SECTION-A

1 What is Auditing?

Ans.: Auditing is a process of complete inspection of books of accounts and reporting on its
genuisness and authenticity.

Q 2. Define Auditing?

Ans.: Montogomery defined Auditing as "Auditing is a systematic examination of the books and
records of a business or other organisation obtain or verify and to report the facts regarding the
financial Operations and the results thereof.

0 3. What is Audit Note Book?

Ans.: A note book which is prepared by the audit staff to note down all the unclear queries which he
may find in the cause of the audit and requires further explanation.

0 4. What do you mean by Audit Working Paper?

Ans.: The special sheet maintained by the Auditor to record the audit plan, the nature, timing and
extent of audit procedures and the conclusions drawn from the evidence obtained during the course
of audit is called as Audit Working Paper.

Q 5. What is Audit strategy?

Ans.: It is a combination of audit approach to be-used, resources management and allocation, timing
of an audit and the way how the audit engagement is managed.

Q6. Write up meaning of Audit documentation.

Ans.: It is the principal record of auditing procedures applied, evidence obtained and conclusions
reached by the auditor in the course of auditing. It provides principal support for the auditors report.

Q7. What is Audit evidence?

Ans.: Audit evidence is all the information, whether obtained from audit procedures or other
sources, that is used by the auditor in arising at the conclusions on which the auditors opinion is
based.

Q 8. What written presentation?

Ans.: W.R. are statements made by client management confirming certain topics or supporting audit
evidence. The representations are needed by the auditor as supporting evidence in an audit
engagement.

Q 9. What is Audit Planning?

Ans.: Developing a general strategy and a detailed approach for the expected nature, timing and
extent of the audit.
 SECTION-B

Q 1. Write up merits and demerits of Auditing.

Ans.: Advantages/Merits of Auditing

1. Accuracy: Auditing ensures the accuracy or correctness financial transactions entered in the books
of accounts maintained by the business and other organisations.

2. Detection and prevention of errors and frauds: Auditing helps in the early detection of errors and
frauds and their prevention in future, leading to the accurate and systematic maintenance of books
of accounts and avoiding the losses due to frauds.

3. Authenticity and reliability: Auditing guarantees the authenticity/genuineness and

reliability/dependability of the financial statements prepared by business and other organisations.

4. A true and fair financial position: Correctness of the values of assets and liabilities shown in the
Balance Sheet is guaranteed when accounts are audited regularly. This would help to understand the
true financial position of the concern.

5. Uniformity in maintenance of books of accounts: Auditing facilities maintenance of books of

accounts and the financial statements over the years in a meticulous and uniform way. This would
permit the business unit to compare its accounts and its own performance from One year to
another.

6. Keeps the staff and management vigilant: Auditing keeps the employees in charge of maintenance
books of accounts and records, and the people at the help of affairs (management) on their toes
(vigilant, regular, prompt and honest). This in turn, helps the owners of the business to ensure that
their investment is safe and secure and they get from the business what they deserve,

7. Legal compliance: Auditing helps the enterprise and management to ascertain whether the legal
requirements in the matter of preparation and maintenance of books of accounts, returns and
statements are complied with and there is no infringement (violation) of such legal provisions,

8. Easy to get credit: Audited accounts help a business unit in availing of loan facilities from banks
and other financial institutions since audited accounts reflect the financial soundness of business
unit and thus relied upon by the creditors.

9. Better reputation: In case books of accounts are audited regularly by an independent professional
auditor, a business unit is in a position to build up and enhance its reputation in the business field.
This would, in turn, help in carving a niche in the minds of its stakeholders.

10. Legal evidence: In case of litigation or legal disputes between the business and a third party in
the court of law, audited accounts serve as a reliable evidence for the transactions carried on by the
business concern in defending the case in the court of law.
Advantages to the Owners of the Business:

1. Sole Trader of a Sole Trading Concern: In the case of a sole trader, auditing assures
systematic maintenance of books of accounts without any error or fraud. Further, it also
helps him in devising plans.
2. Partners of a Firm: In the case of a partnership firm, audited accounts serve as evidence for
the proper maintenance of the books of accounts. The audited accounts help in the
valuation of goodwill and settlement of accounts on the admission, retirement, or death of
a partner.
3. Shareholders of a Company: In the case of joint stock company, there is a separation of
ownership from management. Auditing assures the shareholders/owners a true and fair
reporting of the financial position of a company and that the affairs of the company are run
smoothly protecting their interest.

Advantages to Others:

1. Creditors: Lenders can depend on audited financial statements while taking a decision
to grant credit to their customers who run the business through the financial assistance
extended by the creditors.
2. Government Authorities: Government authorities accept audited statements as true
and fair for the assessment of income tax, wealth tax, goods and services tax, etc.
3. Employees of the Business: Audit of accounts protects the interest of the employees of
the business unit and it facilitates the settlement of claims of the employees for
increased wages and bonuses.
4. Investing Public: Members of the public who are interested to invest their valuable
surplus funds in the securities of companies are benefited since audited accounts assure
the safety and security of their future investment.
5. Insurance Companies: In the event of a claim for loss, the insurance companies can rely
on the audited figures submitted to them by those who have incurred loss and settle
such claims of damages due to fire, accident, theft., or other natural calamities.

Disadvantages/ Demerits of Auditing

1. Limited Scope: Auditing simply deals with the procedures techniques of checking,
vouching (verifying the truthfulness of entries with the help of documentary evidences),
etc. It keeps silent on other major issues like raising and management of finance,
administrative efficiency, management of people in the organisation, business ethics, etc.
2. May Fail to Serve the Purpose: Auditing is considered as a post-mortem of accounts. It
starts only after the completion of the preparation of books of accounts. So, there is no
use in examining the accounts as errors and frauds have already been committed.
3. Does not Guarantee Perfection: Owing to the limited time at the disposal of the auditor,
it may not be possible for him to make a detailed inspection of every transaction
recorded in the books of accounts. Therefore, auditing is not a position to give any
assurance as to the correctness of the financial account.
4. Manipulations may not be Revealed: An auditor has to depend upon the books of
accounts and records presented before him which might have been cleverly manipulated
by those people who are responsible for the maintenance of such books of accounts. At
 times, an auditor may not be able to unearth (detect) such manipulations and bring them
to the notice of the owner of the business.

Q 2. Write a note on Audit Programme.

Ans.: The successful completion of the work of an auditor depends On a sound audit programme. An
audit programme is a plan of action specially designed for each audit with a set of procedures to be
followed by the audit staff in the completion of work assigned to them. It begins with the
recognition of specific objectives followed by the specification of procedure designed to produce
sufficient competent evidential matter.

Essentials of Audit Programme:

1. Prepared by the Auditor

2. Prepared Before Hand

3. Individual Programme

4. Blue Print of the Task Distributed

5. Fixed Responsibility

6. In Writing

7. Contain Details of Procedures

8. Time Frame for Completion

9. Flexible

10. Copy to All Clerks

Advantages of the audit programme:

1. Supervision of Work: An auditor can supervise the work of his staff with the help of an audit
programme. He is also in a position to understand the progress made by him and his staff in
the audit work.
2. Allocation of Work: An audit programme acts as a tool in the hands of an auditor to
distribute the audit work among his staff based on their knowledge, experience, and skill.
3. Increased Efficiency : An audit programme enhances the efficiency of the Audit assistants as
they are very clear about their
4. Basic Instrument for Training : An audit programme can act as an instrument for training the
newly appointed audit staff as it lays down the duties and responsibilities of the staff and
procedures for the completion of a particular audit.
5. Fixation of Responsibility : since the audit assistant in charge of each work signs the audit
programme, it extracts the responsibility from him. He could be held liable for any
negligence in the performance of his duties,
6. Several Audits may be Controlled : An auditor can control the audit of various business units
simultaneously based on audit programmes of different audit.
 7. Final Review: Before signing the report, the auditor Can make a final review of the work
done by his assistants with the help of an audit programme.
8. Useful for the Future: An audit programme works as a roadmap for upcoming years and the
audit staff can use it as a reference for future courses of action.
9. Serves as Legal Evidence: A well-designed audit programme serves as evidence in the court
of law for the work done by the auditor in the completion of the work assigned to him, It can
also act as a shield against any charge of negligence by the client on the part of the auditor.
10. Adherence to Standards: An audit programme ensures the adherence of International
Accounting and Auditing Standards at the time of preparation of accounts and audit of
books of accounts.

Disadvantages of an audit programme:

1. Not Comprehensive: Even a detailed audit programme may not consider each work involved
during the audit of a business. In such a case, certain items may be left from being verified
by the auditor.
2. Rigidity: An audit programme cannot be applied uniformly to all business units as the audit
work of all organisations cannot be the same. A stereotype (rigid) audit programme cannot
be laid down for different types of business because each business has got it a own
problems.
3. Too Mechanical: The audit assistants tend to go ahead with the work as per the audit
programme. Hence, there is no scope for adopting new techniques which are necessary
according to the circumstances, which arise during the audit.
4. Not Suitable for Smaller Audit: An audit programme is not very useful in the case of a small
audit where the books to be audited are very few.
5. Ignoring the Quality of Work: There in always a tendency to speed up the audit work to
complete it within the required schedule. This tendency among the audit staff may result in
poor quality of audit work by them.
6. Tends to be Obsolete: In case the audit programme is not revised properly by the auditor
according to the changed circumstances, the audit programme may become obsolete
(outdate) and may not serve the purpose of auditing.

Q3. Briefly state the contents of Audit Working Papers.

Ans.: 1. Documents on client's nature of business.

2. Correspondence relating to acceptance and appointment of an auditor.

3. Evidence of the planning process including audit programme and any change made thereto.

4. Copies of audited financial statements for previous years.

5. Document of communication with the retiring auditor, if any. before the acceptance of the
appointment by the present auditor.

6. Extracts of important matters in the director's meetings and general meetings relating to the
audit.
7. Bank Reconciliation Statement prepared by the accountant.

8. Documents of communication with experts, debtors, creditors, and other third parties.

9. Conclusions reached by the auditor concerning major aspects of the audit.

10. Analysis of significant ratios and trends.

11. Confirmation by the banker regarding the bank balances of the client.

12. Documents relating the legal and organisational structure of the entity like the
Memorandum of Association and the Articles of Association.

13. Details of clarifications sought were made during the audit.

14. Analysis of transactions and balances.

4.Explain different qualities of an Auditor Professional Qualities.

Ans.: a) The auditor must have a complete and through knowledge of the principles, theory and
practice of accountancy.

b) He should have through knowledge in various legislation regulating business such as

Companies Act, the Indian Partnership Act, Banking and Insurance Act, the Indian Contract Act
etc.

c) He should be fully aware of new changes and developments in the principles and
developments in the principles and practice of auditing.

d) He must be familiar with the computer accounting and other automatic machine devices used
in the office.

e) He should know the various provisions relating to income tax, wealth tax, GST etc.

f) He should be familiar with the principle of economics and economic laws.

g) The auditor should have knowledge on the technical details of business under audit.

Personal Qualities:

1) Honesty: To carry auditors work successfully, he must be honest enough to maintain a good
moral standard.

2) Ability to work hard: He must have a pain staking attitude and willingness to work hard.

3) Impartial: He should not be influenced by any bias in discharging his duties.

4) Cautious and Vigilant: He should always proceed with his eyes open and be alert.

5) Ability to trace out Facts and Figures: He should possess a realistic attitude towards his work.

6) Ability to maintain Secrets: He should not disclose the secrets of his client to anybody.
7) Ability to Communicate: He should have ability to communicate, through his reports correctly,
forcefully, precisely concisely and clearly

Q 5. Explain relationship of audit with other disciplines.

Ans.: 1) Auditing and Accounting: Auditing and accounting are closely related with each other as
auditing reviews the financial statements. It naturally calls on the part of the auditor to have a
sound knowledge of generally accepted principles of accounting before he can service the
financial statements.

2) Auditing and Law: Auditing involves examination of various transactions from the view point
of whether or not then have been properly entered into. So the auditor should be familiar with
law of contracts and negotiable instrument.

3) Auditing and Economics: Accounting is concerned with accumulation and presentation of data
relating to economic activity. He is expected to be familiar with the overall economic
environment in which his client is operating.

4) Auditing and Behavioural Science: Even though auditor deals basically with the figures
contained in the financial statements, he shall be required to interact with a lot of people in the
organisation.

The internal auditor or the management auditor is expected to deal with human beings rather
than financial figures. Knowledge of human behaviour is very important for an auditor to
discharge his duties effectively.

5) Auditing and Statistics: Mathematically with the emergency of test check procedure, discipline
of statistics has come quite close to auditing as the auditor is expected to have the knowledge of
statistical sampling so as to arrive at meaningful conclusion.

6) Auditing and Data Processing: The dependence on the accuracy of the programme
instructions given today, the computer is able to carry out each of there activities with complete
accuracy. With such phenomenal growth, in the field of computer science. The auditor should
have good knowledge, of the components, general capability of the system and the related
terms.

7) Auditing and Financial Management: Auditing is also closely related with other functional
fields of business such as finance, production, marketing, personal and other general areas of
business management. The knowledge of various institutions and government activities that
influence the operations of the financial market are also required to be understood by an
auditor.

Q 6. State the details involved in Audit strategy document

Ans.: An Audit strategy document consists of the following details.

1. Significant Risks: This part describes the significant risks and mentions how the Auditors will
address them.
2. Materiality: This includes performance materiality and overall materiality.

3. Deliverables and Timetables: In this section, Auditors describe the Audit's timetable with the
deliverable documents.

4. Independence: This section describes how the Auditors ensure they are independent in the
Audit engagement.

5. Audit Approach and Scope: In this part, one can find the details of the approach and standards
Auditors use. Moreover, this also mentions whose works the Auditors consider reliable.

6. Audit Engagement Team: This part of the Audit strategy document usually describes the
senior members of the Audit team, including the team manager and leader.

7. Overview: This part summarizes the Auditor's responsibilities and engagement. For example,
offering an opinion on their client's financial statements and assessing their practices concerning
value for money.

Q 7. What are the objectives of Audit Engagement.

Ans.: 1. Planning: During the planning potion of the Audit, the Auditor establishes the terms of
the engagement with the Auditee. The Auditor will prepare an engagement letter to be sent to
the head of the Audited department the letter will confirm the scope of work to be performed,
objectives of the Audit, the Auditors assigned to the project and other relevant information such
as the timing.

2. Understanding: During the understanding phase, the Auditor gathers relevant information in
order to obtain a general overview of operations. The Auditor discusses with key personnel and
reviews sources of information for a good understanding of the processes and the policies.
Potential risks are identified for which the expected control measures are documented.

3. Execution: The execution phase concentrates on transaction testing in order to ensure that
the actual mitigating controls are adequately designed and effectively operational. It concludes
with a list of significant findings, from which the Auditor prepares a draft of the Audit report.
Upon completion of the fieldwork, the Auditor will meet with the client to discuss the
preliminary findings and the proposed recommendations.

4. Closing: In the closing phase, the Auditor prepares the report expressing the Audit opinion,
presents Audit findings and discusses recommendations for improvements. The management
will prepare an action plan as response to the Audit findings. When the management's response
is incorporated in the draft Audit report, the report becomes final. The Auditor will present the
final report to the Audit committee.

Q 8. What is the need for Audit document?

Ans.: 1) Assisting the engagement team to plan and perform the Audit.

2) Assisting members of the engagement team to direct and supervise the Audit work, and to
discharge their review responsibilities.
3) Enabling the engagement team to be accountable for its work.

4) Retaining a record of matters of continuing significance to future Audits.

5) Enabling the conduct of quality control reviews and inspections.

6) Enabling the conduct of external inspections in accordance with applicable legal, regulatory or
other requirements.

9). What are the different types of Audit Evidence?

