MATHUR SIR CLASSES - HOWRAH | GIRISH PARK. DIFFERENCE BETWEEN ERROR & FRAUD Points Error Fraud 1. Intention | Error is committed without Fraud is committed with intention intention. or some ulterior. 2. Effect “The error does not usually cause any | Frauds generally have a serious damage other than misstatement of | impact on the firm. accounts. 3.Integrity | The integrity and honesty of Fraud arises doubt about the employees are not questioned for _| integrity & honesty of the any error management 4. Liability | Errors in the books of accounts are _| It may occur both in lower & upper committed by lower level level of management: employees. S.Levelof | The integrity and honesty of Fraud arises doubt about the Occurrence | employees are not questioned for _| integrity & honesty of the any error. management. Types of Audit / Classific it 1. Internal 1. Periodical 1.Balance 1. 1, Statutory 1. Cost Audi Audit Audit/Final Sheet Complete Audit 2. Social Audit 2 Audit = Audit 2. Non- 3. Cash Flow Independent © 2: Standard 2. Internal Statutory Audit Audit Continuous = Aur Audit 3. Government 4. Performance ‘Audit 3, System Audit Audit 3. Interim Audit 5. Tax Audit ‘Audit 4, EDP 6. Stock Audit 4. Limited Ts Review Management Audit PERIODICAL AUDIT FINAL AUDIT ‘The audit which is undertaken after the end of accounting year is known as periodical Audit. In this audit, the auditor starts his job after all book are balance and completed. In the words of Spicer & Pegler: “Periodical is commonly understood to be an audit which is not commenced until after the end of the financial period and is then carried until completed”, oi 5|PageMATHUR SIR CLASSES - HOWRAH | GIRISH PARK. avoidable expenditure. So, Govt. officials remain cautious and careful in applying a high degree of financial morality while incurring expenditure. SYSTEM Al 2016) The audit which is conducted to examine the suitability of various systems of accounting Prevailing in the firm is called of system audit. It assesses the existing systems of accounting to determine whether they work effectively or not so that appropriate opinion can be formed on financial statements. System audit judges if the various systems of accounting and control mechanisms are efficiently followed in the organisation or not. Therefore, companies should employ auditors to analyse their accounting systems and. business methods to ascertain whether accounting records and practices ate up to date and economical and whether such records and practices may be changed so as to do the work better, quicker and at less cost under the changing conditions. Advantage of System Audit: 1. It can be revised or designed according to the changing business environment. 2. It can generate information that are useful to decisions making. 3. New system prevents errors and fraud, 4, The profitability of the business is increased. 5. The system audit is dynamic in the sense that old conceptsiand systems are subject to review. Disadvantage of system Audit 1. The introduction of system audit is likely to increase the overheads cost. 2. If the system fails to attain desired result; itwilllead to wastage of money, time and energy. CONTINUOUS AUDIT (2015, 2016) The audit procedure which is conducted throughout the course of accounting year is called continuous audit. Incase of such audit, a few audit staffs are deployed by the auditor at client offices throughout the year. They conduct detailed checking of book of accounts. The auditor visits the client's office as and when required to supervise their work and to see whether everything is going on with due regulatory and properly as per management policy. ‘Advantage of Continuous Audit: * General Advantage 1. No pending Accounting works. 2. Establishing cordial relationships. 3. Increase in efficiency of accounting work. 4, Moral pressure. 5, Timely declaration of dividend. 6. Information about the business. * View point of Shareholders or owners 1. Timely receipt of annual report. 2. Getting dividend quickly. 3, Integrity of shareholder's capital.MATHUR SIR CLASSES - HOWRAH | GIRISH PARK. iii, With the help of interim audit, the management and the auditor can complete Final Audit early. iv. To detect errors and frauds at the earliest. v. To ascertain the interim profit or loss or state of financial affairs of the concern. ‘The introduction of interim audit is needed to save time in the final audit. vii. To gather some important points with regard to the concern which may be of help to him later while conducting the final audit. vill. In the event of admission, retirement or death of any partner, interim audited accounting data is needed in the middle of the year. ix. Where an investigation becomes necessary covering an interim period. x. In the case of transfer, sale or change of ownership of a business, it becomes necessary to know the true result of operation and the true financial position at the/end of the interim period. Advantages of interim Audi Interim audit ensures speedy completion of statutory audit. ii, It helps to detect errors and frauds up to the period of time for:which interim audi conducted. iii. Very often banks and other ending institutions require interim figures such as inventory, debtors etc. The authenticity of these interim figures'can be upheld by the interim audit. iv. The management can continuously monitor the solvency, profitability and operating position of the firm. v. The client's staff remain cautious and careful in'their work