Question Bank

Principles and practices of Auditing

Unit 1Two Marks Questions

1. Define Auditing?Ans. Mautz : defines auditing as being “Concerned with the verification of accounting data with determining the accuracy and reliability of accounting statements and reports.”

2. Define Auditor?Ans: Auditor is a trained professional who is responsible to review and verify the accounting data of any business undertaking pertaining to its business activities.

3. State any two objectives of audit?Ans: Primary Objective . The primary objective of an auditor is to respect to the owners of his business expressing his opinion whether account exhibits true and fair view of the state of affairs of the business. Secondary Objectives: Detection and prevention of Frauds and errors.

4. What is government audit?Ans: Government audit serves as a mechanism or process for public accounting of government funds. It also provides public accounting of the operational management, Programme and policy aspects of public administration as well as accountability of the officials administering them.

5. What do you mean by statutory audit?

Ans: any audit carried on as per the requirement of law is called as a statutory audit. eg: all companies have to get their accounts audited as per the provision of the company’s Act of 1956.

6. Give the meaning of external audit?Ans: It refers to the audit of a business concern undertaken independently by a professional qualified auditor. Such an audit report is quite independent of the business concern by whom he is appointed to audit. 

7. What is final audit?Ans: Final audit is conducted by the statutory auditors after the close of the financial period with a view to prepare the financial statements &audit report to be presented to the Board of Directorsand to be filed with statutory authorities.

8. What is tax audit?Ans: a Tax audit refers to examining of an organisations or individuals incomes or expenses and claims of deductions or exemptions for the purpose of assessment of tax.

9. What is management Audit?Ans: Management audit is one of the techniques of management control. It refers to the systematic examination of the activities of management at all levels of management . 10.What do you mean by cost audit?Ans: Cost Audit means audit of cost records.In other words, it refers to detailes checking and verification of correctness of cost accounts, costing techniques and system.

11.What do you mean by performance audit?Ans: In this type of audit the auditor examines the growth of the organization in terms of production, sales and profitability of the organization.

12.What do you mean by audit note book?Ans: Audit note book is a note book which is maintained by the audit staff in which large variety of matters observed during the course of audit are recorded.

13.State any two objectives of audit note book?Ans: Two objectives of Audit Notebook are:

It helps in preparation of audit report. It helps the auditor to know about the progress of audit work and the

efficiency of his staff in audit work.

14.What do you mean by audit working papers?Ans: Audit working papers refers to the audit papers which records the audit evidence resulting from the audit work performed to provide support for the auditor’s opinion including the representation:

15.State any two purposes of audit working papers?Ans: The two purposes of audit working papers are:

They show the extent of adherence to accounting principles and accounting standards.

They can be used as a permanent of quick preparation of audit report.

16.Define Audit Program?Ans: An Audit program is an outline of all procedures to be followed in order to arrive at option concerning the client’s financial statements.

17.State the types of audit program?Ans: The types of audit program are:(i) Fixed or rigid audit programme.(ii) Flexible audit programme.

18.What do you mean by fixed audit program?Ans: Generally, auditor prepares audit program on the suggestions and recommendation of assistant staffs but such program cannot be changed during the course of audit which is known as fixed audit 

19.What do you mean by Flexible Audit Program?Ans: An audit program which can be changed as per the need, time, nature of business and auditing standard is known as flexible audit program. 

20.What do you mean by internal audit?Ans: Internal audit is a review of operations and records undertaken within a business by specially assigned staff.

21. What is interim audit?Ans: this audit is conducted in between two final audits. Generally this audit is done in case of joint Stock Company which are paying interim dividend. At the same time, there are certain companies which close their accounts over in 6 months, such companies also prefer interim audit: Eg:- commercial bank – their interim audit enables the business enterprise to publish interim report.

21.What is cash audit?Ans: It involves verification of cash transactions. All cash entries for a given period have to be verified with cash vouchers. The report is submitted regarding cash receipts and payments.

22.What is partial audit?Ans: when audit is carried out in respect of only a part of books of accounts, it becomes partial audit. If the proprietor suspects fraud wants to investigate certain facts and figures he may prefer partial audit.

Eight Marks questions:

Q1. Briefly explain the different types of frauds?Ans. Frauds is an act done intentionally to get an advantage or gain. Errors are unintentional, whereas frauds are intentional errors.Type of frauds following type of frauds can occur in the books of account:(i) Misappropriation of goods: – When any employee or any outsider of the company steels the goods (raw material, semi-finished product or finished goods) this type of fraud occurs.(ii)Misappropriation of cash: – similarly cash can also be misappropriated. The auditor has to verify the loss of cash by-1. Checking receipts of the business

2. Cash used by the firm and3. Balance cash in hand

(iii)Falsification of Books-Intentionally writing the books of account in a wrong way is known as falsification of the books of account. This type of fraud is done in the books of account with the involvement is interested in showing a picture of the state of affairs of the company in such a way that suits them. There may be a hidden purpose behind it.This type of act can be done for following purposes:-1. To show less profit: This can be done by showing less receipt or by showing less expense. This object may be to save tax or to avoid takeover bids.2. To show more profit: this can be done by showing more receipts or by showing fewer expenses. This can be done in order to attract more investments, loans. Or to attract the shareholders etc.