Ans.: There are two types of Audit Evidence, they are:

A. Depending upon nature:

1) Visual: For example, observing physical verification of inventory conducted by the client's
staff.

2) Oral: For example, discussion with the management and various officers of the client.

3) Documentary: For example, fixed deposit certificate, loan agreement, sales bill etc.

B. Depending upon Source:

1) Internal Evidence: Evidence which originates within the organisation being audited is internal
evidence, for example, Sales invoice, Copies of sales challen and forwarding notes, goods
received note, inspection report, copies of cash memo, debit and credit notes etc.

2) External Evidence: The evidence that originates outside the client's organization is external
evidence, for example, Purchase invoice, supplier's challen and forwarding note, debit notes and
credit notes coming from parties, quotations, confirmations etc.

SECTION-C

Q 1. Explain various objectives of Auditing.

Ans.: I. Main Object or Primary Object:

The Auditing and Assurance Standards of the Institute of Chartered Accountants of India specify
that the primary object of an audit is to express an opinion on financial statements. Every
organisation prepares a Profit and Loss Account to disclose its operating results of the financial
period. It also prepares a Balance Sheet to demonstrate its financial position. These financial
statements are submitted to the auditor for inspection/examination. The auditor carries out this
assignment giving due attention and utmost care using his professional competence. He checks
whether the facts and figures exhibited in the Profit and Loss Account and Balance Sheet are
true. Based on this scrutiny, he expresses his expert opinion about the trueness and fairness
representing operating results and the financial position of the enterprise as disclosed in these
financial statements.
II. Secondary Objects:

It is said that "the twin purposes/objects of auditing are the detection and prevention of errors
and frauds". It implies that there are two objects which can be grouped under secondary objects
of auditing, namely, detection and prevention of errors and detection and prevention of frauds.
If an auditor is able to achieve these secondary objects, certainly he would be able to achieve
the primary object of auditing, i.e., expressing an opinion as to the trueness and fairness of the
financial statements. Hence, the achievement of secondary objects is complementary to the
fulfilment of the main/primary object of auditing.

Secondary objects of auditing can be discussed as under:

A. Detection and Prevention of Errors:

Errors are generally innocent, but sometimes errors which might appear at first sight as innocent
are ultimately found to be cleverly made through fraudulent manipulation, and therefore, an
auditor must pay attention to every error.

The following are the various types of errors:

1. Clerical Errors: The clerical errors are the mistakes committed by the people in the Accounts
Department who are responsible for the preparation of the accounts. Such errors may be done
innocently or deliberately by employees. These errors are committed in recording, calculating,
posting, totalling, balancing, etc. Such errors may again be sub-divided into:

a. Errors of Omission

b. Errors of Commission

a. Errors of Omission: An error of omission takes place where a transaction has not been
recorded in the books of account either wholly or partially. Such errors are likely to be more
common than errors of commission. If a transaction is omitted altogether from the books of
accounts, there would be neither a debit nor a credit entry in the ledger. Hence, the Trial
Balance will not be affected.

Example: The partial error of omission occurs if the value of goods sold to Mr. X for5,000 is
recorded in the Sales Book but is not posted to Mr. X's Account.

b. Errors of Commission: When a mistake consists of doing something wrong, such as recording a
wrong amount, recording an amount in the wrong place, wrong calculations, and so on, we have
an error of commission. It may be due to the carelessness on the part of the accounting clerks
while recording the transactions. Most of these errors are reflected in the Trial Balance and can
be identified by routine checking of the books.

Example: A purchase invoice for 7,250 was entered in the Purchase Book as R2,750.

2. Errors of Principle: An error of principle is an accounting mistake in which an entry is made in

the wrong account, violating the fundamental principles of Accountancy. It is a procedural error,
meaning that the amount recorded is correct but placed incorrectly in a wrong account
disregarding the basic accounting principles.

Example: Treating. a revenue item as capital and vice versa, ignoring the outstanding assets and
liabilities, valuation of assets and liabilities against the principles of book keeping, etc. If such an
error is committed deliberately, the intention is to manipulate the accounts either to inflate the
profits or to show fesser profits than they are. The presence of such an error obviously affects
the Profit and Loss Account and the Balance Sheet. Therefore, an auditor has to pay greater
attention to this type of error. It can be detected only by an enquiry and independent checking.

3. Compensating Errors or Off-setting Errors: Compensating error is an error in calculation or in

recording of accounting data, which is compensated (neutralised) by an equal and opposite
error. Some such errors do not affect the totals, they are more difficult to locate through
statistical methods.

Example: An over debit given to Wages Account to the tune of Z10,000 may be neutralised by
another error of under debit given to Salary Account for the same amount., Though there are
two errors, they will not affect the profit or loss amount calculated. Again, an overcasting
(showing more amount) of an account may be counter-balanced by the undercasting of another
account to the same extent.

B. Detection and Prevention of Frauds:

When something is being done to deceive, to mislead, or to conceal the truth, a fraud is said to
have been committed. It is committed to deliberately defrauding the owners of the business.
Frauds are more difficult to detect than unintentional errors. Detection of fraud is considered to
be one of the important duties of an auditor.

The following are the different methods through which fraud may be committed:

1. Embezzlement of Cash: Embezzlement (misappropriation) of cash is usually done by theft of

cash, altering figures in receipts, cheques, negotiable instruments, etc. When a person is not
subject to any form of a check, such person has several opportunities of committing fraud. The
transactions relating to the receipt of cash are omitted from records or recorded with smaller
amounts in the Cash Book, thereby such cash or a part of it is pocketed by the cashier.

Similarly, false payments of cash or overpayment of cash are shown in the Cash Book. A strict or
sound internal check system for receipts and payments of cash in the organisation would
reduce-the chances of misappropriation of cash. But still, the auditor must check the cash
transactions thoroughly.

2. Misappropriation of Goods: This type of fraud is very difficult to detect unless proper stock
records are maintained. It is easy to misappropriate goods which are less bulky and of high
value. The goods may be removed by the employees for their personal benefit.

The sales return may be misappropriated before such goods are received by the Store Officer.
The efficient system of record-keeping, periodic checking of stock, and adequate external
security will be helpful to avoid misappropriation of goods.
3. Fraudulent Manipulation of Accounts: This type of fraud is usually committed by owners,
managers, directors, board of directors by manipulation of the accounts. This is done by either
showing more profits or lesser profits. Higher profits may be shown to get more commission for
their services or to sell their shares in the market as more profits declared would increase the
market value of shares, etc.

Lesser profits may be shown to mislead the shareholders or competitors or to deceive the
creditors, bankers, or tax authorities.

4. Window Dressing: Window dressing is the way of presenting the financial data in a much
better position than the original position. Window dressing is more of a misrepresentation than
a fraud. Some of the reasons for window dressing are as follows:

a. To win the confidence of the shareholders who are the real owners of the company.

b. To obtain further credit from banks and other financial institutions.

c. To attract prospective partners or shareholders.

d. To increase the market price of the shares by paying higher dividends.

Auditor's Duty Regarding Prevention of Frauds:

As regards the prevention of fraud, an auditor does not do anything directly. He can only advise
the management to design and implement an effective internal check system preventing the
employees from committing fraud. If such frauds are committed by the management, he has to
bring such frauds to the knowledge of the shareholders of the company. However, if they remain
undetected, they could affect the opinion of the auditor on working results and the financial
position of the organisation. Therefore, the auditor must exercise greater care to detect such
frauds. Further, an auditor's very audit examination will have a moral influence or check on the
staff and will indirectly help in the prevention of fraud.

III. Specific Objectives:

The meaning of audit cannot be restricted only to financial audit. It covers other areas like
operations audit (performance audit), cost audit, management audit, propriety audit, social
audit, etc. As such, there will be a specific objective for each type of specific audit.

Q 2. Explain various types of audit.

Ans.: I. Classification of Audit on the Basis of Organisation:

On the basis of organisation, auditing can be classified into -

1. Statutory Audit

2. Government Audit
STATUTORY AUDIT

Meaning of Statutory Audit:

The audit which is prescribed by the statute or law is called a statutory audit. In other words, it is
an audit which is mandated (compulsory) by the law. In India, statutory audit means an audit
under the Companies Act, 2013 in which the auditor submits his report to the members of the
company, i.e., shareholders. To ensure that accounts, as prepared by the accountant of the
company, show a true and fair view of the financial position of the company, it is necessary to
check or audit those accounts. It is conducted with the object of checking the accuracy of
accounts of a company, mainly in organisations where ownership and management are
separate.

In India, all companies including banking companies, insurance companies, electricity ompanies,
public enterprises, co-operative societies, and educational trusts must get their accounts audited
regularly by an independent professional auditor.

Features of Statutory Audit:

The main features of a statutory audit are enumerated below:

1. Mandatory: A statutory audit has been made compulsory by law. It cannot be made optional
under any circumstances by the management or owners through a unanimous decision.

2. Law Determines its Scope: Its scope is determined by law. Therefore, its scope cannot be
restricted either by the management or owners of the entity who appoint the auditor.

3. By Qualified Auditor: It is required to be conducted by a qualified chartered accountant who

has been appointed by the owners of the business.

4. Auditor Works as per the Law: The law lays down the rights, duties, and liabilities of a
statutory auditor and it is not possible to curtail (cut) these rights, duties, and liabilities of such
an auditor by the appointing authority or the management.

5. Protects the Owners' Interest: The auditor is required to safeguard the interest of the owners
and not the management. It is so because the very purpose of a statutory audit is to give
assurance to the owners regarding the trueness and fairness of the financial statements
prepared by the management of the company.

6. Independent in Nature: Statutory audit is independent and hence, the auditor is required to
submit his report to the owners of the business and not to the management.

7. Done by External Person: As per the law, the auditor appointed in the case of the statutory
audit must not be an employee, officer, debtor, secretary, or director of the company.

Advantages of Statutory Audit:

There are several advantages to having a statutory audit. The following are such advantages:
1. Increased Reliability: It enhances the trustworthiness of financial statements prepared by the
organisation. In other words, gives a guarantee to the shareholders and other stakeholders that
the activities of the organisation are carried on in the best interest of the organisation.

2. Certifies the Performance of the Management: It ensures the management that they have
performed their statutory duties appropriately and as per the law.

3. Assurance on Compliance of Law: It gives assurance to management that they have complied
with corporate governance requirements in respect of managing the affairs of the organisation.

4. Suggestions for Improvement: It gives efficiency (quality) of internal controls. Where internal
controls are weak or inadequate, the auditor will provide recommendations for their
improvement.

GOVERNMENT AUDIT

Meaning of Government Audit:

The audit of books of accounts of government departments, government offices, Government

companies, statutory or public corporations, local governments, not-for-profit organisations, and
institutions of higher education is called government audit.

The Comptroller and Auditor General of India (CAG) is an authority, established by Article 149 of
the Constitution of India, who is authorised to audit all receipts and expenditures of the
Government of India and the State Government including those bodies which are substantially
financed by the government. The appointment of such an auditor is made by the President of
India as per Article 148 of the Indian Constitution. Usually, a statutory auditor is appointed by
the Central Government on the advice of the Comptroller and Auditor General of India.

Features of Government Audit:

Government audit has the following features:

1. It is Mandatory: Accountability to the public is very essential for every government entity. For
this reason, a government audit has been made compulsory. For instance, an audit of accounts
of government departments and government offices is done according to Article 149 of the
Constitution of India. Similarly, the Indian Companies Act makes it obligatory on the part of
government companies to get their accounts audited.

2. Internal in Nature: A government audit is an internal audit as the audit of government

companies and government departments usually undertaken by the Comptroller and Auditor
General of India and his staff who are Central Government employees.

3. Undertaken Throughout the Year: As there are a large number of transactions in government-
owned companies and departments, the audit is undertaken continuously throughout the year.

4. Could be done by Chartered Accountants: Government audits could also be done by

professional chartered accountants, provided they are permitted to do so by the Comptroller
and Auditor General of India.
Objectives of Government Audit:

The objectives of government audit are as follows:

1. To ensure that expenditure has been incurred in the interest of the public only.

2. To see that the expenditure incurred has already been sanctioned by a competent authority.

3. To verify that every expenditure is sanctioned as per the specific rules and regulations.

4. To ensure that the expenditure incurred is not above the permitted limit.

5. To ensure that the payments have been made to the right persons and each payment is
entered in the books accordingly.

6. To see that the payments are properly classified into capital and revenue.

7. To satisfy himself that money due from others has been regularly recovered.

8. To check the existence of stock and stores and their proper valuation.

9. To confirm that there is a proper system of stock-taking and stock is taken properly and
recorded systematically in Stock Registers.

10. To make suggestions to the proper authority for devising strategies for the improvement of
effectiveness and efficiency of the people in the organisation.

11. Classification on the Basis of the Independence of the Auditor: On the basis of the
independence of the auditor, auditing can be classified into -

INTERNAL AUDIT

Meaning of Internal Audit:

Internal audit is a voluntary appraisal activity normally undertaken by a large organisation to

assure the effectiveness of internal controls, risk management, and governance to facilitate the
attainment of organisational objectives. Internal audit is performed by employees of the
organisation who report to the Audit Committee constituted by the board of directors. It may be
noted that there is no compulsion on the part of an organisation to go for an internal audit.

Features of Internal Audit:

The most important features of an internal audit are as follows:

1. Large Entities Prefer it: It is normally undertaken by large organisations where the number of
transactions is huge and where the chances of committing errors and frauds are more.

2. Optional: It is left to the discretion of the management of the organisation to undertake an

internal audit or not. In other words, an internal audit is purely optional/voluntary.

3. Scope is Decided by the Management: The scope of internal audit is decided by the
management of the organisation depending upon the nature and size of the business unit.
4. Spread over the Financial Year: 1nternal audit is undertaken by the internal auditor
throughout the year. In other words, an internal audit is carried out continuously throughout the
financial period.

5. Done besides External Audit: Internal audit may be done in addition to independent audit or
external audit. Therefore, it is complementary to external audits.

6. No Changes in Modus Operandi: The techniques and methods of auditing employed in the
internal audit by the internal auditor are the same as those in an external audit.

Objectives of Internal Audit:

The main objectives of an internal audit include:

1. To monitor the effectiveness of the internal control, internal check, and accounting system
prevailing in the organisation.

2. To ascertain whether the pre-determined policies, plans, and procedures as framed by the
management have been complied with by the people in the organisation.

3. To examine the effectiveness, efficiency, and economy of operations and processes.

4. To investigate the instances of fraud and theft.

5. To ascertain whether the assets of the organisation are duly protected.

6. To verify and review financial and operating information.

7. To offer suggestions to the management for the improvement of internal control, internal
check, and accounting system.

Advantages of Internal Audit:

The main advantages of the internal audit are as follows:

1., Early Detection of Errors and Frauds: It is helpful to the management to understand whether
internal control and accounting systems are adequate to prevent errors and frauds by careless
and dishonest employees.

2. Effective Implementation of Plans: It helps the management to ascertain whether the pre-
determined policies, plans, and procedures devised by it have been duly implemented by the
people in the organisation.

3. Tool to Evaluate the Performance: It acts as a tool to evaluate the performance of the
employees in the organisation and to recommend suggestions to improve upon it.

4. Protection of Assets: It helps the management to safeguard the assets of the concern against
misappropriation, theft, and loss.
5. Proper Review: It facilitates the review of the matters of accounting as well as the non-
accounting nature. This review is needed to incorporate necessary changes in the. system to
make it more effective and efficient.

6. Increased Accountability: It increases the accountability of the people in the organisation to

improve their efficiency and to come up to the expectations of their superiors.

Disadvantages of Internal Audit:

Internal audit suffers from the following serious limitations:

1. Serves the Needs of Management Only: Internal audit fails to protect the interest, of the
shareholders and outsiders since it seeks to help and guide only the management of the
concern.

