Audit Important Question With Answer Chapter 1 To 5

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AUDIT IMPORTANT QUESTION ANSWER (SELF MADE)
Chapter 1. CONCEPT NEED AND PURPOSE OF AUDIT
Q 1. What is audit ? what are the features of audit?
Ans: - The term audit is derived from the term ‘audire’ which means to ‘hear’. It is a systematic
examination of books of accounts and records of a business or an organisation regarding the fact to verify
financial records and result thereof.
Features of audit can be found by analysis of definition of audit. Some of the important features are given
below:
(a) Analytical examination : It involves the verification of books of accounting data for the purpose of
reporting on the reliability of financial statements.
(b) Examining the accounts : Auditing does not means checking the arithmetical accuracy of books of
accounts and statements by mechanical ticking figures. For this auditor is undertaken by an
independent person or a body of persons who was duly qualified for the job.
(c) Verify true and fair view of accounts: audit is a critical examination of records, statements e.t.c.
for expressing the opinion its necessary to vaerify true and fair vie.
(d) Investigation of characters: The process of collecting evidence in audit is known as investigation
of characters.
Q 2. State the objectives of audit ?
Ans : Audit consists of three types of objectives
a) Primary objective
b) Secondary objective
c) Social objective
These objectives are discussed below:
a) Primary objective : The primary objective of the auditor is to express as opinion whether the
financial statements reflect a true and fair view of the company’s state of affairs.
b) Secondary objective : (i) Detection of Errors

(ii) Detection of Fraud
(iii)Prevention of Errors
(iv)Prevention of Frauds
c) Social objective : (i) To safeguard shareholder’s interest
(ii) To stop tax evasion
(iii)To safeguard against capital erosion
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Q 3.What are the advantages of Audit?
Ans : Advantages of audit are as discussed below :
1. The financial statements become more reliable and authentic.
2. Safeguards the financial interest of the owners.
3. It acts as a moral check on the employees from committing frauds.
4. Helps in submitting proper income tax and other returns.
5. Helps in reduction of wastage and losses due to inadequacy of internal control system.
6. Helps to ensure that financial records are properly maintained.
7. Acts as an overall check on the integrity of the management.
8. Helps in easy availability of loans from various financial institutions.
9. Helps in ensuring that all necessary legal rules and regulation have been complied with.
Q 5.Comment on the importance of Auditor’s Independence.
Ans : audit independence' means the ability of the auditor to express his opinion on the financial
statements without being influenced by the parties that have any interest in the results published.
Independence is one of the most important factor in the accounting profession. The investors rely on
information from management regarding financial position of the company.
Importance of audit independence are as given below:
(1) Protection of Public Wealth from Scam: The primary purpose of an audit is to provide honest opinion
on the financial statements of an organisation. This opinion given to the shareholders should be unbiased
and not influenced by any relationship with the client's business. Henceforth the shareholders, creditors,
bankers and several other segments of the society gets an expert, Independent, professional opinion
regarding the financial position of the concern.
(2) Safeguarding the Stakeholders: Stakeholders expect loyalty and trust from auditors while resolving
financial facts and exposing the fault in an organisation. The auditors are in charge of examining the
company's accounts and reports and also comment on the internal control being practised in the
company. Therefore, the reports provided by the auditor's are the only safeguard to the stakeholders
about the financial affairs of an organisation..
Q 6.Write a note on principles of Audit.
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Ans: As per SA 200, the basic principles governing an auditor’s professional responsibilities are given
below- (i) Integrity, objectivity and independence: An auditor should be a man of high integrity and
objectivity. He should remain honest, impartial and free from bias.
(ii) Confidentiality: An auditor should maintain a high level of confidentiality and should not disclose the
information of his client, acquired by him during the course of audit to any third party, without the prior
permission of the client, unless there is a legal duty to disclose.
(iii) Skill and competence: An auditor should be competent and skilful, and acquire the necessary training
and experience relevant for discharging his responsibilities in the best manner.
(iv) Work performed by others: Whether to rely on the work done by others including experts will depend
upon the auditor himself. Where he relies on such work, he continues to remain responsible for forming
and expressing his opinion on the financial information.
(v) Documentation: An auditor should document the matters which are important in providing evidence
to ensure that the audit was conducted in accordance with the basic principles
(vi) Planning: An auditor should plan his work so that audit can be done in effective, efficient and timely
manner.
Q 7. Define the terms Fraud and Error. Give examples of conditions which may indicate the
existence of fraud or errors.
Ans: Fraud refers to intentional misrepresentation of financial information. It can take place in the form of
manipulation of accounts, misappropriation of cash, misappropriation of goods, etc. Errors refer to
unintentional mistake in the financial information. They occur mainly due to ignorance of accounting
principles or negligence of employees, clerical mistakes, etc.
1. Internal control: Weak internal control may increase the chances of errors and fraud.
2. Management support: Lack of support from management to rectify weakness in internal control system
promotes fraudulent conduct.
3. Unusual transactions: Transactions with uncredit worthy parties, sudden increase in unnecessary
expenses, etc. indicate fraudulent conduct as well.
Q8. What are the different types of errors that can be found while auditing the accounts of a
concern?
Ans : The different types of errors that can be found in the books of accounts are as follows:
1. Error of Omission: When a transaction is omitted from being recorded in the books of accounts, it is
called error of omission.
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2. Error of Commission: When a transaction is erroneously recorded, it is called Error of commission. (a)
Recording with wrong amount (b) Posting on wrong side (c) Posting in wrong account
3. Error of Principle: When a transaction is recorded in contravention to any accounting principle, it is

called error of principle. This type of error does not affect the Trial Balance. For example, installation
expenses of a machine is wrongly debited to revenue account instead of machine account.
4. Compensating Error: When the effect of one error gets balanced by the effect of other errors, they are
called Compensating Errors. These errors do not affect trial balance and hence, are difficult to detect.
Q.9. Fraud does not necessarily involve misappropriation of cash or goods”-comment
Ans. Fraud refers to intentional misrepresentation of financial information. It includes not only
misappropriation of cash or goods, but a lot of there things. SA 240, deals with "The Auditor's
Responsibilities Relating to Fraud in an Audit of Financial Statements". Apart from frauds involving
misappropriation of cash or goods, there can be fraudulent financial reporting as well.
Fraudulent Financial Reporting involves manipulation of accounts. It involves:
* Omission or understatement of income to evade taxes
*Fake expenses or overbilling of expenses for reducing profit
*Overstatement of profit to earn more commission in case of profit linked commission
*Overstatement of profit for better value in case business is to sold
It is generally done by internal staff of the business and involves alteration of accounting data, records,
etc. For investigating the cases of manipulation of accounts, the following steps may be taken by the
auditor: Ensure detailed checking of purchases and sales.
Ensure that no fictitious expenditure is included in Profit and Loss Account.
Ensure that all incomes are genuine and properly recorded.
Ensure that revenue and capital expenditure are correctly assessed.
Check the methods of valuation of closing stock.
Check if the same accounting principles are followed every year.
Check that consistent rate of depreciation is applied every year. Check the transactions involving bigger
amounts in detail.
Check past year data and trends .
Q 10. Auditors are not Accountants. Discuss.
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Ans:
Points Accountant Auditor
Definition Accountant is a permanent Auditor is an Independent

