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AUDITING

Q.1:- What is continuous audit (concurrent Audit ). Point out their relative merits and drawbacks. For what type of business concerns continuous audit is suitable? Ans:- CONTINUOUS AUDIT :According to R.C. Williams A continuous audit is one where the auditors his staff is constantly engaged in checking the accounts during the whole period or here the auditor or his staff attends at regular or irregular during the period. As per the above definition the following main features are comes. (a) It is carried throughout the year. (b) The accounts are subjected to scrutiny as and when prepared. (c) Full verification of assets and liabilities is left until the balance sheet is prepared. However, some assets like cash balances and inventory may be verified at every visit by the auditor. (d) Trial balance, profit and loss account and balance sheet are audited at the end of the year.

SUITABILITY OF CONTINOUS AUDIT


Continuous audit is suitable in the following situations. (a) Where final accounts are to be presented immediately after the close of financial year, for example, in case of subsidiary companies. (b) Where internal controls are not very effective. (c) Where volume/number of transactions is very large. (d) Where management is interested in getting statement of accounts audited at regular intervals.

ADVANTAGES OF CONTINOUS AUDIT


(a) Detection of Frauds and errors :- Detailed and exhaustive checking of accounts leads to quick detection of frauds and errors. (b) Knowledge of technical details: - Continuous audit helps the auditor to understand the technicalities of business. Hence he can advance valuable suggestions to his client for improving the systems of maintaining accounts and other internal controls. (c) Efficiency of auditors :- Auditors, in case of continuous audit, can plan his audit work in a systematic manner. The auditor s work is more evenly spread over the year. As a result the auditor, who has a number of such audit assignments, avoids a situation in which additional and, possibly, less trained staff has to be employed temporarily in busy period. (d) Moral Check :- The fact that the auditor is visiting frequently acts as a moral check on the staff of the client.

BY MUKESH VERMA (B.COM/M.COM/PGDBA/B.ED.) MOBILE:- 9212528831

AUDITING
DISADVANTAGES OF CONTINOUS AUDIT
(a) Tampering with figures: - Figures may be altered after being checked. (b) Likely collusion between client s staff and auditor s staff :- Frequently interaction of he staff of the client wit tat of the auditor provide scope for unhealthy relationship between the two. (c) Losing link in audit work:- The auditor s staff may not be able to clear certain queries so that certain queries be left answered. (d) Expensive :- The continuous audit involves detailed and exhaustive checking. The auditors, therefore, charge hefty (large) audit fees. (e) Dislocation of client s work:- Frequent visit of the auditor disrupt the normal flow of work. The staff of the client may divert its attention from their routine work to providing details required by the auditor.

SAFEGAURDS FOR MINIMIZATION OF DISADVANAGES IN CONTINOUS AUDIT


The following safeguards can be use for minimizing the disadvantages of continuous audit. (a) He should instruct the staff of the client to make alterations, if any, in figures that have been audited by only passing rectification entire in journal and bringing it to the notice of auditor. (b) The auditor should also device special form of ticks for being placed against figures which have been altered and neither their purpose nor significance should be disclosed to clients staff. (c) Total of accounts at the end of period under review should, if practicable, be recorded in the audit note book and verified at the next visit. (d) The auditors should prepare detailed audit programme. (e) The auditor should try to check the accounts of similar nature in one continuous sitting. (f) The biggest limitation of continuous audit is that it is quite expensive. Only big organizations should go for it after undertaking cost benefit analysis.

Q.2:- What is Annual Audit (periodical , final, completed ) . Distinguish between Continuous Audit and Annual Audit. Ans:- Annual audit is one which is carried out only at the end of an accounting period. SPICER AND PEGLER An audit which is not commenced until after end of the financial period and is then carried on until completed.