2. Management Control: Since the scope of the internal audit is decided by the management,
the quality of the internal audit depends upon the management.

3. Quality of Work may Suffer: If qualified and skilled persons are not appointed as internal
auditors, the purpose of internal audit may be defeated.

4. Negligence: As internal audit is not made compulsory, some of the organisations may not go
for it even if it is required in the organisation.

EXTERNAL AUDIT

Meaning of External Audit:

External audit/independent audit involves the examination of the truthfulness and fairness of
financial statements of an entity by an external auditor who is independent of organisation,
following a reporting framework such as International Financial Reporting Standards (IFRS). The
need for this audit primarily stems from the separation of ownership and control in large
companies, in which shareholders elect directors to run the affairs of the company on their

behalf.

An external audit provides reasonable assurance to the owners of the company that the financial
statements, as reported by the directors are free from material mis-statements. External
auditors are required to comply with professional auditing standards to ensure a level of quality
and trust of all stakeholders in the auditing exercise.

III. Classification of Audit based on the Methods of Approach to Audit Work:

Based on the method of approach to audit work, an audit can be classified into -

1. Continuous audit

2. Periodic audit or final audit or annual audit

CONTINƯOUS AUDIT

Meaning of Continuous Audit:

A continuous audit is one in which the auditor's clerks (staff) are engaged continuously in
checking the accounts of the client. Normally the audit staff pays a visit to the client's office once
a week or fortnight or a month during the financial period depending upon the size of
transactions to be verified by them. In other words, it involves a detailed examination of the
books of accounts by the auditor/audit clerks at regular or irregular intervals so that audit work
could be completed at the end of the financial period without much loss of time.

Definition of Continuous Audit:

R.G. Williams defines it as, "Continuous audit is one where the auditor or his staff is consistently
engaged in checking the accounts during the whole period, or where the auditor or his staff
attend at regular or irregular intervals during the period".

As per the above definition, continuous audit is the audit-related activities that are done either
by the auditor or his staff more continuously than activities scheduled as part of the annual audit

plan.

Features of Continuous Audit:

The following are the important features of continuous audit:

1. Completed During the Financial Year: The audit is completed in the same year. Accounting and
auditing go hand in hand in case of a continuous audit.

2. Frequent Visits: The auditor/his staff pay many visits to the client's office since they have to
verify several transactions throughout the financial period.

3. Time Fixed by the Management: The management fixes up the time for paying a visit by the
auditor or his staff for the verification of books of accounts maintained by the client.

4. Surprise Visits: Sometimes, the auditor or his staff may even pay surprise visits to the client's
office without informing them about their visit.

5. Checking at Length: A continuous audit involves a detailed checking of books of accounts as

chances of committing errors and frauds are more in the case of large organisations due to
voluminous (a lot of) transactions.

Application of Continuous Audit:

Continuous Audit is warranted (necessitated) in the following cases:

1. Banking companies, electricity companies, railways, etc. where audited accounts are to be
presented to the owners (government) soon after the close of the financial year.

2. Where the size of the business transactions is voluminous.

3. Where the statement of accounts is required to be presented to the management after every
month or quarter.

4. Where there is the absence of a satisfactory system of internal check in the organisation.

Advantages of Continuous Audit:

A continuous audit is advantageous to the organisation as well as to the auditor in the following
ways:

1. Early Location of Errors and Frauds: As the number of transactions to be examined at a stretch
is comparatively small, the auditor can make a detailed checking of the transactions. This will
facilitate the detection of errors and frauds easily and their occurrence in the future can also be
stalled (prevented).

2. Knowledge of Technical Details: Since the auditor remains more in touch with the business
unit, he is in a position to know the technical details of it. This would enable the auditor to give
valuable suggestions to his client on matters relating to the maintenance of accounts.

3. Quick Presentation of Accounts: This kind of audit helps the audit clerks to complete their
audit work in the financial year itself. This, turn, helps the auditor to prepare his report quickly
soon after the completion of the financial year so that it could be presented to the shareholder
at the Annual General Meeting.

4. Keeps the Client's Staff Regular: Frequent visits by the audit clerks to the client's office, keep
the accounting staff of the client very much regular in maintaining the books of accounts since
they have to show the same to audit clerks for inspection.

5. Better Quality of Audit Work: As the time at the disposal of the audit clerks is more in
continuous audit, they can make a detailed checking of every transaction. This would enable to
enhance the quality of audit work done by them.

6. Preparation of Interim Accounts: When the directors of a company wish to declare an interim
dividend to their shareholders, the continuous audit will help in the preparation of the interim
accounts for audit without much delay.

7. Convenience: The work of audit clerks is distributed over the whole year. They are not
overburdened with the heavy workload. Therefore, they find it convenient to finish of their
work taking their own time in doing the tasks assigned to them.

8. Surprise Visits: The continuous audit provides chances for surprise visit to the audit clerks. The
accounting clerks in the Accounting Department of the client become alert due to this surprise
visit. Such visits are necessary for eliminating the chances of committing errors and fraud.

9. Auditor's Advice: The auditor is in a position to advise the accounting staff for the
improvement of the accounting system or on loopholes in the internal control system since he
keeps visiting the client's office quite often in the continuous audit.
Disadvantages of Continuous Audit:

Despite the above-mentioned advantages, there are certain drawbacks of continuous audit
which are as follows:

1. Tampering with Figures: Figures in the books of accounts which have already been checked by
the auditor on his previous visits may be tampered (altered) with by dishonest clerks. Further,
frauds committed by altering such figures may go unnoticed in case proper attention is not given
by the auditor regarding such alterations.

2. Dislocation of Client's Work: The frequent and surprise visits by the auditor/his clerks to his
client's office for audit work may result in the dislocation of the work of his client's staff putting
them to inconvenience.

3. Proves to be Costly: This type of audit may be uneconomic if the size of the concern is small.
Hence, a continuous audit may prove to be very expensive, since large amounts of audit fees are
required to be paid to the auditor.

4. Time-consuming: It involves a detailed checking of every transaction of the business. The time
spent on the audit will be a sheer waste if the size of the business does not warrant (require) it.

5. Queries may Remain Outstanding: The audit clerks may lose the thread of their work and the
queries which they wanted to clarify may remain pending in case there is a long interval
between two visits.

6. Increased Dependency: The staff of the client might become careless in their work and
excessively rely on the audit staff to find mistakes and errors in accounts.

7. Extensive Note: Extensive note-taking by the audit clerks may be required to avoid any
alteration of the figures by the unscrupulous (dishonest) employees of the client after the audit.

8. Unhealthy Relationship may Breed Frauds: Frequent interaction between client staff and audit
staff may give scope for the unhealthy relationship between them and they might join hands for
committing fraud. The audit staff may even conceal frauds committed by the client's staff who
are very much friendly with them.

Precautions to Guard Against the Drawbacks of Continuous Audit:

The following steps should be taken by the auditor and management to guard against the
drawbacks of continuous audit:

1. No Alteration of Figures Without Permission: The management should ensure that the books
checked by the audit clerks are not altered by its accounting staff. Alteration in the figures by the
client's staff should be allowed only after obtaining the prior approval of the auditor.

2. Alteration Through Rectifying Entry Only: If any alteration has to be made, it should be done
only by using a rectifying entry in the journal.
3. Completion of a Particular Work in One Sitting: The auditor should complete the checking of a
book as far as possible, in one sitting. If that is not possible, he should complete the checking up
to a certain stage, and note it. When he starts next, he should take a glance over the
transactions already checked by him in the previous sitting. This will help him to avoid the
possibility of any omission.

4. Well Thought-out Audit Programme: Well-drawn up audit programme by the auditor will
prevent any loose ends. In such a case, in each sitting, audit staff will be able to complete only a
particular task assigned to them by the auditor.

5. Note on Queries Unanswered: A note should be made in the audit note book by the audit staff
regarding any queries which have not been satisfactorily answered by the staff of the client.
Efforts should be made by the audit staff to seek clarification on such queries at the earliest.

6. Probing Alterations: Before commencing the work at the subsequent sitting, the auditor
should glance over any alteration, which does not bear any secret tick or mark put by him in the
previous sitting.

7. Paying Surprise Visits: The auditor or his clerks should pay surprise visits so that the clerks of
the client may not anticipate the date of their next visit to the client's office for inspection.

8. Proper Planning of the Audit Work: The auditor should so plan his audit programme that no
part of his work at any visit is left under the audit in progress.

FINAL AUDIT/ANNUAL AUDIT

Meaning of Final Audit:

Final Audit or Annual Audit or Periodic Audit is an audit where the auditor takes up his work of
verifying the books of accounts and other records only at the end of the financial period. Audit
work is done only after all the transactions for the whole year are completely recorded,
balanced and financial statements such as the Profit and Loss Account and the Balance Sheet
have been prepared. The auditor carries on his audit work till it is completed. Then he submits
his report to his client. In the case of small business houses, the final audit gives satisfactory
results.

Features of Final Audit

The main features of the final audit are as follows:

1. Begins Only After Financial Period: The audit work is started only after the close of the
financial year. As per the agreement between the auditor and client, an auditor is supposed to
start working on his audit assignment only after the financial year.

2. It Follows Preparation of Accounts: Audit work starts after accounting work is over. Books of
accounts prepared during the year and the financial statements prepared at the end of the year
by the accounting clerks of the client are then submitted to the auditor for inspection and
examination.
3. Completed at a Stretch: Audit work once started should be completed at a stretch. Auditor
gives no break in between in the process of his audit assignment.

4. Only One Visit: The auditor visits the client's business only once a year. The auditor takes
possession of the books of accounts, does the audit work and submits his report.

5. Followed by Small Firms: It is p popular, particularly with small Concerns where there are only
fewer transactions to be checked by the auditor.

Advantages of Final Audit:

Final audit results in many advantages which are as follows:

1. Suits Small Firms: The fee to be paid to the auditor is quite reasonable in the case of the final
audit. So, it is suitable for smaller Concerns where the number of transactions is very small and
which cannot afford to pay hefty (heavy) audit fees.

2. Less Time: The auditor can complete his audit work easily and in a shorter period, i.e., in one
sitting. He need not pay visits to his client's office very often.

3. Convenient: As audit work is completed in one sitting without intervals, it proceeds

uninterruptedly.

4. No Dislocation of Client's Work: As the auditor is supposed to commence his audit work only
after the books of accounts have been closed at the end of the financial period, the work of the
auditor does not affect the everyday routine of the organisation and its people.

5. No Alteration of Figures by Client's Staff: As the auditor is given an entire set of books of
accounts after the closure of the financial period for audit work, there is no scope for alteration
of figures by the client's staff to commit fraud.

6. Easy to Complete: Since the number of transactions to be verified is small, the auditor can
easily complete his audit work with a limited number of audit staff. Further, as the number of
audit staff is not large, the audit work can be easily distributed among them by the auditor.

7. Interesting Work: Monotony does not creep in while doing audit work by the auditor since his
assignment does not spread over a longer period. Therefore, he takes a keen interest in his work
as the audit work is completed in one sitting taking reasonable time.

Disadvantages of Final Audit:

The following are the inherent disadvantages of a final audit:

1. Scope for Manipulation: As the checking of accounts by the auditor is undertaken only after
the close of the accounting year, the staff of the client has sufficient time to use their cunning
(crookedness) to adjust or manipulate the accounts.

2. Delay in Locating Errors and Frauds: In the case of the final audit, the errors and frauds are
found only after the close of the accounting year, which means errors and frauds remain in the
books for a long period.
3. Only a Post-mortem of Accounts: The auditor detects the errors and frauds only much after
they have been committed. There is a possibility of the business suffering some amount of loss
during the period of errors and frauds.

4. Paucity of Time: In the case of a final audit, the time available at the disposal of the auditor is
very less. Therefore, the auditor has to complete his work in a hurry.

5. Depends much on Test Checking: Since there is a lack of time for exhaustive (complete)
examination, the auditor has to depend very much on test checking. This may lead to the
presence of errors and frauds even after the completion of audit work.

6. Delay in Preparing Auditor's Report: In the case of the final audit, the audit of accounts begins
only after the close of the financial year. There is a possibility of delay in submission of auditor's
report as the time at the disposal of the auditor to check all the transactions is very much
limited.

7. Not Effective: The final audit fails in imposing an effective moral check on the client's staff
since there is no element of surprise check by the audit staff.

8. Unsuitable for Large Organisations: It is not suitable for large organisations where the
transactions are numerous and complex and an in-depth examination of business transactions is
a must.

9. No Declaration of Interim Dividend: It does not help in the preparation of interim accounts
and the declaration of interim dividends when a company wants to declare interim dividends to
its shareholders.

Q 3. Classify the Audit process on the basis of Ownership.

Ans.: 1. Audit of Proprietorship: In case of proprietary concerns, the owner himself takes the
decision to get the accounts Audited. Sole traders will decide about the scope of Audit and
appointment of Auditor. The Auditing work will depend upon the agreement of . Audit and the
specific instructions given by the proprietor.

2. Audit of Partnership: To avoid any misunderstanding and doubt, partnership Audits their
accounts. Partnership deed on mutual agreement between the partners may provide for Audit
of financial statements. Auditor is appointed by the mutual consent of all the partners. Rights,
duties and liabilities of Auditor are defined in the mutual agreement and can be modified by the
partners.

3. Audit of Companies: Under companies Act, Audit of a accounts of companies in India is

compulsory. C Chartered accountant who is professionally qualified is required for the Audit of
accounts of companies. Companies Act 1913 for the first time made it Compulsory tor joint stock
companies to get their accounts Audited from a qualified accountant. A number of amendments
have been made in companies

Act, 1956 and 2013 regarding appointment, duties, qualification, power and liabilities of a
qualified Auditor.
4. Audit of Trusts: The beneficiaries of the trusts may not have access and knowledge of
accounts of the trust. The trustees are appointed to manage and look after the property and
business of the trust. Accounts of the trust are maintained as per the conditions and terms of
the trust deed. The income of the trust is distributed to the beneficiaries. There are more
chances of frauds and misappropriation of incomes. In the trust deed as well as in the Public
Trust Act, which provide for compulsory Audit of the accounts of the trust by a qualified Auditor.
The Audited accounts of the trust ensure true and fair view of accounts of the trust.

5. Audit of Accounts of Co-operative Societies: Co-operative societies are established under the
Co-operative Societies Act, 1912. It contains various provisions for the regulations and the
working of these societies. Some of the states have adopted it without any change, while others
have brought certain changes to it. The Auditor of the Co- operative Society should have a good
knowledge of the particular act under which Co-operative society is functioning. He should also
study by-laws of the society and make sure that the amendments made from time to time in the
by-laws have been duly registered in the Registrar Office. Companies Act is not applicable to the
co-operative Societies.

The Registrar of co-operative societies shall Audit or cause to be audited by some person
authorized by him, the accounts of the society once in every financial year.

6. Government Audit: Audit of government offices and departments is covered under this
heading. A separate department is maintained by government of India known as Accounts and
Audit Department.

This department is headed by the Controller and Auditor General of India. This department
works only for the government offices and departments. This department cannot undertake
Audit of non- government concerns. Its working is strictly according to government rules and
regulations.

Q4. What are the different types of Audit on the basis of particular issues?

Ans.: 1. Complete Audit: A complete Audit examines the system of internal control and the
details of the books of account, including subsidiary records and supporting documents. This is
done with an eye to locality, mathematical accuracy accountability, and the application of
accepted accounting principles.

2. Detailed Audit: A detailed audit is used to examine a large proportion of the transactions of a
business. It is typically used to search for cases of suspected fraud, where there may be a few
fraudulent transactions hidden amongst a mass of legitimate transactions.