Q2. Write differences between auditing and accounts. OR Explain difference between book keeping and accountancy?

Sl.no Points of difference

Accounting Auditing

1 Meaning It is concerned with recording of business transactions systematically

It is concerned with verification of accounts prepared by the accountant

2 Objective The objective is to know the financial result of the business

The objective is to verify the truth and fairness of the accounts

3 Scope The scope of accounting is limited to the preparation of financial statements

The auditing is concerned with checking of accounts.

4 Status Accountant is an employee of the organization

Am auditor is an independent auditor who does not belong to the organization

5 Benefit Accountant gets salary for his work

Auditor gets fees for his work known as audit fees.

6 Period of work Accounting work is carried throughout the year.

It is done usually at the end of the year.

7 Qualification There is no formal qualification for accounting work

To become a company auditor one should be a qualified chartered accountant.

8 Dependence Accountancy is not dependent on auditing

Auditing can be started only after accounting ends and it is dependent on accounting

9 Nature of work Accountancy is a constructive work

Auditing is an analytical work

10 Accountability The accountant is accountable to management

Auditor is accountable to shareholders.

Q3. Distinguish between internal audit and independent audit. (dec 2000)

Internal Audit Independent Audit or External audit

It is a type of audit conducted by the own staff of the organization specifically assigned for that purpose.

This is a type of audit performed by the auditors outside the business organizations.

This audit work is carried out continuously throughout the year

This audit is work happens once at the end of the year

In this type of audit, thorough examinations of the accounting transactions as well as the system according to which transactions are recorded are conducted.

They are no way related to the preparation of accounts or the management of organization

It is done to verify the reliability and authenticity of the financial accounting and other records presented to the management.

This audit is conducted in order to fulfill the legal requirement of the business.

Q4. Briefly state the advantages and disadvantages of interim audit?

Ans: Advantages Of Interim Audit

1. Interim audit is good where the publication of the interim figure is necessary.

2. Then final audit can be completed very soon, if there has been an interim audit.

3. Errors and frauds can be detected more quickly during the final audit.

4. There is moral check on the staff of the client as the accounts are checked, say after three or six months in the interim audit.

Disadvantages Of Interim Audit

1. Figures may be altered in the accounts which have already been audited.

2. It will mean that the audit staff will have to prepare notes when they finish the interim audit.

3. Interim audit is an additional work because final audit must be conducted after conducting this audit too.

Q5.write down the differences between continuous and interim audit?

Ans: Differences between continuous and interim audit are as below:

Points of distinction

Interim audit Continuous audit

1  Fee The fee of interim audit is low. The fee of continuous audit is high.

2 Legal Position

The interim audit is not compulsory by law.

Continuous audit is compulsory by law.

3 Objectives Interim audit checks and determines the profit or loss for the particular period.

Continuous audit shows the true and fair view of the financial statement.

4 Scale Of Business

Interim audit is conducted for the both large scale and small scale business.

Continuous audit is conducted only for large scale business.

5 Scope  In interim audit there is no detailed checking of accounts.

 In continuous audit there is a detailed checking of accounting records.

6  Verification Verification of assets and liabilities are done when interim audit is conducted.

 In continuous audit it is done when balance sheet is prepared.

7 Period Of Audit

 Interim audit period is upto the particular date.

Continuous audit period is for one whole year

8  Interest Of The Third

In case of interim audit third In case of continuous audit

Party party has no interest. third party may be interested.

9 Trial Balance  Preparation of trial balance is compulsory in interim audit.

 It is not compulsory in continuous audit.

10 Report  The report of interim audit is presented at the end of the interim audit.

Continuous audit report is presented at the end of the accounting period.

Q6. Distinguish between continuous audit and internal audit?

Sl.no

Continuous Audit Internal Audit

1 Checking of A/C is done by an auditor

It is conducted by staff, employees of concern specially appointed for purpose.

2 Its objective is to findout truthness and fairness of financial statement/operating result of business.

Its object is to ensure that internal checks and accounting system are adequate and effective.

3 Auditor must be qualified chartered accountant

Auditor need not be qualified chartered accountant.

4 The auditor conducting continuous audit is independent of management

Staff conducting internal audit is not independent of management

5 It is done by external auditor It is done by internal staff

6 Audit report needs to be submitted at year end

No question of auditor report arises

7 Auditor is responsible to share holders

Auditor is responsible to internal staff

Q7. Distinguish between continuous audit and Final audit?

Ans: The difference between continuous audit and final or annual audit are as below:

Sl.no Points of distinction

Continuous audit Annual or final audit

1 Period Continuous audit remains continue for whole year.

Final audit is done at the end of the year

2 Scope In case of continuous audit accounts are checked in detail.

 In case of final audit detailed checking is not made as compared to continuous audit.

3 Chances Of Fraud   In continuous audit chances of errors and frauds are reduced.

In case of final accounts chances of fraud and errors high.