CHARACTERISTICS OF ANNUAL AUDIT


The main characteristics of annual audit are as follows : (a) It is done at the close of the financial year after books of accounts have been closed and final accounts drawn, (b) The audit work is completed in a single continuous session BY MUKESH VERMA (B.COM/M.COM/PGDBA/B.ED.) MOBILE:- 9212528831

AUDITING
(c) It gives satisfactory results in case of small concerns. DIFFERENCE BETWEEN CONTINUOUS AND ANNUAL AUDIT BASIS (1) NATURE CONTINUOUS AUDIT ANNUAL AUDIT Continuous audit is carried on at Annual audit is completed in a regular or irregular intervals single continuous session after the close of financial year In case of continuous audit, there In Annual audit the auditor is also is a possibility of early detection of better familiar with accounting frauds and errors. and other control systems of the entity as compared to an auditor who undertake annual audit. Continuous audit is most suitable Annual audit is more suitable for for big organizations or medium small business. sized organization which do not have an efficient system of internal control. In case of continuous audit, the Annual audit is second steps for auditor does not undertake full verification of assets because verification of the assets and continuous audit gets merged into liabilities, till the balance sheet is the annual audit. prepared. Continuous audit is more Annual Audit is less expensive expensive

(2) Diligence

(3) Suitability

(4) Verification of Assets

(5) Cost

Q.3 :- What are the different kinds of Audit. Give the merits and demerits of each. ? Ans :- Audit can be classified on the following two basis. 1. According to the organization of business. 2. According to practical way. ORGANISATION OF BUSINESS (a) (b) (c) (d) Statutory Audit Private Audit Government Audit Internal Audit

1. STATUTORY AUDIT OR COMPULSORY AUDIT :- Where audit in the case of an enterprise is made compulsory by law, it is called statutory audit. Statutory Audit has been prescribed in the case of the following : (a) Companies governed by the Companies Act. (b) Banking Companies governed by the Banking Regulation Act. BY MUKESH VERMA (B.COM/M.COM/PGDBA/B.ED.) MOBILE:- 9212528831

AUDITING
(c) Electricity supply companies governed by the Electricity Supply Act, 1948. (d) Co-operative society registered under the cooperative societies Act. (e) Societies registered under the societies Registered Act, 1860 The scope of audit, qualification, disqualification, remuneration appointment, removal, rights, duties, and liabilities of the Auditor and the Audit-report and certificates, etc. are regulated by the respective provisions of various statues. The chartered Accountants Act, 1949 also prescribes the general guidelines for the auditors in the audit process of the respective organizations.

2. PRIVATE AUDIT OR VOLUNTARY AUDIT :- Where audit in the case of an enterprise is not compulsory by law, though, it is opted for by the enterprise in view of the several benefits resulting from it, is called Private Audit. In India, for example sole proprietary are not obliged under the law to get their financial statements audited, while according to a recent amendment to the Income tax Act, Audit by a professional auditors has been made compulsory in the case of all businesses whose gross turnover exceeds Rs. 40 lacks and all professional persons whose gross receipts exceeds Rs. 10 lacks. 3. Government Audit :- The Government maintains a separate department in the name of Accounts and Audit Department which performs the Audit of its different departments

Q.4:- Distinguish between Continuous Audit and Balance Sheet Audit. Ans :BASIS Nature CONTINUOUS AUDIT The auditor or his staff is constantly engaged in checking the accounts during the whole period. i.e. throughout the financial year. This involves detailed and exhaustive checking of accounts. BALANCE SHEET AUDIT Audit takes place at the end of the financial period.

Diligence

Suitability

Verification of assets

This involves limited review in which all the balance sheet items are verified.Tests are applied only on those items of profit and loss account which are directly related to the asset and on income/expenditure attributable to asset/liabilities. It is most suited to big It is most suitable for organizations organization and entities where which have an efficient system of internal control are not effective. internal control. In this verification of assets and In this verification of assets and liabilities are verified at the end of liabilities is also done at the end of

BY MUKESH VERMA (B.COM/M.COM/PGDBA/B.ED.) MOBILE:- 9212528831

AUDITING
Popularity financial year but the cash and financial year. inventory records are verified by the auditor at every visit. It is used widely in India, England It is more popular in America. and other European countries.