3. Partial Audit: An audit which is conducted considering the particular area of accounting is
known as partial audit. Under partial audit, audit of whole account is not conducted. Audit of
particular area where the owner thinks essential to conduct audit will be conducted. Generally,
transaction of business is related to cash, debtor, creditor, stock etc. A business may conduct an
audit of any of these transactions. An auditor should conduct audit of that transaction as per the
scope determined by the agreement. Method of conducting such audit is similar to other audit
but an auditor should sign the report clearing stating the 'particular audit'. If it is not done so, an
auditor will be liable for the loss which is caused due to using the report as complete audit.
4. Management Audit: A management audit is an independent and systematic analysis and
evaluation of a company's overall activities and performances. It is a valuable tool used to
determine the efficiency, functions, accomplishments and achievements of the company.

5. Proprietary Audit: Proprietary audit has been described as an audit of the actions and
decisions of the executives. The focus of such an audit is on the financial discipline, the authority
structure, efficiency, rules and regulations and the protection of public interest.

6. Performance Audit: A performance audit is an assessment of operations or functions,

efficiency, effectiveness, and compliance to legal and other requirements of an entity to
determine whether functions are working as intended. It is done to implement improvements so
that desired goals can be achieved

7. Environment Audit: Environment auditing is a systematic, documented, periodic and objective

process in assessing an organization's activities and services.

8. Compliance Audit: A compliance Audit is an examination of the policies and procedures of an

entity or department, to see if it is in Compliance with internal or regulatory standards. This
audit is most commonly used in regulated industries or educational institutions.

9. Construction Audit: A construction Audit is an analysis of the costs incurred for a specific
construction project. Activities may include an analysis of the contracts granted to contractors,
prices paid, overhead costs allowed for reimbursement, change orders, and the timeliness of
completion. The intent is to ensure that the costs incurred for a project were reasonable.

10. Financial Audit: A financial audit is an analysis of the fairness of the information contained
within an entity's financial statement. It is conducted by a CPA firm, which is independent of the
entity under review. This is the most commonly conducted type of Audit, and is required for all
publicity-held companies.

11. Information Systems Audit: An information systems Audit involves a review of the controls
over software development, data processing, and access to computer systems. The intent is to
spot any issues that could impair the ability of IT systems to provide accurate information to
users, as well as to ensure that unauthorized parties do not have access to the data.

12. Investigative Audit: An investigation Audit is an investigation of a specific area or individual

when there is a suspicion of inappropriate or fraudulent activity. The intent is to locate and
remedy control breaches, as well as to collect evidence in case charges are to be brought against

Someone.

13. Operational Audit: An operational Audit is a detailed analysis of the goals, planning
processes, procedures, and results of the operations of a business. The Audit may be conducted
internally or by an external entity. The intended result is an evaluation of operations, likely with
recommendations for improvement. It is an essential element of a campaign to increase
efficiencies and reduce costs.

14. Tax Audit: A tax Audit is an analysis of the tax returns submitted by an individual or business
entity, to see if the tax information and any resulting income tax payment is valid. These Audits
are usually targeted at returns that result in excessively low tax payments, to see if an additional
assessment can be made. If the taxpayer disagrees with the outcome of a tax Audit, there is an
appeal process that may overturn the initial finding.

15. Independent Audit: Is conducted by the independent qualified Auditor. The purpose of
independent Audit is to see whether financial statements give true and fair view of financial
position and profits. Mainly it is for safeguarding the interest of owners, shareholders and other
parties who do not have knowledge of day-to-day operations of organization.

16. Statutory Audit: Statutory is often called financial Audit. Independent financial Audit is
generally conducted to ascertain whether the Balance Sheet and Profit and Loss Account
presents a true and fair view of the financial position and working result of the organization
under Audit. The need for financial Audit arises as the control of the company is vested in the
hands of the management of the company and the financial statements are also prepared by the
management.

Q 5. Explain advantages and disadvantages of Auditing.

Ans.: Following are a few advantages of Auditing:

1. Assurance to Stakeholders: This comes as one of the biggest advantages of Auditing is that the
final report of the Audit is accepted by all and provides a clear picture of the business's position.
The owners or investors get a proper idea of the accuracy of the books of accounts and,
eventually, the performance of the business. This also provides them with satisfaction about the
functioning of their employees and various departments. They get an idea about the overall
profitability and efficiency of the business; this helps them be assured of their stake holding.

2. Fair Evaluation: This process helps a business' evaluation be done fairly without any chance of
manipulation as the Auditor responsible for examining the books of account gives their
viewpoint as an independent authority. The Audit officer's remark is much valued among the
owners and investors of the business entity. All the documents, financial statements, and
inventory inspections are closely respected and verified for getting a fair report and do. not
involve any biasness.

3. Fraud Identification: Fraud is intentional misconduct on the part of individual. At the same
time, there is always a chance of unintentional mistakes by an individual. Both situations can be
easily noticed after an Audit, and accountability can be sought in both cases. Employees taking
care of them might get examined for any of these cases. So, thus Creates a responsibility among
them to do their tasks honestly and efficiently. The Auditing process decreases the chance of
committing fraud and errors in the functioning of the business entity.

4. Moral Policing: This process does the task of teaching a sense of moral accountability towards
the firm in the employees. They know their mistakes will be discovered, so this generates the
responsibility for being honest and always avoiding irregularities and irresponsibility in their
work.

5. Credibility: Audit of the books of a firm allows their stakeholders, like creditors, investors,
banks, and debenture holders, to have more confidence in them. These are important
connections of a business entity as they help raise money, loans, and capital accumulation, a
much-needed resource for their growth. As the Auditing body has no agenda or biasness, the
reports thus produced after analysis of the financial statements, accounts etc. have high
credibility for the stakeholders.

6. Overall Improvement: An Audit is the best way to get an idea about the functioning of the
sustaining system and opportunities that can be grabbed for more development and business
performance. Auditing also helps implement changes in the present situation as regular reports
are obtained with overall performance.

7. Compliance with Rules and Standards: The main objective of an Audit lies in ensuring that all
the policies and procedures comply with the standard norms. Also, with the help of the process,
a proper analysis can be done to evaluate the company's conduct with that of good practices,
and effectively can be measured against the expected one.

8. Helps in Building a Good Reputation: Audit reports at regular periods ensure the stakeholders
about the firm's conduct. This builds a reputation for the firm in terms of teamwork, ethical
working, and conduct. This also helps in the further development of a firm.

9. Legal Proof: The report obtained after auditing a business firm act as legal proof. This record
can be used for the sake of insurance. Many firms like LIC, HUDCO etc., consider the previous
year's Audit report more reliable for their services.

10. Dispute Settlement: This helps settle disputes and claims between management. This
contains independently done assessments about every transaction with defined all details. It
becomes a source for the identification of any claim or disputes involved.

Disadvantages of Auditing:

Following are a few disadvantages of Auditing:

1. Auditing requires experts: Auditing in general can be a very difficult process and requires
considerable knowledge and experience. Moreover, Auditing for large companies is both cost
and time-intensive. Accounting firms tend to charge high prices because they have access to
unprotected client data. This is a huge problem because it means company employees can use
this information to commit fraud or theft a the workplace.

2. Impossible to check all transactions: The key dis advantage of performing an Audit is that it is
impossible to check all transactions that are taking place in the company. This makes constant
monitoring a challenge for Audits in business settings.

3. Not suitable for small businesses: Auditing is a highly intensive process that requires
substantial time and resources. Most of the small businesses do not have the in-house expertise
or the resources to conduct Audits,. Instead, these companies should invest their efforts in
improving their processes and decision-making so that Audits unnecessary.

4. Bribes and threats: It's easy for an Auditor to be tempted by bribes and other incentives that
can significantly raise the value of their Audits. Similarly, threats posed to an Auditor can also
impact the Audit's end result.
5. Auditing is Expensive: This process puts a heavy monetary cost on a film for execution. This
requires a cost of examination of all financial statements and records, which may include
duplication of records for easy access and availability, by an Auditor. Auditing firms charge a high
fee for their services.

6. Chances of Uncertainty in the Report: There can be cases where errors can be found in Audit
reports if the staff involved is not careful or inexperienced and biased. The report helps in the
future planning for the business entity, so any mistake may turn out to be a disaster.

7. Lack of Certainty in Standards: There are no rules or general standards followed in the Audit
process. For every other firm, there must be a newly defined Audit plan.

8. Lack of Participation: The planning of an Audit program does not include participation in terms
of suggestions by efficient and competent staff. So this prevents their application of knowledge
and caliber. Instead, turns into their harassment in a way.

9. Ignorance of Technology: In modern times, the use of technology has been introduced in the
process of accounting. The Audit process still depends on manual examinations and ignores the
internal control based on the particular technology used in the firm. The difference in
technology creates a problem, but this Audit system does not include prevention measures for
these issues.

10. Less Guaranteed: The report does not disclose any details about the data or figures involved
in the analysis. So the report does not guarantee any explanations. Most of the components are
based on information and disclosures made by departmental personnel of concerned
departments.

Q 6. Briefly explain Audit Planning Process.

Ans.: According to the International Standard of Auditing (ISA) an Audit plan should be based on
an overall Audit Strategy. The Audit strategy must explain the scope, timing, and direction of the
Audit. In addition, strategy formulation depends on the features of Audit engagement like its
characteristics, reporting objectives. Auditor's professional judgement the outcome of
preliminary engagement activities, and the resources necessary to perform the Audit
engagement.

The following points depict the Audit Planning Process.

1. Planning: The Auditor will review prior Audits in the area and professional literature. The
Auditor will also research applicable policies and statutes and prepare a basic Audit program to
follow.

2. Notification: The Office of Internal Audit Services will notify the appropriate department or
department personnel regarding the upcoming Audit and its purpose, at which time an opening
meeting will be scheduled.

3. Opening Meeting: This meeting will include management and any administrative personnel
involved in the Audit. The Audit's purpose and objectives will be discussed along with Audit
program. The Audit program may be adjusted based on information obtained during this
meeting.

4. Fieldwork: This step includes the testing to be performed as well as interviews with
appropriate department personnel.

5. Report Drafting: After the fieldwork is completed, a report is drafted. The report includes such
areas as the objective and scope of the Audit, relevant background, and the findings and
recommendations for correction or improvement.

6. Management Response: A draft Audit report will be submitted to the management of the
Audited area for their review and responses to the recommendations. Management responses
should include their action plan for correction.

7. Closing Meeting: This meeting is held with department management. The Audit report and
management responses will be reviewed and discussed. This is the time for questions and
clarifications. Results of other Audit procedures not discussed in the final report will be
communicated at this meeting.

8. Final Audit Report Distribution: After the closing meeting, the final Audit report with
management responses is distributed to department personnel involved in the Audit, the
President, Provost, and Chief Financial Officer, and CWRU's external accounting firm.

9. Follow-up: Approximately six months after the Audit report 1s issued, the Office of Internal
Audit Services will perform a follow-up review. The purpose of this review is to conclude
whether or not the corrective actions were implemented.

Q 7. Discuss the purpose and objectives of Written Representation.

Ans.: The process of obtaining this form of evidence is two-fold:

1) To obtain representations that management, and those charged with governance have
fulfilled their responsibility for the preparation of the financial statements, including:

a) Preparing the financial statements in accordance with an applicable financial reporting

framework.

b) Providing the Auditor with all relevant information and access to records;

c) Recording all transaction and reflecting them in the financial statements.

2) To support other Audit evidence relevant to the financial statements if determined necessary
by the Auditor or required by SAs. Objectives of the Auditor regarding written representation

The objectives of the Auditor regarding written representation are discussed as below:

a) To obtain written representations: To obtain written representations from management. Also

that management believes that it has fulfilled its responsibility for the preparation of the
financial statements and for the completeness of the information provided to the Auditor;
b) To support other evidence: To support other Audit evidence relevant to the financial
statement or specific assertions in the financial statements by means of written representations
; and

c) To respond appropriately: To respond appropriately to written representations provided by

management or if management does not provide the written representations requested by the
Auditor.

MODULE 2

RISK ASSESSMENT AND

INTERNAL CONTROL

SECTION-A

Q 1. what is Audit Risk?

Ans.: The risk that the auditor expresses an inappropriate audit opinion when the financial
statements are mutually misstated.

Q 2. VWhat is Assessment of risk?

Ans.: R.A. is the identification of hazards that could negatively impact an organization's ability to
conduct business. These assessments help to identify then inherent business risks and provide

measures.

Q 3. What do you mean by internal control?

Ans.: The process designed to ensure reliable financial reporting, effective and efficient
operations and compliance with applicable laws and regulations safeguarding assets of the
company against theft, unauthorized use, acquisition or disposal.

Q 4. What is Internal Check?

Ans.: An accounting procedure whereby routine entries for transaction are handled by more
than employee in a such employee is automatically checked against the work of another for
detection of errors irregularities

SECTION-B

Q 1. What are the objectives of Internal Control?

Ans.: Objectives of internal control:

1. To encourage adherence to prescribed policies.

2. To avoid frauds and errors.

3. To promote promotional efficiency.

4. To safeguard assets and records.

5. To provide accurate and reliable data.

6. To assist in timely preparation of financial information:

Q 2. What are the objectives of Internal Check

Ans: 1. Allocation of Duties: Internal check aims at the allocation of duties among the accounting
staff of the organisation depending upon their qualification, experience, and efficiency.

Z. Fixing the Responsibility: Once the duties are allotted to all the employees, responsibilities are
fixed on every employee of the concern in such a way that every employee would be held
accountable for a particular error or fraud committed by him.

3. Minimisation of Errors and Frauds: One of the main objectives of an internal check system is
to minimise the possibility of committing errors, frauds, or irregularities by the people in the
organisation.

4. Detection of Errors and Frauds: Despite the best efforts of the organisation to prevent errors
or frauds, there could be a few errors and frauds committed by dishonest employees. The
internal check system makes every effort to detect them and tries to take action against such
people.

5. Ensures Reliability of Books of Accounts: Internal check system facilitates recording of all
business transactions in a systematic way which will ensure the reliability and dependability of
the books of accounts and other records by the people who depend on such books of accounts.

Q 3.State the fundamental principles of Internal Check System.

Ans.: 1. Careful Selection and Training: All the employees of the Concern should be carefully
selected and well-trained for the job to be performed by them.

2. Clear-cut Instructions in Writing: Clear-cut instructions about each job should be given to
every employee in black and white so that every employee clearly understands the work to be
done by him.

3. Well-defined Authority: The authority, duties, and responsibilities of each member of the staff
of the business concern should be clearly defined. There should be clarity of thought to every
staff about the work to be performed by him.

4. Assignment of Duties: Each member of the staff should be assigned that job for which he is
best fitted (suited) according to his ability, qualification, and experience.

5. Proper Division of Work: The work should be distributed among the members of the staff in
such a way that no single person is allowed to do any particular work alone.

6. Independent and Automatic Checking: The duties to be performed by each individual should
be devised in such a way that the work done by him should be independently and automatically
checked by another individual simultaneously.
 SECTION-C

Q 1. Explain Internal Check with regard to Wage Payment.

Ans.: A. General Guidelines:

1. There should be a separate Wage Office in the organisation under the charge of a responsible
officer, i.e., Cashier.

2. A responsible officer from HR Department should be authorised to deal with aspects relating
to the appointment and removal of the workers, fixation or alteration of their wage rates, their
promotion, etc.

3. A separate register should be maintained for recording the personal details of every worker
such as name and address, nature of the job, pay scale, date of appointment, and date of
retirement.

4. Copies of the orders relating to promotion, increase in pay, and deductions from gross wages
as a penalty for mistakes committed, net wages, etc. should be communicated from the Wage
Office to the Accounts Department and HR Department.

B. Guidelines for the Maintenance of Wage Records:

1. Time Records:

a. Time Recording Clock: Under this method, every worker is given a time card. When the worker
enters the gate of the factory, he has to put his time card into the slot of the clock. The date and
time of his arival into the workplace and departure from the workplace are recorded on this
card.

b. Use of Tokens: Every worker is ivenametal disk or token beanng his number under this
method. At the gate of the factory, a time board is kept. Each worker who enters the gate hangs
his token on the time board and the timekeeper records his attendance.