4  Visits In case of continuous audit, the auditor makes many visits.

 In final audit, the auditor makes one visit in a year.

5 Dividend To declare the interim dividend and final dividend, continuous audit is very useful.

 Due to final audit only final dividend is declared.

6 Scale Of Business Continuous audit is desirable for large size of business.

 Final audit is very desirable for small business.

7 Checking  Continuous audit has strong check on the employees.

 In case of final audit there is a less check on the employees.

8 Fee   Fee of continuous audit is high as compared to the final audit.

Final audit fee is low as compared to the continuous audit

9 Time Of Conduct  Continuous audit can be conducted when entries and

Final audit is conducted after the completion of

records are being prepared. entries and record.

10 Suitability  In case of poor internal control system continuous audit system is suitable.

In case of effective control system final audit may be conducted.

11 Proper Planing  In case of continuous audit planning is effective because accounts are prepared in time.

In case of final audit effective planning is not made because accounts are prepared late.

Q8. Distinguish between internal and external audit?

Ans: Difference between internal audit or auditor and external audit or auditor

1. Appointment :-Internal auditor : Internal auditor is appointed by the management of the company.External auditor : External auditor is appointed by the shareholders of the company.

2. Legal Position :-Internal auditor : Legally internal audit is not compulsory.External auditor : External audit is compulsory by law.

3. Status Of Auditor :-Internal auditor : Internal auditor is employee of the company.External auditor : External auditor is an independent person.

4. Qualification :-Internal auditor : For internal auditor any specific qualification is not compulsory.External auditor : For external auditor specific qualification is compulsory.

5. Submission Of Report :-Internal auditor : Internal auditor has not to submit any report.External auditor : External auditor submits report to the shareholders.

6. Fixation Of Remuneration :-Internal auditor : Internal auditor remuneration is fixed by the management of the company.External auditor : External auditor remuneration is fixed by the shareholders of the company.

7. Name Of Remuneration :-Internal auditor : Internal auditor receives salary.

External auditor : External auditor receives audit fee.

8. Nature Of Checking :-Internal auditor : Internal auditor checks all the transactions.External auditor : External auditor may apply test check.

9. Right Of Attending Meeting :-Internal auditor : Internal auditor has no right to attend the meetings of the company's shareholders.External auditor : External auditor has a right to attend the meetings.

10. Kinds Of Audit :-Internal auditor : Internal audit is kind of continuous audit.External auditor : External audit is conducted after the preparation of final accounts.

11. Guidance :-Internal auditor : Internal auditor gives suggestions to the management for the betterment of the business.External auditor : External auditor has no need to give suggestions unless he is asked.

12. Duties :-Internal auditor : Internal auditor primary duty is to find the frauds and errors.External auditor : External auditor has to report about final accounts whether these are true or false.

13. Removal :-Internal auditor : Internal auditor can removed by the management.External auditor : External auditor can be removed by the share holders.

14. Case Of Misconduct :-Internal auditor : Internal auditor cannot be prosecuted for professional misconduct except (C.A).External auditor : External auditor can be prosecuted.

Q9 Give the meaning of audit working papers? What are is contents?

Ans: Audit working papers are those papers which contain essential facts about accounts, which are being audited. Its defined as the file of analysis, summaries, comments and correspondence build up by the auditor during the course of audit. The auditor maintains papers as supporting evidence to the audit work. The institute of chartered accountants of India states that “an auditor is expected to maintain evidence of work done by him and his staff”. Usually, audit working

papers contains a copy of the trial balances, schedule of debtors and creditors, reconciliation statements important correspondence etc.

Contents of Audit working papers:

1. Audit programme

2. Audit notebook

3. Audit appointment letter

4. Correspondence done in relation to audit programme

5. List of debitors and creditors

6. Opening and closing trail balance

7. A copy of the audit report

8. Rules of organization, memorandum of association, articles of association, prospectus. Etc.

9. List of cost vouchers

10.Documents relating to depreciation

Q.10. explain audit working papers and audit files as vital tools of an audit work?

Ans: Audit working papers are those papers which contain essential facts about accounts, which are being audited. Its defined as the file of analysis, summaries, comments and correspondence build up by the auditor during the course of audit. The auditor maintains papers as supporting evidence to the audit work. The institute of chartered accountants of India states that “an auditor is expected to maintain evidence of work done by him and his staff”. Usually, audit working papers contains a copy of the trial balances, schedule of debtors and creditors, reconciliation statements important correspondence etc.

Purpose of maintaining working paper:

1. They show the extent to which accounting principles and auditing standards have adhered to.

2. They provide the required support for the auditors report.

3. They also reveal the efficiency with which the audit work was done.

4. They can be used as evidence in the court to defend himself against negligence in his duty.

5. They help the auditor in finalizing his report quickly.

6. They help the auditor to understand the efficiency of the accounting system, internal check system etc.

Q.11. state the objective of cost audit?