Q.5:- An Auditor is often said to work like a watch dog and not as blood hound. Explain and illustrate this statement. Ans:- The detection or errors is an important part of an Auditor s duty. He must always be very careful about these errors. In Re-Kingston cotton Mills company case, an auditor s duties have been clearly indicated and the auditor was not held liable for the manipulation of accounts perpetrated by the trusted officials of the business concern. It was clearly stated in the judgment that An auditor is a watch dog and not a bold hound. . He is not expected to assume the role of a detective or a blood-hound. Explanation:- Describing the duties and liabilities of the Auditor, Justice Lopes has quoted: 1. An Auditor s duty is restricted to careful and intelligent inquiry only. The auditor must exercise reasonable care and skill in connection with the detection of errors. 2. An auditor is not bound to be detective or to approach his work with the suspicion that the employee of the concern are dishonest. 3. An auditor is a watch dog and not a blood hound. The auditors should be faithful and honest towards the concern. 4. If any doubt arise then the auditor should make a detailed investigating. 5. In case the auditor has exercised reasonable care and adopted the required skill in examining the accounting records, he cannot be held liable for not detecting the errors or frauds. Q.6:- Distinguish between Government Audit and Commercial Sheet Audit. Ans:S.NO. 1. Government Audit Usually, the government runs the accounts and audit department which performs both the functions i.e. preparation of accounts and their audit. The government department is itself the spending authority in the Government offices and as such, the department is responsible for a part of audit work though not actually the audit. Commercial Audit In case of commercial concerns, accounts are prepared by the salaried accountants and their Audit is external and is conducted by an Independent Auditor. In commercial concerns the department spending the money has no concern with the audit of accounts.

2.

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AUDITING
3. The Treasury officer or the Disbursing officer on his behalf makes the payment on Government accounts. He has no place in the Accounts and Audit Department. Bills for payment are submitted to him and they are passed after preliminary scrutiny. The audit of Government Accounts is a sort of continuous audit in the sense that the mostly, the transactions relate to the personal claims of the Government officers. The cashier in commercial concerns has no hand in the audit or preliminary scrutiny of the bills the bills that he pays.

4.

In commercial concerns, the audit is normally conducted after a fixed period i.e. a financial year. It is not continuous in the strict sense of the term.

Q.7 :-Difference between the audit of company and Audit of Partnership Firm.? Ans :Base of Difference Compulsory Audit of Partnership firm The audit of a partnership firm has not been made compulsory. It depends at the will of the partners. In case of the audit of a partnership firm, the appointment of the auditor is made by agreement between the partners. The scope of the audit of a partnership firm may be limited by the partners and in that case the auditor should get clear instructions in writing. Audit of company. The audit of company has been made compulsory by Indian Companies Act, 1956 In case of the Audit of a company, the appointment of audit is made by the shareholders, in general, according to the provisions of the act. In case of the audit of a company, the rights and duties a company auditor cannot be limited by the articles of association of the company or through a resolution passed in the general body meeting. In case of company audit, the audit work is carried on according to the provisions of the companies act and according to the decisions of the court. In case of company audit, the auditor must be a chartered accountant In case of the audit of a company it is necessary to give full knowledge about the memorandum and article of the company to the auditor.

Appointment

Scope

Operation

In case of partnership audit, the audit work is carried on according to the instructions of employer and partnership deed. In case of partnership audit, auditor need not possess professional qualification In case of the audit of a firm not necessary to present partnership deed before auditor. the any it is the the

