Auditing Solved Paper May’ 2014 (Semester Exam)
Dibrugarh University B.Com 4th/6th Sem
CBCS and Non-CBCS Pattern(1) detection of error
(2) to find out whether profit and loss account and balance sheet show true and fair state of affairs.
(3) detection of fraud
(4) detection and prevention of fraud and errors
(ii) A continuous audit is needed for
(1) Any trading concern
(2) Smaller concern
(3) Banking companies
(4) Any manufacturing concern
(iii) Internal auditor is appointed by
(1) Management
(2) Shareholders
(3) Government
(4) None of above
(iv) The objective of internal audit is
(1) To prevent error and fraud
(2) To detect error and fraud
(3) To improve financial control
(4) All of the above
(v) stock should be valued at
(1) cost
(2) market price
(3) cost or market price whichever is lower
(4) cost less depreciation
(b) fill in the blanks: 1*3
(i) The company can buy back its shares only if it is authorized by its Articles.
(ii) Section 143 of Companies Act, 2013 has laid down reporting requirement for the auditor.
(iii) The Constitution of India has envisaged the office of the CAG to be the Supreme Audit Institution in the country.
2. Write short notes on the following (any four) 4*4=16
(a) Fraud and error: Errors are mistakes committed unintentionally because of ignorance, carelessness. Errors are of many types:
a. Errors of Omission: These are the errors which arise on account of transaction into being recorded in the books of accounts either wholly partially.
b. Errors of Commission: When incorrect entries are made in the books of accounts either wholly, partially such errors are known as errors of commission.
c. Compensating Errors: when two/more mistakes are committed which counter balances each other. Such an error is known as Compensating Error.
d. Error of Principle: These are the errors committed by not properly following the accounting principles. These arise mainly due to the lack of knowledge of accounting.
e. Clerical Errors; A clerical error is one which arises on account of ignorance, carelessness, negligence etc.
Fraud: A fraud is an Error committed intentionally to deceive/ to mislead/ to conceal the truth/ the material fact. Frauds may be of 3 types.
a) Misappropriation of Cash: This is one of the majored frauds in any organisation it normally occurs in the cash department. This kind of fraud is either by showing more payments/ less receipt. The cashier may show more expenses than what is actually incurred and misuse the extra cash.
b) Misappropriation of Goods: Here records may be made for the goods not purchase not issued to production department, goods may be used for personal purpose. Such a fraud can be deducted by checking stock records and physical verification of goods.
c) Manipulation of Accounts: this is finalizing accounts with the intention of misleading others. This is also known as “WINDOWS DRESSING”. It is very difficult to locate because it is usually committed by higher level management such as directors. The objective of WD may be to evade tax, to borrow money from bank, to increase the share price etc.
(b) Tax audit: Tax audit means the detailed examination of financial records of a concern to verify that the taxable profits are correctly calculated and the provisions of the Income Tax Act, 1961, are complied with. It also ensures that conditions required for claiming deduction under the Income Tax Act, 1961 have been fulfilled.
According to sec. 44AB of the Income Tax Act, 1961, tax audit is compulsory for a person carrying on any business, whose total sales turnover exceeds Rs. 40 lakhs in the previous year or in case of a profession, if the gross professional receipts exceeds Rs. 10 lakhs in the previous year.
(c) Continuous audit: Continuous audit is a system of audit where the auditor and his staff Examines all the transactions and books of accounts in details continuously throughout the year at regular intervals i.e. weekly or fortnightly or monthly etc.
According to Spicer and Pegler, “a continuous audit is one where the auditor’s staff is occupied continuously on the accounts the whole year round, or where the auditor attends at intervals, fixed or otherwise, during the currency of the financial year and performs an interim audit; such audits are adopted where the work involved is considerable and have many points in their favour although they are subject to certain disadvantages.”
Where this audit is applicable: In the following cases continuous audit is applicable.
(i) Where there are enormous transactions in a big organizations and continuous monitoring of accounts are required.
(ii) If there is no internal check system in the organization or the system is not very much effective.
(iii) When the company wants to declare interim dividend and for this purpose interim accounts are to be prepared.
(iv) In case of financial institutional and insurance companies, where it is necessary to get the final accounts just after the end of the financial year.
(v) If the management of the company are to get statement of accounts at a regular intervals.
(d) Routine checking: Routine checking is a checking of books of original entry and ledgers as a matter of routine work to determine the arithmetical accuracy and to detect errors and frauds and ensures the reliability of final accounts. It includes checking of casting of ledger accounts, posting to ledger accounts, preparation of trial balance and final accounts.