Auditor is an independent person engaged in verification
employee of the company and examination books of
engaged in preparation and accounts.
maintenance of books of
accounts.
Qualification No qualification is prescribed Auditor is usually a Chartered
under any law for working as Accountant
an accountant.
Employee Accountant is a paid employee Auditor is an independent

of the organisation person and not a paid
employee.
Scope It is concerned with the It is concerned with the
preparation and finalization of examination and verification
accounts of accounts
Knowledge Knowledge of audit is not Knowledge of accounts is
required required
Type of Work Work of accountant is Work of auditor is analytical in
constructive in nature nature
Report No need to submit any report Auditors need to submit
to the owners report on audit to the owners
Working It is done throughout the year It is done at the end of the
financial year.
Q 11. Auditors are not blood-hounds. Do you agree? Or "Detection and prevention of errors
and frauds are the main objects of Auditing". Discuss.
Ans. As held in the case of The Kingston Cotton Mills Co. Ltd. (1896) an auditor is a watch-dog, not a
blood-hound. He is required to express an opinion on whether the financial statements reflect a true and
fair picture of the state of affairs and position of profit or loss of the organization. However, he must
perform his duty with reasonable care and skill and he need not become a detective or look upon his
client with suspicious. The auditor is entrusted with the responsibility of protecting the interests of the
owners. However, he must act as a watch-dog and believe that the books of accounts and other records,
statements, etc. which have been made available to him are genuine, rather that acting as a blood-hound,
unless there are some definite reasons to support his suspicion.
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Detection of frauds and errors is not the main object of the auditor. The auditor shall, for ascertaining the
truth and fairness of the financial statements, examine all the books of accounts, documents, etc. with
reasonable skill and care. He cannot guarantee that the books of accounts show a true picture of the
organization. He is neither an in- surer nor blood-hound, but just acts as a watch-dog. However, we know
that few errors may not be reflected on the trial balance and balance sheet.
Q 12. What do you understand by the term 'Investigation'? What are the features of
investigation?
Ans. Investigation of accounts may be defined as the systematic and in- depth examination of books of
accounts, records, documents, etc. for a specific purpose. In fact, it is an audit, the scope of which varies
with the requirements of the particular purpose. Investigation is primarily conducted to discover the
required facts in detail so as to enable the interested parties to draw conclusions and make their decisions
accordingly.
Features
It involves in-depth checking of records.
It is undertaken for some specific purpose.
Its scope depends upon requirements of the particular matter.
It covers both financial and non-financial matters.
The investigator may also require the concerned officials to appear before him for personal enquiry.
No standard or guidelines has been prescribed for conducting investigation.
The investigator shall work freely according to his judgement, logic and wisdom.
It is usually conducted in cases of utmost emergency or upon order of Central Government.
The investigator shall work like a detective with suspicious attitude and apply his scepticism.
The investigator shall submit his report and remain account.
Q 13. How would you investigate the following:
(a) Misappropriation of Cash.
(b) Misappropriation of goods
(c) Suspected Fraud
Ans. (a) Misappropriation of Cash
Cash may be misappropriated in any of the following ways:
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i) Non-recording or short-recording of cash receipts