Qualifications

Inspection

BY MUKESH VERMA (B.COM/M.COM/PGDBA/B.ED.) MOBILE:- 9212528831

AUDITING
Q. 8:- Explain briefly the principles, procedures and techniques of auditing. ? Ans :-According to Arthur W. Holmes:- Audit principles are the basic truths, which are indicative of the objectives of auditing. . the audit principles suggest the manner in which the objectives of audit are accompanies. Some basis principles of auditing are: 1. Principle of Independence 2. Principle of Objectivity. 3. Principle of Materiality. I) Principle of Independence :- The audit work should be independent from accountancy and the auditor should examine the books of accounts indifferently and independently. II) Principle of objectivity:- The audit work should be based on evidence and should be done impartially. III) Principle of Materiality:- This principle of materiality is and has always been fundamental to the whole process of accounting. And auditor has also to be quite concerned regarding the concept of materiality. The auditor has to analyses and take decisions regarding various items whether they are material or not during the course of and audit. In case the auditor finds that an items quite material in nature he would have to give careful consideration to its checking and would care for more evidences in support. If he is not careful about the, he may held liable for the same. Q.9:- Explain Audit Notebook. What are the advantages and disadvantages of Audit notebook.? Ans:- The audit clerk cannot remember everything at all times. During the course of an audit, he experiences several difficulties and hence, he maintains a book with him, popularly known as audit notebook in which he notes down the important point and enquiries which he has to refer to the officials of his clients or to discuss with his senior or the auditor himself. Thus the use of this book has become important to keep an exhaustive record of enquiries made, replies received thereto, correspondence etc. Contents of an Audit Notebook: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. Technical details about a business. Queries for which explanations and information have to be demanded. Missing vouchers and invoices whose duplicates have to be obtained. Fraud and errors found in the books during the course of and audit. Details which are to be included in the audit report. Audit programme. Notes regarding the system of maintaining accounts. Information to be needed in the future. Names of officials who certify bad debts, depreciation etc. Record of all important correspondence. Total of important correspondence. Progress of an audit work.

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AUDITING
Advantages :1. The audit is enabled to record important points which arise during the course of his audit, lest he might forget these points. 2. He can produce this book as a documentary evidence if a suit is filed against him for negligence or misfeasance. 3. A notebook makes the work of an audit convenient as all he important details about and audit can be recorded in this book and as such, any change in the staff of the auditor does not disturb or dislocate the work of an audit. 4. Such a book can help in making as assessment of the knowledge, efficiency and work of audit clerks. 5. It makes the procedures of subsequent audit more easy. 6. It provides a key to evaluate the efficiency of the audit staff. Disadvantages 1. It develops a fault attitude in the minds of the audit staff. 2. It place too much reliance on the staff of the client for its preparation. 3. If and audit notebook is prepared negligently, the auditor can use it as an evidence of negligence in he court of law. 4. Very often, it creates misunderstanding between the client s staff and the audit staff. Q.10:- Write short note on the following: (a) Auditing standards :- A standard denotes a model, example, measures, rule or principle established by an authority, custom or common consent. Auditing standards serves as the criteria to measures the quality of the auditing procedure performed by an independent auditor. The American Institute of certified Public Accountants has prescribed the following generally accepted standards for its members. (b)Standards of filed work:- (a) The work is to be adequately planned and assistants are to be properly supervised. (b) There should be a proper study and evaluation of the existing internal control as a basis for reliance thereon and for the determination of thee resultant extent of the test to which the auditing procedures are to be restricted. (c) sufficient competent evidential matter is to be obtained through --inspection --observation --confirmations, to afford to a reasonable basis for an opinion regarding the financial statement under examination. Q.11:- Briefly explain the inherent limitations of audit.