And: the following are the objectives of cost audit:

a) To establish the accuracy of the costing data. This is done by verifying the arithmetical accuracy of cost accounting entries in the books of accounts.

b) To ascertain whether the costing records have been maintained properly or not.

c) To find out whether the costing principles by management are followed in the preparation of cost accounts or not.

d) To confirm whether the cost statements are drawn from costing records and exhibit true and fair view of cost of production.

e) To verify whether each iten of expenditure entered in costing records have been properly incurred or not.

f) To print out the inefficiencies in the area of material labour, and machines and to assist the management to evaluate suitable measures for controlling them.

g) To checkup the general working of the costing department and to suggest ways and means for its smooth working.

Q.12 state the objectives of management audit?

Ans: Objectives Of Management Audit

Main objectives of management audit are as follows:

1. To formulate the goal of an organization.

2. To ensure the fulfillment of goals.

3. To help management to improve the activities and procedures.

4. To help all the members of management to make effective discharge of their duties.

5. To help in the improvement of profits.

Q13. Write a note on audit program?

And: Meaning Of Audit Program

An auditor prepares a plan after the selection of senior and junior staffs allocating the jobs to them, mentioning when to start, how to do the work etc. This plan is known as audit program.

An auditor should include all the procedures in written form, objectives of each sector and all the directions which are to be given to the staffs which helps to control their works and helps to implement such programs into action. Following are the facts regarding meaning of audit program:

* Audit program is a detailed work plan which includes the time of doing work and how to do the works.

* Audit program includes audit procedures

* Audit program estimates the duration to complete the audit task

* Senior staffs prepare audit program to junior staffs on the basis of nature of business

* Generally accepted points are included in the audit program

* Junior staffs put tick marks in the completed tasks

Q.14: Distinguish between management audit and cost audit?

Ans: the main differences between management audit and cost audit are as under:

Sl.no Cost audit Management audit

1 It is the verification of cost accounting records to measure the internal efficiency of the business.

It is the investigation into the objectives and actions of the management to measure the performance of the management.

2 It is generally a programme of one year It may cover more than one year

3 It has to be conducted only by qualified cost accountants or CAs

It can be conducted by any independent person having good knowledge of management priciples an practices

4 Cost audit is made compulsory for companies engaged in production, processing, manufacturing or mining activities

It is not compulsory for any company

5 There is a time limit fixed by the any statue for the submission of cost audit report

Statue for the submission of management audit report.

Section – C (16 marks questions and answers)

Q1. Explain the types of audit?

Ans: Classification of audit or types of audit Audit can be classified on different types: ( 1) Classification of Audit on the basis of Organization structure. ( 2)Classification of audit on the basis of Degree of independence of the auditor ( 3) Classification of Audit on the basis of method or approach to audit work or on the basis of extent of work to be performed or on the basis of conduct of audit. (4) Classification of audit on the basis specific objectives Classification on the basis of organization or organization structure : - On the basis of organization structure, audit may be classified into three types. They are:

( 1)Statutory audit ( 2) Government audit ( 3) Private Audit Statutory Audit: -

Statutory audit refers to the audit of accounts of a business enterprises carried out compulsorily under the provisions of a statute or law. It is is the audit carried out compulsorily under any statute any law.

2. Government audit: - Government audit refers to the audit of accounts of Government departments and offices, Government companies and statutory or public corporations.

3.Private audit or Voluntary audit : - Where an audit is not compulsory under any statute, but is undertaken by the owners voluntarily to get the benefit of audit, the audit is called private audit. In other words , private audit refers to the audit of accounts of private enterprises such as a sole trading concerns, partnership firms and other individuals and institutions.

Classification of audit on the basis of Degree of Independence:- 1. Internal audit 2. External audit

Internal audit: -Internal audit is a continuous and systematic review of the accounting, financial and other operations of a concern by the staff specially appointed for the purpose. In other words, it is the audit of accounts by the staff specially appointed for the purpose.

2. External Audit. Audit conducted by independent qualified person and examines the books of accounts and report to the management.

On the basis of Conduct of audit or methods or approach to audit work

1. Continuous Audit. Continuous audit is one where the auditor’s staff is occupied continuously on the accounts whole the year round and performs interim audit. It is an audit under which detailed examination of the books of accounts is conducted continuously throughout the year. It is continuous review of the accounts of the organization. It is generally applicable to banking company and insurance company.

2. Final Audit or Annual or periodical audit It is an audit carried out after the preparation of financial statement. It is an audit where the auditor takes up his work of checking the books of accounts only at the end of the accounting year. In this case, the audit work is commenced and completed in a single uninterrupted session.

3. Interim Audit. It is an audit conducted between two annual audits. In other words, it is the audit conducted in the middle of the financial year. It is carried out for some specific purpose for declaring interim dividend, ascertaining interim profit.

4. Balance sheet audit : - Balance sheet audit is a type audit which concentrates mainly on the verification of the items in the balance sheet such as capital, reserves, profit and loss account balance, liabilities and provisions and all the assets of the business.

5. Occasional Audit:- An occasional audit is an audit which is conducted once a while, whenever the need arises. In other words , it is a kind of audit which is not conducted on regular basis, but is conducted for a special event, time or purpose.