Objective of routine checking: The objectives of routine checking are discussed below:
(i) Checking of primary books
(ii) Examining arithmetical accuracy
(iii) Examination of pointing
(iv) Helps to detect errors and frauds
(v) Prevent to alter errors and frauds
(vi) Accuracy of Trail Balance
(vii) Reliability of Final Accounts
(e) Audit programme: By an audit programme we mean a written plan containing exact details with regard to the conduct of particular audit. It is description of the work to be done which is prepared by an auditor for the guidance and control of assistants. An audit programme provides a guide in arranging and distribution of work and in checking against the possibility of the omissions.
According to Howard Stettler “The programme is an outline of all procedures to be followed in order to arrive at an opinion concerning a clients’ financial statement”.
An audit programme should be elastic. An audit programme should be chalked out in such a way that if there may be any need for revision that may be carried out without any difficulty. For this purpose auditor takes the following steps:
a) Collects necessary information about the accounts to be audited
b) Evaluates Internal Control System
c) Designs audit working papers
(f) Source of dividend: As per Section 123 of the Companies Act, 2013 dividend may be declared out of the following three sources:
a) Out of Current Profits: Dividend may be declared out of the profits of the company for the current year after providing depreciation. The company must transfer the prescribed percentage of its profits to general reserve before declaring dividends. This percentage depends on the percentage of dividend declared.
b) Out of Past Reserves: Dividend may be declared out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with the provisions of Schedule II of the Companies Act, 2013 and remaining undistributed. Section 123 of the Act, requires that dividend can be declared out of the reserves only in accordance with the rules framed by the Central Government in this behalf.
c) Out of Money provided by the Government: A company can also declare dividend out of the moneys provided by the Central Government for payment of such dividend in pursuance of guarantee given by the Government.
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3. (a) Examine critically the role of auditing in the efficient and economical conduct of a business concern. Explain the advantages of audit to different user group. 5+6
Ans: Role of Auditing: The word audit is derived from the Latin word “AUDIRE” which means to hear. Initially auditor was a person appointed by the owners to check account whenever the suspected fraud, he was to hear explanation given by the person responsible for financial transactions. Emergence of joint stock companies changed the approach of auditing as ownership was pestered from management. The emphasis now is clearly on the verification of accounting date with a view on the reliability of accounting statement.
In the words of Spicier and Pegler ,“An audit is such an examination of the books, accounts and vouchers of a business as it enable the auditor to satisfy that the Balance Sheets is properly drawn up, so as to give a true and fair view of the state of the affairs of the business and whether the profit and loss accounts gives a true and fair view of the profit or loss for the financial period according to the best of his information and explanations given to him and as shown by the books, and if not, in what respects he is not satisfied”.
In the words of R.B. Bose, ”Audit may be said to the verification of the accuracy and correctness of the books of accounts by independent person qualified for the job and not in any way connected with the preparation of such accounts”.
The main purpose of Auditing or object is to find the opinion of an auditor about the correctness and reliability of accounts and the financial position of the business concern. For this purpose auditor has to check the arithmetical accuracy of the books of account and to find out that whether the transactions entered in the books of account are correct or incorrect. This is done by various methods like inspecting comparing and checking. So all that work that is done by the auditor ensures him that figures are facts.
Auditors are basically concerned with verifying whether the account exhibit true and fair view of the business. The objectives of auditing depend upon the purpose of his appointment. There are two main objectives of auditing.
1. Primary objective and
2. Secondary or incidental objective.
Primary Objective: The primary objective of an auditor is to respect to the owners of his business expressing his opinion whether account exhibits true and fair view of the state of affairs of the business. It should be remembered that in case of a company, he reports to the shareholders who are the owners of the company and not tot the director. The auditor is also concerned with verifying how far the accounting system is successful in correctly recording transactions. He had to see whether accounts are prepared in accordance with recognized accounting policies and practices and as per statutory requirements.
Secondary Objective: The following objectives are incidental to the main objective of auditing:
A) Detection and prevention of errors: errors are mistakes committed unintentionally because of ignorance, carelessness.
B) Detection and Prevention of Fraud: A fraud is an Error committed intentionally to deceive/ to mislead/ to conceal the truth/ the material fact. Frauds may be of 3 types.
a. Misappropriation of Cash
b. Misappropriation of Goods
c. Manipulation of Accounts
To conclude it can be said that, it is not the main objective of the auditor to discover frauds and irregularities and run the business in a economical and efficient manner.