ii) Excess recording of expenses
iii) Showing fictitious payments
For investigating the cases of misappropriation of cash, the following steps may be taken:
Examine the efficiency of internal check system implemented for checking cash collections and
disbursements.
Match the counterfoils of paying-in-slips with entries recorded in the cash book and pass book.
Check that all discounts are duly approved and within organizational policy.
Confirm personally any old balance of debtors to make sure that payments made by debtors are recorded
in books or not.
Check that bad debts are written off as per organizational policy.
Ensure that double payment has not been made against single item of purchase.
Check whether any fictitious worker has been included in the payroll.
(b) Misappropriation of Goods
For investigating the cases of misappropriation of goods, the following steps may be taken:
Examine the efficiency of internal check system implemented by the organization regarding receipt and
issue of materials.
Ensure that purchases are made only when necessary.
Compare the purchase order with actual goods received and purchase invoice.
Check that samples distributed are within organizational policy.
Reconcile the statements of goods sent to branches and received by the branches at regular intervals.
(c) Suspected Fraud
Fraud may take place in the form of misappropriation of cash or goods, or manipulation of accounts. The
investigator may, in respect of the above check the following matters:
Misappropriation of Cash
Cash may be misappropriated in any of the following ways:
Non-recording or short-recording of cash receipts
Excess recording of expenses.
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Showing fictitious payments
For investigating the cases of misappropriation of cash, the following steps may be taken:
Examine the efficiency of internal check system implemented for checking cash collections and
disbursements.
Match the counterfoils of paying-in-slips with entries recorded in the cash book and pass book.
Check that all discounts are duly approved and within organizational policy.
Confirm personally any old balance of debtors to make sure that payments made by debtors are recorded
in books or not.
Check that bad debts are written off as per organizational policy
Ensure that double payment has not been made against single item of purchase.
Check whether any fictitious worker has been included in the payroll.
Q13) Briefly discuss the concept of Statutory Audit and Non- Statutory Audit. Differentiate
between the two.
Ans. Statutory Audit: The audit which is required to be conducted as per the provisions of any statute or
law is called Statutory Audit. Such an audit is compulsory in nature and the rights, responsibilities, etc., of
the auditor is governed by the provisions laid down in the statute. For example, audit under Section 139 of
the Companies Act, 2013. This is also known as Financial Audit.
Advantages of Statutory Audit: Statutory Audit helps various stakeholders in the following manner:
(a) Decision making: The stakeholders can use the audited inform decision making.
(b) Timely tax assessment: It helps in timely assessment of income tax return of the organization
(c) Purchase consideration: Statutory Audit helps in determining the purchase consideration in case the
business is acquired by any entity.
(d) Financial Assistance: Audited financial statements help in obtaining financial assistance from banks,
financial institutions, investors, etc.
(e) Evaluation of internal control: It also helps in evaluation of the internal control systems of the
organisation.
Non-Statutory Audit: An audit which is not prescribed by any law or statute, but conducted for fulfilling
some definite purpose or interest of any concerned person is known as Non-Statutory Audit.
Q14) Explain the concepts of Interim Audit and Final Audit.
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Ans. Final Audit: This type of audit is conducted after the preparation and finalization of books of accounts
after the end of the financial year. It covers checking of transactions for the entire accounting period.
Advantages of Final Audit:
(a) Less time consuming: Final audit is conducted once in a year. So, the auditor has to devote less time for
conducting the audit work.
(b) Economical: Since auditor has to devote less time, he may not charge high fees for conducting audit.
Demerits of Final Audit:
(a) Incomplete Checking: Due to lack of time, there will always remain a possibility that few transactions
are not verified by the auditor and left unchecked.
(b) Chances of errors: Since checking has to be completed within a short span of time, the chance of any
error or fraud remaining undetected cannot be ruled out.
Interim Audit: An audit which is conducted in between two annual audits is called interim audit. It may be
carried out for the following reasons:
To determine the sales, profitability, etc. of a certain period say 3 months, 6 months, etc.
For declaration of interim dividend For early completion of final audit.
For settlement of accounts in case of admission, retirement or death of any partner
Advantages of Interim Audit
Early detection of errors: It helps to detect and prevent errors and frauds at an early stage.
Creates moral pressure: There is always a moral pressure on the management and accounting staff to
work properly or else their mistakes may get caught.
Reliable: Since transactions are checked in more detail by the auditor, the report becomes more reliable
Demerits of Interim Audit
(a) Alteration of records: The records and figures in the books of accounts, which have already been
checked by the auditor, may be altered after the audit is over.
(b) Inconvenience: Frequent visits made by the auditor may cause inconvenience to employees at work.
(c) Repetition: Since same job is done by the audit staff more than once, it also causes repetition of work.
(d) Costly: Since auditor has to check huge number of transactions and devote more time, they may
charge high fees for conducting such audit.
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Q16) What do you understand by EDP Audit or Audit in Computerised Information System (CIS)
environment? Discuss its problems.
Ans. EDP stands for Electronic Data Processing. In case, accounting and other financial information is
maintained by an organization in computers, the auditor needs to check a number of aspects in addition
to normal audit procedures
Quick: In CIS environment, data processing is very quick, which enables the auditor to complete his work
within time.
Multiple works: One computer program can handle a lot of activities at a single point of time, which
reduces various filters and requirement of a lot of employees
Accuracy: The chances of calculation and clerical errors will be negligible.
Reliable: Since transactions in CIS environment are automated, this increases reliability of the results
produced by it.
Easy exception reporting Computerised operations make exception reporting very easy and fast.
Problems of EDP Audit .
If system does not perform efficiently, it may have an adverse impact on the business operations.
Sophisticated computer frauds become difficult to trace out.
Lesser people are required to perform the functions, so authority may be abused.
Data may be at risk due to online frauds, hacking, etc.
Q 17. Discuss Special Audit.
Ans. The Central Government may, if it has reasons to believe that the affairs of the Company are not
being managed in accordance with sound business practices or the Company is being managed in a
manner which is likely to cause damage to the business community or society or the financial position of
the Company is the chance of such, which might endanger its solvency, order for conducting an audit of
such Company. It is known as special audit. Few important aspects of special audit are given below:
The Central Government may appoint either the Company's auditor or any other Chartered Accountant,
whether having certificate of practice or not, to conduct the special audit
The Special auditor has the same powers, rights and responsibilities as the statutory auditor
The auditor shall submit its report to the Central Government
The remuneration is fixed by the Central Government but it is payable by the company.
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CHAPTER – 2. AUDIT PROCDURURES AND TECHNIQUES
Q1) Write a note on Audit Engagement.
Ans. In case of statutory and compulsory audit, the scope and nature of the audit is governed by
respective law or authority. However, in all other cases, the terms of appointment are mutually decided
between the auditor and client. Both, the client and the auditor brings forward their terms and conditions
and discuss what is expected of each other. On the basis of the mutually agreed terms, the auditor and the
client sign an agreement to avoid any future misunderstanding. For example, the client may be under an
impression that the auditor is visible for both preparing and auditing the financial statements, whereas the
auditor may think otherwise. Hence, to avoid any dispute, the auditor and the client shall define the exact
scope of audit before- hand and reduce the same in writing.
following details should be specified in audit
The objective and scope of audit;
The responsibilities of the auditor;
The responsibilities of the management;
Form and content of report; etc.
Restriction of auditor's liability engagement letter
Computation of audit fees and other charges
Importance of Audit Engagement Letter
Needed only when audit is not statutorily required.
Eliminates misunderstanding in future.
Properly defines the scope and nature of audit.
Helps in control and supervision of audit work.
Helps in smooth flow of work.
Q2) What are the considerations to be kept in mind by an auditor before commencement of
audit?
Ans. Before commencement of audit, the auditor must follow the given procedure:
a. Appointment letter: First of all the auditor should receive the letter of his appointment and verify the
contents of the same
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b. Previous auditor: The auditor should communicate with the various auditor to ascertain the reason of
not getting re-appointed.
c. Acceptance and intimation of appointment: The auditor shall then accept the appointment and inform
the organization.
d. Scope of audit work: Next, the auditor should determine the nature and scope of audit.
e. Nature of organisation: The auditor should gather an idea about the nature of organisation for smooth
completion of audit work.
f. Preliminary checking: The auditor should verify the important documents such as Memorandum of
Association, Articles of Association, Partnership deed, etc. for getting an idea of the client's constitution
and policies.
Q3) What is Audit Programme? What are its advantages and disadvantages.
Ans. An audit programme may be defined as a detailed plan of the auditing work to be performed. It helps
the auditor to chalk out as to what work will be done by which audit staff, how the work will be done and
the expected time by which the work is to be completed.
Advantages of Audit Programme:
(a) Division of work: Work is distributed among the audit team in an orderly manner keeping in mind the
qualification, experience and efficiency of each member of the audit team.
(b) Clarity: All the audit staff remain well aware of their duties in advance which increases clarity.
(c) Complete checking: Since everything is properly planned, no portion of the work is left unchecked.
(d) Convenient: Division of work is done in such a way that even if someone is absent, work goes on.
(e) Progress report: The auditor can always have a real time progress of the work done by his assistants.
(f) Time saving: Since everyone know their jobs in advance, work can be started immediately without any
delay.
(g) Increases responsibility: In case, any aspect remains unchecked, the responsible person can be easily
identified.
Disadvantages/Limitations of Audit Programme:
(a) Suitability: Audit programme is not suitable for small concerns.
(b) Inflexible: Once prepared and followed, it becomes difficult to change the programme. (c) No
motivation: Assistants are required to blindly follow the programme and they cannot offer any
suggestions, Hence, they do not feel motivated to take that extra step of effort.
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(d) Incomplete: Even if care is taken, it is very difficult to cover each and every aspect of audit work in
programme.
