. Confidentiality: During the course of his audit work, whatever information the auditor has
gathered should not be divulged to any third party without prior approval of his client, unless there
is a legal or professional duty to make such disclosure. He should maintain the confidentiality of the
information obtained during his audit work.
3. Skill and Competence: The auditor should perform his job with due professional care. The audit
work should be undertaken by a person with adequate training, experience and competence. He
should be aware of the legal provisions and the pronouncements of ICAI required in the course of
his audit.
4. Work performed by others: The auditor can rely on the work of others, but he shall continue to be
responsible for the opinion on the financial statements. Therefore, when the auditor is relying on
the work performed by others, he should exercise reasonable skill and care to satisfy himself that
the work performed by others is adequate for the purpose of his audit.
5. Documentation: The auditor should properly document all matters relating to his audit work. Such
documents are known as working papers of the auditor. The working papers are maintained to
demonstrate that the audit has been conducted by following the basic principles.
6. Planning: The auditor should plan his audit work in an effective and timely manner. The plan
should be made based on the knowledge of his clients business. If the circumstances so demand,
the plan should be further developed and revised.
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7. Audit Evidence: The auditor should obtain sufficient and adequate evidence through the
performance of the compliance and substantive procedures which will enable him to draw a
reasonable opinion on the financial statements.
8. Accounting system and internal control: The internal control system should ensure that the
accounting system is adequate and that all accounting information which should be recorded has
actually been recorded.
9. Audit conclusion and reporting: The auditor should review the conclusions draw from the audit
evidence obtained by him so that he can express an opinion on the financial statements impartially.
Objectives of Audit:
1. Primary Objective
• The primary objective of an auditor is reporting. The audit of financial statements, aims to
enable the auditor to form an opinion on such financial statements.
• The auditor should report whether the financial statements reflect true and fair view of the
state of affairs of the company.
• As per Section 129(1) of the Companies Act, 2013, the financial statements shall reflect a true
and fair view of the state of affairs of the company.
• According to Section 143(2) of the Companies Act, 2013, the auditor shall report to the
members of the company, whether to the best of his information and knowledge, the financial
statements examined by him are in conformity with the generally accepted accounting
principles and gives a true and fair view of the state of the company’s affairs as at the end of its
financial year as well as profit or loss and cash flow for the year.
• According to SA 200, Overall Objectives of the Independent Auditor and the Conduct of an
Audit in Accordance with Standards on Auditing issued by ICAI “the overall objectives of the
auditor are:
a) To obtain reasonable assurance about whether the financial statement as a whole are free
from material misstatement, whether due to fraud or error, thereby enabling the auditor to
express an opinion on whether the financial statements are prepared, in all material
respects, in accordance with an applicable financial reporting framework; and
b) To report on the financial statements, and communicate as required by the SAs, in
accordance with the auditor’s findings”.
2. Secondary Objective
• The auditor is expected to provide an opinion on the true and fair view of the financial
statements. He shall not be able to express such an opinion if there is a possibility of fraud and
error in the financial statements. Thus, the detection of misstatement becomes the secondary
objective of the audit.
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a) To identify and assess the risks of material misstatement in the financial statements due to
fraud;
b) To obtain sufficient appropriate audit evidence about the assessed risks of material
misstatement due to fraud, through designing and implementing appropriate responses;
and
c) To respond appropriately to identified or suspected fraud”.
• According to Section 143(12) to (15) of the Companies Act, 2013, the auditor should report to
the Central Government if he has reason to believe that a fraud is committed or likely to be
committed against the company by the officers of the company.
Limitations of Audit:
The audit process suffers from some inherent limitations which the auditor cannot avoid in spite of
planning his audit procedure with due care and diligence. According to SA 200, Overall Objectives of the
Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing, inherent
limitations of an audit means that ‘The auditor is not expected to, and cannot, reduce audit risk to zero
and cannot therefore obtain absolute assurance that the financial statements are free from material
misstatement due to fraud or error.’ The users of the financial statements should bear this in mind while
using the financial statements. The following are the inherent limitations of audit:
1. Exercise judgement: the nature and extent of the audit procedure to be performed depends on the
judgement of the auditor. The financial statements are prepared based on reasonable estimates
made by the management on which the auditor needs to exercise his judgement. Thus the
conclusions made by the auditor are more subjective rather than conclusions arrived through any
scientific process.
2. Inconclusive audit evidence: The auditor has to obtain evidence for the transactions through proper
verification. Mostly, the evidence which the auditor gathers is more persuasive rather than
conclusive. As a result, the auditor can draw only reasonable conclusion based on such evidence.
3. Time constraint: The auditor is generally required to conduct the audit within limited time. Thus,
the auditor is always under pressure to complete the assignment within the limited time.
4. Nature and audit procedure: It is almost impossible for the auditor to check and every transaction
due to the time limitation and the cost involved in such process. As a result, with the audit evidence
obtained by the auditor it may not be possible to detect intentional misstatement. So there is
always a chance that frauds and errors might remain undetected even after audit.
5. Conceptual restriction: In audit the main thrust is on audit procedure and technique rather than
development of a sound theoretical framework which can substantiate the audit process.
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6. Post-mortem examination: Auditing is a post mortem activity since the audit is undertaken only
after the close of the accounting year. Therefore, the auditor cannot prevent any fraud and error.
His job is restricted only to detection of fraud and error.
Classification of Audit:
Types of Audit
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audit.
• It helps the auditor in documenting his work.
• It acts as a guide for the auditor in every stage of his audit.
• The confidence of the public in the audit work will increase.
• It helps in the reduction in audit risk.
• Auditing Standards are mandatory to be followed by practitioners under the direction issued by
the council of ICAI.
• If the SAs are not complied while performing the Assurance Engagement, the chartered
accountant shall be held guilty of Professional Misconduct under Schedule-II of CA-Act, 1949.
• As per the Section 143(9) of Companies Act, 2013, every auditor is required to comply with the
auditing standards.
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Accountancy
Accountancy begins where book-keeping ends." It means that an accountant comes into the picture only
whenthe book keeper has done his job. The functions of accountant can be classified as under :
(i) Checking the work of book-keeper.
(ii) Preparation of trial balance,
(iii) Preparation of Trading and Profit and loss Account.
(iv) Preparation of balance sheet,
(v) Passing entries for rectification of errors and making adjustments.
An accountant is supposed to be an expert in the accounting procedures as he has to examine analytically
the final accounts. But it is not necessary for him to pass the chartered Accountant's examination. He it's
not supposed to submit his report after the completion of work.
Auditing
It is said, "where accountancy ends, auditing begins." It is slightly said. An auditor has to verify the
entries passed by the accountant and the final accounts prepared by him. Thus, auditing is the checking of
the accountsof a business with the help of vouchers, documents and the information given to him and the
explanations submitted to him. An auditor has to satisfy himself after due verification and complete.
Checking of accounts as to whether the transactions entered into the books are accurate. An auditor is
required to submit his report to theeffect whether or not the balance sheet is a true and fair representation
of the existing state of affairs of a business concern.
Thus, an auditor should have the proper knowledge of accounting principles. That is why he should be a
chartered Accountant. He has to express his impartial opinion in his report which he can not give unless
he satisfies himself completely with the proper recording of transactions. Thus, auditing is based on
accountancy and not accountancy on auditing. An auditor must be well familiar with the principles and
practical aspects ofaccountancy but it is not necessary for an accountant to be an expert in the audit work.
The following table makes the distinction clear among book-keeping accountancy and Auditing.
(a) Book-keeping :
(i) Journalizing.
(ii) Posting into Ledger.
(iii) Totaling of different accounts in the Ledger
(iv) Balancing,
(v) Checking the work of the Book-keeper.
(vi) Preparation of Trial Balance
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Accountancy
(i) Preparation of Trading & Profit & loss account
(ii) Preparation of Balance sheet, (Theoretical part)
(iii) Passing entries for rectification of errors and making adjustments,
Auditing
Checking the work done by the accountant. (Examination of Records) (the Analytical part)
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Accounting is a systematic process of recording, classifying and summarizing transactions and economic
events which affect the business. At the end of this process, accounting prepares financial
statements which should contain information useful to the management and other stakeholders for
decision making.
Auditing is concerned with verification of financial statements as prepared by the accountant and
thereby expressing opinion on their reliability and fairness. The auditor verifies the financial statements
with help ofrelevant documentary evidence and explanation and information given to him. So auditing
begins, where accounting ends. In other words, accounting is followed by auditing which confirms the
accuracy and fairness of the former. Unless auditing is carried out, the reliability of the financial
statements will not be ensured. Consequently, the management and other stakeholders will not find the
financial statements useful for decision making. So auditing and accounting are closely related although
they are district disciplines.
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concern.
(f) Knowledge in the An accountant may not necessarily An auditor, having no knowledge in
subject possess the knowledge of auditing. accountancy cannot perform his
func-tions of audit well.
(g) Ranking The work of accountancy has to be After the work of accountancy ends,
done at first. So, it is done before the the work of audit begins. So, without
work of audit begins. performing the work of accountancy,
auditing can not start.
(h) Time period of work The work of accountancy The work of audit may be done at the
continuesthroughout the year. end of financial year or continuously
throughout the year.
(i) Control For the work of accountancy there The work of audit is always regulated
is no scope for professional control by the rules and regulations of the
or regulation. association.
(j) Type of work The accountant takes the The auditor does not prepare
responsibility of the preparation of
account, but reviews and analyses the
accounts. As such, its work is
accounts prepared by accountant. As
constructive in nature such, his
work is analytical in nature.
(k) Submission of report The accountant after completion of The auditor after examining and
his preparation of account need not reviewing the accounts must have to
submit report to the owner or to sub- mit a report to the owner or to
management. management.
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(e) Case of necessity In case of large concerns and where Whatever may be the size of the concern
the number of transactions are and whatever may be the number of
numerous, the necessity of applying transactions,its necessity is felt everywhere.
the continuous
audit is felt.
(f) Relationship of the Under this system of audit, a close Under this system of audit, no close
auditor with the relationship is formed between the relationship is formed between the
concern auditor andthe firm auditor and the firm.
(g) Scope of expendi- This system involves much expenditure. This system does not involve much
ture : So, it cannot be applied to small expenditure and as such is applicable to
concerns. alltypes of concerns.
(h) Certification of Under this system, it requires less time Under this system, it required much time
accounts: toprepare and submit the report toprepare and submit report concerning
relating to the
the certification of final accounts. certification of final accounts.
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11. Distinguish between investigation & audit?
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7. Use of GAAP The auditor is required to ensure that The investigator does not bother
accounts have been prepared in about the compliance of generally
conformity with generally accepted accepted accounting principles. He
accounting practices and relevant is not concerned with whether
accounting standard. He is required to accounting policy of the company is
be well versed in accountancy and being followedor not. He may belong
generally to accounting
becomesa Chartered Accountant. profession orother profession.