as interim audit is conducted in between the two final audits. Disadvantages of Interim Audit: i. Itincreases the cost of audit in the firm: ii, There is a chance of alteration of audited figures by dishonest client's staff. It may interrupt the normal flow of work in the accounts department. Q10) Write about Environmental Audit (Compliance Assurance Audit). [2015] The concept of audit is notmerely confined to accounting and finance. It has been extended to other areas of social/sciences. One such area where audit is now playing an important role is related to environment. Environment refers to external conditions and surrounding in which people, animals or plant live. The Government of India has passed following islations for protection of environment: i. The Air (Prevention and Control of Pollution) Act, 1981. ii, The Water (Prevention and Control of Pollution) Act, 1974. ili, The'Forest (Conservation) Act, 1980. iv. Environment (Protection) Act, 1986. v. The Factories Act, 1948, The main objective of all these legislative measures is to keep the environment clean and transparent. But, in spite of all these measures, many companies are found to act in ways that promote their own short-term interests causing a great damage to the environment. For this reason, the necessity of environment audit has arisen. It is sometimes called ‘Compliance Assurance Audit. Environment Audit may be defined as thorough examination, ‘through vouching, verification etc. to see whether various regulatory measures relating to environmental hazards have been complied firms, It also encompasses review and monitoring of firm’s policies towards m ental protection. 17 |Pagear. MATHUR SIR CLASSES = MU 1 we Q11) What is Propriety Audit? What are its objectives and advantages? [2015] Propriety Audit can be defined as an assessment of rightness of plans and policies of Management in connection with various financial events or transactions of the business. It verifies whether all transactions are being executed in the best interest of the company or not: Propriety audit makes all employees exercise same degree of skill, care and caution in executing business transactions as they are supposed to do in case of their personal transactions. In other words, in the propriety audit, it is examined whether all transactions are fair, compatible with the interest of the company and conducted with expected level of efficiency. According to Eric Kohler, “It is an audit in which various actions and decisions are examined to find out whether they agree in public interest and whether they meet the standard of conduct”. i. To see that all expenditures have been incurred in the best interest of the company. i. To ensure that an expenditure is not prima-facie more than it should be under the given circumstances. To look into whether the important business decisions takef'by the management are in conformity with generally accepted customs and standard of conduct. In other words, Propriety audit verifies whether any executive is difectly.or indirectly benefitted from a business decision taken by him. iv. To see that no allowance such as travelling allowance or medical allowance is being used as a source of profit by an executive. v. Too see whether an alternative plan of attion’¢an bring in improvement or better result. vi. To see whether all transactions @re faity justified and able to safeguard the public interest. vii. To ensure that transactions’¢an, protect the capital of the entity and do not result in wastage of resources. Advantages of Propriety Audit: Ensures that public moneys not being misused from the point of view of propriety. . Ensures that policies and procedure are being followed accordingly. Ensures that public interest is being safeguarded, Q12) What is Social Audit? What are its objectives and advantages? Social Audit provides for the protection of the interests of the consumers, employees and in fact all those who are affected by the decisions of the company. The need for social audit arises because\of the tendency on the part of the business to use its power indifferently, responsibly. or in an anti-social way. Conceptually, social audit is a sophisticated and scientific technique of testing the truth of the social performance of a company with feference to its means and motives by an independent authority with a view to detect end Prevent abuse of power. Objectives: i. To assess that the company has discharged its social res li. To assess that the company has discharged its social customers, debtors, creditors, and the government. Ui To ensure that the company discharges its statutory obligations, 'v. To ensure that the company in no way violates its social obligations, v. To ensure that economic susceptibility is maintained, ponsibility towards stakeholders. Obligations towards shareholders, AB LD annINE Advantage: i. Fulfils social obligations. 