Q4) What are Audit Working Papers? What are its advantages? Dis- cuss briefly about
preservation of Audit Working Papers by the Auditor.
Ans. SA 230 on 'Audit Documentation' deals with the 'working papers'. Audit working papers are the
written documents prepared or obtained by the auditor in the course of audit. They contain the important
workings, audit conclusions and a summary of all other important matters identified and considered by
the auditor while forming his opinion
(a) Completion of work: The assistants usually prepare working papers of work done by them. By verifying
the same, the auditor can easily understand the level of work completed by the assistants.
(b) Evaluation of audit staff: On the basis of working papers prepared by the audit staff, the auditor can
easily verify whether they are efficient.
(c) Carrying out of directions: The auditor can also assess whether the assistants have carried out his
directions.
(d) Time Saving: Since information is readily available through working papers, it helps the auditor to
prepare his report without any delay.
(e) Proof of evidence: If any charge is made against the auditor, he can use the working papers as
evidence.
(f) Smooth conduct of work: Even if any assistant is absent, work will go on in normal flow.
(g) Basis for planning of subsequent audit: It may serve as a useful basis for planning the audit of
subsequent years thereby saving time and labour.
Contents of Working Papers
The nature of client's business.
The nature of audit engagement.
Extent of availability of client's records.
Adequacy of internal controls.
The audit plan.
The nature, timing and extent of auditing procedures performed by the auditor.
Audit evidence obtained by the auditor.
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Ownership and custody of Working Papers
Working papers are the property of the auditor. The auditor may, at his discretion, allow the client to take
the portions or extracts of the working papers. These working papers should be preserved by the auditor
in confidential custody for such time as is sufficient to meet the requirements of his practice or to satisfy
any related legal or professional requirement of record retention.
Q4) What is Audit File? current audit file? What are the contents of permanent and current
Audit file?
Ans : The file in which the auditor keeps the various audit related papers and records is known as
audit file. Audit file can be classified into the following two heads:
(i) Permanent Audit File: It contains such working papers which are of continuing importance
in nature. A permanent audit file normally includes:
(a) Memorandum and Articles of Association, Partnership Deed, etc. of the organization.
(b) Copies of important legal documents, agreements, etc.
(c) Copy of initial letter of appointment.
(d) Analysis of internal controls related to the accounting system.
(e) Copies of financial statements of earlier years.
(f) Correspondence with the retiring auditor.
(g) No Objection received from previous auditor.
(h) Analysis of accounting ratios.
(i) Summary of accounting policies.
(j) Observations of previous audits.
ii) Current audit file: It mainly contains information relating to the audit of current period. A
current audit file normally includes:
(a) Letters of annual re-appointment.
(b) Extract of important matters in the minutes of Board Meetings concerning the audit.
(c) Extract of important matters in the minutes of General Meetings concerning the audit.
(d) A record of procedures followed for conducting the audit.
(e) A record of supervision of the work performed by assistants.
(f) Correspondence with internal auditor.
(g) Financial statements and audit report of the current period.
(h) Analysis of ledgers and unusual transactions.
Q5) What is Audit note book? What are its contents and advantages?
Ans. While conducting audit, the auditor maintains a note book and record in it, all the important matters
which he has to discuss with the client. t is known as audit note book. The auditor might have certain
double his mind, which he may forget due to workload. Further, the client is not always readily available
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to clarify the doubts of the auditor Hence, instead of disturbing the client every now and then, the auditor
may note down everything in the note book and clarify the mat tears whenever the client is free.
Contents of Audit Note Book
Nature of client's business.
Record of missing vouchers.
Matters requiring clarification.
Working notes prepared while auditing.
Record of errors and frauds.
Accounting methods and procedures followed by the client.
Communication with previous auditor.
List of accounts maintained by the client.
Any other matter that may be necessary for preparation of report.
Advantages of Audit Note Book
(a) Clarification of doubts: Instead of disturbing the client on daily basis, the auditor can sit and clarify
the all doubts at a single meeting
(b) Helps in preparation of report: Material information is readily available in audit note book. Further,
it increases the chances that nothing is omitted. Hence, it helps in preparation of report.
(c) Control: The auditor can check the progress of work and take necessary actions as and when
required.
d) Planning: It may serve as a useful basis for planning the future audit thereby saving time and labour.
Q6) Write a short note on Audit Memorandum ?
Ans : An audit memorandum may be defined as a document containing vital information relating to
client's business. It covers audit manual, audit programme, audit file, etc. and can be of great help to
the auditor while conducting the audit. It shall be prepared very carefully, covering all the important
areas of the client, If required, necessary changes can be made. An audit memorandum may contain
the following information:
a. A brief history of the client.
b. Addresses of various offices, branches, plants, etc.
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c. Details of owners or persons in control of the client.
d. Details of responsible officers and their roles.
e.Details of holding and subsidiary units, if any, of the client.
f. Details of assets and net worth of the client.
g. List of books of account maintained by the client.
h. Nature and size of internal control systems.
i.Significant accounting policies of the client.
Q7) What is Audit evidence? What are its advantages?
Ans. The records, documents and information obtained by the auditor during the course of audit, on the
basis of which, he draws his conclusion and expresses audit opinion, is known as audit evidence. As per SA
500, an auditor should obtain sufficient and appropriate audit evidence in support of his conclusions.
Simply stated, the auditor must collect enough evidence to express an honest opinion on the financial
statements.
Need for Audit Evidence
Audit Evidence is required for the following reasons:
(a) Existence: To ascertain whether an asset or liability exist on a certain date.
(b) Occurrence: To ensure whether a transaction took place during the relevant period.
(c) Valuation: To ascertain whether an asset or liability is fairly valued.
(d) Right and Obligation: To ensure that an asset is a right and a liability is an obligation of the business at
a given date.
Advantages of Audit Evidence
a) Planning: It may serve as a useful basis for planning the future audit thereby saving time and labour.
(b) Proof of evidence: If any charge is made against the auditor in future, audit note book can serve as an
important evidence as to what work was done by him or his assistants.
(c) Basis of opinion: It helps the auditor to form his opinion on the financial statements.
Q8) What is Test Checking? When it should be done? What factors should be considered before
resorting to test checking What are the advantages and disadvantages of Test Checking. Discuss
the duty of auditor in this connection.
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Ans. Test Checking may be defined as the process of auditing where the auditor examines a few
transactions out of large number of similar transactions. In other words, under test checking, the auditor
checks less than 100% of the total records. It is believed that checking of the selected transactions will
lead the auditor to the same conclusion a he would derive after detailed checking.
Need of test checking
Test Checking should be done in following circumstances:
1. Large number of transactions: Due to large number of transactions, the auditor may not be able to
complete his audit, if he checks each and every transaction in detail.
2. Objective of audit: The main objective of audit is not to detect errors and frauds, but to express an
opinion regarding truth and fairness of financial statements. Hence, the auditor may choose to undertake
test checking to determine the degree of authenticity of financial statements.
3. Internal control system: In case, internal control and internal check systems are adequate, the auditor
can rely on test checking.
4. Computerised accounting system: In computerised accounting system, all castings, carry forward, etc.,
are done automatically by the computer. The auditor can, therefore, undertake test checking to satisfy
himself about the reliability of computer system.
Factors to be considered for Test Checking
While determining the extent of Test Checking, the auditor should keep in mind the following precautions:
(a) Sampling risk: If there is a risk that the actual result will differ from the results derived out of Test
Checking, the auditor will conduct thorough checking.
(b) Tolerable Error: If the auditor expects that there might be difference in the actual results, if thorough
checking was done, with the results derived out of Test Checking, and that such differences are within his
tolerable limits, he will go with Test Checking. However, if auditor cannot tolerate any error, he will con-
duct thorough checking.
(c) Expected Error. If the auditor expects that there will be lot of differences in the results derived out of
Test Checking and actual results, if detailed checking was conducted, he will check more items Similarly if
he expects less errors, sample size will be small.
(d) Nature of transactions: In case transactions are of repetitive nature, the auditor may select a small
sample for checking. However, the sample size will be large if transactions are of divergent nature.
Importance/Advantages of Test Checking
(a) Reduced workload of auditor: Each and every transaction is not required to be checked, hence, work
load of auditor reduces
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(b) Evaluation of internal control: Test Checking can be applied effectively only if the internal control
system is strong. Hence, it helps in taking prompt actions for improving internal control if there is any
lacuna.
(c) Saves time: It helps in saving time and energy of the auditor.
(d) Focus on important areas: Since each transaction is not checked. "the auditor can focus on more
important matters in detail.
(e) Completion of audit within time: Since number of transactions to be checked is less, audit gets over
within time and as per schedule.
Disadvantages of Test Checking
(a) Risk of incomplete checking: There is always a risk that few items of importance might get avoided and
not considered.
(b) Improper selection: Test Checking will be of no use if transactions are not properly selected.
(c) Fraud in less important areas: Since detailed checking is conducted for important items, the accountant
may develop a habit of committing fraud in less important areas.
Methods of Selection of Sample
1) Simple random sampling: Under this method, sampling is based on the entire population of transactions
involving sales, purchase, etc. This method is appropriate only when the range of population is not
diverse.e.it may be applied if all transactions are between 1,000 to 2,000 but not if between 100 to
250,000.
2) Stratified sampling: Under this method, the entire population of Each group transactions is divided into
several smaller groups. Each group is called a strata and treated as a separate range. Samples are selected
from each range.
3) Systematic sampling: Under this method of sampling, a particular gap between transactions is selected
by the auditor for checking. examining every 10th voucher. It is also called interval sampling.
4) Block sampling: Under this method, the auditor selects a continuous block of transactions for sampling,
e.g. the first 50 vouchers or the last 50 vouchers in every month.