C. Attendance Cards: In some manufacturing units, attendance Cards may be issued to the
workers to record their attendance.

Attendance card contains the details of the worker such as his name, number, department, rate
of wages, etc. The worker puts his card into a box kept at the gate of factory as he enters the
gate. Gatekeeper records the time of arrival and departure of each worker in the attendance
register maintained by him.

d. Time Cards:

e. Bio-matric Attendance System: Under this system, there is an electronic device that identifies
an individual based-on psychosomatic and behaviour characteristics.

2. Piece Work Records:

When wages are paid to the workers on the basis of piece work (units produced), each worker is
given a card known as a job card or piece work card containing his name, job number, nature of
work, etc.

It is used to record the quantity of work, quality of work, and rate per unit produced by the
worker. It is signed by the worker and counter- signed by the foreman and where possible, by
the Store Officer to whom the goods produced are delivered.

3. Overtime Records:

Sometimes to meet urgent orders from the customers, the organisation may go for production
of units after normal hours of work.

However, no worker should be allowed to work overtime unless permitted by some responsible
officer.

4. Pass-out Records:

-Normally, no worker is permitted to leave the factory before the scheduled time. In case a
worker wants to go out of the factory before the scheduled departure time for some urgent
personal work, he is supposed to take written permission from the foreman or Works Manager.
When the written permission is given to a worker for going out of the factory during working
hours for his personal work, a slip known as pass-out slip' is prepared by the authority concerned
in duplicate, stating the reason. One copy of the pass-out slip is to be given to the gatekeeper
and the second is to be given to the foreman who will send it to the Wage Officer for records.

C. Guidelines for the Preparation of Wage Sheets:

1. There should be a separate office known as the Wage Office in the Accounts Department to
prepare the wage sheets, which should be under the control of a responsible officer.

2. Information for preparing wage sheets is made available to the Wage Office from the
attendance register, job cards, piece work register, overtime slips, pass-out slips, etc.

3. The work involved in the preparation of wage sheets is normally divided into four parts to be
performed by clerks in the Wage Office which is as follows:

a. Two clerks to examine the time and piece wage records, overtime records, a statement
received from the forèman, etc. to preclude (prevent) any irregularities, if any, at an early stage.

b. The third clerk to fill in the names and addresses of workers, rates of wages, attendance, the
gross amount of wages, etc.

C. The fourth clerk, to verify the work already done by the first three clerks and to calculate the
net amount of wages payable.

d. The fifth clerk to check the whole work thoroughly.

4. All these clerks who have completed their assignments should sign wage sheets and they will
be held accountable for the work done by them.
5. Separate wage sheets should be prepared for time wage and piece wage workers.

6. The wage sheets should be properly verified by a responsible officer (Works Manager) who
should also sign the wage sheets to confirm the accuracy and correctness of the total wages to
be paid to all the workers.

7. After the wage sheets are certified as correct by the officer, they should be sent to the Cash
Department for the payment of wages to the workers.

D. Guidelines for the Payment of Wages:

1. The wage sheets should be sent to the Cashier who should withdraw the amount as shown by
the wage sheets under the column "Net wages".

2. Any person associated with the preparation of wage sheets should not, be permitted to take
part in the payment of wages to the Workers to avoid any collusion between two or more
persons.

3. The net wages payable to each worker should be kept in a separate envelope called 'Pay
Pocket'. The envelope should indicate on its face the name and number of the worker and the
amount contained in it.

4. All the workers who are entitled to receive wages should be personally present unless they
have a valid reason to be absent.

5. The foreman of each of the departments should be present at the time of payment of wages
to prevent impersonation (a substitute without authority) for absent workers.

6. It is the duty of the clerk paying the cash to ensure that each worker signs the wage sheet in
front of his name before receiving payment.

7. In case any worker is not present at the time of making payment of wages, his wages may be
paid to his fellow worker provided he has produced authorisation letter from the absentee
worker duly attested by the foreman, Works Manager, and the Cashier.

8. On the completion of payment of wages, a list of unclaimed wages should be prepared and
signed by the Cashier, the foreman, and the Works Manager.

9. Utmost care should be taken while making payments to casual labourers, as chances of frauds
are more while making payment to such workers. A separate list of such workers should be
prepared and payment of wages to these workers should be made only in the presence of the
foreman concerned or the Works Manager.

O 2. Explain the internal check regarding cash sales.

Ans.: A. Internal Check for Cash Sales at the Counter:

1. Under no circumstances, the salesman should be allowed to receive cash from the customers
for the goods sold or to deliver the goods to the customers.
2. Separate salesman should be appointed for each sales counter, who should be in independent
charge of his counter.

3. Counter salesman at each sales counter should be provided with Sales Memo Book or Cash
Memo Book which should be printed and serially-numbered.

4. Every counter salesman at his counter must be identified by his name or by a number given to
his counter.

5. As far as possible, the Cash Memo Book provided to the different counter salesmen should be
prepared in different colours for their easy identification.

6. When a cash sale transaction is made at the counter, the counter salesman should record the
details in the daily cash sales sheet.

7. The sales memos prepared by the counter salesman should be checked by some responsible
officer.

8. When the customer carries and hands over three copies of the sales memos to the Cashier
and makes the payment, the Cashier should check the entries in respect of units sold and collect
the amount.

9. The customer presents both copies of the sales memo at the delivery counter to collect the
goods.

10. After receiving the two copies of the sales memo from the Customer, the person at the
delivery counter has to deliver the goods by giving one copy of the sale memo to the customer,
retaining the second copy.

11. At the end of every day, the following procedure should be followed:

12. Daily cash received against cash sales should be deposited into the concern's Bank Account
either on the same day or on the following day.

B. Internal Check for Sales by Travelling Salesman:

1. They should be made to issue only temporary receipts from the Rough Receipt Book issued to
them to the customers for the cash collected by them against the sales made by them.

2. The final receipt for the cash collected by the travelling salesmen should be issued from the
head office or the branch office.

3. If the final receipt is not issued to them within a stipulated period, the customers should be
asked to contact the head office or the branch office.

4. They should be instructed to remit the cash collected by demand draft to the head office or
branch office as the case may be at regular intervals.

C. Internal Check for Sales under Mail Order Business:

1. There should be a separate section in the Sales Department to deal with postal sales.
2. There should be a separate register for recording the sale by the post known as Value Payable
Post Register.

3. Cash received from postal sales should be deposited into the concern's Bank Account.
Separate bank pay-in-slips should be prepared for the deposit of the cash received from postal
sales.

4. At regular intervals, a responsible officer should check the Value Payable Post Register for
goods which have not been returned and also for those for which payment has not been
received.

Q 3. Explain the method of internal check to be followed regarding cash purchase.

Ans.: 1. Purchase Department should supervise and control entire purchase transactions of the
whole organisation.

2. The procedure for purchases should start with issuing purchase requisitions and making an
enquiry about the terms and conditions of purchases from different suppliers.

3. Purchase requisition should be in printed form and serially- numbered. They should be given
to all departments of organisation for placing an indent for their requirements.

4. On receipt of purchase requisition from various departments, the Purchase Department

should send a letter of enquiry to the suppliers, inviting quotations from them.

5. The Purchase Department after verifying the quotation should place a purchase order with
the supplier for the supply of materials to be purchased.

6. All purchase orders should be signed only by the Purchase Manager or any responsible person
who is authorised to sign on his behalf.

7. Goods should be received and inspected by a responsible official and entered in the goods
received note and the same should be recorded in the Goods Received Register.

8. On receipt of the invoice from the supplier, the Purchase Department verifies the invoice with
the goods received note and check the rate, discount, quality, and quantity of goods.

9. Goods received should also be recorded in stores ledger accounts maintained in the Costing
Department and entries should be made in the bin card maintained in the Stores Department.

10. The Accounts Department should verify the purchase invoice with the goods received note
and purchase order before making payment to the suppliers of materials.

11. After making the payment, the Accounts Department should affix a rubber stamp on the
invoices to avoid duplication of payments by the Cashier

12. At regular intervals, a responsible officer should check the entries in the Purchases Book with
the supplier's ledger account.

13. Proper care should be taken to see that the correct amount is paid to the supplier.
14. All payments should be made in cheque so that the right person receives the payment from
the organisation.

MODULE -3

VERIFICATION AND VALUATION OF ASSETS AND LIABILITIES

SECTION-A

Q 1.What do you mean by verification of assets?

Ans.: Verification implies an enquiry into the value, ownership and titles, existence and
possession and the presence of any charge on the assets.

Q 2. What do you mean by Valuation of Assets?

Ans.: Determining the fair value of the assets shown in the Balance Sheet on the basis of
generally accepted accounting principles is called valuation of assets.

Q 3. What do you mean by wasting assets?

Ans.: Wasting assets means those which lose their value gradually upon their use, e.g., a mine, a
quarry etc.

O 5. Give example for Ficticious Assets of a company.

Ans.: Preliminary Expenses, discount on issues of shares or

debentures, Profit and Loss A/c. (Dr) are examples for Ficticious Assets.

SECTION-B

01. What are the objectives of verification of valuation of Assets and Liabilities of a Company?

Ans.: 1. To verify whether the values of assets shown in the balance sheet are valued as per
generally accepted accounting principles.

2. To see that all the liabilities of the client's business are disclosed in the financial statements.

3. To verify whether his client is the owner of the assets shown in the balance sheet through
legal and official documents examination.

4. To see that all the liabilities of the client's business are properly valued as per generally
accepted accounting principles.

5. To verify the existence of assets shown in the balance sheet through physical examination of
the assets.

6. To see that all the liabilities of the client's business are properly classified and disclosed.

7. To verify whether the assets shown in the balance sheet are under the possession of his client.

8. To see that all the fictitious liabilities are not disclosed in the financial statements.
Q 2. What is the position of an auditor as regards to the valuation of assets?

Ans.: It is the duty of the auditor to confirm that assets and liabilities are appearing in the
balance sheet exhibits proper value of assets and liabilities. If the absence of proper valuation,
they are either overvalued or undervalued.

In matters relating to valuation of assets the auditor must adhere to the generally accepted
principles of valuation, commercial practices and accounting standards.

The auditor should state the basis for valuation of assets in the Balance Sheet as certified by the
directors, or engineers, architect etc. as the case may be.

Auditor should even are reasonable are a skill to analyse the basis of valaution from technical
experts and satisfy himself that assets and liabilities are shown in accordance with the
accounting conventions and concepts.

SECTION-C

Q 1. Explain the points to be considered by the auditor, while undertaking verification and
valuation of land and building?

Ans.: 1. He should see that the freehold lands are shown in the B/S at cost, and freehold
buildings are shown at cost less depreciation.

2. He should see that the leasehold property is shown in the B/S at cost less depreciation written
off to date.

3. He should examine the title deeds relating to the free hold lands and buildings to ensure that
they are in the name of the client.

4. He should examine the lease deeds to ascertain the terms and conditions of the lease.

5. He should find out the existence of land and building either through physical verification or
through documentary examination.

6. If the land and building is mortgaged, the auditor should get a certificate from the mortgages
stating that title deeds are in his possession.

7. He should make proper enquiry to ensure that there is no second mortgage on the free hold
property.

8. Leasehold property cannot be mortgaged to others. But it can be sub-let to others. In case it is
sub-let to anybody, the auditor should examine the agreement with the sub-tenant.

Q 2. Explain the procedures of verification and valuation of Plant and Machinery.

Ans.: 1. He should see that it is valued at cost price less depreciation Written off to date.

2. He should check the plant register with the Plant and Machinery Ale and satisfy himself as to
the value of Plant and Machinery.
3. If necessary, he should obtain a certificate from the technically qualified persons for its
valuation.

4. Satisfy that depreciation has been provided on a recognized method. If not, see that adequate
disclosure has been made in the year of change of the method along with monetary impact.

5. He should find out the ownership and title of Plant and Machinery through the examination of
legal and official documents.

6. Conduct spot inspection for the physical existence of Plant and Machinery on random basis.

7. If Plant and Machinery is kept abroad, the auditor should get a certificate to that effect from
the concerned auditor.

8. To see the mortgage or charge on the Plant and Machinery, the auditor should look into the
details given in the plant register.

Q 3. What are the condition to be fulfilled while valuation Goodwill of a Company?

Ans.: 1. If goodwill has been purchased along with a running business from the vendors, the
auditor from the purchased agreement should verify the amount of goodwill.

2. When a company has raised goodwill account by writing up the value of its assets, the auditor
should examine the basis on which the assets have been revalue.

3. The auditor with the help of the partnership deed should verify the amount of goodwill
created in the books of a partnership firm. On admission or retirement or death of a partner.

4. The valuation of goodwill is a matter of financial policy, to be decided by the management.

Therefore, the duty of the auditor is just to see that the goodwill is shown in the balance sheet
at its proper value.

5. If it appears to the auditor that the future benefits associated with goodwill do not exist, he
should insist on the writing off the goodwill. If the management does not accept his suggestion
regarding the writing off goodwill, he should qualify his report and state the facts in this regard
in his report.

Q 4. Explain the verification and valuation of Investment and Stock in Trade.

Ans.: Investments:

1. If investments are in large number, the auditor should obtain a schedule certified by a senior
office of the company. Such schedule must include the nine of the investment, the book value,
the market price, the date of purchase of investment, rate of interest, date of payment of
interest, tax deducted at source, etc.

2. If the investments are held as Fixed Assets, they should be valued at cost price. On the other
hand. if the investments are held as Current Assets, they should be valued at Cost Price or
Market, w.e.1
Enquiry into the existence and possession

1. If the investments are in the hands of the client, the auditor should verify the existence of the
investments by personal inspections. (City equitable fire insurance company Ltd.)

2. If a trustee on behalf of the company holds the investments, the auditor should examine the
trust deed.

3. If the investments have been entrusted to a bank for safe custody, he should get a certificate
from the bank. Stock in Trade

1. He should see that the basis of valuation has been consistently adapted from year to year to
facilitate comparison of profits of different years.

2. As stock is a floating asset meant for resale, the auditor should see whether the stock is
valued at cost price or market price. W.e.1.

3. He should check the values of few items in the stock sheets with their corresponding invoice
prices and current selling prices.

4. He should find out whether the calculations, additions, and castings in the stock sheets are
correct.

5. He should see that a responsible official signs the stock sheets.

6. He should see that the goods with the consignees or with the customers are valued at cost
price and not at selling price.

7. He should compare the percentage of gross profit to sales of the current year with that of the
previous year and investigate into any material difference in the percentage of profit.

8. He should verify whether slow-moving, obsolete and damaged goods have been listed
separately and are properly valued.

0 5. Explain the verification and valuation of liabilities by the auditor.

Ans.: Bills Payable

1. He should obtain a schedule of bills payable and verify whether the schedule contains all the
details of the bills payable.

2. He should check the total of the schedule of the bills payable with the bills payable book, bills
payable account and cash book.

3. He should examine the retuned bills payable, which can be taken as evidence for the payment
made for the matured bills.

4. He should see that the bills payable, which have been paid, are not shown as outstanding.

5. He should check the bills payable paid after the balance sheet but before the date of audit
with the entries made in the cash book.
Creditors:

1. He should get a list of creditors from the management, and verify whether the schedule
contains all the details about sundry creditors.

2. He may also obtain statement of accounts from the creditors to check the accuracy of the
creditor's ledger balances.

3. He should check the goods inwards book to ensure that all goods purchased during the year
have been actually received and are duly recorded in the purchases book.

4. He should compare the percentage of gross profit to sales of the current year with that of the
previous year and investigate into any material difference in the percentage of profit.