Advantages of Auditing
A. Benefits of Business: Business may get many advantages of conducting audit by a qualified auditor. The advantages are discussed below:
(a) True and Fair view: With the help of audit of accounts, it is possible get a true and fair view of the financial position of the business.
(b) Detection of errors and frauds: If books of accounts are audited, errors and frauds can be detected and necessary action can be taken to prevent it.
(c) Moral pressure on the employees: If audit is conducted by the organization, employees should be cautions and there should be a moral pressure on them. As a result, chances of errors and frauds will be minimized.
(d) Proper accounting control: A system of regular audit helps the organization to maintain proper books of accounts regularly and books of accounts are kept up to date.
(e) Acceptable evidence: Audited accounts are very strong financial document acceptable to many interested parties e.g. taking loan from financial institution, determination of income tax, sales tax, amalgamation of companies, determination of purchase consideration, admission, retirement, death of a partner etc.
(f) Increase in goodwill: Audit of business on a regular basis increases confidence to the interested parties and general public. As a result goodwill of the business increases.
B. To the Owner: The owners of the business are also interested to know the financial position of the business. There are discussed below:
(a) Benefit to the sole proprietor: In case of large business, the proprietor can get a true and fair view of the accounts maintained by his employees and also able to know the state of affairs and profit made by him. The proprietor is also benefited for getting loan from financial institutions, to pay income tax etc.
(b) Benefits to the partners: Shareholders are the owners of a company. With the help of audited accounts help to the partners to settle their unsettled disputed, for taking loan from financial institutions, to get off the books of accounts maintained by the employees etc.
(c) Benefits to the shareholders: Shareholders are the owners of a company. With the help of audited accounts they get a real picture of the financial position of The company and they can assure that business is running efficiently.
(d) Benefit to the non-profit seeking organizations: There are different non-profit seeking organizations e.g., charitable institution, club, religious institute, school, college etc. This organization run with public money. Whether public money is properly utilized or not can be revealed from the audited accounts.
C. To the third parties: Besides business and the owners, there are different outside interested parties who required audited accounts for different purposes: These are:
(a) Government may be interested to get the audited accounts to show the deficiency of the business for giving grant and subsidy.
(b) Financial institutions sections loan to the organization on the basis of verification of financial soundness form the audited accounts.
(c) Tax authorities may depend on audited accounts for determination of income tax, sales tax, excise duty etc.
(d) Prospective buyers who want to invest money in shares and debentures of a company may rely on audited accounts.
(e) Creditors who supply goods to the business may asses the solvency and liquidity position of the business on the basis of audited accounts.
(f) For settlement of insurance claim, insurance companies can barely on audited accounts.
Or
Also Read:
(b) state the purpose and characteristics of sound system of internal check. How it is differ from internal control audit? 6+5
Ans: Internal Check (IC): The term internal check implies that the work of various members of the staff is allocated in such a way that the work done by one person is automatically checked by another. It is defined as “such an arrangement of book keeping routine where in errors and frauds are likely to be prevented or discovered by the very occupation of book keeping itself’.
Internal check is a system under which accounting methods and details of an establishment are laid out that the accounts and procedures are not under the absolute and independent control of any one person or the contrary the work of one employee is complementary to that of another. The system of IC is based upon the principle of division of labour; where in performance of each individual is automatically checked by another. This is possible by properly allocation the work and integration of function of the employees in such a manner their work complements each others.
Objectives of Internal Check
1. To have accurate record of business by preventing errors and frauds.
2. To fix responsibility for particular default or omission on a definite person
3. To have confirmation of facts and entries of transactions
4. To facilitate division of labour for the smooth flow of work
Essentials of effective Internal Check
1. Sufficient Staff: The primary essential of internal check is sufficient staff. The employees can be appointed according to the workload. The overloading can creates trouble for management.
2. Division of Work: Division of work is a principle of internal check. The management can determine the total amount of work. The whole work is divided among departments. The heads of such department are responsible for completion of work according to timetable.
3. Co-Ordination: Coordination is an essential of internal check. All departmental managers are bound to coordinates with other in order to achieve organization objectives. When there is fault in one department, the work of other department suffers.
4. Rotation of Duties: Rotation of duties is an essential of internal check. The workers feel bore by doing the same work from year to year. There is a need of rotation of duties. It is in the interest of concern as well as employees.
5. Responsibility: The responsibility is an essential of internal check. The employee can enjoy recreation leave. It is necessary for mental health. He cannot commit fraud as the new employee in his place can disclose the matter. There internal check system can work in the interest of business. The weakness in of one person is disclosed due to leave.