5) Cluster sampling: Here, the total population is divided into several smaller groups called clusters. A few
clusters are then randomly selected for sampling.
6) Haphazard selection: When the auditor arbitrarily selects the samples without any scientific basis, it is
called haphazard selection.
Q9) What is audit in depth? Discuss advantages and disadvantage of audit in depth.
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Ans. Audit in depth, as the name implies, means extensive examination of any transaction from its origin
till end. Under this technique, few transactions are selected by the auditor, and all aspects relating to
those transactions, including validity, arithmetical accuracy, accounting treatment, etc. are checked in
detail.
Advantages of In-depth Audit
(a) Reduced workload of auditor. Each and every transaction is not required to be checked, hence, work
load of auditor reduces.
(b) Saves time: It helps in saving time and energy of the auditor
(c)Focus on important areas: Since each transaction is not checked, the auditor can focus on more
important matters in detail.
(d) Completion of audit within time: Since number of transactions to be checked is less, audit gets over
within time and as per schedule.
(e) Low Cost: Since number of transactions to be checked by the auditor is comparatively less, cost of
audit also gets reduced.
(f) Moral Pressure: It creates a moral pressure on the accounts clerk, as any transaction may be selected
for in-depth study.
Disadvantages/Limitations of In-depth Audit
(a) Incomplete: There is always a risk that few items of importance might get avoided and not considered.
(b) Improper selection: It will be of no use if transactions are not properly selected.
(c) Redundant audit opinion: In case transactions are not selected properly, the audit opinion may also
become redundant.
(d) Fraud in less important areas: Since detailed checking is conducted for important items, the accountant
may develop a habit of committing fraud in less important areas.
Q10) What do you mean by Analytical Procedures? What are the various tools and techniques
of Analytical Procedures? How much can the auditor rely on these procedures?
Ans. Analytical procedure involves study of financial information on the basis of relationship among
various financial and non-financial data, past trends, etc. As per SA 520 analytical procedure can be
conducted with the help of following tools and techniques:
1) Trend Analysis: Under this technique, analysis is done on the basis of past trends, usually two to three
years.
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2) Testing of Reasonableness: Reasonableness testing is done by reviewing the relationship between two
or more variables. e.g. ratio of raw materials consumed to finished goods produced, wastage to raw
materials consumed, etc.
3) Ratio Analysis: Under this technique, financial ratios are analysed. e.g., Gross Profit Ratio, Net Profit
Ratio, Debt Equity Ratio, Liquidity Ratio etc.
4) Sources of Information: Various sources of information such as budgets, government policy, board
minutes, etc. may be used for analytical review.
5) Common size Analysis: Under this system, each item of balance sheet is reviewed as a percentage of
total assets and each item of the income statement is reviewed as a percentage of total sales
Extent of reliance on analytical procedures
The reliability of analytical procedures depends upon several factors, which are given below: (a) External
Sources: Analytical procedures will be more reliable when it is based on information obtained from
external sources.
(b) Materiality: Analytical procedures will be less reliable if items to be checked are material in nature.
(c) Comparability: Analytical review will be more reliable if data of competitors can be compared.
(d) Predictability: Analytical review will be more reliable, if financial data is predictable.
(e) Logical Information: If the information which is to be compared is logical, analytical review will be more
reliable.
Q11) Write a note on Cut off examination.
Ans. Business transactions continuously take place in an organization throughout the year. It may so
happen that due to inadvertence, transactions of one period get recorded in another period. Hence, effort
should be made to ensure that there is a clear demarcation between transactions of two accounting
periods.
Objectives
To ensure that the transactions of a particular period have been recorded in that year only.
To check if the principle of consistency is followed or not.
To check if outstanding and prepaid items are recorded correctly.
To check the correctness of amounts accrued.
Q12) What are the steps for conducting the audit of an Education Institution/School/College?
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Ans. While conducting the audit of an Educational Institution, an audit shall check the following:
Preliminary matters:
Study the Memorandum of Association, Trust Deed and other Rules and Regulations.
Study the adequacy of internal control systems implemented.
Study the minutes of the meetings of the governing body.
Study the method of maintaining accounts.
Income:
Check the donations and grants received.
Check admission forms and admission fee receipts.
Check the class registers and fee registers
Compare counterfoils of fee book with the fee register.
Check whether doubtful fees have been written off as per rules.
Check whether collection of late fine has been accounted for.
Check whether interest and dividends received are properly accounted for.
Check the rent received for premises let out by the Institution along with Rent Agreements.
Expenditure: .
Check whether all salaries and allowances are paid as per terms of appointment.
Check whether provident fund, pension fund, tax is required to be deducted from the salaries.
Check whether the deductions made regarding above are deposited into Government Accounts on time.
Assets and Liabilities:
Conduct physical verification of Fixed Assets.
Conduct physical verification of stock-in-hand.
Check the investments register and conduct physical verification of the investment certificates.
Check whether depreciation is properly provided for.
Check the secured and unsecured loans with loan statements.
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Check Loan Agreements, Charge documents, etc.
Check the balances of Debtors and Creditors.
Conduct physical verification of cash in hand. Check the Bank Reconciliation Statement.
Q13) What are the steps involved in conducting audit of Hospital/Nursing Home?
Ans. While conducting the audit of a Hospital/Nursing Home, an auditor shall check the following:
Preliminary matters:
Study the memorandum of Association, Trust deed and other Rules and regulations.
Study the adequacy of internal control systems implemented
Study the minutes of the meetings of govt. body
Study the methods of maintaining accounts.
Income:
Check the donations and grants received
Check the fee received from patients with the fee register
Check if any free bad facility is in place
Check the reimbursement for Mediclaim from Insurance Companies.
Check whether interest and dividends received are properly accounted for.
Check the rent received for premises let out by the Hospital/Nursing Home along with Rent Agreements.
Expenditure:
Check whether all salaries and allowances are paid as per terms of appointment.
Check whether provident fund, pension fund, tax is required to be deducted from the salaries.
Check whether the deductions made regarding above are deposited into Government Accounts on time.
Check whether administrative expenses like maintenance, electricity, etc., are properly accounted for.
Assets:
Conduct physical verification of Fixed Assets.
Conduct physical verification of stock of medicines.
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Conduct physical verification of medical equipment.
Check the investments register and conduct physical verification of the investment certificates.
Check whether depreciation is properly provided for.
Check the secured and unsecured loans with loan statements.
Check Loan Agreements, Charge documents, etc.
CHAPTER 3. AUDIT RISK AND INTERNAL CONTROL SYSTEM
Q1) What is Internal Check System? What are its objectives? Or "In a good system of Internal
Check the work of an employee is checked indirectly by the work of another" - Discuss the
statement.
Ans. Internal check is a system of division of work and allocation of responsibility, whereby the work of
one employee is checked continuously by another. It is the system of distributing the total work of the
organization amongst the various employees in such a manner that work done by one person gets
automatically checked by another person. Internal check system ensures that no work of the organization
is left completely under the absolute control of one single person. It also discourages fraud and collusion
among employees by creating a moral fear of getting caught in their minds.
Objectives of Internal Check System
The main objectives of internal check system are:
(a) Smooth Flow of Work: Internal check aims at distributing the total work among the employees in a
systematic manner for ensuring smooth flow of work
(b) Early detection of frauds and errors: Internal check tries to detect and prevent frauds and errors, if any
committed, at an early stage. within
(c) Recording of transactions: Internal check ensures that all transactions have been properly recorded and
nothing is omitted.
(d) Improve the design of accounting system: Internal check, through its systematic application, also
improves the design of accounting system of the organization.
(e) Reliability of accounts: Since transactions are automatically checked, internal check reduces the
chances of errors and frauds and hence, make the accounts more reliable.
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(f) Moral Pressure: Internal check creates a moral pressure over the employees for working diligently and
hence discourages any fraud.
Q2) What are the provisions of Companies Act, 2013 regarding appointment of Internal
Auditor? Is it compulsory for every company?
Ans. The provisions relating to Internal Audit are contained in the Section 138 of Companies Act, 2013 and
Companies (Accounts) Rules, 2014. As per the said provisions, the internal auditor shall either be a
chartered accountant whether engaged in practice or not or a cost accountant, or such other professional
as may be decided by the Board to conduct internal audit of the functions and activities of the company.
The report of internal audit shall be submitted to the Board of the company.
The following class of companies shall be required to appoint an internal auditor or a firm of internal
auditors, namely:-
(a) every listed company;
(b) every unlisted public company having-
** paid up share capital of fifty crore rupees or more during the preceding financial year; or
**turnover of two hundred crore rupees or more during the preceding financial year; or
outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore
rupees or more" at any point of time during the preceding financial year; or outstanding deposits of
twentyfive crore rupees or more at any point of time during the preceding financial year
(c) every private company having-
** turnover of two hundred crore rupees or more during the preceding financial year; or
** outstanding loans or borrowings from banks or public financial institutions exceeding one hundred
crore rupees or more at any point of time during the preceding financial year
Q3) Can a statutory auditor rely on the work of internal auditor?
Ans. A good system of internal audit can be of great help to the statutory auditor, and the audit may get
completed within a reasonable time. On the basis of internal audit, the statutory auditor can do away with
detailed checking of records. However, as a basic principle and as per SA 610, the auditor shall check the
effectiveness of the internal audit by conducting necessary test checks, and shall rely on it only at his own
risk. Just because internal audit is done, it does not reduce the responsibility of the statutory auditor and
he shall continue to remain liable in case any fraud or error is discovered. he should undertake a study of
the internal audit system, but whether to rely on the work of the internal auditor or not will depend
completely upon his own judgement and risk.
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Q4) Differentiate between Internal Check and Internal Audit year; and Or "Internal Audit
cannot replace internal check" - Comment.
ANS:
BASIS INTERNAL CHECK INTERNAL AUDIT