7 am ii. Makes the society aware of the functioning of the organisation. iii, Assesses the social performance of the organisation iv. Increases the accountability of the organisation towards the stakeholders. v. Helps the management judge the organisation. Q13) Define Performance Audit or Efficiency Audit. What are its objectives and peat (2015) Performance Audit or Efficiency Audit involves an appraisal of the performance ofa business. For efficient performance, an organisation sets its plans and the interpretation of the plan in financial and quantitative terms, that is the budget. Performance auditichecks how efficiently the various budgets have been fixed and how far the actual performances are in line with the budget. The results obtained by the same expenditure must also be satisfactory. Performance audit analyses the variance of actual expenditure from the budget and of actual performances from the target set. It also aims.at checking the results against capital investments and tries to ascertain how efficiently the capital has been utilised. For the evaluation of the performances, the auditor may have: towresort to inter-firm comparison. Performances audit does not end in finding out the good and the bad points. It must also tell the management to take appropriate remedial measures in future. Performance audit is thus, a check of efficiency. It ascertains)if the internal activities of the organisation are carried out efficiently. It helps the management in improving performance. Obi i. To strengthen the performance control and improve internal audit. ii. To study whether the management controls are functioning effectively and efficiently. iii. To appraise and review efficiency. iv. To be obliged towards theattainment of organisational goals. Advantages: i, Reduces the area of uncertainty in business. Removes bottlenecks in/achieving goals. iii. Removes inefficiencies and\ineffectiveness. iv. Achieves operational goals smoothly. 14) Present position as to number and title (as issued by ICAI) / Standards on Auditing (sa) (2017 - 2018] There are several standards that make the audit transparent (Table below), SA 1- 99 indicates the standards on quality control, SA 100-199 indicates the introductory matters, SA 200-299 indicates the general principles and responsibilities, SA 200-499 indicates the risk assessment and response to assessed risks, SA 500-599 indicates audit evidence, SA 600-699 indicates the using of other's works, SA 700-799 talks about audit conclusion and reporting, SA 800-899 focuses on specialised areas, SRE 2000-2699, SAE 3400, SAE 3402, SRS. 4400 and SRS 4410 states the underlying mechanism f it more reliable and transparent. lying mechanism for the standards on auditing to makeTi Accounes sects One ea iv. Inventory turnover v. Leverage ratios vi. Liquidity ratios 4. Sources of Information: Following sources of info revie i. Interim financial information ii, Budgets Non-financial information e.g, employee morale, Gi products etc iv. Confirmation from bank, debtors and creditors: v. VAT return vi. Board minutes 5. Common size Analysis: Common ae balance sheet as a percentage of ota wn percentage of total sales is a useful tool o 08, Soe uni are tuition fees, admission {MATHUR SIR. (c) Payments and expenses: 4. Capital expenditure 2. Vouching of expenses 3. Vouching of other staff 4, Depreciation (d) Assets and liabilities: 1. Verification of assets and liabilities 2. Caution money and other deposits 3. Investments 4. Income tax liability Audit of college hostel: A college hostel mainly provides facilities to students such as boarding facilities, lodging facilities etc. The college hostels are usually maintained by the collegeuthority with no Profit motive. The accounting of college hostel is maintained under cash basisiA receipt & Payment accounts and an income& expenditure account are prepared to show the cash Position and the results of the hostel for a particular period. The maimSources of income of a college hostel are hostel fees and donations and government grants. The special steps involved in their audit are as follows: (a) General: 1. Studying the rules and regulations 2. Identifying the facilities 3. Examining the capacity of hostel. (b) Receipts and incomes: 1, Hostel fees 2. Defaulter list 3. Donation and grants (c) Payment and expenses: 1. Review of internal control over foodstuff 2. Vouching of expenses 3. Depreciation (d) Assets and liabilities 1. Verification of stocks 2. Caution money and other deposits 19. Audit programme of a Hospital/ Nursing home. (c.u.27) Audit of hospitals Hospitals are mainly established to provide medical services to the common public at a reasonable cost. Hospitals are usually run by Government or Local Authority. Sometimes hospitals can be run as trust or sole proprietorship or partnership or company. The special steps involved in such an audit are stated below (a) General 1. Studying the rules and regulations 2. Reviewing the internal control system 3. Inspecting the minute books {b) Receipts: 1. Billing system 2. Collection from patients 38|Page bear rPAPEPAPAAPOMMNG OOH RKO ORME Kende & pLMATHUR SIR CLASSES - HOWRAH | GIRISH PARK. thorized; 2. that the purchase of assets was duly aut . 3. that the assets had been purchased for the purpose of the business, 4, that the right of ownership of the assets vested in the entity 5. that they were free from any charge or mortgage 6. that ihe had been correctly valued and properly disclosed in the balance sheet. 