6. Checking: The principle of internal check is to check the work of other employees. Many persons perform the work. The officers can put his signatures to verify the work done by his subordinate. In this way one work passes many hands. The chances of error and fraud are minimized due to checking and counter checking.
7. Simple: The principle of internal check is simples in working the employees can understand the working of internal check system. A person can work under the supervision of other employees. The line of authority moves from top to bottom level. All workers can understand their duties in the organization.
8. Documents Classification: The classification of documents is an essential of internal check. The business documents are prepared, collected, recorded and placed in proper files. The index is prepared to compile the data.
9. Dependent Work: Dependent work is a principle of internal check. The work of one employee is dependent upon others. One work passes in the hand of two or three persons till it is complete. Another person checks the passes done by one person. No person is all in all to start and complete the transactions.
10. Harmony: The principles of internal check are harmony among the employees and departments. The understanding is essential for business goals. The harmony is basis for successful internal check.
Internal Audit Vs. Internal Check
1. Meaning: Internal check is the organization of staff for checking the work of one by the other. Internal audit is continues audit of accounts by employees of the business concern.
2. Object: Internal check aims to prevent errors and frauds. Internal audit aims to detect errors and frauds. Internal audit aims to detect errors and frauds.
3. Nature: In the case of internal check, recording and checking of entries is simultaneously done. In the case of internal audit, only checking of already recorded entries is done.
4. Scope: The scope of internal check is limited. The scope of internal audit is comparatively broad.
5. Appointment: In the case of internal check, no new member is employed as duties are so assigned that involved cross checking. In the case of internal audit, process of auditing is carried by special staff appointed for this purpose.
6. Detection: In the case of Internal Check, any error or fraud is detected at the time of inter checking. In the case of internal audit, any error or fraud is only detected at the end of audit work.
4. (a) what is verification of assets and liabilities? State the duties of an auditor regarding valuation and verification of stock in trade. 4+7
Ans: Verification of Assets and Liabilities: Verification is a process carried out to confirm the ownership valuation and existence of items at the balance sheet date. Spicer and Pegler have defined verification as “it implies an inquiry into the value, ownership and title, existence and possession and the presence of any charge on the assets”. Verification is a process by which an auditor satisfies himself about the accuracy of the assets and liabilities appearing in the Balance Sheet by inspection of the documentary evidence available. Verification means proving the truth, or confirmation of the assets and liabilities appearing in the Balance Sheet. Thus, verification includes verifying:
a) The existence of the assets
b) Legal ownership and possession of the assets
c) Ascertaining that the asset is free from any charge, and
d) Correct valuation
While conducting verification following points should be considered by the auditor:
1. Existence: The auditor should confirm that all the assets of the company physically exist on the date of balance sheet.
2. Possession: The auditor has to verify that the assets are in the possession of the company on the date of balance sheet.
3. Ownership: The auditor should confirm that the asset is legally owned by the company.
4. Charge or lien: The auditor has to verify whether the asset is subject to any charge or lien.
5. Record: The auditor should confirm that all the assets and liabilities are recorded in the books of account and there is no omission of asset or liability.
6. Audit report: Under CARO the auditor has to report whether the management has conducted physical verification of fixed assets and stock and the difference, if any, between the physical inventory and the inventory as per the book.
7. Event after balance sheet date: The auditor should find out whether any event after the date of balance sheet has affected any items of assets and liabilities.
OR
(b) explain the significance of vouchers. Discuss the factors which affect the reliability of vouchers and explain what precautions should be taken by the auditor in this regard. 3+4+4
Ans: Voucher: Voucher is the original document in support of any payment or receipt of money pertaining to a transaction in a business. It forms the basis of accuracy of any entry in the books of accounts. It is of two types – primary vouchers and secondary vouchers. Primary vouchers are original written evidence of supporting a transaction. Collateral vouchers are duplicate copies of primary vouchers.
According to J.P. Batliboi “A voucher may be defined as a documentary evidence in support of an entry appearing in the books of accounts.”
According to Arthur W. Halmes,” A voucher is any documentary evidence in support of a transaction.”
Importance of vouchers:
a) Voucher is a documentary evidence of a transaction. It is an evidence in black and white.
b) It is a simple receipt which presents the full description of a transactions.
c) It helps in substantiating the accuracy of books entries.
d) It is a documentary evidence in support of an entry in the books of accounts.
