Auditing Solved Paper May’ 2013 (Semester Exam)Dibrugarh University B.Com 4th/6th Sem
CBCS and Non-CBCS Pattern
1. Choose the correct world from the alternatives given below:
(i) Preparation and checking of accounts.
(ii) Examination of account of business unit
(iii) Examination of accounts by professional accountants
(iv) Checking the voucher
(b) Auditing is luxury for a
(i) Joint stock company
(ii) Partnership firm small shopkeeper
(iii) small shopkeeper
(iv) government company
(c) The scope of work of internal audit is decided by the
(i) Shareholders
(ii) Management
(iii) Government
(iv) Law
(d) Errors of omission are
(i) Technical errors
(ii) Errors of principle
(iii) Compensating errors
(iv) None of the above
(e) Stock should be valued at
(i) Cost
(ii) Market price
(iii) Cost of market price whichever is lower
(iv) Cost less depreciation
(f) Government may order for cost audit under the
(i) Section 227
(ii) Section 223A
(iii) Section 223B (Old) Section 148 of Companies Act, 2013
(iv) Section 224
(g) Institute of chartered Accounts of India was established in the year
(i) April 1, 1956
(ii) April 1, 1949
(iii) July 1, 1956
(iv) July 1, 1949
(h) Internal check is a part of
(i) Internal audit
(ii) Internal accounting
(iii) External audit
(iv) Internal control
2. (a) What do you mean by continuous audit and to what type of business is it especially applicable? State its merit and demerits.
Ans: 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.
Advantages of continuous audit: Following are the advantage of continuous audit in an organization. These are discussed below:
(i) Extensive checking: As the auditor regularly visits the client’s office, he should get time for extensive checking of small transactions and the audit work can ne smoothly conducted.
(ii) Early detection of errors and frauds: As continuous audit is conducted throughout the whole year, errors and frauds can be quickly detected. The accounting staff should not get sufficient time to manipulate accounts.
(iii) Early Preparation of Final accounts: AS this audit is conducted throughout the whole year, it is possible to prepare final accounts i.e. Profit and Loss account and Balance Sheet just at the end of the financial year. The management and the owners can know the financial results without delay.
(iv) Deceleration of interim dividend: Those companies who want to declare interim dividend at the middle of the year is to prepare interim accounts. Continuous audit helps to get interim account in time.
(v) More reliability on audited accounts: If continuous audit is done throughout the year, all the interested parties can rely much on the audited accounts.
(vi) Moral check: As a result of continuous audit employees should feel a moral pressure and the chances of errors and frauds are minimized.
(vii) Early declaration of dividend: With the help of continuous audit final accounts are prepared just at the end of the financial year and the shareholder get dividend without delay.
(viii) Early submission of report: As continuous audit is conducted throughout the year the auditor can complete final accounts audited just at the end of the financial year and can submit his audit report to the shareholders as early as possible.
(ix) Increase in efficiency: As audit is conducted on continuous basis, all the transactions are correctly recorded in the books of accounts and overall efficiency in according work can be made.
Disadvantage of continuous audit: The following are the disadvantages of continuous audit:
(i) High Cost: As continuous audit is conducted throughout the year the organization has to give huge remuneration to the auditor. Therefore, a small concern cannot afford the high cost of conducting such audit.
(ii) Difficulties in accounting work. As a result of frequent visits of the auditor often it is seen that the books of accounts are checked by the audit staff and for this audit work is hampered.
(iii) Change of figures: It may so happen that the portion of accounts which have already examined by the auditor may alter the figures by the dishonest employees to achieve some personal interest.
(iv) Loss of continuity of work: As continuous audit is conducted at regular intervals, the auditor may left unchecked same audit work which was pending during his last audit work.
(v) Adverse effect on employees morale:
(vi) monotony in Work
(vii) Chances of collusion between organization’s staff and auditor’s staff
Or
(b) Discuss the essential qualities which an auditor should possess. What steps would you take before commencing the actual work of audit upon being appointed as an auditor?
Ans: Essential qualities of an auditor: An Auditor must possess the following essential qualities
1. Professionally Competent: It is the basic quality of an auditor. He must have a complete and thorough knowledge of the accountancy. To understand the accounting details he can apply his knowledge and skill. It is only possible if he has a sound background in accountancy and he is professionally competent.
2. Honest: This is the personal quality of an auditor. He should have the high moral standard. It is his duty to report on the fact basis. The auditor must be honest and sincere with his profession. He is responsible not to sign any paper which is no correct under his observation.