8. Reporting The report of auditor is stereotyped and The report of the investigator is made
as per format prescribed by the in detail and refers to (a) the
Companies Act and SA700, ‗Forming an instructionsgiven to him; (b) method
Opinion and Reporting on Financial of approach followed by him; (c)
Statements‘. documents reliedupon; (d) his findings
and observations;
and (e) hisrecommendation to hisclient.
Meaning:
Standards on auditing refer to a set of systematic guidelines used by auditors while conducting audit of
company‘s accounts. These guidelines are generally prescribed by the professional bodies of
accountants based on collective deliberation and views of different segments of society and interested
groups such as regulators, industry and academies. These standards provide principles and techniques of
auditing which help the auditors ensure performing his duties most efficiently and effectively. They are a
set of ideas which serves as a framework for auditing.
Importance/Purpose:
The importance of standards of auditing can be summarized as below:
1. Guidance for audits: Standards on auditing provide high quality auditing standards and guidance for
financial statement audits and other types of assurance services. Thus, quality of audit is much improved.
2. Reducing audit risk: By rely on standards on auditing auditors can minimize the probability of missing
material information. So the extent of audit risk is reduced. The auditor can defend himself against
allegation of negligence by establishing that he has performed audit according to standards.
3. Prevention of scams and accounting scandals: The standards on auditing educate the professional
auditors about their role and responsibility in performing audit. So they always remain careful and
cautious while performing audit. This mindset of auditors goes a long way towards detection of scams
and accounting scandals.
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4. Public confidence in the auditing profession: As standards on auditing enhance the quality of audit, the
public confidence on audit profession which has been shattered due to recent wide spread scams and
accounting scandals, will be strengthened.
Reduction of investor’s risk: If there is any discrepancy between what the audit report states and the actual situation, it
will have a disastrous impact on the risk perception of the investors. The cost ofcapital will then rise and the firm
will find it difficult to raise finance. It is expected that standards on auditing can play a significant role in reducing the risk
perception of the investors as they can rely on audit conducted in a fair and uniform manner.
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Expenditure:
(i) The auditor understand the method of purchase made by the hotel. The payment made for
purchase of food, drink and other articles should be vouched with the help of original invoice, order
copy, receipts, counter foils and purchase book.
(ii) He should ensure that all expenditure heads have been properly classified and expenses incurred
during the year have been allocated between capital and revenue expenses.
(iii) Salaries, wages, perks, allowances, etc. paid to different categories of staff are to be verified
according to standard procedures.
(iv) The assets purchased during the accounting year should be properly vouched.
(v) If discounts are paid to guests or boarders the authority of granting discount should be checked
and to ensure that discounts are duly accounted for.
Other Considerations:
(i) There might be certain specifications conferred on star hotels like heritage hotel or ISO 9001
certified hotel etc. In many situations the statutory auditor needs to certify certain documents to
confirm such certification. The auditor should verify the prerequisites before certifying the required
documents.
(ii) The auditor should verify assets, liabilities and stock of the extent physically which are shown in the
balance sheet.
(iii) The auditor should ensure that adequate depreciation has been charged to the assets and stocks of
food articles, drinks etc. are properly valued.
Audit engagement
When a company has to go through the audit process, an auditor may use the term "audit engagement."
This can mean different things, so it is important that the auditor clarify what he means when he uses the
term. Regardless of which definition the auditor follows, however, the auditor always follows specific
procedures and guidelines for handling the engagement.
Accepted Definitions
An audit engagement very loosely refers to an audit that an auditor performs. More specifically, it refers
onlyto the initial stage of an audit during which the auditor notifies the client he has accepted the audit
work and clarifies his understanding of the audit's purpose and scope. Even more specifically, the term
audit engagement can refer to the written letter by which the auditor formally notifies the client he will
engage in audit services.
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Full Engagements
When referring to the audit as a whole, audit engagements encompass several distinct steps, which are
organized into planning, testing of controls, substantiation or fieldwork and exit or finalization.
The first is sending a letter to the client alerting him of the audit.
After this initial contact, the client and auditor meet to pinpoint further how, when and why the audit will
happen, as well as the resources the auditor will have at his disposal. The auditor then conducts primary
surveys to understand the company and the controls in place.
The next step is testing the controls and gathering as much information as possible. Based on the results,
the auditor constructs a draft of the formal audit report, which he shares with the client. Auditors
complete the audit by following up with the client, normally within six months.
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discharging his duties. Actually these papers come to the help of the auditor in future in case the client
files a suit against the auditor for negligence etc. it is also argues that the outgoing auditor should hand
over these papers to incoming auditor but he should not do so if there is some kind of suspicion or doubt
in his mind. In many cases, it was held that these papers belonged to the auditor and not to the client.
The File in which the auditor preserves audit papers is known as audit file. So it is the archive of audit
papers which are generated and obtained by the auditor in the cause of audit. To the auditor, the
importance of audit file is enormous. In the subsequent audit of the same client, he can use it as reference.
He can also use it as proof of defence, if any charge of negligence is levelled against him in future. For
the sake of convenience, the audit file should be classified into permanent audit file and current audit file.
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(g) Copies of communications with other auditors, experts and other third parties.
(h) Copies of letters or notes concerning audit matters communicated to or discussed with the client,
including the terms of the engagement and material weaknesses in relevant internal controls.
(i) Letters of representation or confirmation received from the client.
(j) Conclusions reached by the auditor concerning significant aspects of the audit, including the manner in
which exceptions and unusual matters, if any, disclosed by the auditor‘s procedures were resolved or
treated.
(k) Copies of the financial information being reported on and the related audit reports.
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he is trying to prove. In other words, he must be clear about the propositions in support of which evidence
is required. The accounting statements, which an auditor reviews, consist of a series of propositions. For
example one of the propositions in balance sheet is that the enterprise has fixed assets, debtors cash etc.
(b) Evaluation of Propositions After the propositions behind accounting data being identified they must be
evaluated according to their significance or materiality. In other words, various propositions may be
classified into those which are very significant, those which are moderately material, and those which are
not so material. Materiality is a relative concept and depends upon the size and nature of an item. It is
natural that an auditor must collect quantitatively more compelling evidence in case of significant
propositions, than in case of propositions which are not so material. Therefore, there is a direct link
between the materiality of a proposition and the quality of evidence required to support it.
(c) Collection of Evidence By applying various audit techniques an auditor collects different types of
evidence to support the propositions made in the accounting data. The audit programme lists the manner
in which such evidence is to be collected within the constraints of time and cost.
(d) Evaluation of Audit Evidence After the evidence being collected the auditor must evaluate it critically
with regard to its usefulness. Auditor, like historians and mathematicians must develop professional
standards to such an extent that they can be used to evaluate audit evidence.
(e) Formation of judgement: The last steps is to form an opinion about the various propositions by the
auditor after he has identified the propositions behind the accounting data, evaluated them according to
their significance, collected evidence through the audit techniques, critically reviewed the evidence as
regards, it validity. In forming his judgemnt the auditor is not looking for absolute proof. He has to find
evidence which assures that the accounting data under report fairly represent the reality as far as it can be
determined.
The checking of books which are carried on by the auditor as a matter of routine work is known as routine
checking. In other words, the work performed by auditor in order to see whether the transactions recorded
in the books of account are proper and whether scientific method has been followed in recording the
transactions, is called the routine checking.
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viii. To see that whether all balances have been transferred to appropriate column in the trial balance.
ix. To check whether balances of all nominal accounts have been transferred to Income Statements.
x. To see whether balances of all real and personal accounts have been properly recorded in the
respective site of Balance Sheet.
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TEST CHECKING
Test checking refers to the process of selection and examination of a few sample transaction out of large
number of similar transaction. It is presumed that selected transaction represent other transaction not
considered for verification. It is selective verification of transaction. An auditor can form his opinion on
financial statement by conducting verification of either cent percent transaction or only a few
representative transactions from each category. However, his opinion is unlikely to differ even if he
verifies only a few transactions provided his selection of transaction is judicious and rational.
As per SA 530 ―Audit Sampling‖, the auditor should select sample item in such a way that the sample
can beexpected 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.
Precautionary measures before the application of test checking
As the adoption of test checking is fully dependent on the judgement of the auditor, he should be very
carefulin this respect. The following are the precautionary measures to be taken by the auditor before he
applies test checking for audit.
(a) Covering every book of prime entry: Representative transactions should be so selected as far
as possible, as to cover the whole of the period under audit. It should cover every book of
prime entry and ledger.
(a) Clerks of organisation checked: The selection of transactions should be distributed in such a way that
the work of almost all the clerks of the organisation is checked.
(b) Reviewing the internal control system etc: The auditor must review the system of internal check,
internal control and internal audit thoroughly. If he views that the prevalent internal control system is
either defective or ineffective, he should not apply it.
(c) Items be representative: The selection of the items should be made at random and should be as far as
possible be representative in character.
(d) No element of biasness: There should be no element of biasness or arbitrariness in the selection of
sample.
(e) Number of transactions pre-determined: The number of transactions to be selected for each test
check should be pre-determined.
(f) Transactions selected to be large number: The transactions selected for test checking must include a
fairly large number of transactions for the period.
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(g) Entries for first and last months be checked: The entries pertaining to the first and the last months of
the year should be thoroughly checked as fraudulent manipulations are usually made during these
months.
(h) Test checking not to be applied for Cash Book and Pass Book: Test checking should not be applied
for Cash Book and Pass Book which are to be thoroughly checked.
(i) Review the results of test checking: The auditor must always review the results of test checking for
determining whether there is any further scope of checking records. The nature of errors detected
throughout test checks may reveal this if they are reviewed carefully and thoroughly.
(j) Checking the different portions of the work: In case of selection of entries and accounts for applying
test checks, proper care should be taken to check the different portions of the work at each audit
(k) No consultation with the staff of the client: No consultation should be made with the staff of the
clientas regards the selection of transactions for test checking. This is absolutely his job and is to be
treated with utmost secrecy.
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Advantages:
Following are the advantages of audit in depth:
i. Effectiveness of audit: Audit in depth makes the audit more effective. In fact in depth review of some
representative transactions provides the auditor with better audit evidences than superficial
examination of all transactions.
ii. Timely completion of Audit: It is possible to complete audit very quickly.
iii. Reduction of cost of Audit: Cost of Audit can be reduced as only a few representative transactions of
each category are thoroughly checked.
iv. Avoidance of monotony: The audit staff do not feel monotonous as they are to check only
representative transactions of varied nature.
v. Creating moral pressure: There is moral pressure on accounts clerk, in as much as any transaction may
be selected for in depth study.
vi. Assessment of propriety: This technique is very suitable for propriety study with regard to transaction
of material importance.
vii. Fair assessment of Position: Since only items of material importance are selected for verification,
there is least possibility off any error on the part of auditor in assessing position of the company.
viii. Scope of development: Since audit in depth is conducted analytically, the auditor finds scope to
develop new thoughts and techniques for future improvement of audit.