5. He should examine the purchase invoice for the succeeding year to ensure that none of them
relates to the current year.

6. To ensure that all the liabilities are properly valued, classified and disclosed.

Contingent Liability (C/L)

1. He should obtain a list of C/L duly certified from the management to ensure that all C/L have
been disclosed.

2. To verify the existence of C/L., he should examine the accounts books, minutes,
correspondence, share certificates etc.

3. If there is provision for C/L, the auditor should examine the minute's book or resolution to
confirm the provision.

4. He should see that C/L are properly disclosed in the Balance Sheet.

5. If provision have not been made by the management for certain C/L, and if the auditor thinks
that they are likely to materialize as actual liabilities, he should insist on the management t0
make necessary provision for them.

MODULE -4

COMPANY AUDIT AND AUDIT OF OTHER ENTITIES

SECTION-A

Q 1. VWho is called as Company Auditor?

Ans.: Qualified Chartered Accountant appointed for the purpose of examining the accounts of a
Joint Stock Company and giving the report thereon to the shareholders every year at the annual
general meeting.

Q 2. What is meant by professional ethics of an company auditor?

Ans.: Duty of auditor to adhers to high standards of behaviour in the cause of their work and in
their relationship is called as professional ethics.
Q 3. What are the statutory qualification of a company auditor?

Ans.: 1. Only chartered accountant is qualified to act as an auditor of the company.

2. A firm can be appointed as the auditor of the company, if all partners are practicing chartered
accounting in India.

3. A person. who holds a certificate under restricted auditors, certificate rules, 1956, is also
qualified to act as an auditor of the company.

SECTION-B

Q 1. Write a note on appointment of a company auditor.

Ans.: First Auditor

The first auditor of a company is appointed by the board of directors within one month of the
registration of the company. The auditor so appointed will hold office till the conclusion of the
first annual general meeting of the company.

If the board of directors fails to appoint the first auditor, the shareholders may appoint the first
auditor in the first general meeting.

The auditor so appointed will not only hold office till the conclusion of the first annual general
meeting of the company, but may also automatically reappointed at the first annual meeting of
the company.

Subsequent Auditor:

Every subsequent auditor is appointed every year at every annual general meeting by the
shareholders. The auditor so appointed may be the old or previous auditor of a new auditor.
Further, such auditor will hold office till Conclusion of the next annual general meeting.

Appointment of Auditor by the Central Government:

If a subsequent auditor is not appointed by the shareholders at the annual general meeting, the
company must bring it to the notice of the Central Government within seven days of the
conclusion of the annual general meeting. If the company fails to give such a notice, the
company and every officer of the company in default will be punishable with a fine, which may
extend upto to 500. On receiving the notice of non- appointment of a subsequent auditor at any
annual general meeting, the Central Government may appoint an auditor to fill the vacancy.

Appointment in case of casual vacancy:

Any casual vacancy in the office of an auditor can be filled up by the board of directors.
However, casual vacancy caused by the resignation of the auditor cannot be filled up by the
board of directors. It can be filled up only by the shareholders at the general meeting. An auditor
so appointed can hold the office till the conclusion of the next annual general meeting.

Appointment by Special Resolution:

The appointment or re-appointment of an auditor shall be made by a special resolution in the
case of a company in which not less than twenty five percent of the subscribed capital is held,
whether singly or in any combination with financial institutions or Government company or the
General Government or any State Government.

A nationalised bank or an insurance company carrying on general insurance business. If a special

resolution has not been passed for the appointment of an auditor, it shall be deemed that the
appointment has not been made and the Central Government will get the right to make the
appointment.

Q 2. What are the professional ethics of an auditor?

Ans.: 1. Integrity: A professional accountant should be straight forward and honest in all
professional and business relationships.

2. Objectivity: He should not allow bias, conflict of interest or under influence of others to
override professional of business judgements.

3. Professional competence and Due Care: Professional auditor should act diligently and by
applicable technical and professional standards when providing professional services.

4. Confidentiality: A professional auditor should respect the confidentiality of information

acquired as a result of professional and business relationship and should not disclose any such
information to third parties without proper specific authority.

5. Professional Behaviour: A Company auditor should comply with relevant laws and regulations
and should avoid any action that discredits the profession.

Q 3. Write a note on civil liability of an auditor for misfeasance.

Ans.: Misfeasance means breach of trust or duty imposed by law. In other words, if an auditor of
a company does something wrongfully in the performance of his duties, resulting in financial loss
to the company, he is held guilty of misfeasance.

The civil liability of the auditor of company for misfeasance has been confirmed in several cases.
Some of the leading cases in which the civil liability of an auditor for misfeasance has been
confirmed are:

1. London and General Bank Ltd.: In this case, the assets of the company were over valued. As a
result, dividend was paid out of capital.

The auditor was aware of the over valuation of the assets. But he did not report the matter to
the shareholders in clear terms. It was held that an auditor is liable for misfeasance, if he fails to
bring to 1 the notice of the shareholders in clear terms about the unsatisfactory state of affairs
of the company, when he knew the company assets Were over valued.

2. Union Bank of Allahabad: In this case, the manager of a bank Sums of money from the bank
for himself and his relatives without providing proper securities. The auditor of the bank had
borrowed large sum blindly signed the balance sheet, as he had full trust in the manager of the
bank. He was held liable for misfeasance, as he had signed false balance sheet by blindly trusting
a dishonest manager and secretary of the bank.

3. The City Equitable Fire Insurance Co. Ltd.: In this case, it was held that it is the duty of an
auditor to satisfy himself that the securities of the company reality exist and are in safe custody.
He is liable for misfeasance, if he does not verify the existence of the investments and merely
accepts the certificate of a stock broker.

Q 4. Write a note on Ethical guidance in Accounting and Audit.

Ans.: The major principles in professional ethics of accounting and auditing are including:

1) Considering the beneficiary benefits: Professional accountant should consider the benefits of
all beneficiaries including society, employer, creditor and employees.

2) Responsibility: Deep understanding of professional, ethical and legal responsibilities is the

necessities of works in this profession.

3) Doing work truly: Resorting of professional accountant to general ethical principles.

4) Impartiality in judgement: The professional accountant should have a judgement without

benefits contradict and others influence and don't prejudice.

5) Autonomy: The ability of professional accountant to keep impartiality and the independent
auditor shouldn't have direct benefits or important indirect benefits in the unit.

6) Confidentiality: The information of employer should be confidential. The auditor is not obliged
to disclose the employer confidential information without his permission and the disclosure is
only in legal courts.

7) Observing the type of service: This principle shows that the limitations of services are
observed and the work is compatible with the professional role.

8) Professional qualification: The professional accountant should have adequate information of

techniques in professional work and should have required skills and experiences.

9) Observing the technical regulations: Observing the accepted accounting and auditing
standards is obligatory. The professional accountant should consider professional care in the
work as observing law, report form, timely report, and accuracy in figures, work appropriate
method, quality standards and other accepted.

10) Professional behaviour observation: Observing the position of professional accountant is

necessary. The accountant should behave as making the job creditability problematic.

Q 5. What are the fundamental principles of Ethics?

Ans.: 1) Integrity: Integrity refers to the use of honesty and directness during their work. The
code states that members should be honest and straight forward in all ·their, professional and
business relationships.
2) Objectivity: Objectivity, deals with auditors' independence during their work. The code states
that members should not allow bias, Conflicts of interest, or undue influence of others to
override their professional or business judgement.

3) Professional behaviour: Professional behaviour refers to acting professionally during audits.

The code states that members should comply with relevant laws and regulations. Furthermore,
it requires them to avoid any actions that discredit the profession.

4) Professional competence and due care: Professional competence and due care relate to the
auditor's knowledge and performance. The code states that members should maintain
professional I knowledge and skill at a specific level to provide competent professional services.
Members should also not diligently under applicable standards.

5) Confidentiality: The code states that members should respect the confidentiality of the
information and not disclose it to third parties.

However, they can do so if they is a legal or professional right or duty to disclose or if they have
the authority. Similarly, they must not exploit their professional and business relationships for
personal gains.

SECTION-C

Q 1. Explain powers and rights of company auditor.

Ans.: 1. Right to of access to books of account and vouchers: An auditor of a company has a right
to of access, at all times, to the books of accounts and vouchers of the company, whether they
are kept at the head office of the company, or elsewhere. The auditor of the company may
examine the books and vouchers whenever he likes. For this purpose, he may pay even surprise
visits to the company's office without informing the directors in advance. But, in practice,
generally, an auditor informs the directors before he pays his visit.

2. Right to obtain information and explanation: An auditor of a company has a right to obtain
from the directors and officers of the company such information and explanations as he may
think necessary for the performance of his duties as an auditor.

If the directors or officers of the company refuse to supply any information on the ground that,
in their opinion, it is not necessary to furnish it, the auditor has a right to mention that fact in his
report.

3. Right to comment on the inadequacy of the accounting system in his report: If the system of
maintaining accounts is inadequate, auditor can advise the directors to amend the system of
accounting. However, if his advice or suggestion is not carried out by the directors, he has a right
to mention the fact in his report. He has to state in his report that proper books of accounts
have not been maintained by the company.

4. Right to receive notices and other communications of general meeting: An auditor of a

company has a ight to receive notices and other communications relating to any general
meeting, like any other member of a company, irrespective of the fact whether accounts are
discussed or not at that meeting.
5. Right to have legal, technical or expert advice: An auditor has a right to take legal, technical or
expert advice on any matter relating to the business in order to perform his work satisfactory.
This right of the auditor was upheld in the case of London and General Bank.

It may be noted that, no doubt, the auditor has the right to seek legal, technical or expert advice.
But, in his respect, he must give his own opinion and not that of the expert.

6. Right to receive remuneration for his audit work: An auditor of a company has a right to
receive remuneration for his audit work provided he has completed the work which he
undertook. It may be noted that, if the remuneration payable to the auditor is fixed in the form
of an annual fee, he is entitled to full year's fee, even if he is dismissed during the year.

7. Right to be indemnified: An auditor of a company has a right to be indemnified, out of the

assets of the company, for any liability incurred by him in defending himself against any civil or
criminal proceedings by the company, provided the judgement is in his favour.

8. Right to sign the audit report: An auditor has the right to sign the audit report. It may be
noted that only a person appointed as an auditor of the company may sign the auditor's report.

9. Right to make representation and to speak in the general meeting when he is asked to vacate
office: An auditor has the right to refuse to start the audit Work until the books of accounts of
the business are balanced by the management.

In order to enable an auditor of a company to discharge his duties effectively, the Companies Act
of 1956 has given certain rights and powers to him. It may be noted that the rights and powers
given to an auditor of a company by the Companies Act cannot be restricted either by the
articles of association of the company or by the resolution of the members of the company.

2. Explain briefly duties and responsibilities of a company auditor.

Ans.: An auditor highlight accompany has several duties and responsibilities to perform. The
various duties of an auditor of company can be grouped into four categories. They are:

1. Statutory duties, i.e., duties imposed by the Companies Act.

I. Contractual duties, i.e.. duties arising out of the auditor's contract with the client.:

II. Certain duties imposed by legal or court decisions.

IV. Duties arising out of professional ethics.

I. Statutory duties, i.e., duties imposed by the Companies Act.

Statutory duties refer to the duties imposed by the statute, i.e., by the Companies Act. It may be
noted that the statutory duties of an auditor cannot be restricted either by the articles of
association of the company or by any resolution of the members of the company or the directors
of the company.

A. Duty to make certain enquiries

An auditor of a company should make the following enquiries:

1. Whether loans and advances made by the company on the basis of securities have been
properly secured

2. Whether the terms on which loans have been made are not prejudical to the interests of the
company or its members.

3. Where the company is not an investment company, whether the shares, debentures and the
other securities of the company have been sold at a price less than its purchase price.

4. Whether loans and advances made by the company have been shown as deposits.

5. Whether the position as stated in the books is correct, regular and not misleading.

B. Duty to sign his audit report

It is the duty of an auditor to sign the audit report prepared by him.

In the case off a firm of auditors, any partner of the firm can sign the audit report.

C. Duty to assist investigators or inspectors

It is the duty of the auditor of a company to preserve and produce all books and papers relating
to the company under investigation to the investigators or inspectors and to give them all
assistance in connection with investigation.

D. Duty to assist the Central Government in connection with prosecution An auditor of a

company is required to give the Central Government all reasonable assistance in connection
with the prosecution of directors, managing director or other officers of the company.

E. Duty to certify the statutory report

The auditor of the company should certify the statutory report as correct after it has been
certified more correct by not less than two directors, one of whom should be the managing
director.

E Duty to report

An auditor of a company should make a report to the shareholders on the accounts examined by
him. The report, so submitted should contain the following:

1. Whether he has obtained all the information and explanations to the best of his knowledge
and belief and which were necessary for the purpose of his audit.

2. Whether, in his opinion, proper books of accounts, as required by law, have been kept by the
company and proper returns necessary for the purpose of his audit have been received from
branches not visited by him.

3. Whether the company's balance sheet and profit and loss account are in agreement with the
books of accounts and returns. 4. Whether, in his opinion and to the best of his information and
according to the explanations given to him. Whether the balance sheet and profit and loss
account have been drawn up according to the requirements of the Companies Act and exhibits a
true and fair view of the state of affairs of the company.

I. Duties Arising out of Common Law ( i.e., under his Contract with the company)

An auditor is appointed by an agreement with his client, i.e., the Company. So, he has some
duties arising out of the common law or the law of contract.

The important contractual duties of an auditor are:

1. If he is requested to perform certain special duties under the Contract with the company, say,
conduct of efficiency. audit or propriety audit, he has to perform them.

2. An auditor is required to perform his contractual duties with reasonable care and diligence in
order to avoid his liability for breach of contract.

II. Duties imposed by legal or court decisions

There are certain duties imposed on a company auditor by court or legal decisions. They are:

1. He is not bound to be a detective or to approach his work with suspicion or with foregone
conclusion that there is something wrong.

He is a watching, but not a blood hound. He is justified in believing the responsible officials of
the company and is entitled to rely upon their representations, provided he takes reasonable
care

2. An auditor should correspond in writing with the previous auditor in whose place he has been
appointed as an auditor of the company.

IV. Duties arising out of professional ethics

The main duties of an auditor arising out of professional ethics are:

1. It is the duty of an auditor not to practice as an auditor unless he is a member of the Institute
of Chartered Accountants and a holder of a certificate of a practice from the Council of the
Institute (Joint Secretary to the Ministry of Trade and Industry, Government of India Kaher).

2. An auditor should comply with the rules and regulations formulated by the Institute of
Chartered Accountant of India. He must be honest, sincere, technically competent and carry on
his duties, with due regard to public interest and not in his personal interest. Further, he should
disclose full and fair information about the working and the financial position of the company to
all the stakeholders.

Q 3. Enumerate civil liabilities of a Company Auditor.

Ans.: An auditor of a company is appointed by the shareholders. As such, he becomes an agent

of the shareholders. As an agent of the shareholders, he must safeguard the interest of the
company. To safeguard the interest of the company, he must exercise reasonable care and skill
in the performance of his duties. If he fails to do so and as a consequence thereof, if the
company suffers any loss, the auditor will be held liable to compensate the loss suffered by the
company.

The civil liability of an auditor for negligence has been confirmed in several leading cases. Some
of the leading cases confirming the civil liability of an auditor for negligence are as follows:

1. London Oil Storage Co. vs. Sears Hasluck and Co. In this case, the auditor failed to verify the
existence of petty cash.

As a result, the company suffered loss. It was held that, if the auditor of the company fails to
verify the existence of assets as shown in the balance sheet, he is liable to pay damages to the
company.

2. Leeds Estates Building and Investment Co. vs. Shepherd In this case, it is the duty of the
auditor not to confine himself merely to the tasks of ascertaining the arithmetical accuracy of
the balance sheet, but to see that it is a true and accurate representation of the Company's
affairs. It was not excuse that the auditor has not seen the article when he knew to their
existence.