6. Complete Audit : - Complete audit is a kind of audit under which all the records and books of accounts are audited by an auditor.

7. Partial Audit: - It is a kind of audit the scope of which is limited one. It is carried out in respect of only a part of the books of accounts of a business, for a part of whole of the period.

Classification of audit on the basis of specific objectives: -

1. Cash Audit: - It is a type of partial audit which is undertaken for only cash receipts and cash payment.

2. Special Audit:- It is a kind of audit with some special object in view. It is a fact finding enquiry.

3. Operational Audit: - It is an efficient examination of the various operations of the different functional area of business.

4. Proprietary Audit: - It is an audit in which various actions and decisions are examined to find out whether in public interest and whether they meet the standard of conduct.

5. Efficient Audit: - It is an evaluation of overall efficiency and performance of an organization.

6. Tax Audit: - It means audit for tax purpose. Audit required to be carried out of income tax act of 1961. It is conducted by certified Chartered Accountant.

7. Cost Audit. It is a thorough examination of the cost accounting records of a company by a cost auditor to ensure that they are accurate and they also follow to the cost accounting principles, procedures and plans.

8. Management Audit. It is the critical examination, scrutiny and appraisal of plans, policies, procedures, objectives, means and operational area of the organization. It is the audit of managerial actions and decisions. It is the audit of activities of various level of the managers.

9. Social Audit: - Social audit is a systematic study and evaluation of a business enterprise’s social performance as distinguished from its economic performance. Social audit is intended to evaluate the social performance or social contribution of a business organization. TISCO firstly adopted social audit.

Q2. What is continuous audit and final audit? Or explain continuous audit is a double edged weapon. What are their merits and demerits?

Ans: Continuous Audit

Continuous audit or a detailed audit is an audit which involves a detailed examination of books of account at regular intervals i.e. one month or three months. The auditor visits clients at regularintervals during the financial year and checks each and every transaction. At the end of the year auditor checks the profit and loss account and thebalance sheet. A continuous audit is not of much use to small firm as its accounts can be audited at the end of the financial year without much loss of time.

Advantages Of Continuous Audit

1. Easy to quick discovery of errors

Errors and frauds can be discovered easily and quickly as the auditor checks the accounts atregular intervals and in detail. As a auditor visits the client after a month or two or so on, the number of transactions will be small and hence, the errors will be detected easily and quickly.

2. Knowledge of technical details

Since the auditor remains more in touch with the business, s/he is in a position to know its technical details and hence can be of great help to her/his clients by making valuable suggestions.

3. Quick presentation of accounts

As most of the checking works are already performed during the year, the final audited accounts can be presented to the shareholders soon after the close of the financial year at annual general meeting.

4. Keeps the client's staff alert

As the auditor visits the clients at regular intervals, the clerks are very regular in keeping the accounts up-to-date. They will see that there is no in accuracy or frauds as it would be detected by the auditor at the next visit.

5. Moral check on the client's staff

If the auditor pays surprise visit, it will have a considerable moral check on the clerks preparing the accounts as they do not know when the auditor may pay a

visit to check. Moral check will be more valuable to make staff alert and careful.

Disadvantages Of Continuous Audit

In spite of the above-mentioned advantages of a continuous audit, there are certain drawbacks of such and audit which are as follows:

1. Alteration of figures

Figures in the books of account which have already been checked by the auditor at previous visit, may be altered by a dishonest clerk and the frauds may be committed.

2. Disturbance of client's work

The frequent visits by the auditor may disturb the work if the client and cause inconvenience to the latter.

3. Expensive

Continuous audit is an expensive system of audit because an auditor devote more time. So, company needs to pay more amount as the remunerations of an auditor.

4. Queries may remain outstanding

The audit clerk may lose the thread of work and the queries which s/he wanted to make may remain outstanding as there might be a long interval between two visits.

5. Extensive note taking

Extensive note taking may be necessary in order to avoid any alteration in the figures after the audit.

Q3. What are the steps to be undertaken by the auditor before starting the new audit?

Ans: An auditor must prepare well before he actually commences a new audit. He has to take certain steps or bear in mind certain considerations before commencing a new audit. These steps are known as preliminary steps or general steps.

The following are the important preliminary or general steps to be taken by an auditor in all types of concerns before the commencement of a new audit:

I. Obtaining letter of appointment. Auditor should satisfy himself that he has properly appointed.

II. Knowing the scope of his studies.

III. Ascertaining the nature of the business undertaken by the client enterprise.

IV. Knowledge of the organizational structure of the client business. Pattern of authority and responsibility are revealed through the organizational structure.

V. Obtaining the list of principal officers of the client business.

VI. Knowledge of internal check, internal control and internal audit

VII. Knowledge of system of accounting of the client business.

VIII. List of books maintained in the organization.

IX. Detailed study of important documents of the organization.

X. Study of prospectus, preliminary contracts etc of the organization.

XI. Study of the previous year financial statements.

XII. Enquiry about the reason for the change of the auditor.

XIII. Giving instructions to the client.

a) The books should be closed before the audit.

b) Voucher should arranged date vise.

c) Schedules should be kept for ready reference such as schedules of debtors and creditors, list of bad and doubtful debts, schedule of investment, schedule of depreciation etc..