Disadvantages:
Following are the disadvantages of audit in depth:
i. Risk: The auditor cannot avoid risk since all transactions are not considered for in-depth
examination.
ii. Chance of improper selection of Transactions: This technique will not be very effective, if the
transactions are not properly selected for verification.
iii. Inappropriate audit opinion: If some errors and frauds remain in transaction not selected for
examination, the financial statement will not reflect a true and fair view. So, there will be
inappropriate audit opinion.
iv. Chance of Brand: Since only items of material importance are selected, the accounts clerk may
become prone to commit fraud in less important transactions the cumulative effect of which may
be enormous.
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preparation.
3. Development of expected values: The auditor shall develop an expectation of recorded amounts
ofratios. For developing expectation of recorded values, the auditor should consider the following:
i. The degree of accuracy with which the expected results of substantive analytical
procedures can be predicted. For example, the auditor may expect greater consistency in
comparing gross profit ratio from one year to another than discretionary expenses like
travelling or advertisement.
ii. The degree of which information can be disaggregated. For example, substantive analytical
procedure is more effective when applied to segment information than composite
information.
iii. The availability of the information both financial and non-financial. For example, if financial
information such as budgets and non-financial information such as number of units
produced or sold is available, analytical procedure for substantive testing can be effectively
designed.
4. Necessity of further investigation: The auditor will determine whether the difference between
recorded amounts and expected values is material enough to warrant further investigation.
Educational institutions like school, colleges are usually run under the Societies Registration Act, 1960 or
Public Trust Act of the state, if any. The audit of accounts of an educational institution is carried out
according to the provisions of the Regulation or Trust Deed or the Act governing the concerned
educationalinstitution. The audit process of an education comprises of the following aspects:
A. Preliminary Matters
1. Study the Trust Deed or Regulations in the case of school or college and note all the provisions
concerning the accounts of the institution. In case of a university, the Act of Legislature and the
Regulation framed there under should be carefully studied.
2. Evaluate the internal control system involving maintenance of records and documents,
safeguarding of assets, acquisition of assets, authorization of transactions, segregation and rotation
of duties etc.
3. Go through the minutes of the meetings of the managing committee or governing body and note
down resolutions concerning accounts. See that they have been duly complied with.
B. Income
1. Check names entered in the Student’s Fee Register with respective class registers and verify that
there operates a system of internal check ensuring that defaulting students are identified and
served with notice in time.
2. Check fees received by comparing counterfoils of fees book with the collection recorded in the Fee
Register and trace the entries in the Cash book to confirm that revenue under this head has been
properly accounted for.
3. Examine whether all concessations have been granted as per rules.
4. See that arrear fees which are irrecoverable have been written off under the sanction of
appropriate authority.
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5. Check admission fees with the admission forms duly signed by the head of the institution or other
authorized person and see that the amount has been credited to Capital Fund unless the other
decision is taken in this regard by the Managing Committee or Governing Body.
6. Confirm that late fines have been either collected or waived under proper authority.
7. If the Institute is having hostel facility, then examine the statement reconciling the total hostel
charges recoverable with the amounts actually received.
8. Verify receipts of rent for premises let out by the institute with reference to copies of agreements
with the relevant parties.
9. Examine the entries in the cash book in respect of donations and legacies with reference to the
counterfoils of receipts issued to doners.
10. Verify interest and dividends received during the year with reference to the securities in which
investments have been made.
11. Verify the grants received with reference to the sanction letters and examine whether conditions
specified therein have been duly complied with.
C. Expenditure
1. Examine whether salaries and allowances paid are as per the terms and conditions of appointment
of each category of staff.
2. Check the computation of gross salary payable and deduction in respect of provident fund, income
tax etc. See that income tax and provident fund deducted from salaries have been deposited with
the authorities in time.
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 confirming that established norms 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.
7. Examine the payments on account of expenditure on hostel facilities including those on repairs,
maintenance, electricity, water charges etc. 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 cash book, minutes of the Governing Body and utilization
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 from investment has been duly
claimedsince the institutions are generally exempted from payment of income tax.
6. See all the liabilities in respect of purchase of assets, maintenance expenses, food grains and
provisions have been duly provided.
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E. 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 etc.
A college hostel provides boarding and lodging facilities to the students of college. It is run by the college
authority on no profit no loss or subsidised basis. Generally a cash book is maintained to record daily
receipts and disbursement of cash. At the end of the year a Receipts and Payments statement is prepared
and in case of a big hostel an Income and Expenditure Account is also prepared to know the results of
operation. The programme of auditing the accounts of big College hostel will cover following special
points..
1. Study the rules and regulations of hostel.
2. Check the number of seats in the hostel and verify whether only eligible students are. accommodated
in the hostel.
3. Vouch the receipt of hostel fees with the register of students.
4. See whether arrear hostel fees have been properly recorded and reflected in Income and Expenditure
Account.
5. See that advance hostel fees have been properly recorded and reflected in accounts.
6. Check that suitable action is taken against students who are regular defaulter in payment of hostel fees.
7. Check the system of internal control for procurement of foodstuff. If it is procured through contractor,
see that selection procedure is appropriate.
8. Vouch the payment against contractor's invoices. See that bill is duly certified by the storekeeper and
hostel superintendent.
9. Check the stock register of various main items of foodstuff like rice, wheat, mustard oil etc. See that
all entries of issue are supported by stores requisition duly signed by head cook and authorised by
hostel superintendent.
10. Vouch the petty expenses and see all vouchers are duly sanctioned by hostel superintendent.
11. Check the asset register and see whether there is any discrepency in physical verification.
12. See that adequate depreciation is being provided on all items of assets in the Income and expenditure
Account,
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A medical College is run with the twin objectives of imparting medical education and rendering medical
services to general public. It is generally established by the Government and run with budget allocation
out of Government exchequer. Now a day, however, Corporate bodies are also coming forward to
establish Medical College with the main object of earning profit. Whatever may be the nature of Medical
College, the auditor must consider the following points:
1. The rules, regulations and bye-laws of institution should be studied by the auditor to acquaint himself
with its functioning.
2. The internal control system for procurement of food, medicine etc. and their issue should be studied to
determine its adequacy or otherwise.
3. The minute book containing resolutions of Governing Body should be studied.
4. The system of procurement of assets, medical equipment and other accessories should be studied and it
should be examined whether the system as prescribed is being duly complied with.
5. See that proper stock register is maintained and issue of medicine is based on requisition duly
approved by doctor. He should physically verify the stock of some high value medicine to compare the
same with book balance.
6. Monthly fee from students should be vouched from fee register and carbon copies of receipt issued. If
fee collection is entrusted with a bank, the same should be confirmed from bank statement. He should
note that —
(a) Fees received in advance is duly carried forward.
(b) Outstanding fees have been duly adjusted.
(c) Fee other than tution fee have been duly credited to respective heads.
7. Income from endowment if any should be vouched separately and the auditor will see that income is
used for the purpose for which the endowment is made.
8. Check the charges and collection received from patients with Register of patients, copies of bills and
cash book.
9. Check donation from public if any and see it is used for the purpose for which it is received.
10. Vouch the payment of salaries in usual manner.
11. Grants from Governments, if any, should be properly verified. This should be classified as capital
grant, maintenance grant etc.
12. See that expenditure have been properly classified as revenue and capital and methods and rates of
depreciation on capital assets are reasonable.
13. Ensure that wage payment system is sound and there is no loophole for defalcation.
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.
16. Prepare an audit programme in respect of a Nursing
Home/Hospital.
A hospital is established with the objective of providing service to the society. There are some hospitals
which are run and funded by Government or Local Authority. They are usually non – profit seeking.
Hospitals established and run by private bodies are mostly profit seeking. Now a days many hospitals are
found to be running on the basis of public – private partnership. So, keeping in mind the nature of
hospital to be audited, 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 of meetings of Board of
Directors or the Managing Committee and note down resolutions concerning financial
matters such as acquisition of assets, engagement of staff, investment, fees, expansion of
facility for treatment etc.
4. Study of accounting system: The accounting system maintained should be studied and
audit procedure to be followed should be decided.
B. Receipts:
1. Vouching of collection from patients: The auditor should check the collection from
patients as entered in the cash book with reference to Patient Register, receipt counterfoils
and other evidences. The auditor will check the bill register to see whether all charges have
been computed correctly as per rate chart, period to stay of patient, category of bed,
medicine used, time taken by patient in the operation theatre, medical materials used etc.
2. Free bed facility: The auditor will see that free bed facility has been provided to deserving
patients as per rules and regulations.
3. Reimbursement from Insurance Company: The auditor will vouch the reimbursement of
medical expenses from the insurance company in case of cash less admission health
insurance. He will also vouch the collection from patient over the limit sanctioned by TPA
with reference 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.
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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.
C. 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.
D. Assets and liabilities:
1. Verification of cash and investment: The auditor will carry out physical verification of
cash and various investments as laid down in the investment register.
2. Verification of fixed assets: The auditor will conduct physical verification of fixed
assetsas shown in the assets register.
3. Depreciation: The auditor will see that depreciation at appropriate rate has been
written off against all fixed assets.
4. Examination of stock: He will see whether the stock of medicine, foodstuff and other
materials are properly maintained. He will ensure that any difference found in physical
verification from stock records has been properly adjusted.
5. Provisioning of liability: The auditor will ensure that all the liabilities in respect of
purchase of assets, medicines, maintenance expenses, foodgrains etc. have been duly
provided.
6. Verification of capital: Capital introduced during the year by partners or by
shareholders by way of subscribing shares should by checked based on various
documents like agreement, board’s meeting etc.
E. 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.
F. Submission of audit report:
At the end, the auditor will submit his report expressing opinion about the reliability
and fairness of financial statements.
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(C) Receipts:
In order to conduct audit of a hotel, an Auditor should study, verify and vouch books of accounts, keeping
in mind the different points of sale.
(a) Revenue from Room Rent
(b) Revenue from Food & Beverages (Restaurants)
(c) Revenue from Food & Beverages (Room Service)
(d) Food & Beverages Revenue from Minibar
(e) Revenue from Banquets
(f) Revenue from Business Centre
(g) Arcade Revenues
(h) Revenue from Car Hire
(i) Revenue from Telephone & Internet
(j) Revenue from Housekeeping
(k) Revenue from Laundry
(l) Revenue from Beauty Parlors and Health Clubs
(m) Revenue from Sale of Scrap and Disposal of Empties
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(b) He should verify all purchases through requisition slip, quotations, purchase order, inward register,
quality control verification record and stock ledger.
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4. Review of compliance with laws and regulations: The internal auditor may be assigned to review
compliance with laws, regulations and other external and internal requirements.