3. Up to Date Knowledge: An auditor's knowledge of auditing must be up to date. He must know the techniques of auditing. He must have the knowledge of other subjects relating auditing.
4. Knowledge of Business/Mercantile Law: It is the professional quality of an auditor to aware of the mercantile law, he has a complete knowledge of Contract Act, Sales of Good Act, Agency, Negotiable instruments Act, Partnership Act etc.
5. Knowledge of Taxation Law: It is also a professional quality of an auditor. He is aware of income tax ordinance 1979, sales tax and excise act and wealth tax etc this is helpful in checking the correct return of income etc.
6. Intelligent: It is also important quality of an auditor that he should be intelligent.
7. Qualification: For a professional auditor it is necessary that he should be charted accountant. According the company's ordinance 1984 it is essential qualification for auditor.
8. Tactful: It is also the personal quality of an auditor. Technical information is required to comment and criticize the policies of management. In case of missing can collect it from the client.
Preparation before commencement of the audit:
Before beginning the audit work, an auditor must review the various arrangements with his client to decide his future course of action. Usually, the following point must be considered in this connection.
1. The Client: An auditor must know about his appointee will in advance.
(a) Whom to report? And
(b) Who will pay his fees?
Some times the client may be a dissatisfied shareholder, member or a banker or the government or some other person and not the person whose accounts he is auditing.
2. Scope of Duties: the auditor should ascertain the scope of his duties and responsibilities from statues, or from the instructions received from those employing his services. If he is appointed under any statue, his duties and responsibilities are enumerated under it and cannot be contracted. However they may be increased by an agreement between the client and the auditor. The auditor’s duties and responsibilities are determined by reference to terms of agreement entered into between him and hic client, who may be partners in a firm or a sole trader. He has no statutory obligation to comply with. He has only to carry out the instructions he receives from his clients. The dividing line between accountancy and audit work is sometimes so uncertain, that it is always proper for the auditor to ascertain what exactly his client requires. He should check that this is formulated in writing especially where accountancy work is also involved. The scope of auditor’s duties is also affected by the purpose for which the audit is to be made.
3. Period to be covered: The auditor should ascertain the period to be covered in the audit. Usually the period is one year, but the period may be more or less than one year if conducted for a specific purposes.
4. Use of client’s staff: The auditor may have his own staff or may take the assistance of his client’s staff where some clerical work is also to be performed. He should know whether he can use the client’s staff as per agreement.
5. Place of Audit Work: The auditor should know the place of his work. This place is where he will open his office with his staff and conduct his enquiries. Regarding working conditions proper arrangement must be made with the client as it is in the interest of effective conduct of his audit work.
6. Review of Business: This includes the review of the following:
(a) Nature of Business.
(b) Organisation of Business.
(c) Basic Documents of the Business.
(d) Accounting Frameworks.
(1) Previous Accounting Records and Balance Sheets.
(2) Additional Accounting work.
(3) Basic Accounting Policies.
(4) Various Control Systems.
7. Clarification: The auditor should clear the following points with the client:
(a) The confirmation of receivable;
(b) The time of starting the examination;
(c) Fees to be charged;
(d) The preparation of tax returns;
(e) Whether or not the client’s records are to be closed prior to the start of the examination.
Note that if the audit is a repeat engagement, work papers and correspondence of prior years should be reviewed.
Also Read:
3. (a) explain the objectives of verification of assets. State the differences between routine checking and vouching.
Ans: 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.
Following are the objects of verification of assets and liabilities
1. To show correct valuation of assets and liabilities.
2. To know whether the balance sheet exhibits a true and fair view of the state of affairs of the business
3. To find out the ownership and title of the assets
4. To find out whether assets were in existence
5. To detect frauds and errors, if any
6. To find out whether there is an adequate internal control regarding acquisition, utilisation and disposal of assets.
7. To verify the arithmetic accuracy of the accounts
8. To ensure that the assets have been recorded properly.
Difference between Routine checking and vouching
Basis | Routine Checking | Vouching |
Meaning | It means checking of common records and books maintained by the business organisation. | It means an act of establishing accuracy and authenticity of entries in the account books. |
Scope | Its scope is limited upto the books of accounts. | The auditor has to go beyond the books of account to trace the source of entries in books of accounts. |
Period | Routine checking is a financial act that is done on a monthly basis to ensure that the numbers in accounting books match the information held by financial institutions. | Vouching is a similar process but only occurs when audit is done at the end of the year. |
Process | Routine checking is a total process of accounting control which includes examination of totals, balance, verification of entries in ledgers etc. | It is mainly concerned with the arithmetical accuracy of posting, casting and balance. |
Staff | Routine checking of books of accounts are done by the staff appointed by the organisation. | Vouching is mainly done by auditing staff. |
Superior | Routine checking does not include vouching. | Vouching is a broader term as it includes routine checking. |
Or
(b) What is vouching? Discuss the main points which must be taken care of while vouching the transactions.