3. Irish Woollen Co. vs. Tyson and others In this Case, there was considerable understatement of
trade liabilities and suppression of some of the purchase invoices. The falsification of accounts
might have been discovered by the auditor, if he had called for the creditors statements and
checked the same With the respective ledger accounts. But the auditor did not care to check the
creditors statements. As a result. dividends were paid out of capital.

The auditor was sued for negligence in the performance of his duties. It was held by the court,
"An auditor shall be liable for all the damages sustained by a company by reason of falsification
which might have been discovered by the exercise of reasonable care and skill in the
performance of audit".

Q 4. Briefly explain criminal liabilities of Company Auditor.

Ans.: I. Criminal Liabilities of an Auditor under the Companies

Act of 1956

1. Where the prospectus issued by a company includes any untrue statement or mis-statement
by the auditor, the auditor becomes criminally hable. In this case, he may be punishable with
imprisonment for a term which may extend to two years or with fine which may extend to
rupees five thousand or both.

2. If an auditor intentionally gives false evidence upon any examination about the winding up of
the company, he becomes punishable with imprisonment for a term which may extend to seven
years and also to fine.

3. An auditor of the company liable for criminal prosecution, if he, in any return, report,
certificate, makes a false statement, particularly knowing it to be false or omits any material
fact, knowing it to be material. The punishment on conviction will be imprisonment for a term
which may extend to two years and also fine.

4.If an auditor destroys, mutilates or makes alternations in any books, papers or securities
belonging to the company with intent to defraud or deceive any person at the time of the
winding up of the company, he becomes punishable with imprisonment for a term which may
extend to seven years and also to fine.

5. When a company is wound up, the court may direct the auditor of the company, who is
known or suspected to be in a possession of any property, books or papers of the company, to
appear before the court and to return to the court the property, books or papers of the
Company.

If the auditor fails to appear before the court, he can be imprisoned.

6. If the Central Government takes action and prosecutes any officer connected with the affairs
of the company, the auditor is required to assist the prosecution. If he fails to do so, he becomes
punishable with imprisonment for six months or with fine up to Rupees five hundred or

with both.

7. If the auditor of a company does not give the required assistance to an inspector appointed by
the Central Government to investigate the affairs of a company, the auditor is punishable with
imprisonment up to six months or with fine up to Rupees ten thousand or with both.

II. Criminal Liability of an Auditor under the Indian Penal Code If an auditor issues or signs any
certificate, knowing or believing that such certification is false in any material point, he becomes
punishable in the same manner as if he gives false evidence.

III. Criminal Liabilities of an Auditor under the Income tax Act of 1961

If an auditor induces in any person to make and deliver to the income-tax authorities a false
statement or declaration relating to any income chargeable to tax, he becomes punishable with
simple imprisonment which may extend to six months or with fine which may extend to Rupees
one thousand or with both.

IV. Criminal Liabilities of an Auditor under the Chartered Accountants Act

If a person. not being chartered accountant, acts as an auditor of a Company and signs any
document, he becomes liable for criminal prosecution.

If company has suffered any loss, it is only the company which can sue the auditor for damages
and an individual shareholder has no right to do so, Further, the court has power to relieve an
auditor either partly or wholly, if a case is proceeding against him for negligence or misfeasance,
provided it is satisfied that the auditor acted honestly and reasonably.

Q 5. Write-up the Audit procedures of NGOs.

Ans.: 1. Understanding the Organization: Gain a through understanding of the NGOs mission,
objectives, activities and organizational structure.
2. Assessing Risk and Materiality: Identify risks specific to NGOs, Such as misappropriation of
funds, lack of transparency or inadequate program monitoring.

3. Financial Reporting and Accountability: Examine financial statements to ensure accuracy,

completeness, and proper disclosure of activities, assets and liabilities.

4. Governance and Internal Controls: Evaluate the effectiveness of internal controls and Assess
the NGO's governance structure, including the role of the board of directors and the existence of
governance policies.

5. Compliance with Regulatory Requirements: Verify compliance with local, national and
international laws and regulations governing NGO's, including tax-exempt status and reporting
obligations.

6. Review of Supporting Documentation: Examine supporting documentation for financial

transactions, including invoices, receipts, contracts and bank statements.

7. Testing of Donor Funding: Trace funding sources to ensure proper allocation and utilization of
donor funds. Confirm that funds are used in accordance with donor restrictions.

8. Review of Grant Agreements: Confirms that funded programs and projects are executed as
planned.

9. Review of Board Minutes and Governance: Examine board meeting minutes to assess the
oversight and decision-making processes. Verify that governance policies are in place and
followed.

10. Verification of Beneficiary Records: Confirm the accuracy and validity of beneficiary records
for program activities, such as education, healthcare, or relief efforts.

11. Cash Handling and Disbursement Procedures: Assess controls over cash handling,
disbursements, and petty cash funds to prevent misappropriations.

12. Internal Control Testing: Test the effectiveness of internal controls through inquiry,
observation, and sample testing.

13. Management Representation Letters: Obtain written representations from management to

confirm the accuracy and completeness of information provided.

14. Communication with Stakeholders: Discuss audit findings with key stakeholders, including
the board of directors, donors, and beneficiaries.

Q 6. Explain the audit procedure of charitable institutions.

Ans.: 1. Understanding the Charitable Institution: Gain a comprehensive understanding of the

institutions mission, activities, beneficiaries and organizational structure.

2. Assessing Risk and Materiality: Identify risks relevant to charitable institutions, such as misuse
of funds, lack of transparency or inadequate program monitoring.
3. Financial Reporting and Accountability: Examine financial statements for accuracy,
completeness, and proper disclosure of activities, assets and liabilities. Verify the appropriate
allocation of expenses among administration and fund-raising activities.

4. Program Effectiveness and Impact: Evaluate the effectiveness of prgrams in achieving the
institutions charitable mission and objectives.

5. Governance and Internal Controls: Assets the effectiveness of internal controls, including
segregation of duties, authorization processes, and financial reporting mechanisms.

6. Compliance with Regulatory Requirements: Verify compliance with local, national and
international laws and regulations applicable to charitable institutions, including tax - exempt
status and reporting

7. Risk Assessment c and Fraud Detection: Identify areas susceptible obligations. to fraud,
misappropriation or corruption.

8. Review of Supporting Documentation: Examine supporting documentation for financial

transaction, including invoices, receipts Contracts, and bank statements.

9. Testing of Donor Contributions: Trace donor contributions to ensure proper recording and
reporting. Confirm that funds are used in accordance with donor intentions.

10. Review of Grant Agreement: Confirm that funded programs and projects align with the
institution's charitable objectives.

11. Review of Board Minutes and Governance: Examine board meeting minutes to assess
decision-making processes.

12. Cash Handling and Disbursement Procedures: Assess controls wover cash handling,
disbursements and petty cash funds to prevent misappropriation.

13. Internal Control Testing: Test the effectiveness of internal controls through inquiry,
observation, and sample testing.

14. Audit Findings and Recommendations: Document and communicate significant findings,
deficiencies or areas for improvement.

O 7. Give brief note of audit programmes of Educational Institution regarding Income and
Expenses.

Ans.: Income

1. He should verify the receipts of monthly or terms fees from the counterfoils or carbon copies
of the receipts, the register of students and the cash book. He should also see whether the cash
received has been banked daily or not.

2. He should vouch the receipts on account of admission fees Dy reference to the proper
documentary evidence. He should compare the receipts from admission fees with the
application forms for admission.
3. He should vouch the receipts on account of examination fees by reference to proper
documentary evidence.

4. He should also verify other charges collected from the structure, such as laboratory fees,
fines, etc. carefully.

5. He should see that the concessions of fees and free ships given to students are duly
authorized by the proper authority.

6. He should vouch the grant-in-aid received from the Government or a local body carefully by
examining the correspondence and any other documentary evidence.

Expenditure:

1. He should vouch the amount of salaries paid to staff with the salary register, counterfoils of
the cheques book, cash book and the bank pass book.

2. He should see whether any increment given to an employee has been duly sanctioned by the
proper authority, say, the managing committee.

3. He should see that, while making the payment of staff salaries, income-tax has been deducted
at source and duly deposited with the income-tax department.

4. The establishment expenses must be careful vouched with relevant vouchers and the entries
in the cash book.

5. The payment of scholarship should be verified with the receipts from students and the
scholarship register.

6. He should vouch the items of capital expenditure and see that are sanctioned by proper
authority, İ.e., the managing committee.

Q 8. Explain the audit procedure for Government.

Ans.: 1. Understanding the Government Entity: Gain a comprehensive understanding of the

government entity's functions, services, programs and organizational structure.

2. Assessing Risk and Materiality: Identify risks specific to Government entities, such as
mismanagement of public funds, lack of accountability or non-compliance with laws.

3. Compliance with Laws and Regulations: Verify compliance with relevant laws, regulations, and
statutes governing government entities.

4. Financial Reporting and Accountability: Examine financial statements to ensure accuracy,

completeness, and proper disclosure of activities, assets, liabilities and equity verify the
appropriate classification and presentation of financial information.

5. Internal Controls and Accountability: Assess the effectiveness of internal controls over
financial reporting, procurement and contract management.
6. Risk Assessment and Fraud Detection: Identify areas vulnerable to fraud, corruption or
misappropriation of public funds.

7. Review of Supporting Documentation: Examine supporting documentation for financial

transactions, contracts, agreements, and expenditure authorizations.

8. Testing of Revenue and Expenditures: Verify the completeness and accuracy of revenue
collection and expenditure transactions.

Confirm that public funds are collected, recorded, and expended in accordance with established
procedures.

9. Evaluation of Public Program Outcomes: Assess the outcomes and impact of government
programs on citizens and communities.

10. Internal Control Testing: Test the effectiveness of internal controls through inquiry,
observation and sample testing.

11. Audit Findings and Recommendations: Document and communicate significant findings,
deficiencies or areas for improvement.

12. Management Representation Letters: Obtain written representations from government

officials to confirm the accuracy and completeness of information provided.

13. Communication with Stakeholders: Discuss audit findings with key stakeholders, including
governing bodies, citizens and oversight agencies. Provide assurance on the transparency,
accountability and responsible use of public funds.

O 9. What is the audit procedure for Local Bodies?

Ans.: 1. Understanding the Local Government Body: Gain a comprehensive understanding of the
local body's functions, services, programs and organizational structure. Identify the legal and
regulatory framework governing the local body's operations.

2. Assessing Risk and Materiality: Identify risks specific to local government bodies, such as
mismanagement of funds, lack of accountability or non-compliance with laws and regulations.

3. Budgetary Compliance: Verify compliance with budgetory limits and appropriations

established by governing bodies. Confirm that expenditures align with approved budgets and
allocations.

4. Financial Reporting and Transparency: Examine financial statements to ensure accuracy,

completeness and proper disclosure of activities, assets, liabilities and equity. Verify the
appropriate classification and presentation of financial information.

5. Program Effectiveness and Community Impact: Evaluate the effectiveness of local programs in
addressing community needs and priorities.

6. Internal Controls and Governance: Assets the effectiveness of intimal controls over financial
reporting, procurement and contract management.
7. Risk Assessment and Fraud Detection: Identify areas vulnerable to fraud, corruption or
misappropriation of public funds.

8. Review of Supporting Documentation: Examine supporting documentation for financial

transactions, contracts, agreements, and expenditure authorization.

9. Testing of Revenue and Expenditure: Verify the completeness and accuracy of revenue
collection and expenditure transactions. Confirm that public funds are collected, recorded, and
expended in accordance with established procedures.

10. Assessment of Public Program Outcomes: Evaluate the outcomes and impact of local
programs on the community and Residents.

11. Compliance with Laws and Regulations: Verify compliance with local, regional and national
laws and regulations applicable to local government operations.

12. Evaluation of Local Governance Practices: Assets the effectiveness of local governance
practices, public engagement and mechanisms for accountability.

13. Internal Control Testing: Test the effectiveness of internal Controls through inquiry,
observation and sample testing.

14. Audit Findings and Recommendations: Document and Communicate significant findings,
deficiencies or areas for improvement.

15. Communication with Stakeholders: Discuss audit findings with key stakeholders, including
local officials, residents and oversight agencies. Provide assurance on the transparency,
accountability and responsible use of public funds.

Q 10. Enumerate the audit procedure for co-operative societies.

Ans.: 1. Understanding the Cooperative Society: Gain a comprehensive understanding of the

cooperative society's purpose, activities, membership and organizational structure. Identify the
legal and regulatory framework governing cooperative societies.

2. Assessing Risk and Materiality: Identify risks specific to cooperative societies, such as misue of
funds, non-compliance with cooperative principles, or lack of accountability.

3. Financial Reporting and Accountability: Examine financial statements to ensure accuracy,

completeness, and proper disclosure of activities, assets, liabilities and equity. Verify the
appropriate allocation of expenses and revenues among cooperative activities.

4. Membership Engagement and Participation: Assess the extent of membership engagement,

participation, and representation in the cooperatives decision-making processes.

5. Internal Controls and Governance: Assess the effectiveness of internal controls over financial
reporting, cash handling and Cooperative governance.

6. Risk Assessment and Fraud Detection: Identify areas vulnerable to fraud, mismanagement or
non-compliance with cooperative principles.
7. Review of Supporting Documentation: Examine supporting documentation for financial
transactions, contracts, agreements and membership records.

8. Testing of Financial Transactions: Verity the completeness and accuracy of financial

transactions, including income, expenses and investments. Confirm that cooperative funds are
collected, recorded and expanded in accordance with established procedures.

9. Review of Membership Records: Assess the accurate and completeness of membership

records, including new admissions, withdrawals and member benefits.

10. Evaluation of Cooperative Governance: Assess the effectiveness of cooperative governance

practices, including election processes, member participation and decision making.

11. Compliance with Cooperative Bylaws: Verify compliance with cooperative bylaws and
internal rules governing membership, operations and financial matters.

12. Internal Control Testing: Test the effectiveness of internal controls through inquiry,
observation and sample testing.

13. Audit Findings and Recommendations: Document and communicate significant findings,
deficiencies, or areas for improvement. Provide recommendations for addressing identified
issues to enhance financial transparency and cooperative governance.

14. Communication with Cooperative Members: Discuss audit findings with cooperative
members, the board of directors, and oversight agencies. Provide Assurance on the
transparency, accountability, and responsible management of cooperative resources.

11. Explain the Audit procedure followed for Hotels.

Ans.: 1. Understanding the Hotel Operations: Gain a

Comprehensive understanding of the hotel's operations, services, facilities and revenue streams
(e.a. rooms, restaurants, events). Identify the specific challenges and risks associated with the
hotel industry.

2. Assessing Risk and Materiality: Identify risks relevant to hotels, such as revenue
misstatements, occupancy fraud, inventory management issues, or lack of compliance with
hospitality regulations.

3. Revenue Recognitions and Control: Verify the accuracy of revenue recognition, including room
revenue, food and beverage sales, and ancillary services. Assess internal controls over revenue
collection, billing and cash handling.

4. Financial Reporting and Accounting: Examine financial statements for accuracy, completeness
and proper disclosure of revenue, expenses, assets, liabilities and equity.

5. Internal Controls and Risk Management: Assets the effectiveness of internal controls over
cash handling, inventory management, guest services and procurement.
6. Compliance with Hospitality Regulations: Verity compliance with local, regional and national
regulations and licensing requirements applicable to the hospitality industry.

7. Customer Experience and Service Quality: Assess the hotel's commitment to customer service,
guest satisfaction and brand reputation.

8. Review of Supporting Documentation: Examine supporting documentation for financial

transactions, guest invoices, contracts and operations records.