5. Functions relating to Risk Management: The internal auditor may assist the concern by identifying
and evaluating significant exposure to risk. The internal auditor may help the management to
improve its risk management and control system.
6. Governance: The internal auditor may evaluate the governance process in fulfillment of the entity’s
objectives on ethics and values, performance management and accountability, communicating risk
and control information to appropriate areas of the organization and effectiveness of
communication amongst those charged with governance.
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of related internal controls. Therefore, this risk is assessed by understanding the entity and is the driver
behind much of the work performed at the acceptance and planning stages of the audit.
To effectively complete an audit, the auditor must thoroughly understand the entity that they are to give
an opinion on. This understanding will allow for the inherent risks to be identified, which means the
auditor canfocus their attention towards areas more likely to contain errors.
Control Risk
This is the risk that the entity‘s controls will not prevent / detect and correct a material misstatement in
the financial statements on a timely basis.
In order to assess this risk, the auditor must understand the key business processes in place at the client
and whether the controls over these processes are designed effectively, as well as assessing the overall
control systems at the entity.
The auditor can then test the controls to assess whether they have operated effectively during the year,
and therefore, will reduce the likelihood of a misstatement occurring in the financial statements.
This work will be completed after the planning work, as part of the systems and controls analysis stage of
theaudit.
Detection Risk
Detection risk is the risk that the auditor‘s procedures will not detect a material misstatement that exists
inthe financial statements. It is the only risk that can be controlled by the auditor as it will depend on the
level of procedures performed by the auditor.
The level of detection risk will depend on the inherent risk and control risk that the auditor has already assessed, and it
will drive the amount of work that is performed at the substantive testing stage of the audit.
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3. Existence Internal control system exists in all To carry out internal audit, a separate
the departments of the department is formed. The internal
organization. All the employees of auditor who heads this department is
each department are responsible responsible for continuous and
for proper implementation of independent review of books of
internal control system. accounts and appraisal and
evaluation
of effectiveness of other controls.
4. Responsibility To implement the internal control is To carry out internal audit is the
the responsibility of the responsibility of the internal auditor
management staff who work who works independently.
according to established policies
and procedures.
5. Nature Internal control system runs It does not work automatically. It is
automatically and concurrently with undertaken after the transactions take
the execution of transactions. place.
6. Reporting system It involves regular reporting of daily The internal audit reports about the
transactions and operations of the operational efficiency and reliability of
department to the departmental financial records and reports are
manager. sent
to the top management.
Internal Check
Internal check is a method of organising the accounts system of a business concern 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 thus the possibility of fraud, or error or irregularity is minimised unless there is
collusion betweenthe clerks. For example, the receipt of cash is entered by the cashier on the debit side
of the cash book; thisentry is carried to the ledger by another clerk; the statement of account relating to
this transaction is sent to thecustomer by a 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. It is a kind of
division of labour. This minimises the possibilities of frauds and errors unless all the three join hands in
defrauding their employer.
According to the special committee on Terminology, American Institute of Accountants, 1949 "Internal check-
a system under which the accounting methods and details of an establishment are so laid out that the
accounts procedures are not under the absolute and independent control of any person - that, on the
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contrary, the work of one employee is complementary of that of another, and that a continuous audit of
the business is made by theemployees."
The essential elements of an internal check are :
(a) Instituting of checks on day-to-day transactions.
(b) These checks operate continuously as a part of routine system.
(c) Work of each person is 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.
Internal audit is an independent and continuous appraisal and review of accounting, financial and other
operations of the undertaking.
Internal check on the other hand is the division of work amongst various staff members in such a way that
workof one person is instantly and automatically checked by the work of other staffs. So, their difference can
be summarised as follows
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Points of Distinction Internalcheck System Internalaudit System
(i) Nature It is an inbuilt system and once It does not work automatically. It is
introduced it runs automatically and under taken after the transaction takes
con- currently with the execution of place.
transaction.
(ii) Function It is an arrangement of allocation of It is an independent and continuous
duties in such a way that work of one review of operations and records.
employee is automatically checked by
the work of another employee.
(iii) Results It prevents occurrence of errors and As it is undertaken after the work is
frauds or if they are committed, it can complete, it cannot prevent
detect them almost instantaneously. occurrenceof error or fraud..
(iv) Formation To run the internal check system, no To carry out internal audit, a separate
separate set of staff is required. It only department is formed. This
represents arrangement of duties among departmentconsists of people both of
staff. accounting and technical profession.
(v) Objective The objective of this system is Detection of errors and frauds is the
preventionand early detection of errors secondary objective of internal
and frauds. audit,Its thrust mainly is, on
operational efficiency.
(vi) Subjectmatter An internal check system is concerned It is concerned with the appraisal of
with carrying out work efficiently and work done and ascertaining the reli-
effectively. ability of records and reports.
(vii) Reportingsystem It involves regular reporting of daily The internal audit report about the
transactions of the department to the operational efficiency and reliability of
departmental manager. financial records and report are sent
to
the top management.
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h) Obtain a list of shares held as investment on the balance sheet date with particulars such as the
distinctive number, nominal value, book value, cost, quoted price, if any, and the year of
purchase.
2. Goodwill
a) When the company has acquired a running business and has paid for it an amount in excess of
the book-value of its net assets.
b) When the company has written up the values of its assets on a revaluation of the whole of its
assets and has raised a Goodwill Account in its books. Such cases would be rare.
c) When the goodwill acquired by a company that has been written off is later brought back in the
books to write off the debit balance in the Profit & Loss Account or a capital loss that the
company has subsequently incurred.
Vouching is the act of authenticating a transaction recorded in the books of accounts with reference to its
documentary evidence. It is the essence of auditing and in fact, the whole structure of auditing rests upon
it. It is not routine checking. In other words, it is not mere comparison of entries recorded in the books of
accounts with relevant vouchers. Rather, the auditor has to go beyond the books to substantiate propriety
of transactions. So, vouching requires intelligence and tactfulness on the part of the auditor. He will apply
professional skepticism i.e., alertness and judgement in his work. While conducting vouching, he will collect
evidence judiciously in support of transactions, evaluate credibility and truthfulness of evidence and then
form his judgement about the propriety of transactions.
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 account with documentary
evidencein support thereof”.
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Objectives of Vouching
The objectives of vouchingmay be discussed in the followingway:
(a) Correction of vouchers: The work of vouching involves correction of vouchers and related evidences.
(b) Evaluation of evidences and voucher: Its involves the evaluation of collected evidences and vouchers.
(c) Examination of vouchers: It is concerned with the examination of vouchers or documents in such a manner the
auditor maysatisfyhimself as to the authenticity and validity of the recording of transactions.
(d) Nothing unrecorded : It refers to finding out that nothing pertaining the business has been left unrecorded,
(e) Finding out the transactions recorded: It involves finding out whether entries relating to transactions have
been properly recorded in the books of account or not.
(f) Recording of transactions not concerned with: It refers to finding out that no transaction which is not
concerned with the business has been recorded in the books of account.
(g) Recording of transactions in the books: It is concerned with examining whether all the transactions relating to
the business have been recorded in the books and whether those transactions are pertaining to the period under
audit.
(h) Basis for final conclusion: It forms the basis for final conclusion to be drawn by the auditor.
This refers to the amount paid to directors for their services rendered to the company and for attending Board
meeting. While checking this term of expense, the auditor should have the following information:
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(d) Board's Resolution, Prospectus etc. to see that amount is within limit,
(e) Agreement with promoters to see the terms and conditions of reimbursement of expenses to them.
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existence and possession and the presence of any charge on the assets‖.
Verification is a process by which an auditor satisfies himself about the accuracy of the assets and
liabilities appearing in the Balance Sheet by inspection of the documentary evidence available.
Verification means proving the truth, or confirmation of the assets and liabilities appearing in the Balance
Sheet.
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6. Aspects under Review Vouchingverifies— For Assets: It involves enquiry into the
(i) Date of voucher; value, ownership, existence, charge
(ii) Existence of proper and proper disclosure in Financial
authorization of the Statements.
transactions; For Liabilities: To see whether they are
(iii) Supporting evidence truly owed by the entity and
i.e., Bill, challan, disclosedatcorrect amounts.
inspectionreport, etc.;
(iv) Propriety of
transactions;
(v) Completeness;
(vi) Properaccounting
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(b) Investment
Investment may be a share certificate, government bond certificate, government loan certificate, debenture
certificate, etc. For verification of such securities, the following procedure is adopted.
(a) Obtain a schedule of investments in hand at the beginning of the audit period. Obtain the details of
description of investments together with distinctive number of face value, date of purchase, book
value, market value, rate of interest, date of payment of interest or, date around which dividend is
declared, etc., with also the details of interest or dividend received along with tax deducted at source.
(b) Add to the above list, purchase made during the year and delete the investments sold during the year
with all the above details.
(c) Balance this schedule and compare the balance with general ledger and Balance sheet.
(d) Check the market value of investments with reference to stock exchange quotations or other suitable
method, on Balance Sheet date and see that the values are disclosed in the Balance sheet.
(e) Inspect the certificates or securities physically on the Balance Sheet date.
(f) Compare the income received with amount due and adjust the accrued income.
(g) Confirm the uncalled liability on partly paid shares held as investment shown as contingent liability by
way of a note to the Balance Sheet.
(h) See that adequate provision is made for any shortfall in the book value of investment shown in the
Balance Sheet.
(i) See that, regarding the investment in subsidiaries, disclosure requirement of the Companies Act, 2013
are complied with.
(j) For investment in the capital of partnership, the partnership deed and copy of accounts of partnership
firms, is to be verified. Also adjust the share of profit and loss for the partnership period.
(k) Investments which stand in the name of persons other than that of the company are to be confirmed
with appropriate sanction.
(l) For investment lodged with others as security or lying with banks or share brokers, obtain a certificate
from the parties concerned.
(m) In case of application money paid for shares which are still to be allotted, that fact is to be specially
disclosed in the Balance Sheet.
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(c) Debtors:
Sundry Debtors represents the amount recoverable from the customers for sale of goods or rendering of
services.
(a) The under mentioned procedure should be applied for verification of `Book Debts’ or `Sundry
Debtors’ after receiving a schedule or list of debtors from the client.
i. Direct confirmation of balances from debtors by sending confirmatory letters.
ii. Year-end Scrutiny of ledgers.
iii. Verification of the position of debts considered bad or doubt ful. (d) Compliance with
legal requirement or presentation.
(b) The auditor should arrange to send the letter of confirmation of balances by the client as per
client’s records and see that the reply of confirmation is forwarded to his office directly. Usually
this should be sent within 15 or 20 days of close of the year under the supervision of the audit staff.
After the reply is received, the same should be tallied with the balances shown in the Debtors
Ledger and difference properly reconciled.
(c) After the said procedure is carried out, he should carry out a thorough scrutiny of the debtor’s
individual accounts. Wherever the number of debtors is very large, Test Checks can be applied.