Ans: Vouching: The act of examining vouchers is referred to as vouching. It is the practice followed in an audit, with the objective of establishing the authenticity of the transaction recorded in the primary books of account. It essentially consists of verifying a transaction recorded in the books of account with the relevant documentary evidence and the authority on the basis of which the entry has been made; also confirming that the amount mentioned in the voucher has been posted to an appropriate account which would disclose the nature of transaction on its inclusion in the final statements of account. After examination, each voucher is marked in a manner to ensure that it may not be presented again in support of another entry.
Vouching of various books of accounts and transactions
A) VOUCHING OF PURCHASE BOOK (Credit Transactions): While vouching the purchase book auditor should pay special attention to the following points:
1. Internal Control Examination: The auditor should check the internal control system and decide that upto how much extent he can rely upon it.
2. Checking Of Invoices: The auditor should check the entries in the purchases day book with the invoice. He should pay his attention to the following points :
a. The date of invoice.
b. The name of the supplier.
c. The entry in the goods received register.
d. The account involved.
e. Initials of the checking authority.
3. Comparison With Order Book: Various entries of purchase book should be compared with the order book and good inwards book. In this way if there is any fictitious entry it will be traced out.
4. Checking Of Authority: The auditor should check that all the entries made in the book must be authorized by the responsible officer.
5. Vouchers Cancellation: As the voucher is passed it should be cancelled. The auditor should check it and vouch the purchase book with the credit memos, bill and invoices.
6. Over All Checking: The auditor should check the costs cross costs and carry forward of the purchase book.
B) VOUCHING OF SALES BOOK (Credit Sales): Auditor should examine the following points while vouching the sales book.
1. Internal Checks System: Auditor should check the working of internal control and test the few entries.
2. Checking Of Invoices:
a. Debtor's name.
b. date and amount.
c. The authority.
d. Trade discount.
e. Authority for gaining discount.
3. Duplicate Invoices: Auditor should check the entries in the sales book with the duplicate invoices.
4. Authority Checking: It should also be checked by the auditor that the invoice should be authorized by the responsible officer.
5. Comparison With Order Book: Auditor should compare the sales book with the order received book and goods outward book. It will show that no fictitious sale is made.
6. Verification Of Year: It should be also checked by the auditor that all the entries made in the sale book belongs to the year under audit.
7. Fixed Assets Sale: Auditor should check that if fixed assets are sold then these are recorded in the sales book. He should also check that these are posted in the sales account in the general ledger or not.
8. Dispatch Of Goods: Auditor should verify the sales invoices with the documentary evidence to ensure the dispatch of goods.
9. Over All Checking: The auditor should check the casts and carry forwards of the sales book.
C) VOUCHING OF CASH SALES: Cash sales can be vouched by the auditor in the following way:
1. Internal Check: Auditor should evaluate the internal check and if it is proper system then he should rely on it.
2. Checking Of Memos: Auditor should check the cash sales memos and compare it with the daily summaries of salesman and cashier.
3. Entry In Cash Book: Auditor should also check the figures of the salesman and cashier summaries entry in the cash book.
4. Checking Of Cash Register: If cash register is used, auditor should check the total daily rolls with the entries in the cash book.
5. Checking Of Cash Book: Auditor should compare the cash book with the general ledger.
6. Checking Of Price Lists: Auditor should obtain and verify it price lists and other instructions by the authorize persons regarding the cash sales.
7. Guidance To Client: If internal check system is not effective than auditor should inform the client about the dangers of frauds. He should also suggest some measures.
D) VOUCHING OF CASH PURCHASES: While vouching the cash purchases auditor should take the following steps:
1. Auditor should compare the cash memos with goods received notes.
2. Cash memos should also be compared with the goods inward book.
3. Head of the account should also be checked.
E) VOUCHING OF COMMISSION PAID (Expenses): It can be vouched by the auditor in the following way :
1. Checking Of Commission Book: Auditor can vouch the commission paid by checking the commission book. It will be initialed by those people who had received the amount.