9. Testing of Room Revenue: Verify the accuracy of room revenue recognition, including room
rates, occupancy rates and discounts. Confirm the proper recording of room charges and taxes.

10. Review of Food and Beverage Sales: Assess the accuracy of food and beverage sales
recording, including menu pricing, sales reconciliation, and billing.

11. Inventory Management and Controls: Verify the accuracy of inventory records for
consumable items, supplies and fixed assets. Assets controls over inventory procurement,
storage and usage.

12. Cash Handling and Point-of-Sale (POS) Systems: Test controls over cash handling. POS
systems and payment processing.

13. Compliance with Health and Safety Regulations: Review compliance with health and safety
regulations related to food handling, sanitation and guest safety.

14. Audit Findings and Recommendations: Document and communicate significant findings,
control weaknesses, or areas of improvement. Provide recommendations to enhance financial
reporting accuracy and internal control.

15. Communication with Management: Discuss audit findings and recommendations with hotel
management, including finance, operations and compliance teams.

Q 12. Give brief explanation of Audit Procedure for Hospitals.

Ans.: 1. Understanding Hospital Operations: Gain a comprehensive understanding of the

hospital's functions, services, patient care, revenue streams and organizational structure.
Identify the specific charges and risks associated with the healthcare industry.

2. Assessing Risk and Materiality: Identify risks relevant to hospitals, such as revenue
misstatements, coding and billing errors, patient data breaches and compliance with healthcare
regulations.

3. Revenue Recognition and Billing: Verify the accuracy of revenue recognition, including patient
services revenue, insurance claims and government reimbursements.

4. Financial Reporting and Accounting: Examine financial statements for accuracy, completeness,
and proper disclosure of revenue, expenses, assets, liabilities and equity. Review the
classification and presentation of financial information
5. Internal Controls and Data Security: Assess the effectiveness of data security, billing, cash
handling and internal controls over patient data procurement. Review data security practices,
patient privacy and compliance with healthcare data regulations (e.g. HIPAA).

6. Compliance with Healthcare Regulations: Verify compliance with healthcare regulations,

accreditation standards and licensing requirements applicable to hospitals.

7. Quality of Patient Care and Clinical Processes: Assess the hospitals commitment to patient
safety, clinical quality, infection control and risk management.

8. Review of Supporting Documentation: Examine supporting documentation for financial

transactions, patient records, insurance claims, contracts and operational records.

9. Billing and Revenue Cycle Audit: Verify the accuracy of patient billing, insurance claims and
reimbursement calculations. Assess controls over the revenue cycle, including charge capture,

coding and claims submission .

10. Patient Data Security and Privacy Audit: Review controls over patient data access,
transmission, storage and sharing to ensure compliance with privacy regulations.

11. Clinical and Patient Care Process Audit: Assess the quality of effectiveness of clinical
processes, patient care protocols, medication administration and infection control.

12. Inventory Management and Pharmacy Audit: Verify the accuracy of inventory records for
pharmaceuticals, medical supplies and equipment. Assess controls over inventory procurement,
storage and dispensing.

13. Compliance with Medical Regulations: Review compliance with medical and healthcare
regulations related to clinical practices, patient care, and medical record documentation.

14. Audit Findings and Recommendations: Document and communicate significant findings,
control weaknesses, or areas for improvement. Provide recommendations to enhance financial
reporting accuracy. data security and patient care quality.

15. Communication with Hospital Management: Discuss audit findings and recommendations
with hospital management, including finance, operations, clinical and compliance teams.

Q 13. Explain the audit procedure for Clubs.

Ans.: 1. Understanding Club Operations: Gain a comprehensive understanding of the club's

functions, activities, membership, revenue streams and organizational structure. Identify the
specific challenges and risks associated with club operations.

2. Assessing Risk and Materiality: Identify risks relevant to clubs, such as revenue misstatements,
membership dues tracking. Event revenue recognition and compliance with club bylaws.

3. Membership Management and Revenue: Verify the accuracy of membership dues recording,
including membership fees, subscriptions, and event participation fees. Assess controls over
revenue collection. invoicing and payment processing.
4. Financial Reporting and Accounting: Examine financial statements for accuracy, completeness
and proper disclosure of revenue, expenses, assets, liabilities and equity. Review the
classification and presentation of financial information.

5. Internal Controls and Governance: Assess the effectiveness of internal controls over cash
handling, event management, budgeting and financial reporting. Review the club's governance
structure, including the role of the board of directors and compliance with club bylaws.

6. Compliance with Club Bylaws: Verify compliance with club bylaws, rules and regulations
governing membership, operations, events and financial matters.

7. Event and Activity Management: Assess controls Over event planning, execution, revenue
recognition and expense allocation,

8. Review of Supporting Documentation: Examine supporting documentation for financial

transactions, membership records, event contracts and operational records.

9. Membership Dues and Fee Verification: Verify the accuracy of membership dues recording,
fee collection, and proper allocation.

10. Event Revenue and Expense Audit: Assess controls over event revenue recognition, ticket
sales, sponsorship income, and related expenses. Verify the accurate recording of event
revenues and expenses.

11. Budgetary Compliance Review: Evaluate compliance with budgetary limits, financial plans,
and allocations established by the club's governing body.

12. Cash Handling and Financial Controls: Test controls over cash handling, petty cash funds, and
payment processing. Assess the segregation of duties and reconciliation procedures.

13. Audit Findings and Recommendations: Document and communicate significant findings,
control weaknesses, or areas for improvement. Provide recommendations to enhance financial
reporting accuracy, internal controls, and compliance with club bylaws.

14. Communication with Club Management: Discuss audit findings and recommendations with
club management, including finance, operations and compliance teams.

Q 14. What is the audit procedure for Banks?

Ans.: 1. Understanding Bank Operations: Gain a comprehensive understanding of the bank's

functions, financial products. services, risk management, and organizational structure. Identify
the specific challenges and risks associated with the banking industry.

2. Assessing Risk and Materiality: Identify risks relevant to banks, Credit risk, liquidity risk,
operational risk, regulatory compliance and financial fraud.

3. Financial Reporting and Accounting: Examine financial statements for accuracy, completeness,
and proper disclosure of assets, liabilities, income, expenses and equity. Review the classification
and Presentation of financial information.
4. Internal Controls and Risk Management: Assess the effectiveness of internal controls over
financial reporting, risk management, loan underwriting, cash handling and fraud prevention.
Review risk management practices; including credit risk assessment and exposure limits.

5. Compliance with Banking Regulations: Verify compliance with banking regulations, including
capital adequacy, anti-money laundering (AML), know-your customer (KYC) and reporting

requirements.

6. Review of Loan Portfolios: Assess the quality of loan portfolios, Credit risk assessments, loan
approval processes and loan close provisioning.

7. Verification of Cash and Treasury Operations: Verify controls over cash handling, cash vaults,
treasury operations and reconciliation procedures.

8. Review of Supporting Documentation: Examine supporting documentation for financial

transactions, loan agreements, contracts, compliance reports and operational records.

9. Loan Portfolio Review: Assess the quality of loans, loan classifications and impairment
assessments. Verify compliance with loan terms, documentation requirements and collateral
valuation.

10. Deposits and Treasury Verification: Verify the accuracy of deposits, withdrawals and treasury
transactions. Assess controls over cash handling, cash management and liquidity management.

11. Compliance with Regulatory Requirements: Review compliance with banking regulations,
including reporting obligations, risk management standards and customer due diligence.

12. Internal Control Testing: Test controls over financial reporting, Reconciliation processes, cash
handling and risk management

13. Audit Findings and Recommendations: Document and communicate significant findings,
control weaknesses, or areas for improvement. Provide recommendations to enhance financial
reporting accuracy, internal controls and compliance with regulations.

MODULE -5

AUDIT REPORT AND PROFESSIONAL ETHICS

SECTION-A

O 1. What is Audit Report?

Ans.: An audit report is a statement through which an auditor submits his findings and expresses
his opinion on the state of affairs of the company's business. It is the medium through which an
auditor expresses his opinion on the financial statements of a business.

Q 2. What is meant by Professional Ethics?

Ans.: A set of ethical standards regulating the relationship of Charted Accountants with their
clients, employers, employees, fellow members of the group and the public generally. In other
words, the behaviour of a member of a professional body towards the other members of his
profession and towards the members of the public.

Q 3. Who are professional accountants in public practices?

Ans.: Professional accountants in public practice are individuals who provide a wide range of
accounting, auditing, taxation and advisory services to clients, which can include individuals,
businesses. nonprofit organizations and government entities. They play a crucial role in ensuring
financial transparency, compliance and accountability for their clients.

Q4. Who are professional accountants in business?

Ans.: Professional accountants in business work within organizations, including corporations,

government agencies, non-profit organizations and educational institutions. They contribute to
various aspects of financial management, decision-making and strategic planning within their
organizations.

SECTION-B

Q 1. What are the elements of audit report?

Ans.: a) Title

b) Addresses

c) The responsibility of the auditor and the management of the company.

d) The scope of the audit

e) The opinion of the auditor

) Basis of opinion

g) Signature of auditor

h) Place of signature

i) Date of the audit report

i) Date of signature.

Q 2. Write a note on code of ethics of auditor.

Ans.: Code of ethics states the principles and expectations governing the behaviours of
individuals and organisations in the conduct of internal auditing. It describes the minimum
requirements for conduct and behavioral expectations rather than specific activities.

Auditor shall not use information in any manner that would be contrary to the law or
detrimental to the legitimate and ethical objectives of the Supreme Audit Institution (SAI)

SECTION-C
O 1. What is independent auditors' report and what are its illustrations?

Ans.: An independent Auditor's Report is an official opinion issued by an internal or external

auditor as to the quality and accuracy of the financial statements prepared by a company.

CLEAN AUDIT REPORT

To the Share Holders

ABC Limited

Bagalkot

We have audited the attached balance sheet and profit and loss account for the year ended ......
and we report that –

1. We have obtained all the information and explanations which, to the best of our knowledge
and belief were necessary for the purpose of his audit.

2. Proper returns adequate for the purpose of our audit have been obtained from branches not
visited by us.

3. Proper books of accounts as required by law have been kept by the company so far as appears
from our examination.

4. The company's Balance Sheet and the Profit and Loss Account are in agreement with the
books, accounts and returns.

5. In our opinion and to the best of our information and according to the explanation given to us,
balance sheet and profit and loss exhibits a true and fair view of state of affairs of the company.

For Roopa and Company

(Senior Executive)

QUALIFIED AUDIT REPORT

To the Share Holders

ABC Limited

Bagalkot

We have audited the attached balance sheet and profit and loss account for the year ended -----
and the report that -

1. We have obtained all the information and explanations which, to the best of our knowledge
and belief were necessary for the purpose of his audit.

2. Proper returns adequate for the purpose of our audit have been obtained from branches not
visited by us.
3. Proper books of accounts as requires by law have been kept by the company so far as appears
from our examination.

4. The company's Balance Sheet and the Profit and Loss Account are in agreement with the
books, accounts and returns.

5. In our opinion and to the best of our information and according to the explanation given to us,
balance sheet and profit and loss account exhibits a true and fair view of state of affairs of the
company, subject to the following reservations;

* Inadequate provision for bad and doubtful debts has been provided.

Over valuation of closing stock.

Capital expenditure is recorded as a revenue expenditure.

Incorrect provision for discount on debtors.

For Roopa and Company

(Senior Executive)

NQ 2. Explain different types of audit report.

Ans.: 1. Clean or Unqualified Report

When an auditor is satisfied with the affairs of the company and the faimess of the Balance
Sheet and the Profit and Loss Account of the concern, he gives his report without any
reservations, qualifications or modifications.

Before giving a Clean Report, An Auditor Must Observe the following:

a) He must examine the books of accounts of the company as per the accepted accounting
principles.

b) He must observe all the audit procedures necessary under the circumstances.

c) He must see that all the relevant provisions of the companies act and other important laws or
complied with.

d) He must be satisfied with the truthfulness and fairness of the accounts and the financial
statements of the company.

2. Qualified Report

When an auditor is satisfied with the affairs of the company and the fainness of the Balance
Sheet and the Profit and Loss Account of the concern, he gives his report with reservations,
qualifications or modifications.

A Qualifed Report is given by an Auditor only under Certain Circumstances:

a) When he is not satisfied with the accounts or the financial statements presented to him.
b) When proper books of accounts as required by law have not been maintained.

c) When there is a violation of the companies act and any other important laws.

d) When there is a substantial departure from the generally accepted accounting principles.

e) When there is a material mis-statement in the financial statements.

f) When there is an omission of a material disclosure.

g) When the explanations sought by the auditor are not made available to him.

h) When the auditor is not satisfied with the information and explanations given to him.

i) When he finds some discrepancy in the treatment of certain items.

j) When the assets are over-valued or under-valued.

k) When stock in trade has been valued at the market price which is more than the cost price.

1) When there is insufficient provision for depreciation on fixed assets.

m) When there is insufficient provision for depreciation on fixed assets.

n) Where secret reserves have been created.

Q 3. What are the points to be considered while drafting Auditors Report.

Ans.: The auditor's report shall also state the following facts:

1. Whether he (auditor) has obtained all the information and explanations which to the best of
bis knowledge were necessary for the purpose of his audit. If he is unable to collect any
information, the details thereof and the effect of such information on the financial statements;

2. Whether, in his opinion, proper books of account as required by law have been kept by the
company, All information which is relevant tor the purposes of his audit have been received
from branches not visited by him;

3. Whether the reports of all branches of a company which are audited by a person other than
the company's auditor has been sent to him. He should consider all of these reports while
preparing his report.

4. Whether the company's balance sheet and profit and loss account dealt with in the report are
according to the books of account and returns.

5. Whether, in his opinion, the financial statements comply with the accounting and auditing
standards.

6. The auditor's report most contains the observations or comments of the auditors on financial
transactions or matters which have an adverse effect on the functioning of the company.
7. Auditors should ensure, whether any director is disqualified from being appointed as a
director.

8. Any qualification, reservation or adverse remark relating to the maintenance of books of

accounts of the company.

O4. Explain briefly different Elements of Audit Report.

Ans.: The auditor's report includes the following basic elements, ordinarily in the following
layout:

1. Title of the report: The title of audit should help the reader to identify the report. It should
disclose the name of the client. The title distinguishes the audit report from other reports,

2. Name of the Addressee: The addressee normally refers to the person who appoints the
auditor. If a company appoints the auditor, the addressee should be shareholders, As per law,
the complete address

Of the addresses is required. Addressee for the statutory audit shall be shareholders and in case
of Special Audit, it is Central Government.

3. Introductory Paragraph: The introductory paragraph should specify that it is the auditor's
opinion on financial statements audited by him. The period covered by financial statements
should be stated with exact dates.

4) Scope: This part should include the matter-of-fact relating to the manner in which audit
examination was made. The audit examination should cover company's accounts. Profit and Loss
Account, Balance Sheet and Cash Flow Statements. The examination should be as per the
relevant law. The auditor should not curtail or limit any examination task.

5) Opinion: The auditor's opinion on the books of account and financial statements examine by
him is based on the information and free from bias. The auditor has to give his opinion as
follows:

a) Whether the financial statements are arithmetically correct and correspond to the figures
recorded in the books of accounts.

b) In case of unqualified opinion, whether the financial statements represent a true and fair view
of the state of affairs and the results of operations.

c) In case of qualified opinion, if the Balance Sheet and Profit and

Loss Account do not present a true and fair View, the reasons for what and where are wrong.

6) Signature: The signature part should include the manual signature of the auditor. The
personal name and signature of the auditor should be given. If the auditor is a firm, the
signature in the personal name and firm name should be given.

7) Place of Signature: This should include the location of the auditor or the auditor firm, which is
ordinarily their city.
8) Date of Report: The date of completion of the audit work should be mentioned in this section.