(d) While scrutinizing the ledger, the auditor should focus the light on discounts, returns, cash
received, rebates allowed, goods returned etc.
(e) On ascertaining the balances of the debtors as genuine and correct, the auditor has to verify the
debtors to find out bad or doubtful debts to make a provision for the same.
(f) After ascertaining the position of bad or doubtful debts, he should see that the legal requirements
of Schedule III to the Companies Act, 2013 are complied with. For this purpose, the debtors are to
be classified as : (a) Outstanding for a period of more than six months ; and (b) Other debts.
(g) Over and above this, other requirements like debts considered as good and which are fully secured,
debts due from the officers, directors, managers of the company, etc., are to be ascertained for
disclosure.
(h) If the customers have purchased the goods on hire purchase system and some of the instalments
are not due, the same is not to be shown as `stock out on hire purchase’.
(i) Likewise, if the goods are sold on `return or approval’ basis, such customer cannot be shown as a
debtor at the close of the year.
(j) Further, whenever there are credit balances in some debtors account, the same are not to be
deducted from other debtors debit balances and net balance is not to be shown in the assets side,
but former is to be shown as Sundry Creditors.
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one year is not valid unless it has been granted by a registered document.
(c) Ascertain those conditions, the failure of which might result in the forfeiture or cancellation of lease,
and see whether they have been properly complied with.
(d) See whether sub-lease is valid as per lease agreement, in case if it is granted, by referring to sub-
lease agreement.
(e) See that the premium paid and acquisition expenses of lease are being amortised (written off) over
the period of lease adopting a suitable basis.
(f) In case, any provision is to be made under the dilapidation clause for payment on the expiry of the
term of lease, see that the same is properly and continuously provided.
(g) In case of leasehold land, if any building is constructed by the lessee, see the position and ascertain
the correct method of presentation of such expenditure for disclosure in the Balance Sheet
(f) Goodwill:
The duty of an auditor regarding verification of goodwill is stated below:
(a) Whenever the company has purchased or acquired a running business and has paid for it an amount, in
excess of the book value of its net assets, the excess is called `Goodwill’. It can be verified from the
vendor’s agreement and the auditor has to see whether there is a specific sum which is paid or
whetherit is the excess of price paid over the tangible assets and see that it is properly recorded.
(b) When the company has written up the values of all its assets on a revaluation and has raised a Goodwill
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Account in the books, the Goodwill appears in the Balance Sheet. In this case, the auditor has to see
thebasis of valuation and get satisfied about the same. If he is not satisfied, the fact should be reported
to the shareholders.
(c) He has to see that such excess is credited to a Capital Reserve or Revaluation Reserve and no dividend
is being declared from it.
(d) He has also to see the disclosure requirement of Schedule VI and ensure that the fact are disclosed for
5 years subsequent to the date of revaluation.
(e) Sometimes, Goodwill which is written off earlier may be brought back in the books of account to adjust
the debit balance of Profit and Loss account. In this case, the auditor should investigate the fact and
satisfy in full before approving such method of creating Goodwill. He should also refer to the board
resolution. In case he is not satisfied, the fact should be reported to the shareholders.
(f) If Goodwill has been created by any other means, the auditor should see that all relevant facts are
properly disclosed and are supported by documentary evidence.
(h) Copyright:
(a) The auditor has to examine the written agreement of assignment along with the royalty paid to the
authors etc., for such copyrights.
(b) He has to see that such assignments are properly registered.
(c) If the client is the owner of many copyrights, the auditor should ask the client to prepare a schedule of
copyrights and get the detailed information to confirm that the same is shown in the Balance Sheet.
(d) Regarding the value of copyrights, it should be remembered that this asset has no value in the long run.
Hence, value is determined on revaluation basis and period of copyrights.
(e) If any copyrights does not command the sale of any books, then the same should be written off in such
year. The auditor has to verify the same in detail.
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(a) Special care is necessary with regard to verification of cash balances. There can be no certainty that the
cash produced for inspection was in fact held by the custodian.
(b) For this reason, the cash should be checked not only on the last day of the year, but also checked again
sometime after the close of the year without giving notice of the auditor‘s visit either to the client or to
his staff.
(c) If there is more than one figure for cash balance e.g. when there is a cashier, a petty cashier, a branch
cashier and in addition, there are imprest balance with employees, all of them should be checked
simultaneously, as far as practicable, so that the shortage in one balance is not made good by transfer of
amount from the other.
(d) It is desirable for the cashier to be present while cash is being counted and he should be made to sign
thestatement prepared, containing details and the cash balance counted. If he is absent at the time the
cashis being verified, he may subsequently refute the amount of actual cash on hand which may put the
auditor in an embarrassing position.
(e) If the auditor is unable to check balance on the date of the Balance Sheet, he should arrange with his
client for all the balance to be banked and where this cannot conveniently be done on the eve of the
close of the financial year, it should be deposited the following morning. The practice should also be
adopted in the case of balance at the factory, depot or branch where cash cannot be checked at close of
the year.
(f) Should this not be possible, the auditor should verify the receipts and payments of cash upto the date he
counts the cash. This should be done soon after the cash balances have been counted. The cash book of
the day on which the balance is verified should be signed by the auditor to indicate the stage at which
the cash balance was checked.
(g) If any cheques, or drafts are included in cash balance the total there of should be disclosed.
(h) If there is any rough Cash Book or detail of daily balance are separately kept, the auditor should test
entries from the rough Cash Book with those in the Cash Book, to prove that, entries in the Cash Book
are correct.
(i) If the auditor finds any slip, chit or I.O.U‘s in respect of temporary advances paid to the employees,
included as part of the cash balance, he should have them initialed by a responsible official and debited
to appropriate accounts.
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(g) If there are more than one bank account such as `Dividend Account‘. ―Interest Account‘ etc. all such
accounts should be checked and the balances should be verified upon the same date. Information
regarding their balance should also be obtained from the bank directly.
(h) If the bank account shows an adverse balance and the client has deposited any security for the overdraft,
the auditor should enquire from the bank the particulars of the security and the amount of the interest
charged.
iv. The loan agreement entered into between the client and borrower should be examined to
know whether terms and conditions are in the interest of the company.
v. The auditor will see whether there is fixed charge or floating charge on assets for taking
secured loan. In case of fixed charge, the particular asset placed as security for loan should be
clearly stated in the balance sheet.
vi. He will verify whether terms and conditions of taking loan have been duly complied with.
vii. The auditor will obtain certificate from lenders to confirm the validity of the amount of loan
standing on the balance sheet data and any outstanding interest thereon.
viii. He will see that secured loan has been properly disclosed in the balance sheet as per Schedule
III of the Companies Act, 2013.
(l) Creditors:
(a) The auditor should ask for a schedule of creditors and check the same with the purchase ledger as that is
already examined by him.
(b) He should ensure that all purchase made during the year especially at the end of the year are included in
the accounts of the creditors.
(c) In case of suspicion about any creditors, the auditor with the consent of the client can ask the statement
of account to be sent and verify the same by scrutinizing ledger accounts.
(d) He should see the various debits given for discount, goods returned etc, and confirm that the same are
genuine.
(e) The auditor should ask for the reason for not paying any overdue creditors.
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2. State the provisions of the companies act regarding the
appointment of an auditor? [Section 139]
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Appointing a new auditor in place of the retiring auditor as per companies act, 2013 [sec.140(4)] Section
140(4) of the Companies Act, 2013 has laid down following provisions for appointment of newauditor
in place of retiring auditor at an annual general meeting:
i. Special Notice: A special notice has to be given for a resolution at the annual general meeting
for appointing as auditor a person other than a retiring auditor or providing expressly that a
retiring auditor shall not be reappointed.
This provision is not obviously applicable where the retiring auditor has completed a
consecutive tenure of five years or ten years as the case may be.
ii. Intimation to auditor: On receipt of such notice, the company shall forthwith send a copy
thereof to the retiring auditor.
iii. Representation by the auditor: The retiring auditor proposed to be replaced by a new auditor
has right to make a representation to the company against his removal.
The representation shall be in writing with a reasonable length. He may request the
company to circulate the representation to the members of the company.
Removal of auditor by tribunal [sec.140 (5)]
i. Removal for Fraud: The Tribunal may, either suo motu or on an application made to it by the
Central Government or by any person concerned, directs the company to change its auditors
if it is convinced that the auditor has acted fraudulently.
ii. Appointment of New Auditor by Central Government: If the application is made by the
Central Government and the Tribunal makes an order removing the existing auditor for fraud,
the Central Government may appoint another auditor in his place.
iii. Liability of the Auditor being removed: An auditor, whether individual or firm, against whom
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final order has been passed by the Tribunal under this section, shall not be eligible not be
appointed as an auditor of any company for a period of five years from the date of passing of
the order and the auditor shall also be liable for action under section 447.
the branch auditor shall send a report on the account of the branch of the Company’s auditor who
shall deal with it in his report in such a manner as he considers fit.
4. Right to receive notices and to attend General Meeting: Section 146 of the Act, 2013 has given right
to the auditor to have notice of and to attend every general meeting. He has also right to be heard
in the meeting on matters concerning himself.
5. Right to have audit report read at AGM: As per section 143 of 2013 Act, the auditor has the right to
have the audit report read before the company in the General Meeting and the same shall be open
to inspection by any member of the company.
6. Right to be indemnified: The auditor has right to be indemnified for any expenses incurred by him in
defending himself while the Court’s judgement goes.
7. Right to take legal and technical advice: According to judgement in London and General Bank
(1895) case, an auditor can take legal, expert or technical advice while conducting audit. However,
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Duties of An Auditor
According to Companies act, 2013, the duties of an auditor may be described as below:
1. Duty to make report on financial statements: According to Sec. 143(2) of the Companies Act,
2013 the statutory auditor is required to submit a report on the accounts audited by him to the
shareholders of the company. It is to be noted that he might have been appointed by directors.
But he is always required to submit his report to shareholders and not to the directors.
2. Duty to make enquiry: The auditor shall also inquire, under section 143(1), into various matters
such as:
i. Whether loans and advances made by the company are properly secured and whether
the terms of loans and advances are against the interest of the company.
ii. Whether the transactions which are merely represented by book entries are prejudicial
to the interest of the company.
iii. Whether shares, debentures and other securities have been sold of a price less than cost
price.
iv. Whether personal expenses have been charged to the revenue A/c.
v. Whether loans and advances made by the company have been shown as deposits.
vi. Whether cash has actually been received in respect of shares allotted for cash as stated
in the books and if no cash has actually been so received, whether the position as stated
in the account books and balance sheet is correct, regular and not misleading.