XIV. Division of audit work among the auditors.

XV. Preparation of audit program.

Q4 give the meaning of audit note book. What are the contents and merits ?

Ans: Audit Note Book

A note book which is prepared by the audit staff to note down all the uncleared queries which s/he may find in the course of audit and requires further clarification and explanation is known as audit note book. Audit note book contains information regarding day-to-day work performed by the audit staff on any particular date. Notes about all types of errors, difficulties and uncleared queries or points to be discussed with the auditor or clients and the points which are to be incorporate in the report are noted down.

Contents Of Audit Note Book

General Information

Generally the following information is incorporated in audit note book:

1. The nature of the business carried on and the important documents relating to the constitution of the business, i.e. Memorandum Of Association, Articles Of Association ( in the case of limited companies) and Partnership Deed ( in the case of partnership firm) and other legal documents.

2. The name of the client and the audit year.

3. A list of books of accounts in use.

4. Names of principal officers, their duties and responsibilities.

5. Particulars of the accounting and financial system followed and the internal check in operation in the business.

6. Details regarding accounting and financial policies followed in the business.

7. A copy of the audit program.

Special Matters To Be Recorded In The Audit Note Book

1. Routine queries not cleared, i.e., missing receipts and vouchers etc.

2. Details of mistakes and errors discovered.

3. The points raised during the course of audit, to which the attention of the auditor must be drawn, i.e. failure of the company to comply with the provisions of the Companies Act or of the Memorandum of Association and other legal requirements.

4. Extracts from minutes books and contracts and other correspondence with various government agencies, financial institutions, debtors, creditors etc.

5. The points to be incorporate in the audit report.

6. The points which needs further explanation and clarification e.g., a change in the basis of valuation of finished stocks or in the computation of depreciation, etc.

7. Date of commencement and completion of the audit. 

Merits of audit notebook

The major points which are detected or found during the course of audit can be noted in audit note book. So, an auditor can get the following benefits by maintaining audit note book properly:

1. No Need To Repeat Task

All the facts related to audit are noted down in the audit note book. While auditing the books of accounts of same organization auditor does not need to do the same work. So, s/he can save time and cost.

2. Helps To Get Clearance Against The Case OF Misfeasance And Negligence

If any person files the cases against the auditor charging misfeasance and negligence, an auditor can present audit note book in the court or concerned authority and can get clearance against such cases.

3. Helps To Refer In Future

Auditor can refer such noted point in the future which helps to continue the work of audit in future to the auditor.

Q5. What are the merits and limitations of audit?

Ans: Auditing has become a compulsory task in the business organization. All the organizations like business, social, industries and trading organizations make audit of books of accounts. Now-a-days, owner of business and its management are separate. So, to detect and prevent frauds, auditing has become essential. Its advantages are as follows:

1. Audit Helps To Detect And Prevent Errors And Frauds

An auditor's main duty is to detect errors and frauds, preventing such errors and frauds and taking care to avoid such frauds. Thus, even though all organizations do not have compulsion to audit, they make audit of all the books of accounts.

2. Audit Helps To Maintain Account Regularly

An auditor raises questions if accounts are not maintained properly. So, audit gives moral pressure on maintaining accounts regularly.

3. Audit Helps To Get Compensation

If there is any loss in the property of business, insurance company provides compensation on the basis of audited statement of valuation made my the auditor. So, it helps to get compensation.

4. Audit Helps To Obtain Loan

Specially financial institutions provide loan on the basis of audited statements. A business organization may obtain loan considering the audited statement of last five years. So, an organization should make audit compulsory to obtain loan.

5. Audit Facilitates The Sale Of Business

Valuation of assets is made by the auditor. On the basis of valuation of assets and liabilities, businessman can sell his business. It helps to determine the price of business.

6. Audit Helps To Assess Tax

Tax authorities assess taxes on the basis of profit calculated by the auditor. In the same way sales tax authority calculates sales tax on the basis of sales shown in the audited statement.

7. Audit Facilitates To Compare

An auditor instructs an accountant in the same way which helps to compare books of accounts of current year with the accounting of the previous year. So, comparing the accounts of current with previous years helps to detect errors and frauds.

8. Audit Helps To Adjust Account Of Deceased Partner

Valuation of all the assets and liabilities of the business is made by the auditor while auditing books of account. Such valuation helps to clear the amount of deceased partner.

9. Audit Helps To Present A Proof

If any case is filed against the auditor regarding negligence, auditor can present audited report as a proof to settle such case. So, it helps to present proof to settle such cases.

10. Audit Provides Information About Profit Or Loss

A businessman wants to know profit or loss of his business after a certain period of time. So, the owner of the business can get information about profit or loss after auditing the books of accounts.

11. Audit Helps To Prepare Future Plan

All the audited statements remain true and correct. Such true and correct account helps to prepare for the future plans.

12. Audit Helps To Increase Goodwill

Auditing shows the profitability and financial position of an organization which creates faith of public over the business. Thus, auditing helps to increase goodwill of an organization.