2. Inspection Of Agreement: If the commission is paid according to percentage on sale then auditor will examine the agreement. It will explain the exact terms of calculation.
3. Calculation Of Commission: Auditor will check dial percentages is calculated on net sale after deducting the allowance bad debts and returns.
4. Checking Of Unusual Increase: Auditor will also examine that is there any unusual increase. If there is any increase then it is authorized or not.
F) VOUCHING OF COMMISSION RECEIVED: It is vouched by the auditor keeping in view the following points:
1. Checking Of Account: Auditor should check the commission account with the account of parties from whom commission is received.
2. Inspection Of Agreement: Regarding the rate of commission auditor should examine the agreement with parties.
3. Checking Of Counter Foil Receipts: Auditor should verify the counter foils of the receipts with the cash book.
4. General Checking: Auditor should make all types of calculations to check the accuracy of the amount.
4. (a) State clearly the rights and duties of an auditor of a company under the Indian Companies Act.
Ans: Rights and Powers of Company Auditors [Sec. 143]: A company auditor has the following rights:
1. Right of Access Books of Accounts: As per Section 143(1) of the Companies Act every auditor of the company has the right to access at all times to the books of accounts and vouchers of the company, whether kept at the head office of the company or elsewhere. According to Sec. 148, A company auditor has the right to examine the cost records also which are required to be maintained by certain companies relating to production sales, stores etc.
2. Right to Obtain Information and Explanations: An auditor can call for any information or explanation from different officers of the company which he may think necessary for the performance of his duties.
3. Right to Receive Notices and Other Communication Relating to General Meetings and to attend them: According to section 146 of the companies act an auditor of a company has the right to receive notices and other communications relating to the general meetings in the same way as that of the members of the company.
4. Right to Visit Branches: According to section 143(8) of the companies act the auditor of the company has the right to visit the branch office or offices of the company. He can also audit such accounts of eh offices of the company provided that there is not qualified auditor to audit the accounts of the branch office or offices of the company, in such cases, the auditor has the right to access at all times to the books of accounts and vouchers that the company maintains at branch office or offices.
5. Right of Lien: Auditor can exercise lien on books and documents placed at his possession by the client for non payment of fees, for work done on the books and documents. [Sec. 128]
6. Right to Correct Any Wrong Statement: The company auditor is required to make a report to the members of the company on the accounts examined by him of the final accounts and the related documents which are laid down before the company in the general meeting.
7. Right to sign the Audit Report: As per section 145 of the companies act only the person appointed as auditor of the company or where a firm is so appointed, only a partner in the firm practicing in India, may sign the audit report or authenticate any other document of the company required by law to be signed.
8. Right to Being Indemnified: An auditor is considered to be an officer of the company and he has the right to be indemnified out of the assets of the company against any liability incurred by him in defending himself against any civil and criminal proceedings by the company if it is proved that the auditor has acted honestly or the judgment is delivered in his favour.
9. Right to seek Legal and Technical Advice: The company auditor has the full right to seek the opinion of the experts and to take their legal and technical advice so as to discharge his duties efficiently.
10. Right to Receive Remuneration: As per Section 142 of the Companies Act, the company auditor has the right to receive remuneration provided he has completed the work which he has undertaken to do so.
Duties of a Company Auditor
According to Sec. 143 of the Companies Act, 2013, the duties of auditors are classified under the following headings:
a) Duty to Enquire: It is the duty of auditor to inquire into the following matters:
i. Whether loans and advances 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 the interests of the company or its members.
ii. Whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company.
iii. Whether loans and advances made by the company have been shown as deposits.
iv. Whether personal expenses have been charged to revenue accounts.
v. Whether or not cash has actually been received from allotment of shares.
vi. Where the company not being an investment company or a banking company, whether so such of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than at which they were purchased by the company.
b) Duty to make report: The auditor shall make a report to the members of the company. In his report, the auditor shall report on:
i. Whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief necessary for the purpose of his audit and if not, the details thereof and the effect of such information on financial statements.
ii. Whether in his opinion, proper books of account are required by law have been kept by the company so far as appears from his examination.
iii. Whether the company’s balance sheet and profit and loss account dealt with in the report are in agreement with the books of accounts and returns.
iv. Whether in his opinion, the financial statements comply with the accounting standards.
v. Whether any director is disqualified from being appointed as a director.
vi. Whether the company has adequate internal financial control system in place and the operating effectiveness of such control.
vii. Such other matters as may be prescribed under rule 11: The auditor’s report shall also include views and comments on the following matters.