3. Matters to be stated in the report: According to Sec. 143(3), of Companies Act, 2013 he has to
clearly state in his report that
i. Whether he has sought and obtained all the information and explanations relating
to the accounts which to the best of his knowledge and belief were necessary for
the purpose of audit.
ii. Whether proper books of account as required by law have been kept by the
company.
iii. Whether proper returns have been received from the branch not visited by him.
iv. Whether the report on the accounts of any branch office of the company audited
by the branch auditor has been sent to him and the manner in which he has dealt
with it in preparing his report.
v. Whether the Company’s balance sheet and profit and loss account dealt within the
report are in agreement with the books of account and returns.
vi. Whether applicable accounting standards have been followed in the preparation
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requires a company which has issued debentures to create a Debenture Redemption Reserve out of
profit available for dividend for an amount not less than 25% of the value of debentures issued.
9. Failure to comply with provisions of acceptance or repayment of deposits: As per Section 123(6)
of 2013 Act, if accompany fails to comply with provisions of sections 73 and 74 regarding
acceptance and repayment of deposits, it shall not declare any dividend on equity shares so long
such failure continues.
10. Unclaimed dividend: Section 124(6) of 2013 Act states that all shares in respect of which unpaid or
unclaimed dividend has been transferred to the Investor Education and Protection Fund shall also
be transferred by the company to the fund along with a statement with certain specified details.
11. Deposit in a separate account in a Scheduled Bank: Subsection 4 of section 123 has mandated that
the company shall deposit the amount of dividend including interim dividend in a separate account
in any schedule bank within five days from the date of declaration of such dividend.
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the company.
3. Conclusion: Payment of dividend out of capital leads to reduction of capital. But reduction of share
capital cannot be done without observing some legal formalities as per section 66 of the Companies
Act, 2013.
Payment of dividend out of capital has not been made legally permissible for protecting
the interest of creditors who should have priority over shareholders in respect of getting
back capital. Moreover, allowing that practice would not have been in the interest of
growth and survival of the company.
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shareholders unnoticed. The continuity of business is, therefore, threatened. So, it is always
prudent to make provision for depreciation regardless of the fact whether dividend is declared or
not.
Whether dividend can be paid out of current profit without setting off past losses can be discussed under the
following three heads.
1. Judicial decisions: The question was dealt in various legal cases long back. But in those cases,
somewhat lenient view was taken by the learned Judges. They did not make the writing off past
losses as the precondition for payment of dividend out of profit of current year. Thus, in the case
Ammonia Soda Company Ltd. Vs. Arthur Chamberlian and other, (1918), it was held by the court
that the company might right up its assets as a result of a bonafide revaluation and might divide
current profits without making good past losses. The same view was expressed by the learned
Judge during the course of his judgment in Stapley Vs. Read Bros. Ltd (1924)
2. Provisions of the Companies Act: As per fourth proviso of sub – section (1) of section 123 of the
Companies Act, 2013 as inserted by Sec. 10 of the Companies (Amendment) Act, 2015 notified on
29th May, 2015, no company shall declare dividend unless carried over previous losses and
depreciation not provided in the previous year or years are set off against profit of the company for
the current year.
3. Business prudence: The existence of debit balance in the profit and loss account means that capital
of the business has already eroded by that extent. So, if a company which suffers from instability in
profit earning distributes its current year’s profit regularly without setting off past losses
completely, the chance of wiping out of net-worth and consequently liquidation of the business
cannot be ruled out. Therefore, it is advisable to set off the entire amount of past loss and not just
the loss caused by depreciation before distribution of dividend out of current year’s profit.
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position. For this the project cash flow should be prepared for the year.
vi. What were the rates of interim dividend and final dividend during the last few years?
vii. What is shareholders’ expectation from the management regarding rate of interim dividend and
what will be the possible effect on the share price, if their expectation is not fulfilled?
viii. What should be the final rate of dividend? This point should be considered because rate of interim
dividend should always be kept lower than final rate of dividend.
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Unit – 6
Audit Report and Certificate
The difference between Audit report and Audit certificate are as follows:
Point of Difference Audit Report Audit Certificate
Meaning It is the expression of independent It is a written confirmation of the
opinion of the auditor on the ‘true accuracy of facts stated therein but
and fair view’ of the financial does not involve any estimates or
statements. opinion.
Scope If covers the total financial matter of a It is furnished by the auditor to
concern during an accounting period. confirm the accuracy of certain
facts like import figures of a
company.
Nature It is the opinion of the reliability of It is a guarantee of accuracy and
the financial statements prepared by correctness of the information
the concern. contained in the certificate.
Responsibility The auditor is responsible to render The auditor is responsible for the
his opinion with reasonable skill and accuracy of the facts stated in the
care. certificate.
Concerned Parties The audit report is prepared for the Audit certificate is sought by
stakeholders of the company. external parties.
Submission Audit report is generally submitted at Certificate is submitted as and
the end of the financial year. when required.
1. Title: The auditor’s report should have a title clearly indicating that it is the report of an
independent auditor.
2. Addressee: The report should be properly addressed based on the circumstance of the
engagement.
3. Opening or Introductory paragraph: As per AS 700 Revised, the introductory paragraph should
include the following:
a) Identify the entity whose financial statements have been audited;
b) State that the financial statements have been audited;
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4. Management’s responsibility for financial statements: This section of the auditor’s report
describes the responsibility of those people who are responsible for the preparation of the
financial statements in accordance with the applicable financial reporting framework.
5. Auditor’s responsibility: The auditor’s repost shall state that the responsibility of the auditor is to
express an opinion on the financial statements based on the audit work conducted by him.
6. Auditor’s opinion: While expressing an unmodified opinion on the financial statements, the
auditor’s opinion shall state that the financial statement discloses a true and fair view.
7. Signature of the auditor: The audit report shall be signed by the auditor.
8. Date of the auditor’s report: The audit report shall be dated. The date shall not be earlier than the
date on which the auditor has obtained sufficient evidence on which he has formed his opinion on
the financial statements.
9. Place: The audit report shall state the place in which the auditor maintains his office.
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10. Date, Signature & Place: The audit report should be signed along with date by the auditor. The
report should contain the place of the office of the auditor.
Based on the type of opinion of the auditor, the audit report may be classified into the following types:
1. Clean or Unqualified Report: The auditor issues a clean report when he concludes that financial
statements are prepared in all material respects according to the applicable financial reporting
framework. The auditor makes a clean or unqualified report when he is satisfied with the following
matters:
a) The financial statements have been prepared in accordance with the generally accepted
accounting policies;
b) The selected accounting policies are consistent with the applicable financial reporting
framework.
c) The financial statements reflect true and fair summary of the financial transactions of the
company;
d) The management has made reasonable accounting estimates;
e) The information presented in the financial statements is relevant, reliable, comparable and
understandable;
f) Adequate disclosures have been made in the financial statements.
g) All terminology used in the financial statement is appropriate.
2. Qualified Report: When the auditor in his report states that the financial statements reflects a true
and fair view but subject to certain reservations, he is said to have given a qualified report. When
the auditor issues a qualified report, it means that the auditor cannot express an unqualified
opinion, but the disagreement with the management is not so material or pervasive that requires
an adverse opinion. A qualified opinion is generally expressed as ‘subject to’ or ‘except for’ relating
to effects of the matter to which the qualification relates. For example, if the auditor disagrees with
the management regarding the treatment of an item of compensation due from an insurance
company which is not yet received, he may quality his report stating ‘subject to the above, we state
the balance sheet shows a true or fair view .......... ’
The auditor shall quality his report only if the matter of qualification is material. The report
should not be qualified unless the amount of the matter is significant. The audit report should
clearly state the reasons for qualification under the heading ‘Basis of Qualified Opinion’.
3. Adverse Report: The auditor shall issue an adverse report when the effect of his disagreement with
management is so material and pervasive to the financial statements that the auditor feels a
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qualified report is inadequate to disclose the misleading or incomplete nature of the financial
statements. While giving an adverse opinion the auditor should expressly state that the financial
statements do not give a ‘true and fair view’, the auditor may issue an adverse report in case of
extreme non-provisioning of depreciation or huge loss which was uninsured, but the company
failed to disclose it in the Profit 7 Loss Statement.
4. Report with Disclaimer: Sometimes the auditor is unable to express his opinion relating to the
matters concerning his report, or the client has laced some restriction on the scope of his audit
work as a result of which he is unable to express his opinion. In such a circumstance, the auditor
shall be forced to state in his report that he is unable to express his opinion on the truthfulness and
fairness of the financial statements. Such a report is known as ‘report with disclaimer’.
5. Piecemeal Report: The auditor on his examination of the financial statements finds partially true
and fair view, he may state in his report that he is unable to express his opinion on certain items in
the financial statements relating to which he is not satisfied. The auditor may issue a piecemeal
report under such circumstances. A piecemeal report is such a report where an auditor gives a split
opinion relating to the matter he is satisfied and those matters he is not satisfied. The auditor shall
state the reasons for issuing a piecemeal report.
Modified Report:
According to Standard of Auditing (SA) 705; Modification to the Opinion in the Independent Auditor’s
Report. A modified report is issued by an auditor when he expresses a qualified opinion or adverse
opinion or a disclaimer of opinion.
As per SA 705, ‘Modification to the Opinion in the Independent Auditor’s Report’ an auditor in the
following circumstances shall express a qualified opinion:
a) The auditor, having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in aggregate, are material, but not pervasive, to the financial
statements, or
b) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the
opinion, but the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be material but not pervasive.
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Every company is required to get its accounts by a qualified auditor under the Companies Act. The
auditor after examination of the books and accounts of the company is required to prepare his report.
The said report is to be placed in the annual general meeting for the consideration of the shareholders.
Section 143 of the Act stipulates the matter to be disclosed by the auditor in his report. The provisions
of Section 143 are as follows:
1. True and Fair View of the state of affairs of the company [Section 143(2)]: The auditor is required
to prepare a reports to the members of the company based on the examination of the accounts
and on any statements which are necessary to be placed at the general meeting. The auditor is
required to state in his report that to the best of his knowledge and information the said accounts
and the financial statements give a true and fair view regarding the state of affairs of the company,
the position of profit or loss and cash flow for the year.
2. Information and Explanation necessary for audit [Section 143(3)(a)]: The auditor shall state in his
report if he obtained all necessary information and explanation which, according to him, is required
for the audit. If the auditor is not able to receive all such information, he shall state that and its
effects on the financial statement in his report.
3. Maintenance of proper books of accounts [Section 143(3)(b)]: The auditor’s report shall state if
according to him, the company has kept proper books of accounts as required by the law. His
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report shall also state that he has received appropriate returns adequate for his audit from the
company’s branch, which he has not visited.
4. Branch auditor’s report [Section 143(3)(c)]: If a branch auditor is appointed separately, he shall
examine the accounts of the branch and prepare a report based on such examination. He shall send
the said report to the company’s auditor. The company’s auditor shall state in his report if he has
received the report from the branch auditor and the manner in which he has dealt with suchreport.