Reliability of Vouchers:
a) Most reliable: Vouchers which have been prepared by a third party and sent directly to the auditors are ordinarily more reliable.
b) Sometimes reliable: Vouchers which have been prepared by a third party but are in the possession of the client have a lower degree of reliability. These are fictitious or altered by the client’s staff, but they are not valueless as evidence.
c) Least reliable: Vouchers which originate which the client’s organisation are least reliable. There are chances of falsifying these vouchers deliberately to conceal any fraud or manipulation. The employees may get a chance to prepare a voucher giving false evidence. If good internal control exists about the preparation and use of documents the degree of reliability of such vouchers increases.
Important points to be considered while vouching or using vouchers:
a) Numbered, printed and serially filed: All the vouchers must be printed, serially numbered and filed. Any hand written voucher must be seen with suspicion. Accounting entries must correspond to serial number of vouchers.
b) Date and Amount: The auditor should see that the date and amount of the voucher tallies with the date and amount of the transactions recorded in the books of accounts.
c) Signature of the payee: The auditor should note the signature of the payee. Wherever possible, he should try to ascertain its genuineness.
d) Cancelled: All the inspected vouchers are cancelled by a mark or stamp.
e) Period: Voucher should belong to the period under audit and it should be in the name of client.
f) Receipts: Receipt voucher should have signature of recipient if received in cash.
g) Payments: Payment should be made through cheques only. Cash payment voucher should be examined in detail to detect embezzlement or misappropriation of money.
h) Authenticity: All voucher should be seen and signed by the competent authority of business, i.e. voucher is duly authorised;
i) Completeness: The voucher comprised all the relevant documents which could be expected to have been received or brought into existence on the transactions having been entered into, i.e., the voucher is complete in all respects and the account in which the amount of the voucher is adjusted is the one that would clearly disclose the character of the receipts or payments posted thereto on its inclusion in the final accounts.
j) Reasonable: All expenses and expenditure should be reasonable in the eyes of auditor. He can always raise his eyebrows if any excessive payment is noticed.
k) Personal: All vouchers should relate to business. Any voucher of personal expense should not be paid by the business.
l) Verification of other Documents: If required, verify further with other documents like Memorandum of Association, Articles of Association, Prospectus, Partnership deed etc.
5. Discuss the provision of companies Act, 1956 regarding appointment and remuneration of the auditors. 8+4
Ans: Appointment of a Company Auditor:
According to Section 224 of the Companies Act, every company whether private or public must appoint an Auditor or auditors to audit the final accounts. The provisions relating to the appointment of auditor are as follows:
1. Appointment of First Auditors:
(a) In case of a Non-Government Company[Sec. 139(6)]: The first auditor of the company is to be appointed by BOD within 30 days from the date of incorporation of company. Note here that this is not from the date of commencement of business. First auditor shall hold office upto the conclusion of first AGM. If BOD fails to appoint the first auditor, it shall inform the members of the company. The members of the shall within 90 days at an extraordinary general meeting appoint the auditor.
(b) In case of a Government Company [Sec. 139(7)]: In case of any government company or any other company which is owned or controlled by central or state government either directly or indirectly, the first auditor shall be appointed by the Comptroller and Auditor General (CAG) of India within 60 days from the date of registration of the company. In case the CAG does not appoint such auditor within the above period, the Board of directors of the company shall appoint such auditor within next 30 days.
2. Appointment of Subsequent auditors:
(a) In case of Non-Government Company [Sec. 139(1)]: Every company shall, at the first AGM appoint an individual or firm as an auditor who shall hold office form the conclusion of that meeting till the conclusion of its 6th AGM and thereafter till the conclusion of every 6th meeting. The following points need to be noted in this regard:
a. The company shall place the matter relating to such appointment by member at every annual general meeting.
b. Before such appointment is made, the written consent of the Auditor to such appointment and a certificate should be obtained. The certificate shall also indicate whether the auditor satisfies the criteria provided in sec. 141.
c. The company shall inform the auditor concerned of his or its appointment.
d. The company shall also file a notice of such appointment with the registrar within 15 days of such appointment.
(b) In Case of Government Companies [Sec. 139(5)]: In case of any government company or any other company which is owned or controlled by central or state government either directly or indirectly, the Comptroller and Auditor General (CAG) shall in respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor of companies under this act, within a period of 180 days from the commencement of the financial year, who shall hold office till the conclusion of the AGM.
3. Filling of Casual Vacancies [Section 139(8)]:
In the case of a company other than a company whose accounts are subject to audit by an auditor appointed by the CAG of India:
(a) Any Casual Vacancy due to reasons other than resignation: Any casual vacancy in the office of an auditor shall be filled by the board of directors within 30 days.