1) Whether the company has disclosed the impact, if any, of pending litigations on its financial position in its financial statement.
2) Whether the company has made provisions, as required under any law or accounting standards, for material losses, if any on long term contracts including derivative contracts.
3) Whether there has been any delay in transferring amounts, required to be transferred, to the investor education and protection fund by the company.
c) Duty to report on frauds u/s 143 and rules 13: If an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offense involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the central government within such time and in such manner prescribed in rule 13.
Or
(b) explain the procedure of issue of shares at premium and at discount under the provisions of the Companies Act, 1956. Point out the auditor’s duties in this connection.
Ans: Issue of shares at Premium: If Shares are issued at a price, which is more than the face value of shares, it is said that the shares have been issued at a premium. The Company Act, 2013 does not place any restriction on issue of shares at a premium but the amount received, as premium has to be placed in a separate account called Securities Premium Account.
Under Section 52 of the Company Act 2013, the amount of security premium may be used only for the following purposes:
a) To write off the preliminary expenses of the company.
b) To write off the expenses, commission or discount allowed on issued of shares or debentures of the company.
c) To provide for the premium payable on redemption of redeemable preference shares or debentures of the company.
d) To issue fully paid bonus shares to the shareholders of the company.
e) In purchasing its own shares (buy back).
Auditor’s Duties regarding Issue of Shares at a Premium
1. He must examine the Prospectus, Articles and the Directors’ Resolution in the Minute Book to verify that this is not only permissible but properly authorized also.
2. He should vouch the amount of premium received and its transference to the securities premium reserve Account.
3. He should see that this amount has been utilized only for the purposes mentioned in Sec. 78. He cannot object if the utilization is within law. If the premium is used for an unauthorized use, this amounts to reduction of capital.
4. He should see that this amount has not been credited to profit and loss account but shown as “Reserves and Surplus” on the liabilities side of the Balance Sheet.
5. He should note that provisions regarding reduction of share capital apply to securities premium reserve account as well.
Issue of shares at discount:
As per sec. 53 of the Companies Act, 2013, issue of shares at a discount is prohibited. This prohibition applies to all companies, public or private. Any issue of share at a discount shall be void. But a company can issue sweat equity shares to its directors or employees as a reward to them for their contributions. Sweat equity shares are those which are issued by a company at a discount or for consideration other than cash.
According to Section 54 of company act 2013, a company is permitted to issue sweat equity shares provided the following conditions are satisfied:
a) The issue of shares at a discount is authorised by a resolution passed by the company in its general meeting and sanctioned by the Central Government.
b) The resolution must specify the maximum rate of discount at which the shares are to be issued but the rate of discount must not exceed 10 per cent of the nominal value of shares. The rate of discount can be more than 10 per cent if the Government is convinced that a higher rate is called for under special circumstances of a case.
c) At least one year must have elapsed since the company was entitled to commence the business.
d) The shares are of a class, which has already been issued.
e) The shares are issued within two months from the date of sanction received from the Government.
Auditor’s Duties regarding Issue of Shares at a Discount
The auditor must examine compliance with requirements under Sec. 54 and its presentation and disclosure in the Balance Sheet. The auditor must ensure that discount is allowed only in case of sweat equity shares. The auditor must see that at least one year must have been elapsed since the company was entitled to commence the business and rate of discount must not exceed 10%.
5. (a) Discuss the special points arising in the audit of a cooperative society.
Or
(b) Distinguish between audit and investigation. Discuss in detail the procedure for an investigation.
6. (a) What is statutory Report? Discuss the auditor’s duty in this connection.
Ans: Statutory Report – It’s Contents and Auditor’s duties
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.
The auditor’s duties before certifying the statutory report:
The statutory report should be certified by at least two directors of the company. The auditor has to certify the correctness of the statutory audit report. Before signing the report, the auditor has to take into consideration the following points:
1. Study of Legal Documents: Auditor should study the documents of the company like Articles, Memorandum and Prospectus very carefully.
2. Checking of Shares: Auditor should check the total number of shares allotted to different classes of shares. He should also check the fully and partly paid share.
3. Checking of Cash: Auditor should check the total amount of cash received by the company in respect of all the allotted shares.
4. Verify the Capital Receipts & Payment: Auditor should be very careful in verifying the capital receipts and payments.
5. Checking of Commission: Auditor should check all types of commission paid or unpaid with the issue or sale of debentures to any one.
6. Verify the Borrowing Power: Auditor should examine that the limit is imposed on the borrowing power of the company. If it is imposed then company has used his powers within limits.