Limitations of Auditing

1. All transactions cannot be checked – It is not possible for an auditor to check each and every transaction; he has to check them on sample basis.

2. Evidence is not conclusive – Audit evidence is not conclusive in nature the confirmation of debtors is not conclusive evidence that all amount will be collected, the conclusions are persuasive rather than conclusive.

3. Not easy to detect some frauds – It’s not easy for an auditor to detect the deeply laid frauds which involves acts designed to conceal them such as forgery, false explanation, and not recording transaction and so on.

4. Audit cannot assure about profitability or efficiency of management – Even though the accounts are audited it doesn’t that the user can take granted the future profitability or prospects of concern as audit don’t comment on efficiency of the management.

5. Rely on experts – The auditor has to rely on experts like lawyers, engineers, valuers etc. for estimation of contingent liability and valuation of fixed assets. 

Q6. Explain the essentials and objects of audit working papers?

Ans: Audit Working Papers:

Audit working papers are those papers which contain essential facts about accounts, which are being audited. Its defined as the file of analysis, summaries, comments and correspondence build up by the auditor during the course of audit.

The auditor maintains papers as supporting evidence to the audit work. The institute of chartered accountants of India states that “an auditor is expected to maintain evidence of work done by him and his staff”.

Usually, audit working papers contains a copy of the trial balances, schedule of debtors and creditors, reconciliation statements important correspondence etc.

Purpose of maintaining working paper:

1. They show the extent to which accounting principles and auditing standards have adhered to.

2. They provide the required support for the auditors report.

3. They also reveal the efficiency with which the audit work was done.

4. They can be used as evidence in the court to defend himself against negligence in his duty.

5. They help the auditor in finalizing his report quickly.

6. They help the auditor to understand the efficiency of the accounting system, internal check system etc.

Working papers should be clear complete, and contain the necessary information so that they may be of maximum utility. They should be properly organized, documented and signed. In this regard its said hat “an auditor is often judged by the quality of the working paper prepared by him under his guidance”.

working papers are confidential documents hence he should not disclose the facts to others. Doing so results in professional misconduct. Working papers should be preserved properly because they are important documents.

Q7. What is audit programme? what are its merits and demerits?

Ans: Meaning Of Audit Program

An auditor prepares a plan after the selection of senior and junior staffs allocating the jobs to them, mentioning when to start, how to do the work etc. This plan is known as audit program.

An auditor should include all the procedures in written form, objectives of each sector and all the directions which are to be given to the staffs which helps to control their works and helps to implement such programs into action.

Following are the facts regarding meaning of audit program:

* Audit program is a detailed work plan which includes the time of doing work and how to do the works.

* Audit program includes audit procedures

* Audit program estimates the duration to complete the audit task

* Senior staffs prepare audit program to junior staffs on the basis of nature of business

* Generally accepted points are included in the audit program

* Junior staffs put tick marks in the completed tasks

Merits of audit program

1. Audit Program Saves Time And Labor

All the directions which are to be given to assistant are clearly stated in the audit program which helps to complete the task in time. Audit program also helps to conduct the audit of the business in coming years which saves time and labor.

2. Audit Program Increases Efficiency

All the responsibilities of auditor are divided among the number of staffs considering their skill and intelligence which helps to complete the work of audit properly. Similarly, the works are divided among the assistant staffs on the basis of their caliber which helps to increase efficiency.

3. Audit Program Helps To Control

An auditor can compare the work performed by the assistants on the basis of audit program which helps to control their work if there are any deficiencies.

4. Audit Program Helps To Maintain Uniformity

Works are divided among the assistant staffs; so there is no any chance of leaving non audited statements. If the work of audit is performed on the basis of audit program every year, uniformity can be maintained in the work of audit which helps to compare the report of various years.

5. Audit Program Helps To Make Responsible

Work of assistant is clearly defined in the audit program and assistant puts signature in the completed work. So, if any work is left out, assistant can be made liable for such work.

6. Audit Program Helps To Maintain Continuity

Audit program clearly shows the completed task and procedures of doing work. So, if any staff leaves the job or remains absent, new staff can easily continue the job of audit.

7. Audit Program Helps To Present As Proof

Auditor can present audit program as proof if he/she has been accused of misfeasance or negligence and can get clearance from such accusation. Audit program can be presented in the court also.

Demerits of audit programme

1. Audit Program Harasses To Staffs

All the staffs should perform task within the limitation given in audit program. So, staffs can not use their knowledge and caliber which harasses to them.

2. Possibility OF Being Unsuitable

Nature and size of business differs. So, the program which is prepared at the beginning of the year remains unsuitable. Different organizations may have their own problems. So, similar type of program may not be applicable to all.

3. Audit Program Increases The Chance Of Fraud

Staffs of the client get information about the audit program in advance which increases the chance of committing frauds. Similarly, it harasses the audit staffs so they perform the work of audit carelessly which also increases the chance of committing frauds.

4. Audit Program Is Unsuitable To Small Concern

Small concern has less transactions and work of audit can be completed in short period of time. So,audit program is not essential to audit such concern.