(b) Any Casual vacancy due to resignation: Such appointment shall also be approved by the company at a general meeting convened within 3 months of the recommendation of the board and he shall hold the office till the conclusion of the next annual general meeting.
In the case of a company whose accounts are subject to audit by an auditor appointed by the CAG of India:
(a) Any casual vacancy in the office of an auditor shall be filled by the CAG of India within 30 days.
(b) In case the CAG of India does not fill the vacancy within the said period the board of directors shall fill the vacancy within next 30 days.
Remuneration to Auditors
As per sec. 142, the remuneration of the auditor of a company shall be fixed in its general meeting or in such manner as may be determined therein. However, board may fix remuneration of the first auditor appointed by it. Auditor’s remuneration includes:
a) Fee payable to an auditor
b) Expenses, if any, incurred by the auditor in connection with the audit of the company and
c) Any facility extended to him.
But it does not include any remuneration paid to him for any other services rendered by him at the request of the company.
OR
(b) How will you examine the following items while auditing the accounts of a limited company? 6+6
(i) Redemption of preference shares
(ii) Forfeiture of shares
Ans: (i) Auditor’s duties regarding redeemable preference shares:
1. To examine whether or not the provisions of Sec. 55 of Companies Act, 2013 regarding redemption of preference are followed.
2. He must ensure that the redeemable preference shares must be fully paid up. If there is any partly paid share, it should be converted in to fully paid shares before redemption.
3. He must ensure that the redeemable preference shareholders is paid out of undistributed profit/ distributable profit or out of fresh issue of shares for the purpose of redemption.
4. If the shares are redeemed out of undistributed profit, then the auditor must ensure that the nominal value of share capital, so redeemed is transferred to Capital Redemption Reserve Account.
5. He must also ensure that CRR may be utilised only for the purpose of issuing fully paid bonus shares to the members.
(ii) Forfeiture of shares: A company has no inherent power to forfeit shares. The power to forfeit shares must be contained in the articles. Where a share holder fail to pay the amount due on any call, the directors may, if so authorized by the articles, forfeit his shares. Shares can only be forfeited for non-payment of calls. An attempt to forfeit shares for other reasons is illegal. Thus where the shares are declared forfeited for the purpose of reliving a friend from liability, the forfeiture may be set aside.
Auditor’s Duties regarding to Forfeiture and Reissue
1. To examine the Articles to verify authorization and compliance of the Provisions of the Articles. The fact that Articles authorized the company to expel a member is not sufficient to enable the company to deprive the expelled members of the shares also.
2. To examine the Director’s Minute Book to see the resolution forfeiting the shares. The auditor must see that the forfeiture has been correctly accounted for and that necessary adjustments have been made in the Register of Members.
3. To inspect the directors’ resolution about the forfeited shares reissued. To trace the receipt of money and to verify that the amount of discount, if any, does not exceed the amount already received thereon from the defaulter shareholders.
4. To vouch the cancellation by reference to the Directors’ Minute Book and the Register of Members, in case the forfeiture is cancelled by the directors.
5. To see that any premium received on the original issue of the forfeited shares is not transferred to ‘Forfeited Shares Account’ but remains in the ‘Share Premium Account’.
6. To examine that in case some excess money has been realized, it should be transferred to the Capital Reserve Account as it represents capital profit and not divisible profits.
6. (a) Discuss the special point to be considered by the auditor in the audit of an educational institution. 11
Ans: Rights and Duties of the Auditor in case of audit of Educational Institution
The auditor of a Educational Institution has a right to examine the books and vouchers of the business to enable his to satisfy himself whether or not the balance sheet is drawn up, so as to exhibit a true or fair view of the state of affairs of the business, according to the best of his information and explanation given to him. To enable him to perform his duty, the auditor should take the following steps :
1. Examine the Trust Deed, or Regulations in the case of school or college and note all the provisions affecting accounts. In the case of a university, refer to the Act of Legislature and the Regulations framed thereunder.
2. Read through the minutes of the meetings of the Managing Committee or Governing Body, noting resolutions affecting accounts to see that these have been duly complied with, specially the decisions as regards the operation of bank accounts and sanctioning of expenditure.
3. Check names entered in the Students’ Fee Register for each month or term, with the respective class registers, showing names of students on rolls and test amount of fees charged; and verify that there operates a system of internal check which ensures that demands against the students are properly raised.
4. Check fees received by comparing counterfoils of receipts granted with entries in the cash book and tracing the collections in the Fee Register to confirm that the revenue from this source has been duly accounted for.
5. Total up the various columns of the Fees Register for each month or term to ascertain that fees paid in advance have been carried forward and the arrears that are irrecoverable have been written off under the sanction of an appropriate authority.