Definition Allocation of duties in It is an It is independent and
independent an effective continuous appraisal and
manner so that work of one examination of books of
individual is automatically accounts, records, etc.
checked by others
Nature It is an inbuilt system and Does not take place
works automatically automatically
Time Conducted while transactions Conducted after work has
are taking place been done
Results Detects and prevents frauds Detects and prevents frauds
and errors instantly and errors after work has been
done
Qualifications No special knowledge is Specialized knowledge may be
required required
Reporting Report given to department Report sent to top
head management
Q5) Differentiate between Internal control and Internal Audit.
Basis Internal control Internal audit

Definition It is the whole system of It is an independent and
control implemented by an continuous appraisal and
organization for smooth examination of books of
running of the business, accounts, records, etc
safeguarding of assets and
reliability and accuracy of
financial records
Scope It encompasses the entire Specific areas as per direction
accounting and administrative of top management are
areas of the organization reviewed
Responsibility All the employees of each and Only internal auditor is
every department is responsible
responsible for ensuring
internal control
Existence It exists throughout the Separate department is there
organization
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Reporting Regular reporting to Report sent to top

concerned head departmental management
Q6) Difference between Internal Control and Internal check.
Basis Internal control Internal check

Definition It is the whole system of Allocation of duties in an
control implemented by an effective manner so that work
organization for smooth of one individual is
running of the business, automatically checked by
safeguarding of assets and others
reliability and accuracy of
financial records
Scope It encompasses the entire Specific areas as per
accounting and administrative requirement of top
areas of the organization management are covered
Responsibility All the employees of each and Specific employees are
every department is responsible
responsible for ensuring
internal control
Extent It is the whole system of It is a part of internal control
control
Flexibility It may be changed anytime as Once adopted, the system is
per requirement usually maintained for a long
time
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Chapter 4. VOUCHING VERIFICATION AND VALUATION
Q1) What do you mean by vouching? What are its objectives? What are the principle of
vouching?
Ans. Vouching means checking the validity and genuineness of any transaction recorded in the books of
accounts with reference to its documentary evidence in support of the entries made. In simple words,
when the auditor verifies the accounting entries with supporting documents it is called vouching. It does
not mean just checking of arithmetical accuracy of transactions and matching the entries with the
vouchers, but going into deep and looking if the transaction and matching the entries with vouchers but
going into the deep and looking if the transactions have actually taken place, Vouchers is not routine
checking.
>Objectives of vouching<
Ans. The main objective/principles behind conducting vouching are given below.
1. Evaluation of evidence:- vouching evaluates the collected evidences and vouchers and helps in
determining the genuineness of transactions
2. complete recording:- vouching ensures that all transactions have been properly recorded and nothing is
left unchecked.
3. Record of business transactions only:- Vouching ensures that entries relating to only business
transactions and no other transactions are recorded in the books of account.
4. Record of relevant transactions:- Vouching ensures that entries relating to only the concerned period
are recorded in the books of accounts
5. Basis of audit opinion:- Vouching forms the basis of expressing the final audit opinion by the auditor.
Q2) What are the features of the voucher? State the duties of an auditor in respect of missing
voucher?
Ans. Any documentary evidence which supports the entries in the books of accounts and also establishes
arithmetical accuracy, is called voucher. It can be in the form of cash memo, sales invoice etc.
All the voucher should be bear the name of the client
All the voucher should be properly dated
All the voucher should be serially number
One voucher should cover only a single transaction
Every voucher should be approved by be competent authority
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Relevant documents and evidence like challan invoice and etc. should be attached at every voucher.
Every voucher should be clearly written and any correction should be counter signed by the competent
authority
Different colour may be used for different types of vouchers.
Transaction shall relate to only business transaction.
Duties of an auditor in relation to missing voucher
A voucher may go missing due to number of reasons such as careless attitude of clerk in filling lack of
awareness regarding statutory requirement to maintain vouchers, accidental loss due to fire, intention to
hide any transaction etc.
*Record in audit note book:- Instead of disturbing the accountant every now and then the auditor should
record the details of missing vouchers in his audit notebook
*Obtain duplicate voucher:- If the transaction covered by the missing vouchers are important in nature,
duplicate vouchers must be obtained
*Avoid double entry:- Care should be taken to ensure that in case duplicate voucher is obtained, double
entry is not made on the basis of duplicate voucher.
*Inform top management:- If the transactions are of materials importance, the auditor should intimate
the fact of missing vouchers to the top management.
*Certificate of management:- The auditor shall also obtain a certificate from the management to the
effect that transaction covered by the missing vouchers were actually made and not fictitious.
Q3) “Verification forms an important part of the whole system of audit”- Discuss.
Or do you think that verification of assets and liabilities is necessary when vouching has been
done properly?
Ans. Verification means enquiry the value ownership, existence possession and encumbrance on the
assets. In other words, the auditor must verify whether:
>Assets and liabilities have been fairly valued.
>The company is the absolute owner of the assets.
>The assets and liabilities are actual and exist in reality.
>The company possesses all the assets.
>Assets are free from encumbrances.
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Verification is very important aspect of the auditing exercise undertaken by auditor. In case, verification is
not done, the auditor will not be able to expenses his opinion regarding the truth and fairness of assets
and liabilities appearing in the balance sheet.
Sometimes it is argued that there is no need of verification when vouching has been properly done. In this
regard, it must be noted that natures of vouching and verification are completely different. While
vouching involves checking the validity and genuineness of transaction recorded in the books of accounts
with reference its documentary evidence, verification goes to determine the value, ownership, existence,
possession and encumbrance of the assets shown by the organizations.
It is clear that even after conducting vouching it is important for the auditor to verify the assest and
liabilities appearing in the balance sheet. In other words, verification forms important part in the whole
system of audit and vouching cannot replace verification.
Q4) “Verification includes valuation”. Discuss.
Or, “An auditor is not a value, but he is intimately connected with values”- comment.
Ans. Verification means enquiry into the value, ownership, existence, possession, and encumbrance on
the assets. Whereas, valuation of assets means determining.
the fair value of the assets shown in the balance sheet on the basis of generally accepted accounting
principles *verification include valuation. However, an auditor is not a value, though he may be said to be
closely related to the value*. The auditor is required to only verify whether the valuation is fair or need.
He need not value the assets himself. He just need to apply his skills, intelligence, and judgement and take
adequate care to confirm that the value of assets stated in the balance sheet are genuine. Usually asset
are valued by specially qualified experts. So, the auditor may rely on any certificate given by such experts
of determining the genuineness of valuation of any asset. Through an auditor is not supposed to possess
in depth expertise regarding the valuation of all type of asset, he must at least take responsible care to
verify the same with the records available. In case the auditor feels that valuation is unfair, he should
discuss with same with management and if required, state the fact in his report. He must exercise care
and skills while verification of assets and in case of failure to exercise care, the auditor may be held liable
for negligence.
Q5) It is often said that it is no part of an auditor’s duty to take stock. Discuss the statement?
Ans. Verification and valuation of stock-in-trade is very important. If the amount of stock is not properly
taken and valued at the valued at the date of balance sheet, the profit or loss cannot be correctly
determined. While verifying the stock-in-trade, the auditor must ensure that they are fairly and properly
valued, so that he can express an opinion as to whether the balance sheet of the organization reflects a
true and fair view of its state of affairs. Valuation is the primary responsibilities of the, management, and
the auditor is required to only verify whether the valuation is not fair or not. He need not value the stock
himself. He just need to apply his skills, intelligence and judgement and take adequate care to confirm that
the values of asset stated in the balance sheet are genuine. The auditor may rely on any certificate given
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by the management regarding the valuation of the stock-in-trade. However, he must use his intelligence
to verify the same with records available. In case the auditor feels the valuation is unfair, he should discuss
the same with the management and if required, the state the fact in his report. So, that they even though
the auditor is not required to verify the authenticity of the amount stated in the financial statements. He
must exercise care and skills while verification of assets an in case of failure to exercise care, the auditor
may be held liable for negligence.
Q6) Difference between verification and valuation?
Basis Verification Valuation