8. How would you verify the following asset? i) Plant & Machinery (C.U.16) ‘ ne institute cae Accountants of India has issued a Guidance Note on Audit of property, Plant and Machinery according to which the auditor will consider the following points in connection with the verification of Plant and Machinery: Examination of existence, ownership, possession and lien, if any : 1.He will go through the Plant Register containing detailed particulars of various itemg of plant and machinery. it should show separately for each item the original costyaddition to and sales from it during the year. ii, The total of closing balances of all items of plant and machinery should be reconciled with the balances in the General Ledger. il. f there has been any addition, it should be verified with the invoice of the machinery supplied. iv. He should verify title deeds, agreements and other ownership documents. v. The auditor should, periodically, physically examine various items of plant and machinery, say, once in every three or five years, depending upon the size of the concern. Examination of valuation and disclosure i. Purchase of plant and machinery during the year will be examined with reference to authorisation of Board, Purchase order, supplier's invoice, receipt issued by suppliers, etc. The auditor should see whether incidental expenses including installation expenses for addition have been properly charged to the plant and machinery account with reference to bills and wages sheet, If the addition represents the cost of machinery manufactured by the concern itself with its own material andilabour, the auditor should verify the basis on which the expenditure have been allocated. He’should obtain a certificate from the engineer responsible for the. manufacturer of plant confirming the total cost of manufacture. iv. In case anyitem of machinery has been scrapped, destroyed or sold, the auditor should ascertain that the profit or loss arising thereon has been correctly determined and properly accounted. In appropriate cases, a certificate should be obtained from a senior official in this regard. v. if an'assetis revalued, the auditor should examine the basis of revaluation and assess its justifiability. He should see that depreciation has been provided on revised value and not on historical cost. vi. He should see that depreciation on plant and machinery has been provided at the rates calculated on the basis of lives specified for different kinds of plant and machinery in the Schedule | of the Companies Act, 2013. a Tinea ‘needs to consider whether there are circumstances as stated in AS28 Beets eee pc @ possible impairment of Plant & Machinery and if such nations ‘same have been dealt with by the entity. viii. He will ensure that plant & machiner Assets ry have been disclosed under Non-cur Fixed Assets as per Schedule Ill of the Companies Act, 2013, ad, a 61|PageMATHUR SIR CLASSES - HOWRAH | GIRISH PARK. (ii) Goodwill: (C.U.16) Inthe words of M.C. Shukla and TS, Grewal, ‘Goodwill may be defined as the value of the reputation of a business house in respect of profits expected in future over and above the normal level of profits earned by undertaking belonging to the same class of business. Goodwill is an intangible asset representing the earning capacity of the organization and shown in the balance sheet at the top of the assets when it is purchased. In case of partnership, change of goodwill has to be reflected in the partnership accounting and partnership deed. Auditor's duty 1. The auditor should ensure that goodwill exhibits the true and fair view. 2. The auditor should ensure that internally generated goodwill is not recognized and cannot be measured as per AS 26 but valuation of goodwill be made in accordanee with Accounting Standard 10, if purchased, 3. The auditor should examine the Articles of Association. 4 The auditor should examine the relevant portion of the minutes of the Board of Directors. 5. The auditor should examine purchase consideration in case of purchase of running business. 6. The auditor should examine the partnership deed and related valuation at the time of admission, retirement, and dissolution. (iii) Patent (C.U. 18) Ascertainment of existence, ownership and possession (i) Go through the schedule of patents owned by the'client as on the date of balance Sheet and be informed about the dates of registration of patents, value renewal dates etc. Verify the ownership of patents by inspection of certificate issued in respect of grant of the patent. (ii) See that the renewal fees in respect of patent have been duly paid and debited to profit and oss account. The auditor may obtain confirmation letters from client's legal advisor as to validity and existence of patents. Examination of valuation and disclosure i, See that the total of the values of the patent rights shown in the schedule tallies with the values shown in thebalance sheet. ji, Verify the Cost of patent rights. if a patent right was acquired from outside source, check the amount paid with supporting document In case of internally developed patent, examine the procedure of determining its cost and ensure its fairness, The legal fees and expenses for registration should also constitute the cost of patent, ili, Examine the valuation of patent rights. The patent rights should be valued at cost less amortization charged till date, The yearly amortization charge should be determined based on the economic life or legal life whichever is shorter, iv. Ensures that patents have been disclosed in the balance sheet under the head Non- current assets and subhead Fixed Assets as intangible assets as per Schedule Ill of the ‘Companies Act 2013. {iv) Copyright & Trademark (C.U. 16/18) A copyright is the exclusive legal right to publish, reproduce, and sell the things in the form of literary, artistic, or musical work. Copyrights belong to the family of intangible assets, 82/PageMATHUR SIR CLASSES - HOWRAH | GIRISH PARK Copyrights that have been eroded willbe debited in the profit and loss account and residual value will be shown in the asset side of the balance sheet Auditor's di _ 1 The aucitoy should obtain the schedule of copyright from the client and scrutinize the terms and conditions of the copyright. ; ; 2. The auditor should verify the genesis of the copyright: purchase or generates 3 The auditor should estimate the purchase price and registration cost of copyrights. 