6. Check admission fees with admission slips signed by the head of the institution and confirm that the amount had been credited to a Capital Fund, unless the Managing Committee has taken a decision to the contrary.
7. See that free studentship and concessions have been granted by a person authorised to do so, having regard to the prescribed Rules.
8. Confirm that fines for late payment or absence, etc., have either been collected or remitted under proper authority.
9. Confirm that hostel dues were recovered before students’ accounts were closed and their deposits of caution money refunded.
10. Verify rental income from landed property with the rent rolls, etc.
11. Vouch income from endowments and legacies, as well as interest and dividends from investment; also inspect the securities in respect of investments held.
12. Verify any Government or local authority grant with the relevant papers of grant. If any expense has been disallowed for purposes of grant, ascertain the reasons and compliance thereof.
13. Report any old heavy arrears on account of fees, dormitory rents, etc, to the Managing Committee.
14. Confirm that caution money and other deposits paid by students on admission have been shown as liability in the balance sheet and not transferred to revenue.
15. See that the investments representing endowment funds for prizes are kept separate and any income in excess of the prizes has been accumulated and invested along with the corpus.
16. Verify that the Provident Fund money of the staff has been invested in appropriate securities.
17. Vouch donations, if any, with the list published with the annual report. If some donations were meant for any specific purpose, see that the money was utilised for the purpose.
18. Vouch all capital expenditure in the usual way and verify the same with the sanction for the Committee as contained in the minute book.
19. Vouch in the usual manner all establishment expenses and enquire into any unduly heavy expenditure under any head.
20. See that increase in the salaries of the staff have been sanctioned and minuted by the Committee.
21. Ascertain that the system ordering inspection on receipt and issue of provisions, foodstuffs, clothing and other equipment is efficient and all bills are duly authorised and passed before payment.
22. Verify the inventories of furniture, stationery, clothing, provision and all equipment, etc. These should be checked by reference to Stock Register and values applied to various items should be test checked.
23. Confirm that the refund of taxes deducted from the income from investment (interest on securities, etc.) has been claimed and recovered since the institutions are generally exempted from the payment of income-tax.
24. Verify the annual statements of accounts and while doing so see that separate statements of account have been prepared as regards Poor Boys Fund, Games Fund, Hostel and Provident Fund of Staff, etc.
OR
(b) what is investigation? Discuss the characteristics of investigation.4+7
Ans: INVESTIGATION: When for a special purpose an inquiry is made into the accounts of the business it is called investigation. In other words, we may say that audit which is conducted for a particular object is called investigation.
Investigation involves inquiry into facts behind the books and accounts, into the technical, financial and the economic position of the business or organisation. Investigation is an examination of books and records preliminary of financing or for any specified purpose, sometimes differing in scope from the ordinary audit. Investigation implies an examination of and record for some special purpose.
Classes of Investigation: There are many types of Investigation, but certain main classes can be identified. Following are some of the areas where the investigation is mostly called for:
1. Investigation on behalf of a person or company who wants to purchase a running business.
2. Investigation on behalf of a person who is interested to join as a partner in a partnership firm.
3. Investigation on behalf of a person who wants to lend money to a business or interested to know its financial position.
4. Investigation on behalf of the owner/shareholder of the business who suspects a fraud.
5. Investigation on behalf of the tax authority for assessing actual tax liability.
Features of Investigation
| Legal binding | Investigation is not compulsory under Companies Ordinance but voluntary depending upon necessity. |
| Objective | Investigation is conducted with a particular object in view, viz to know financial position, earning capacity, prove fraud, invest capital, etc. |
| Period | Investigation may be conducted for several years at a time, say three years. |
| Parties for whom conducted | Investigation is usually conducted on behalf of outsiders like prospective buyers, investors, lenders, etc. |
| Documents used | Investigation may be conducted even though the accounts have been audited. |
| Extent of work | Investigation is a thorough examination of books of accounts. |
| Reporting Party | Investigation report is addressed to the party on whose instruction investigation was conducted. |
| Adjustment in net profit | In case of investigation in order to determine real earnings certain adjustments are always essential. |
| Person performing work | Investigation may be undertaken even by a non-chartered accountant. |
7. (a) what is a cost audit? Discuss the distinction between cost audit and financial audit. 4+7
Ans: Cost Audit: It is an audit process for verifying the cost of manufacture or production of any article, on the basis of accounts as regards utilisation of material or labour or other items of costs, maintained by the company. In simple words the term cost audit means a systematic and accurate verification of the cost accounts and records and checking of adherence to the objectives of the cost accounting.