BY MUKESH VERMA (B.COM/M.COM/PGDBA/B.ED.) MOBILE:- 9212528831

AUDITING
Ans:- Inherent limitations of Audit: The objective of an audit of financial statements, prepared within a framework of recognized accounting policies and practices and relevant statutory requirements, if any, is to enable an auditor to express an opinion on such financial statements. In forming his opinion on the financial statements, the auditor follows procedures designed to satisfy himself that the financial statements reflect a true and fair view of the financial position and operating results of the enterprise. The process of auditing, however, is such that it suffers from certain inherent limitations, i.e., the limitation which cannot be overcome irrespective of the nature and extent of audit procedures. Such limitations arise, first of all, on account of exercise of judgment in the auditor s work in deciding the extent of audit procedures and exercising judgment also in assessing the reasonableness of the judgment and estimates made by the management in preparing the financial statements. Secondly, much of the evidence available to the auditor can enable him to draw only reasonable conclusions there from. The audit evidence obtained by an auditor is generally persuasive in nature rather than conclusive in nature. Because of these factors, the auditor can only express an opinion. Therefore, absolute certainty in auditing is rarely attainable. There is also likelihood that some material misstatements of the financial information resulting from fraud or error, if either exists, may not be detected. Another reason which may contribute to inherent limitation is the fact that the entire audit process is generally dependent upon the existence of an effective system of internal control.

Q.12:- State briefly the qualities of Auditors. Answer Qualities of Auditors: The auditor should possess specific knowledge of accountancy, auditing, taxation, etc. which are acquired by him during the course of his theoretical education. The auditor should also have sufficient knowledge of general principles of law of contracts, partnership; specific statutes and provisions applicable, e.g. Companies Act, 1956, Co-operative Societies Act, etc.; client s nature of business and its peculiar features. Apart from the knowledge acquired by the auditor in the formal manner, the auditor should also possess certain personal qualities such as, tact; caution; firmness; good temper; judgment; patience; clear headedness and commonsense; reliability and trust, etc. In short, all those personal qualities that go to make a good person contribute to the making of a good auditor. In addition, he must have the shine of culture for attaining a great height. He must have the highest degree of integrity backed by adequate independence. Auditing is a profession calling for wide variety of knowledge to which no one has yet set a limit the most useful part of the knowledge is probably that which cannot be learnt from books because its acquisition depends on the alertness of the mind in applying to ever varying circumstances, the fruits of his own observation and reflection; only he who is endowed with common sense in adequate measure can achieve it.

BY MUKESH VERMA (B.COM/M.COM/PGDBA/B.ED.) MOBILE:- 9212528831

AUDITING
Q.13:- What is an Audit Engagement letter? Ans:(i) Audit engagement letter : Audit engagement letter is a communication issued by auditor to the auditee (the client) expressing therein inter alia, the fact of acceptance of his audit engagement, the objectives and scope of his audit, the extent of auditor's responsibilities and management responsibility for compilation of accounting, application of accounting principles, standards, fees.

(ii) Need for the Issue of Audit Engagement Letter: It is not necessary to issue audit engagement letter each year for repetitive audit. It is enough if the same had been issued at the time of taking initial engagement. When it is repetitively issued : However, the auditor may think of issuing a fresh engagement letter in one or more circumstances described below : (i) When it appears that the client has misunderstood the objective and scope of audit. (ii) Where there has been change in management, board, or ownership so that it is felt that it is pertinent to remind them of the engagement terms again. (iii) Where any revision by way of addition, deletion, or modifications had been contemplated in the engagement letter originally issued. (iv) Where significant changes had occurred in nature, volume of the business transactions of the client which warrant the scope and terms of engagement to be altered to be in tune with them. (v) Where there has been necessity to modify audit approach to be in line with the pronouncements of ICAl, the Companies Act and the like.

Q.14:- Write a short note on - Fundamental Accounting assumptions. Answer Fundamental accounting assumptions: Accounts are prepared based on certain assumptions of accounting policies. These need not be specifically disclosed in accounts. When these assumptions are not followed, then only they need to be indicated in notes to the accounts. There are three fundamental accounting assumptions as listed in AS 1. They are going concern concept, consistency and accrual. Going concern concept implies that the entity will carry on its business in future and it does not have any specific intention of closing. This implies that fixed assets will be valued at cost less depreciation in contrast to current assets which are valued at lower of cost and net realizable values. Accrual concept implies that the all income and expenditure should be accounted irrespective of their payment/ receipt upon their incurring/ accruing. Consistency implies that the accounting policies are consistent from one period to another

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