4. The auditor should ensure that copyrights are amortized over ten years as intangible assets as per AS26. 5. The auuitor should also ensure that the copyright is written-off to the profit and loss account. {v) Investment (C.U. 18) Investment is a tangible asset and considered a semi-fixed or semi-current assets. Verification of investment and valuation of the same is important. Auditor's duty 1 The auditor should verify the existence of investment. 2. The auditor should verify the investment ledger. 3. The auditor should verify the investment policy and adhere to rules and regulations. 4. The auditor has to study the | Memorandum of Association ‘and Articles of Association carefully to know the avenue of investment. 5.The auditor should verify whether purchase of investment has been made on a cum- dividend or ex-dividend basis. 6. The auditor should verify the purchase or sale of investment made in accordance with the quotation price. Case: City Equitable Fire Insurance Co. Ltd. Year of judgement: 1924 Content: Duty of the auditor regarding securities Decision of the case: Judge stated that it was the duty of the company's auditor in general to satisfy himself that the Securities of the company in fact exist and are in safe custody. (vi) Share capital (CWU.18) The share capital reveals the true and fair view of the company by obeying securities and exchange.Boatd of india Act, 1992 and Companies Act, 2013. ‘Authorized eapital refers to the right of the company to raise capital or it can be considered a capital shown in the Memorandum of Association of the company. Issued and paid-up capital means the company can raise the capital and show it in the balance sheet. Auditor's duty 1. Memorandum of Association, Articles of Association, Pa ‘Association, and minutes of the board meeting 2. The auditor should go through the rules regarding Registrar of Companies. 3. The auditor should comply with the Companies Act, 2013, SEBI Act, 1992, Income Tax Act, 1961, and relevant Acts as per requirement. ‘ 4, The auditor should adopt the method of and relevantenties in the cash tee ‘test checking for verification of application formsMATHUR SIR CLASSES - HOWRAH | GIRISH PARK 5, The auditor must see if appropriate steps have been taken to modify the Memorandum of Association and if the required resolution has been passed. (vil) Long-term borrowings (i. loans & advances) (C.U.17) The auditor should take following steps for verification of loans and advances. i, To obtain a list of all loans and advances outstanding and check the agreement of balances as shown in the schedule with those in the ledger accounts. ii, To inspect agreements to satisfy himself about the validity and accuracy of loans and advances granted. . To see that there is acknowledgment of parties in respect of outstanding loans and advances. iv. To see that loans, if material, has been granted only when there is authorisation by the Memorandum and Articles of Association v. To check whether the loans granted were within the competence of persons who had granted the same. vi. To verify that loans and advances have been properly secured. vii. In case of claims made against insurance companies, shipping companies, railways etc. the auditor should examine the correspondence or other availableevidences to ascertain whether the claims have been acknowledged as debts, Vili. To ensure that provision has been made in respect of loans and advances which are too old and are likely to be irrecoverable. x. To verify that loans and advances are being recovered regularly by agreed instalments. x. To satisfy himself that loans and advances have been disclosed properly in the balance sheet as per Part 1 of Schedule | of the Companies'Act, 2013. xi, To ensure that there are no unrecorded loans and advances. xii. To enquire, as required Under Section 143(1) of the Companies Act, 2013, whether Loans and advances made by. thie company on the basis of security have been properly secured and whether the:terms on which they have been made are not prejudicial to the interests of the company or its members; and Loans and advances made by the company have been shown as deposits. (viii) Contingent liabilities (C.U.15) Contingent liabilities are those liabilities which may or may not arise in due course of time. In the words of Walter B. Meigs, ‘Contingent liabilities may be defined as potential obligation which may in the future develop into actual liabilities or may dissolve without necessitating any outlay. Example: Contingent liability in respect of suit pending in the court of law or compensation to be paididue to court order, loss due to speculative transaction, or forward contracts, ‘Auditor's duty regarding contingent liabilities 1, An auditor has to collect the probable list of contingent liabilities, 2. An auditor has to collect certificates from the authority regarding absolute and contingent liabilities 3. An auditor has to ensure that all the contingent liabilities must be shown in the footnote of the balance sheet 4, An auditor must take note regarding the contingent liabilities which may arise in the future due to a court order.