5. Books and Financial statements [Section 143(3)(d)]:
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The Ministry of Corporate Affairs (MCA) has issued the Companies (Auditor’s Report) Order, 2016 (CARO
2016), to be applicable for reporting financial statements of the companies whose financial year starts from
1st April 2015 and thereafter. CARO 2016 is applicable from the financial year 2015-16 and the matters
specified in the order shall be included in the audit report under Section 143 of the Companies Act, 2013 on
the accounts of every company where such order is applicable.
CARO 2016 applies to every company, including a foreign company as defined in clause (42) of Section 2 of
the Companies Act, 2013. However, certain class of companies has been specifically exempted from the
application of this order. The type of companies where CARO 2016 is not applicable is:
a) Banking company as defined in clause (c) of Section 5 of the Banking Regulation Act;
b) Insurance company as defined under the Insurance Act, 1938;
c) Company licensed to operate under Section 8 of the Companies Act (companies formed with
charitable objective);
d) A One Person Company as defined under Section 2(62) of the Companies Act;
e) A Small Company as defined under Section 2(85) of the Companies Act; and
f) A private limited company which satisfies all the following four conditions:
(i) It should not be a subsidiary or holding company of a public company,
(ii) Its paid up capital and reserves and surplus not more than rupees one crore as on the last
balance sheet date,
(iii) Total borrowings exceeding rupees one crore from any bank or financial institution at any
point of time during the financial year.
(iv) Total revenue (as disclosed in schedule III to the Companies Act, 2013 and includes revenue
from discontinued operations) exceeding rupees ten crore during the financial year as per the
financial statements.
The Central Government has issued CARO 2016 in pursuance with the Companies Act, 2013 for the inclusion
of certain matters specified in CARO in the auditor’s report. The auditor’s report on the accounts of a
company to which CARO 2016 applies shall include a statement on the following matters:
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2. QualifiedAudit Report:
When an auditor expresses is opinion in his audit report subject to some reservations he is said to have
qualified his report. In other words, his assertions in the qualified report regarding fairness of financial
statements depend upon some conditions. As for example, if the auditor does not agree with his client
regarding treatment of an item such as subsidy or gratuity, he may qualify the report stating ‗subject to
the above, we report balance sheet shows a true and fair view…‘While qualifying his report, the auditor
should keep in mind the materiality of the matter. Unless the amount is significant, the auditor need not
qualify his report. The reason of qualification should always be clearly stated in the report under the
heading ―Basis for Qualified opinion‖. When the auditor gives qualified opinion, he should use the
heading ―Qualified opinion‖ for the opinion paragraph. ―Basis for Qualified opinon‘ and ―Qualified
opinion‖ paragraphs should be in italics under Sec. 227(3)(e) of the Companies Act.
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when he has strong and convincing evidence to support his conclusion. He should disclose all the reasons
of adverse report.
4. ReportwithDisclaimer:
Very often it may not be possible for a statutory auditor to collect all informations which are necessary
for expressing an opinion on the financial statements. This situation may arise because of incomplete
accounts submitted by the client or reluctance of client to furnish requisite informations or explanations as
sought by him. When the auditor is to submit such inconclusive audit report because of reasons beyond
his control, such report is called a report with disclaimer. When the auditor is to submit a report with
disclaimer he should give the justification for such disclaimer in his report.
5. CompartmentalorPiecemeal Opinion or Report:
When the auditors fails to report on the working results and the state of affairs of the entity in totality and
consequently restricts his opinion to certain matters only, it is called piecemeal audit report. For example,
an auditor may be unable to give an opinion on whether the accounts of the entire concern are true and
fair, but he may be able to give an opinion that the branch accounts are true and fair on the basis of the
branch audit reports. The reason of giving such partial report should be indicated in the audit report.
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describes the responsibility of the management for the preparation of the financial statements in
accordance with the applicable financial reporting framework.
5. Auditor’s responsibility: The auditor’s report shall state that responsibility of the auditor is to
express opinion on the financial statements based on the audit.
6. Auditor’s opinion: When expressing an unmodified opinion on financial statements, the auditor’s
opinion shall state that the financial statement give a true and fair view.
7. Signature of the auditor: The auditor’s report is signed by the auditor in his personal name
mentioning the membership number assigned by ICAI. Where the firm is appointed as the auditor,
the report is signed in the personal name of the auditor and in the name of the audit firm stating
the registration number of the firm.
8. Date of the Auditor’s Report: Auditor’s report shall be dated. It informs the users of the auditor’s
report that the auditor has considered the effect of events and transactions of which the auditor
become aware and that occurred up to that date.
9. Place: The report shall name a specific location, which is generally the city where the audit report is
signed.
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company’s balance sheet and profit and loss account dealt with in the report are in agreement with
the books of account and returns.
6. Compliance with Accounting Standards [Sec. 143(3)(e)]: Whether in his opinion, financial
statements comply with the accounting standards.
7. Adverse comments [Sec. 143(3)(f)]: The auditor’s report shall state, the observations or comments
of the auditor, which have any adverse effect on the company’s functioning.
8. Director’s Disqualification *Sec. 143(3)(g)+: The auditor’s report shall state whether any Director is
disqualified from being appointed as Director u/s 164(2).
9. Adverse remark on maintenance of accounts [Sec. 143(3)(h)]: The auditor shall state in his report
any disqualification, reservation or adverse remark relating to the maintenance of accounts and
other matters connected therewith.
10. Comment on the inadequacy of financial control system [Sec. 143(3)(i)]: The auditor’s report will
state whether the company has adequate internal financial controls system and comment on the
operating effectiveness of such system.
As per Notification dated 14th October, 2014, issued by Ministry of Corporate Affairs, this
requirement will be applicable for the financial years commencing on or after 1 st April,
2015. However, the auditor of a company may voluntarily include this statement in his
report for the year commencing on or after 1st April, 2014 and ending on or before 31st
March, 2015.
11. Reasons of negative reply [Sec. 143(4)]: If any of the matter referred to in Sec. 143(2) & 143(3) are
answered in negative or with qualifications he must mention the reasons in his report.
12. Compliance with C & AG direction [Sec. 143(5)]: In case of a Government company, the auditor’s
report shall include:
i. The direction, if any, issued by the C & AG regarding the manner of audit of accounts;
ii. The action taken on such direction and the impact thereof on the company’s financial
statements.
13. CARO Matters *Sec. 141(11)+: The auditor’s report shall include a statement on the matters
prescribed under the Companies (Auditor’s Report) Order (CARO) 2015.
14. Other matters to be included in the auditor’s report: As per Rule 11 of the Companies (Audit and
Auditors) Rules, 2014, the auditor’s report shall also include the auditor’s views and comments on
the following matters, namely.
i. Whether the company has disclosed the impact, if any, of pending litigations on its financial
position in its financial statement;
ii. Whether the company has made provision, as required under any law or accounting standards,
for foreseeable losses, if any, on long term contracts including derivative contracts;
iii. Whether there has been any delay in transferring the required amounts to the investor
Education and Protection Fund by the Company.
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viii. Financial Statements are conveying information unambiguously. As has been held in many legal
cases Financial Statements should give information and not means of information.
So, the phrase ―True and Fair View‖ has extended the duty of an auditor to a great extent. He will not
conduct mere mechanical comparison of items in the financial statements with the entries in the books of
account. Rather, he should conduct audit more analytical to ensure that Financial Statements as prepared
by management can really cater to the information needs of outside users sincerely and fairly.
1. Relative Context: Materiality of an item can be judged in a relative context. For example, legal
expenses of Rs. 1 lakh may be a material item in a small firm but it may not be considered material
in a large firm.
2. Percentage Criterion: Percentage criterion may be applied in determining the materiality of an
item. As for example, Part – II of Revised Schedule VI to the Companies Act, 1956 requires that any
expenses exceeding one percent of total revenue of the company or Rs. 1,00,000 whichever is
higher, shall be shown as a separate and distinct item under an appropriate account head in the
statement profit and loss and shall not be combined with any other item to be shown under
miscellaneous expenses.
3. Effect on Profit and Loss: An item may be considered material if it has a significant impact on the
profit or loss of the firm. Even an item of small value will become material if its wrong treatment
converts a small loss into a profit or vice – versa.
4. Position in Relation to the Group: Materiality of an item should be judged in relation to the group
to which it belongs, for example for any item of current asset in relation to total current assets and
any item of current liability in relation to total current liabilities.
5. Comparison with Previous year’s figure: Very often comparison with previous year’s
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corresponding figure throws light about the materiality of an item. For example, other income of
Rs. 1.0 lakh this year may appear material when compared with previous year’s other income of Rs.
10 lakhs.
6. Any Deviation from Statutory Requirement: Any deviation from statutory requirement, however
minor it may be, is likely to render an item material. For example, a payment of Rs. 100 to directors
as remuneration in excess of statutory limits may be material. Similarly, a small inaccuracy may be
considered material if it creates or eliminates a prescribed solvency margin.
7. Nature of Transaction: Transaction of abnormal or non – recurring nature may be considered
material even though the amount involved is not very significant.
8. Cumulative effect of small and insignificant items: Individual non – material items might have a
significant cumulative effect. For example, a minor leniency in compliance with travelling rule of
the company in individual cases may have a material impact on total travelling expenses.
9. Estimation error in determinable amounts: If the amount of an item can be determined precisely
and objectively, even a small error in the same may be considered material. On the other hand, if
the amount of an item is subject to estimation and judgement, a minor difference from the
estimate made by the auditor may not be considered material.
Thus, several factors have to be kept in mind by the auditor to judge whether an item is
material or not in giving or distorting the true and fair view of the financial statements. An
erroneous judgement will lead to inappropriate opinion on financial statements. He has to
ensure that all material items have been properly and correctly recorded in the accounts
and disclosed separately and distinctly in the financial statements.
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Unit – 7
Other Thrust Areas
Cost Audit is an independent examination of cost statements, cost records and other related information
of an entity with a view to express an opinion. Cost auditor is being guided by cost auditing standards in
relation to audit process, audit procedures, responsibilities and reporting.
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In order to conduct cost audit, the cost accountant in practice will be guided by the following:
1. Sub-section (1) of Section 148 states that the central government may, by order, in respect of such
class of companies engaged in the production of such goods or providing such services as may be
prescribed, direct that particulars relating to the utilization of material or labour or to other items of
cost as may be prescribed shall also be included in the books of accounts maintained by the
companies.
2. It the central government thinks it necessary, it may direct that the audit of cost records of class of
companies, which are covered u/s 148(1) and which have a net worth of such amount as may be
prescribed or a turnover of such amount as may be prescribed shall be conducted in the manner
specified in the order – u/s 148(2).
3. The audit u/s 148(2) shall be conducted by a Cost Accountant in practice who shall be appointed by
the Board on such remuneration as may be determined by the members in such manner as may be
prescribed.
4. An audit conducted under this section shall be in addition to the audit conducted u/s 143 – sec.
148(4).