7. Verify the Minimum Subscription: Auditor should also check the minimum subscription is according the requirements of act or not.
8. Checking of Minutes: In order to see the allotments of shares and debentures auditor should examine the minutes of the directors meetings. He should also check the capital expenditure and borrowed loans which are duly sanctioned.
9. Examine the Pass Book: Auditor should examine the pass bank pass book and verify the receipts and payment with it.
10. Verify Documents: It is the duty of the auditor that he should verify all the legal documents of the company. Prospectus, Articles and Memorandum of Association are the most important documents.
Or
(b) What do you mean by Management Audit? Discuss briefly the advantages and disadvantages of Management Audit.
Ans: Management Audit: Management audit is a method of independent and systematic evaluation of the management activities at .all levels of management to ascertain the functions, efficiency and achievement of' the management (i.e. policies) as compared to standards set by the company.
According to L. R. Howard, "Management audit is an investigation of business from the highest level downward in order to ascertain whether sound management prevails throughout, thus facilitating the most effective relationship with outside world and smooth running of internal organization."
As per Taylor and Perry; "Management auditing is a method to evaluate the efficiency of management at all levels throughout the organization, or more specifically, it comprises the investigation of a business by an independent body from the highest executive level downwards, in order to ascertain whether sound management prevails through and to report as to its efficiency or otherwise with recommendations to ensure its effectiveness where such is not the case."
ADVANTAGES OR IMPORTANCE OF MANAGEMENT AUDIT:
There are several advantages of conducting management audit of an organization. When an organization grows in its volume and activities, there is a need for management audit for evaluating efficiency and effectiveness of the management at all levels of the organization. The advantages and importance of management audit are discussed below:
(i) Evaluates efficiency of the management: Management audit is a method of independent and 'systematic evaluation of the management activities at all levels of management to ascertain the functions, efficiency and achievement of the management (i.e. policies) as compared to standards set by the company.
(ii) Scrutiny of the plans, policies and procedure: Management audit helps to determine how the management has implemented their plans, policies and procedure to reach the organizations goal.
(iii) Helps for correction of plans, policies and procedure: Through management audit, it is possible to change or revise the plans, policies and procedure as per needs of the company.
(iv) Aids for decision making: Management audit asses the ability of the managers to take important decisions and helps them to rectify the defects.
(v) Helps to get loan: Financial institutions who gives huge loan to the organizations are interested to know the efficiency of the management and the profitability. Management audit certainly gives a guide to them.
(vi) Helps to get subsidy: Before granting subsidy by the government, to any entity they are interested to know the efficiency and functioning of the management. Management audit helps in this matter.
(vii) Helps to increase profitability: Management audit helps the management to increase profitability by giving remedies to maximize the organization's resources in an efficient way.
LIMITATIONS OF MANAGEMENT AUDIT:
(i) The management audit is audit of the management, by the management, and for the management. The management auditors are selected by the management itself. Such auditors may or may not be able to handle the job assigned to them.
(ii) The management auditors are generally familiar with the organization and the staff and employees. The personal aspects cannot be overlooked in such audits. Some may use this audit to level the score with someone while other may utilize it to favour someone.
(iii) They are more likely to take the facts for granted and may not probe into depth to investigate the matter any further.
(iv) Time and cost constraints may limit the scope, operation and extent of such audits.
(v) The management audit team as selected by the management may not look, act and work as a team. Conflicting interests, attitude and inclination may jeopardize the entire objective of the audit.
7. Write short notes on:
(a) Social audit
Ans: Social audit is a process in which people work with the government to monitor the planning and implementation of the policies which are intended for the people. It is also defined as an in-depth scrutiny and analysis of any public utility vis-Ã -vis its social relevance. It examine the impact of specific government activities on certain sections of the society.
(b) Sources of dividend
Ans: As per Section 123 of the Companies Act, 2013 dividend may be declared out of the following three sources:
1) 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.
2) 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.
3) 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.
(c) Secret reserve
Ans: Secret reserve has been defined as any reserve which is not apparent on the face of the Balance sheet. It is also called hidden reserve or internal reserve. It is created usually by Joint-stock companies especially the banking, insurance and financial concerns. It is created by:
a) Overvaluing the liabilities.
b) Providing excessive depreciation on fixed assets.
c) Inclusion of fictitious liabilities.
d) Showing contingent liabilities as real liabilities.
e) Writing down the assets much below their cost or market value.
f) Writing down goodwill.
(d) Fraud and error
Ans: 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.
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