As per ICWA London’ “cost audit is the verification of the correctness of cost accounts and of the adherence to the cost accounting plan.”
The ICWAI defines cost audit as " system of audit introduced by the government of India for the review, examination and appraisal of the cost accounting records and attendant information required to be maintained by specified industries"
From above definition of cost audit, it is clear that cost audit is a systematic examination of cost accounts to verify correctness of cost accounting records.
Difference between Financial Audit and cost Audit
| Financial Audit | Cost Audit |
| 1. Financial audit is the audit of financial accounts of an organization, at the end of the financial year to reflect true and fair view of accounts. | 1. Cost audit is the audit of cost accounting records of an organization to reflect true cost of a product or service and pricing. |
| 2. Financial audit is compulsory for every company as per company's act, 2013. | 2. Cost audit is not compulsory except in certain' cases i.e. companies' carrying. on business of manufacturing or mining and where the Central government has directed to maintain cost accounts in certain industries. |
| 3. The purpose of financial audit are to find out whether financial accounts are properly maintained and whether reflects true and fair view of the state of affairs of the company. | 3. The objects of cost audit are to examine the cost accounting records, verify it and to give report regarding efficiency or inefficiency in cost of production and detailed analysis of cost data's. |
| 4. In this audit all types of financial transactions are examined. | 4. In case of cost audit, only expenses related to costs i.e. material, labour, overheads, and stores are thoroughly checked. |
| 5. Financial audit is primarily conducted to protect the interest of the shareholders. | 5. Cost audit is primarily conducted to protect the interest of the management, customers, government and of the society. |
| 6. The first auditor of a company is appointed by the board of directors and subsequent auditors are appointed by' the shareholders in the annual general meeting except in certain cases. | 6. Cost auditors are always appointed by the board of directors with the previous approval of the Central government. |
| 7. A financial auditor does not check the cost records in detail where manipulation can be mad | 7. A cost auditor examines the cost records in detail to find the errors and also to find manipulations in the cost accounts. |
| 8. At the end of audit work the financial auditor sends his audit report to the management of the company. | 8. At the end of cost audit the cost auditor sends his audit report to the company as well as to the Company Law Board. |
Or
(b) What do you mean by statutory report? Draw up a qualified audit report as per companies order, 2003. 4+7
Ans: Statutory Report: A General meeting of the members should be held by every company limited by shares and every company limited by guarantee and having a share capital within a period of neither less than one month nor more than six months from the date at which the company is entitled to commence business. Such a meeting is called statutory meeting and the board of directors shall, at least 21 days before the day on which the statutory meeting is scheduled to be held, forward a report called statutory report to the every member of the company.
Content of statutory report:
a) It sets out the total number of shares allotted and the mode of allotment.
b) The total amount of the cash received by the company in respect of the shares allotted.
c) An abstract of receipt and payment of the company. This report has to be duly certified by at least two directors. Out of which one shall be a managing director along with auditor of the company.
d) Agenda of the meeting regarding the formation and prospects of the company.
e) Particulars of directors, auditors, etc.
f) Particulars of contract.
g) Under writing contract.
h) Arrears of call.
i) Commission or brokerage.
Specimen of Qualified Report
To,
The Share Holders of ABC Ltd.
We have audited the attached Balance Sheet of ABC Ltd as on 31.03.2016 and also the P&L account of the company for the year ended on that date and report that:
1. We have obtained all information and explanation which to the best of our knowledge and belief were necessary for the purpose of our audit.
2. In our opinion proper books of accounts as required by law have been kept by the company so far as appears from our examination of the books subject to the comments given here under:-
In the absence of stock register, adjustments relating to balances on the registers have been accepted on the basis of management decision.
3. The Balance Sheet and P&L account dealt with by the report are in agreement with the books of accounts and returns.
4. Subject to the qualification given below in our opinion and to the best of our information and according to the explanation given to us the accounts together with the notes there on and documents attached there to give the information required by the company’s Act of 2013 in the manner so required and give a true and fair view:
(a) In the case of Balance Sheet of the state of the company as at 31.03.2016; and
(b) In the case of the Profit and Loss Account of the profit of the company for the year ended on that date.
a. The provision for depreciation of fixed assets is inadequate.
b. Stock has been valued at market price which is higher than the cost price by Rs.……
c. No provision for bad debt has been made for the doubtful debt in case of old bad debt.
d. The debentures agreements restricts the payment of future cash dividends to earnings after 31st March …………….
Date: Signed
Place: (Name, partner XY Associates)