Commonly accepted practices, procedures & requirements are being converted into documents which
are structured and have legal recognition and become ‘standards’. The institute of Cost Accountants of
India, recognizing the need of structured approach to the measurement of cost in manufacture or service
sector and to provide guidance to the user organization, regulators, academic institution etc. has
constituted Cost Accounting Standards Board (CASB) with the objective of formulating the Cost
Accounting Standards. These standards on cost auditing are best guide for the cost auditor in order to
streamline audit, better planning, documentation and implementation.
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Conceptually management audit covers such areas which are not covered by other audits. It does not go
through the vouchers or similar evidences but focuses on the appraisal of management effectiveness in
different managerial operations.
The concept of management audit was developed by T G Rose as a logical system of evaluating the
performance of management. He introduced it for evaluation of 52 publicly owned companies over a
period from 1948 to 1960. Management audit examines the effectiveness of management in controlling
the total activities of the organization. Management audit covers appraisals of planning, organizing, co-
ordinating, staffing, directing, motivating and other management functions. In other words, it is holistic in
nature and goes into the details of managerial effectiveness in conducting the operations of an
organization.
Definition:
Management audit has been defined by number of academicians and institutions. According to William P
Leonard “Management audit may be defined as a comprehensive and constructive examination of an
organization structure of a company and its plans and objectives, its mean of operation and its use of
human and physical facilities.
In present days Management Audit is becoming popular. Many organizations adopt management audit
voluntarily due to its following benefits:
1. It helps in setting up an organizational framework to implement the plans.
2. It helps management in framing basic policies for the organization and to define objectives.
3. It assists in designing systems and procedures for smooth operation of the organization.
4. It assists in analysing SWOC (strengths, weaknesses, opportunities and challenges) of the
organization and helps to provide right navigation to the concern.
5. dia has been grossly benefited by introducing management audit to government sector like
railways as this type of audit breaks the barriers of conventional audit periphery and focuses on
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managerial weaknesses and failures. It has helped many government companies to run efficiently.
6. It helps in designing and reviewing Management Information System (MIS) for decision making.
7. It is essential where a unit is planned to be taken over or an amalgamation or merger with other
unit is proposed.
8. It can help in analysing social cost benefit analysis for public projects like power stations,
highways, etc.
9.
Management Audit Procedure:
Though Management Audit conducted for a specific organization is tailor made, but general approach to
conduct Management Audit may be outlined as follows:
1. Collect necessary data and information by making a preliminary survey in order to frame an
effective audit planning.
2. Study applicable laws, history, nature of responsibility of the assignment given and the authorities
responsible for particular decision making and action in order to conduct the audit efficiently and
effectively.
3. Study the existing system of management control and operating procedures, administrative
activities and explore all significant weaknesses inherent in the activities.
4. Start working on the issues identified by using various tools necessary for evaluating the decisions,
activities and operations under scanner.
5. Report on the findings of the audit work performed to those responsible for receiving them
together with the recommendation for improvement.
Audit under the Income Tax Act, 1961 has been done under two broad categories:
Tax Audit u/s 44AB of the Income Tax Act, 1961 has been discussed at length.
In order to prevent tax evasion by unscrupulous business and professional people, the Finance Minister of
Union of India presented a bill in the parliament in 1984. This bill was converted into act and introduced
Tax Audit under Section 44AB of the Income Tax Act. No specific definition of tax audit is given under the
act, it is different from statutory audit. It requires specific skills and knowledge on taxation matters to
conduct tax audit fruitfully. In general tax audit may be defined as specialized audit conducted for the
purpose to ensure that taxable income of the assessee has been exhibited in transparent manner and
tax has not been evaded unlawfully.
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Section 44AB provides for the compulsory audit of accounts of certain persons carrying on business or
profession. The provision of this section are as under.
Every person:
a) Carrying on business shall, if his total sales, turnover or gross receipts, as the case may be in
business exceed or exceeds one crore rupees in any previous year.
b) Carrying on profession shall if his gross receipts, in profession exceed fifty lakhs rupees in any
previous year.
c) Carrying on the business shall if the profits and gains from the business are deemed to be the
profits and gains of such person under Section 44AE or Section 44BB or Section 44BBB as the case
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may be and he has claimed his income to be lower than the profits or gains so deemed to be the
profits and gains of his business, as the case may be, in any previous year.
d) Carrying on profession shall, if the profits and gains from the profession are deemed to be the
profits and gains of such person under Section 44ADA and he had claimed such income to be
lower than the profits and gains so deemed to be the profits and gains of his profession and his
income exceeds the maximum amount which is not chargeable to income tax in any previous
years, or
e) Carrying on business shall, if the provisions of sub-section (4) of Section 44AD are applicable in his
case and his income exceeds the maximum amount which is not chargeable to income tax in any
previous year, get his accounts of such previous year audited by an accountant before the
specified date and furnish by that date and furnish by that date the report of such audit in the
prescribed from duly signed and verified by such accountant and setting forth such particulars as
may be prescribed.
Penalty:
According to Section 271B of the Income Tax Act, 1961, if any person who is required to comply with
Section 44AB fails to get his accounts audited in respect of any year as required under Section 44AB, the
assessing officer may impose penalty which shall be lower of the following:
a) 0.5% of the total sales, turnovers or gross receipts, as the case may be in business, or of the gross
receipts in profession in such year or years.
b) Rs. 1,50,000
However, according to Section 273B, no penalty shall be imposed if reasonable cause for such failure is
provided.
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Section 44AB requires the tax auditor to submit the audit report in the prescribed forms. Rule 6G (Sub
rule I) provides that the audit report of a person required to be furnished u/s 44AB in:
1. Form 3CA:
2. Form 3CB:
3. Form 3CD:
As per the recent developments, the tax audit report is required to be uploaded using digital signature of
the tax auditor. The report should be uploaded on the tax portal of www.incometaxindia.gov.in. For this,
the tax auditor is required to E-Filing portal as tax professional-Chartered Accountant.
Normally, the report of tax auditor cannot be revised later. However, when accounts are revised in the
following circumstances, the auditor may have to revise his audit report also:
1. Revision of accounts of a company after its adoption in AGM.
2. Change in law with retrospective effect.
3. Change in interpretation of law.
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Cost audit is the independent verification of cost records maintained in manufacturing and mining
industries. It is conducted with a view to ascertaining whether cost records of the company are being
maintained as per cost accounting principles, plans and procedures. The cost auditor verifies cost
statements to report on true and fair view of cost of production and to highlight areas of inefficiency
and wastage, extent of underutilization of capacity and causes of production bottlenecks.
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Coverage Cost audit is mainly concerned with Management audit may cover all
production or servicefunction important areas of the organization
namely production function,
Administrativefunction, marketingetc.
Provision of Income Tax Act, 1961 for Tax Audit u/s 44AB
The provisions for compulsory tax audit u/s 44AB are as follows:
1. Applicability: Tax audit is compulsory for the following categories of assessee:
i. Assessee carrying on any business whose total sales turnover or gross receipts exceed
Rs.1.00 crores in the previous year
ii. Assessee carrying on profession where gross receipts in the previous year exceed Rs. 25
lakhs
iii. Assessee carrying on business referred to u/s 44D, 44AE, 44AF, 44BB, 44BBB, and declaring
lower income than prescribed under those sections.
2. Qualification to conduct tax audit: The audit shall be conducted by an ‘Accountant’ as explained
u/s 288 of the Income Tax Act, 1961. This Section defines accountant as follows:
i. A Chartered Accountant within the meaning of the Chartered Accountants Act, 1949
holding certificate of practice
ii. Auditor of a company under section 226(2) of the Companies Act. It is to be noted that by
the virtue of a resolution of the council of the Institute of Chartered Accountant of India,
with effect from 1.4.2005, a member in part-time practice is not entitled to perform tax
audit.
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A. In case of a person who carries o Form No. 3CA Form No. 3CD
business profession and who is requir
by or under any law to get his accoun
audited
B. In case of a person who carries o Form No.3CB Form No. 3CD
business or profession but not being
person referred to above
The functioning of a firm in the society involves social costs. There are some social costs or detriments to
society for which it has to make payments, e.g. cost of material, energy, labour etc. Again there are some
social costs for which it is not required to make any payment. Examples of this category of social costs
are pollution of environment, spread of diseases, dislocation of inhabitants of a locality etc. So it is but
natural toexpect that firm should spend a portion of its revenue for the benefit of society. The service to
society shouldbe commensurate with costs or detriments which it causes to the society. If the firm ignores
this duty, its existence in the society will not be justified. In the backdrop of this development, the
concept of social audit has emerged. Social audit can be defined as the assessment of the social
performance of a firm in the society to which it belongs. It verifies whether a firm is discharging its social
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obligations commensurate with social costs or detriments to the society caused by its operation. The
National Association of Accountant‘s (NAA) Committee on Accounting for Corporate Social
Performance has identified four major areas of social performance on which the auditor should compile
data and information for assessment:
(a) Community Development: Activities that are undertaken for the benefit of general public e.g., housing,
health service, eradication of illiteracy, food programmes etc.
(b) Human Resources: Activities undertaken for the well-being of the employees e.g., training programme,
improvement of work conditions, education for staff children etc.
(c) Physical Resources and Environmental Contribution: Activities directed towards prevention of
environmental pollution, spread of diseases, depletion of scarce natural resources etc.
(d) Product or service contribution: Activities such as consumer protection, product safety, warranty
provision and product quality.
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society.
(v) To control the costs incurred on procuring the natural resources and ensure that they have been
properly classified.
(vi) To check the compliance of existing environmental related legislation.
(vii) To ensure that standard environmental practices are being followed by the firm.
Following are the advantages that can be derived from the application of environment audit:
(1) Developing Environmental Consciousness: Environment audit keeps the management alert about the
possible hazards associated with the manufacturing process. It compels them to take necessary
precautions so that the company’s operation cannot cause damage to environment beyond an
acceptable limit.
(2) Maintenance of Ecological Balance: Very often industrial activities lead to extinction of many living
things. This is happening due to ecological disbalance caused by industrial pollution. Bhopal gas leak,
Chernobyl disaster, Oil spill off the British South Coast etc. are the examples which destroyed many
living creatures including human beings. Proper environment audit can prevent recurrence of such
disasters and ensure betterment of life.
(3) Optimum utilization of scarce resources: Very often natural resources are consumed recklessly
ignoring the interest of next generation. Environment audit can ensure proper utilization of natural
resources.
(4) Preparation of environment cost budget: It can help to prepare environment cost budget by providing
necessary information required for pollution free environment.
(5) Cost effective measures: It ensures that measures taken for environment protection are cost effective
and they are not causing drainage of money from company’s exchequer.
(6) Recording and reporting of environment cost: Environment audit can ensure proper recording and
reporting of environment cost incurred by the firm. This can help the Government to frame suitable
policy regarding environment protection.
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