5. Exclusion Of Problems Of New Technology

New techniques and technologies are used in the work of accounting. Such technology creates the problem in the work of audit but such problems and remedial measures are not included in the audit program.

Q8. What are the advantages and disadvantages of management audit?

Ans: Advantages of management audit:1. Management audit provides information about strong and weak points of the management after reviewing policies and programs. So, it helps to the smooth operation of an organization.

2. Management audit provides suggestions to the management which helps to maintain effective management.

3. Management audit helps the management providing suggestions to attain goal of an organization.

Disadvantages Of Management Audit

1. Management auditor cannot understand the practical problems. So, the suggestions provided by them is theoretical but not practical.

2. Scope of management audit is vague. So, it does not help to achieve specific goal.

3. Generally management gives more emphasis on maintaining books of accounts rather than concentrating on other factors. So, it consumes time of farsighted management.

Unit 2

INTERNAL CONTROL

Two marks questions

Q1. Define internal control?

Ans. According to W.W.Bigg “Internal control is best regarded as indicating the whole sysem of controls, financial and otherwise, established by the management in the conduct of a business, including internal check, internal audit and other forms of control.”

Q2. Write the meaning of internal check?

Ans. Internal check means a system under which the work connecting with carrying out and recoding of transactions is allocated among the various members of the staff so that errors and frauds are either prevented altogether or if committed are rendered capable of early detection by automatic operation of the system, unless all the clerks join hands in defrauding their employees.

Q3.Write any two objectives of internal check?

Ans. The objectives of internal check are:

(i) To detect errors and frauds easily and quickly.

(ii) To prevent misappropriation of goods or cash by any clerk etc.

(iii) To prepare final accounts with ease and efficiency as an efficient system can make accounts more reliable.

Q4. Write objects of internal control?

Ans. The objects of internal control are:

(i) Assets Protection: the assets are the backbone of any business. These are in the custody of some specific officers of the business. The internal control system checks the valuation and protects the assets of the business.

(ii) Prevention of errors: the purpose of internal control is to prevent errors.

(iii) Accurate record: the main object of internal control is to maintain all records and transactions of business according to the generally accepted accounting principle.

Q5. Define internal check?

Ans.According to Prof.L.R.Dicksee defines internal check as,” A an arrangement of the accounting routine that errors and frauds are automatically prevented or discovered by the very operation of the book-keeping itself.”

Q6. Mention any two principles of internal check?

Ans. The two principles of internal check are:

(i) The management can determine the total amount of work. The whole work is divided among departments. The heads of such department are responsible for the completion of work according to time table.

(ii) Coordination is the principle of internal check. All departmental managers are bound to coordinate with other in order to achieve organization objectives. Internal check determines the degree of coordination among the managers.

Q7. What are the methods of evaluating internal control?

Ans. There are two methods of evaluating internal control:

(i) Internal check: is an arrangement of duties allocated in such a way that the work of one employee is automatically checked by another.

(ii) Internal audit: is an evaluation and analysis of the business operation conducted by the internal staff.

Q8write any two merits of internal check?

Ans. The two merits of internal check are:

(i) It is very easy and convenient

(ii) It is quite easy to detect and prevent locating of errors and frauds.

Q9. Write any two demerits of internal check?

Ans. The two demerits of internal check are:

(i) It is an expensive system for a small scale concern, and hence it cannot afford in all divisions of organization.

(ii) The auditor’s work may become very difficult, if the system is defective and unorganized.

Q10. What do you mean by internal audit?

Ans. Internal audit is a review of operations and records undertaken within a business by specially assigned staff. It is an evaluation and analysis of the business operation conducted by the internal audit staff. It is the overall system of internal control established in an organization.

Q11. Write any two differences between internal check and internal auditing?

Ans. The two differences between internal check and internal auditing are:

Sl.no Internal check Internal audit1 Internal check means separation of

tasks and divisions of dutiesInternal audit means continuous audit by the employees

2 Internal check is applicable throughout the year.

Internal audit is may not be conducted throughout the year.

Q12. Write any two objectives of internal audit?

Ans. The two objects of internal audit are:

(i) To evaluate the accounting system.

(ii) To help an independent audit i.e. the external auditor can rely on internal auditor and there is no need of cent percent checking.

Q13. Give the meaning of embezzlement of cash?

Ans . embezzlement of cash is the fraudulent appropriation of cash by one lawfully entrusted with its possession. To embezzle means willfully to take or convert to one’s own use, another’s money or property of which the wrong does acquired possession lawfully by reason of some office or employment or position of trust.

Q14. Define wage payment?

Ans. Wage payment is a payment to a person for service rendered..the amount paid periodically, especially by the day or week or month, for the time during which workman is at job.

Eight marks questions:

Q1.Define internal control and explain its objectives?

Ans. Control is wider term and will include all types of management controls. It is a means of assisting modern business management in discharging its function. Internal control is a means by which an organisation’s resources are directed, monitored, and measured. It plays an important role in detecting and preventing fraud and protecting the organisation’s resources, both physical and intangible.