Meaning Verification means enquiry Valuation of assets means
the value ownership, determining the fair value of
existence possession and the assets shown in the
encumbrance on the assets. balance sheet on the basis of
generally accepted accounting
principles
Time It is done at end of the year. It is done at during of the
year.
Responsibility It is the responsibility of the It is the responsibility of the
auditor management
Scope It is wide in scope It is narrow in scope.
Objects It involves enquiry of value It involves only determination
ownership existence of fair value of assets.
possession and encumbrance
of assets
Q7) As an auditor, how will VOUCH the following items:
Ans. Travelling expenses-
Check whether business travel rules are formulated by management have been followed.
Check whether tours have got advance approval of competent authority.
In case any limit has been specified for tour expenditure check if the tour expenses have not been debited
to the business accounts.
Check the necessary invoices with payments
Check the minute books for board approval, if any.
Direct expenses-
Check the total numbers of directors
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Checks the terms of appointment.
Check the type of remuneration, allowances and perquisites which directors are entitled
Check whether director’s remuneration has been separately shown in the profit and loss account.
Check whether remuneration exceeds the maximum limit prescribed under companies act,2013.
Check the minutes books and attendance register.
Preliminary expenses-
Check whether the expenses are actually incurred for formation of the company
Check whether expenses are expenses are justified.
Check whether they have been written off as per accounting standards.
Check the necessary invoices.
Payment of divided-
Check the computation of dividend.
Checks the shareholder register.
Check whether the relevant provisions of companies act,2013 has been followed.
Check the counterfoils of the cheques dispatched to the shareholder.
Q8. As an auditor, how will you VERIFY THE FOLLOWING ITEMS:
ANS. GOODWILL-
Check the agreement entered into with the company from whom goodwill is purchased.
In case of partnership firm, check the partnership deed
Check whether goodwill is written off properly.
Check if the goodwill is not written off is properly disclosed in financial statements.
Check that the same goodwill is not written off twice.
Patent and copyright (Intellectual Property Rights)-
Check expiry date of IPR
Check the term and condition of IPR.
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Check whether the renewal fees have been paid on time
Check whether IPR have been shown separately to the market
Check the certificate of registration granted to the company.
Leasehold land-
Check the lease deed.
Check whether the lease is registered
Check that lease rentals are timely paid and charged to profit and loss account.
Conduct physical verification of the property.
Check whether property is properly insured.
Plant and Machinery-
Check the plant register containing detailed particulars of various items of plant & machinery.
Check the invoice of all plant & machinery purchased during the year/.
Check the ownership documents of all plant and machinery
Conduct physical verification of the plant and machinery.
Check whether P/L on sale of machinery has been accounted for.
Inventory stock-
Check the stock register.
Check whether goods purchased but not received have been included in the stock.
Check the stock physically.
Verify the fair value of the stock.
Verify the level of stock with previous year figures.
Secured loan-
Check the loan agreement.
Check whether any asset is mortgaged
Check whether the terms and conditions of loan have been satisfied.
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CHAPTER – 5. COMPANY AUDIT
Q1) What is the procedure for appointment of auditors under the companies Act,2013?
Ans. The provisions for appointment of auditors are contained in section 139 of the companies act 2013
and companies (audit and auditors) rules,2014. As per section139, every company shall, at the first annual
general meeting, appoint an individual or a firm as an auditor who shall hold office from the conclusion of
that meeting till the conclusion of its sixth general meeting and thereafter till the conclusion of every sixth
meeting.
The manner and procedure for selection of auditors by the members of the company, as prescribed in
rule3 of the companies (Audit and Auditor) Rules2014, are given below:
1. In case of a company that is required to constitute an audit committee under section177, the
committee, and, in case where such a committee is not required to be constituted, the board shall take
into consideration the qualification and experience of the individual or the firm proposed to be considered
for appointment as auditor and whether such qualification and experience are commensurate with the
size and requirements of the company.
2. The Audit committee or the board, as the case may, may call for such other information from the
proposed auditor as it may deem, fit.
3. Where a company is required to constitute the audit committee, the committee shall recommendation
the name of an individual or a firm as auditor to the board for consideration and in the other case, the
board shall consider and recommend an individual or a firm as auditor to the members in the annual
general meeting for appointment.
4. If the board agrees with the recommend the appointment of the audit committee, it shall further
recommend the appointment of an individual or a firm as auditor to the members in the annual general
meeting.
5. The auditor appointed in the general meeting shall hold office from the conclusion of that meeting till
the conclusion of the 6th annual general meeting, with the meeting where in such appointment has been
made being counted as the first meeting
Q2) Briefly explain the procedure for Removal of auditor?
Ans.
Removal of Auditor:
As per section 140(1) of the companies act 2013, an auditor appointed under section 139 may be removed
from his office before the expiry of his term only after obtaining previous approval of the central
government and passing a special resolution by the members. The application to central government shall
be made in the form ADT-2 within 30 days from the date of resolution passed by the board for removal of
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auditor. The company shall, them hold a general meeting within 60 days from the date of receipt of
approval from the central government for passing special resolution.
A special notice shall be required for a resolution at an annual general meeting for appointment of any
person other than a retirement auditor, as the auditor of the company or providing expressly that the
retiring auditor has completed consecutive tenure of five years or ten years. The retiring auditor makes
any representation in writing to the company and request the company to notify hid representation to the
members of the company, the company shall, unless the representation is received by it too late to notify,
state the fact of the representation having been made in any notice of the resolution given to the
members of the company.
Q3) What are the qualification and disqualification of auditors as per companies act 2013? Or,
briefly discuss the eligibility criteria for appointment of auditor.
Ans. The eligibility of the criteria for appointment of any individual or firm as auditor is given in section
141 of the companies (Auditor and auditors) rules, 2014.
Qualification for appointment as auditor:
A person shall eligible for appointment as an auditor of a company only if he is charted accountant.
A firm can be appointed as an auditor of a company only if majority of its partner practicing India are
qualified for appointed as an auditor of a company.
Where a firm including an LLP appointed as an auditor of a company only those partners
who are chartered accountants shall be authorized to act and sign on behalf of the firm.
Disqualification for appointment as an auditor:
(a) a body corporate other than a limited liability partnership registered under the limited liability
partnership act,2008.
(b) an officer or employee of the company;
(c) a person who is a partner or who is in the employment, of an officer or employee of the company.
(d) a person who, or his relative or partner-
(i)a person who is holding any security of or interest in the company or its subsidiary or of its holding or
associate company or a subsidiary of holding company. Provided that the company relative may hold
security or interest in the company of the face value not exceeding rupees one lakhs.
(ii)a person is indebted to the company, or its subsidiary or its holding or associate company or a
subsidiary of such holding company in excess of rupees five lakhs.
Phone – 99035-03989
(iii) a person has given a guarantee or providing any security in connection with the indebtedness or any
third party/person to the company, or its subsidiary or its holding or associate company or a subsidiary of
such holding company, un excess of rupees one lakhs.
(iv) a person whose relative is a director or it is in the employment of the company as a director or key
managerial personnel.
Q4) How is remuneration of auditors fixed?
Ans. Section 142 of the companies act, 2013 deals with remuneration of auditors. As per section 142
remuneration of the auditor of a company shall be fixed in its general meeting or in the manner as
determined in the general meeting. the remuneration of the first auditors appointed by the board maybe
be fixed by the board
In addition of the fee payable to an auditor remuneration shall also include the expenses, if any incurred
by the auditor in connection with the audit of the company and any facility extended to him but does not
include any remuneration paid to him for any other services rendered by him at the request of the
company.
Q5) What are the powers or right of an auditor under the companies act,2013?
Ans.
(a)Right to access books of account: the auditor shall at all times have a right to access the books of
accounts and vouchers of the company whether kept at the registered office of the company or at any
other place.
(b)Right to obtain information and explanation: the auditor shall be entitled to require from the officers of
the company, such information and explanation as he may consider necessary for the performance of his
duties as auditors.
(c)Right to inquiry: the auditor shall have the right to, amongst other matters, inquire into the following.
(d)Whether loans and advance made by the company on the basis of security have been properly secured
and whether the terms on which they have been made are prejudicial to interests of the company or its,
members.
(e)Transactions of the company which are represented merely by books entries are prejudicial to the
interest of the company.
(f) whether loans and advance made by the company have been shown as deposits.
(g) whether personal expenses have been charged to revenue account.
Q6) What are the duties of an auditor under the companies Act,2013?
Phone – 99035-03989
Ans. Section 143 of the companies act, 2013 and rule 11 of the companies (Audit and Assurance) rules
2014, an auditor has the following duties:
(a) True and fair view: the auditor shall make a report to the members of the company on whether the
financial statements give a true and fair view of the state of the company affairs as at the end of its
financial year and profit or loss and cash flow for the year.
(b) Information and explanation: the auditor shall report whether he has sought and obtained all the
information and explanations which to the best of its knowledge and belief were necessary for the
purpose of his audit and if not the details thereof and the effect of such information on the financial
statements.
(c) books of accounts: the auditor shall report whether, in his opinion, proper books of account as
required by law have been kept by the company so far as appears from his examination of those books
and proper returns adequate for the purpose of his audit have been received from branches not visited by
him.
(d) Branch audit report: the auditor shall specify whether the reports of an account of any branches office
of the company audited by a person other than himself has been sent to him and the manner in which he
has dealt with it in preparing his report.
(e) financial statement: the auditor shall state whether the company balance sheet and profit and loss
account dealt with in the report are in agreement with the books of account and return.
(f) accounting standards: The auditors shall report whether in his opinion the financial statements comply
with the accounting standards.
(g) advice effect: the report shall contain the observations or comments of the auditors on financial
transactions or matters which have any adverse effect on the functioning of the company.
(h) Director’s disqualification: the auditors shall report whether any directors is disqualified from being
appointed as a director under sub section (2) of section 164.
Q 7. What is depreciation? What are the purpose of providing depreciation? What are the
factors to be taken into the consideration for measuring the extent of depreciation?
Ans. Depreciations may be defined as the gradual and permanent decrease in the value of an asset due to
wear and tear obsolescence etc.
Purpose of providing depreciation
Depreciation on asset is provided for the following purposes:
(a) for determining cost of production: a portion of the fixed asset gets expired in the process of
production. This expired portion is regarded as depreciation and must be considered as any other
expenses to arrive at the proper cost of production.
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(b) for measuring correct profits: in case depreciation is not charged, the account of the entity will not
cover loss in the value of assets and used in production and hence, the amount of profit may be
misleading
(c) True and fair presentation of balance sheet: in case depreciation is not charged, balance sheet will
show a higher than actual value of the assets. Hence, depreciation must be properly accounted for.
(d) funds for replacement of asset: depreciation is non cash expenses and hence results in accumulation of
funds. The accumulated fund can itself provide for replacement of assets and no further capital is required
in the future for the same.
(e) legal requirement: as per section 123 of the companies act, 2013, a company can declare dividend only
after providing for depreciation.
Q8) What are the provisions of companies act 2013, regarding declaration and payment of
dividend?
Ans. The provisions regarding declaration and payment of dividend by a company are contained in section
123 to 127 of the companies act2013.
Sources of dividend: as per section 123 of the companies act 2013, dividend can be paid out of the
following sources:
Current year profits after providing for depreciation.
Past reserves created out of profits brought forward after providing for depreciation.
Both current year and passed year profits after providing for depreciation.
Money provided by the central government or state government in pursuance of guarantee given by the
government.
Inadequate or absence of profits: A company may declare dividend out of accumulated profits earned by it
in previous financial years and transferred to the free reserves.
Utilization of other reserves: no dividend shall be declared or paid by a company from any of its reserves
other than free reserves.
Separate bank account: the company shall deposit the amount of dividend including interim dividend in a
separate account in any schedule bank within 5days from the date of declaration of dividend.
Time limit for payment: dividend declare by the company shall be paid with in 30days from the date of
declaration of dividend.
Mode of payment: dividend shall be paid by a company only to the registered shareholders of such share
or its share to his order or to his banker, either through cheque or warrant or in any electronic mode.
Phone – 99035-03989
Q9) Can dividend be paid out of current profits without making good past capital losses?
Ans. A capital loss arises when a capital asset is sold at a price lower than the original purchase price. It is
not a regular business activity and non-recurring in nature.
Current year profits after providing for depreciation
Past reserves created out of profit brought forward after providing for depreciation.
Both current year and past year profits after providing for depreciation
Money provided by the central government or state government in pursuance of guarantee given by that
government no company shall declare any dividend unless carried over previous losses and depreciation
not provided in previous year or years are sett off against profit of the company for the current year.
Q10) Can divided be paid out of current profit without making good past revenue losses?
Ans. A revenue loss arises when goods are sold at a price lower than the original purchase price and other
than losses forming part of the regular business activites of the company act 2013, dividend shall be paid
out of the following sources:
Current year profits after providing for depreciations
Past reserves created out of profit brought forward after providing for depreciation
Both current year and past year profit after providing for depreciation
Money provided by the central government and state government of the pursuance of guarantee by that
government
No company shall declare any dividend unless carried over previous loss and depreciation not provided in
the previous years or years are set of against profit off the company for the current year. It is clear that
dividend can be paid out of current year profits only after adjustment of previous year losses and
depreciations. Hence, it can be concluded that past revenue losses should be set off before declaring any
dividend.
Q11) Can dividend be paid out of capital?
Ans. As per section 123 of the companies act 2013 a company can pay dividend only out of the following
sources:
Current year profits after providing for depreciations
Past reserves created out of profit brought forward after providing for depreciations
Both current year and past year profits after providing for depreciations
Phone – 99035-03989
Money provided by the central government and state government in pursuance of guarantee given by the
government. Payment of dividend out of capital shall also be not allowed to protect the interest of
creditors and preference share holder who shall have priority on return of capital during winding up of
company. Hence, we may conclude that no dividend shall be paid out of capital.
Q12) Can dividend be paid out of capital profits?
Ans. Capital profits refers to profits earned by a company from the sale of its fixed assets. Further, if the
shares and debentures are issued at a
Premium such premium is also called capital profit.as per section 123 of the companies. Act,2013,
accompany can pay dividend only out of the following sources;
Current year profits after providing for depreciation;
Past reserves created out of profit brought forward after providing for depreciation
Bot current year and passed year profit after providing for depreciation
Money provided by the central government and the state government in pursuance of guarantee given by
that government.
The above does not clearly specify which type of profit and revenue or capital can be utilized for
distribution as dividend. However, we know that capital profit is not earned in the ordinary course of the
business and are transferred to capital reserve of the company. Hence these are not free reserves
available for distribution as dividend.
Q13) What is unclaimed dividend? How should unclaimed dividend be treated in the books of
accounts? discuss the provision regarding unclaimed dividend as per companies act 2013?
Ans. The dividend which has been already declared and paid by the company but not claimed by the share
holders is called unclaimed dividend. As per schedule 3 of the companies act 2013, such dividend shall be
shown as unpaid dividend under the heading’ other current liabilities.
As per section 124 of the companies act 2013, where a dividend has been declared by a company but not
claimed within 30 days from the date of the declaration by the shareholders entitled to the payment of
dividend the company shall, within 7 days from the date of expiry of the said period of 30 days, transfer
the total amount of such unclaimed dividend to a special accounting in any scheduled bank. Such account
shall be called unpaid dividend account. If the company fells to transfer such unclaimed dividend or any
part thereof to the unpaid dividend account within the prescribe period, it shall pay, from the date of such
default, interest on the amount not be transferred at the rate of 12% per annum.
Any person claiming to be entitled to any money transfer to the unpaid dividend account of the company
may apply to the company for payment of the money claimed in case any money transfer to the unpaid
dividend account mains unclaimed for a period of 7years from the date of such transfer, the amount
Phone – 99035-03989
remaining unclaimed and lying in the unpaid dividend account shall be transfer by the company along with
interest acquired, if any, to investors education protection fund.
Q14) Differentiate between internal auditor and statutory auditor?
Basis Internal auditor Statutory auditor

Appointment APPOINTED BY MANAGEMENT APPOINTED BY OWNERS/SHARE
HOLDER
Qualification NO HARD AND FAST QUALIFICATION IS UNDER
QUALIFICATION IS PRESECRIBED PRESECRIBED UNDER
COMPANIES ACT,2013.
Employee MAY OR MAY NOT BE A PAID HE IS AN INDEPENDENT PERSON
EMPLOYEE OF THE AND NOT A PAID EMPLOYE
ORGANIZATION
Removal CAN BE REMOVED BY THE CAN BE REMOVED BY THE SHARE
MANAGEMENT HOLDERS
Remuneration FIXED BY MANAGEMENT FIXED BY SHAREHOLDERS
Internal control IT IS A PART INTERNAL CONTROL IT IS NOT A PART INTERNAL
CONTROL
S.S

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Guiding You Today For a Better Tomorrow Aaditya Gupta Classes

AUDIT IMPORTANT QUESTION ANSWER (SELF MADE)

Chapter 1. CONCEPT NEED AND PURPOSE OF AUDIT

Q 1. What is audit ? what are the features of audit?

Q 2. State the objectives of audit ?

Ans : Audit consists of three types of objectives

These objectives are discussed below:

b) Secondary objective : (i) Detection of Errors

AUDIT IMPORTANT QUESTION ANSWER (SELF MADE)

Q 3.What are the advantages of Audit?

Ans : Advantages of audit are as discussed below :

1. The financial statements become more reliable and authentic.

2. Safeguards the financial interest of the owners.

3. It acts as a moral check on the employees from committing frauds.

4. Helps in submitting proper income tax and other returns.

6. Helps to ensure that financial records are properly maintained.

7. Acts as an overall check on the integrity of the management.

8. Helps in easy availability of loans from various financial institutions.

Q 5.Comment on the importance of Auditor’s Independence.

Importance of audit independence are as given below:

Q 6.Write a note on principles of Audit.

AUDIT IMPORTANT QUESTION ANSWER (SELF MADE)

AUDIT IMPORTANT QUESTION ANSWER (SELF MADE)

3. Error of Principle: When a transaction is recorded in contravention to any accounting principle, it is

Q.9. Fraud does not necessarily involve misappropriation of cash or goods”-comment

Fraudulent Financial Reporting involves manipulation of accounts. It involves:

* Omission or understatement of income to evade taxes

*Fake expenses or overbilling of expenses for reducing profit

*Overstatement of profit to earn more commission in case of profit linked commission

*Overstatement of profit for better value in case business is to sold

Ensure that no fictitious expenditure is included in Profit and Loss Account.

Ensure that all incomes are genuine and properly recorded.

Ensure that revenue and capital expenditure are correctly assessed.

Check the methods of valuation of closing stock.

Check if the same accounting principles are followed every year.

Check past year data and trends .

Q 10. Auditors are not Accountants. Discuss.

AUDIT IMPORTANT QUESTION ANSWER (SELF MADE)

Points Accountant Auditor

Definition Accountant is a permanent Auditor is an Independent

Employee Accountant is a paid employee Auditor is an independent

AUDIT IMPORTANT QUESTION ANSWER (SELF MADE)

It involves in-depth checking of records.

It is undertaken for some specific purpose.

Its scope depends upon requirements of the particular matter.

It covers both financial and non-financial matters.

No standard or guidelines has been prescribed for conducting investigation.

It is usually conducted in cases of utmost emergency or upon order of Central Government.

The investigator shall submit his report and remain account.

Q 13. How would you investigate the following:

(a) Misappropriation of Cash.

(b) Misappropriation of goods

(c) Suspected Fraud

Ans. (a) Misappropriation of Cash

Cash may be misappropriated in any of the following ways:

AUDIT IMPORTANT QUESTION ANSWER (SELF MADE)

i) Non-recording or short-recording of cash receipts

(b) Misappropriation of Goods