Auditing Solved Paper May’ 2015 (Semester Exam)
Dibrugarh University B.Com 4th/6th SemCBCS and Non-CBCS Pattern
The figures in the margin indicate full marks for the questions
1. Choose the correct answer from the alternatives given below: 1x8=8
(a) Auditing is compulsory for(i) Small-scale business enterprises (ii) All partnership firms (iii) All joint stock companies
(iv) All proprietary concerns
(b) Interim audit refers to
(i) examination of accounts continuously
(ii) examination of accounts intermittently
(iii) audit work to find out and check interim profits of a company
(iv) carrying on audit for bonus purposes at the end of the year.
(c) Internal auditor can be removed by the
(i) government (ii) shareholders (iii) management (iv) company law board
(d) The object of internal check is to
(i) control wastage of resources (ii) prevent errors and frauds
(iii) verify the cash receipts and payments (iv) facilitate quick decision by the management
(e) Errors of omission are
(i) technical errors (ii) errors of principle (iii) compensating errors (iv) none of the above
(f) Remuneration of a company auditor is fixed by the
(i) shareholders (ii) Board of Directors (iii) Central Government (iv) appointing authority
(g) A company can issue redeemable preference shares, if authorised by the
(i) Memorandum of Association (ii) Articles of Association (iii) Companies Act, 1956 (iv) None of the above
(h) Shares can be issued at discount under Section
(i) 76 (ii) 75 (iii) 53 (iv) 89
2. Write short notes on (any four): 4x4=16
(a) Audit note book
Ans: Audit Note Book: The audit clerk maintains the audit notebook. He keeps therein a record of his observations during the course of any audit work as also the points to be discussed with his senior clerk or the auditor. It is a written record of the queries made by him and the replies thereto. It is part of permanent record of the audit office, which is used by the auditor while preparing his report. It should be noted that an audit notebook is meant to record only important and strategic items. Matters, which are, or can be sorted out on the spot, or those of a trivial nature, need not be entered therein. Some of the important matters recorded in the Audit Note Book are as follows:
a) Name of the business.
b) Instructions from the management having relevance to the audit.
c) List of book of account maintained by the enterprise.
d) Accounting methods followed in the enterprise, and their defects.
e) Any irregularities in the observance of laws and notifications applicable to the enterprise.
f) List of missing vouchers and receipts.
g) Matters requiring explanation or clarification.
(b) Internal check
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/Purpose of Internal Check
a) To have accurate record of business by preventing errors and frauds.
b) To fix responsibility for particular default or omission on a definite person
c) To have confirmation of facts and entries of transactions
d) To facilitate division of labour for the smooth flow of work
(c) Periodical audit
Ans: Periodical Audit: Periodical audit is one which is taken up at the close of the financial or trading period when all the accounts have been balanced and Trading and Profit and Loss Accounts and the Balance Sheet have been prepared. It may also commence before the final accounts are prepared and continue till the audit is completed even after the close of the financial or trading period. The only thing is that the audit is completed in one continuous session. At this period, the auditor holds the books and checks the accounts. Auditor is in possession of the full facts relating to accounts for the year under review. In the case of such an audit, the auditor visits the client only once a year and goes to the accounts units audit work for that whole of the period is completed.
Following methods can be applied to conduct periodical audit:
Ø Periodical audit is conducted after the preparation of final account. So, an auditor needs to check all those statements and accounts.
Ø Auditor should prove the final accounts correcting irregularities as far as possible.
Ø Auditor should use special sign after the completion of audit work.
(d) Auditing in depth
Ans: Auditing in depth: Taylor and Perry have defined Auditing in Depth as “the examination of the system applied within a business entailing the tracing of certain transactions from their origin to their conclusion, investigating at each stage the records created and their authorization”.
Audit in depth does not mean 100% checking. It is a detailed examination of the selected transactions from the beginning to the end. Thus, it is used along with test checking. For example, if the auditor has decided to check 25% of purchase transactions, these transactions should be checked in depth. Auditor should check the Purchase Requisition, Tenders, Purchase Orders, Purchase Bills, Goods Received Note, Inspection Note, Purchase Journal, Stock Register, Bin Card and so on. Thus, the auditor should check the purchase transaction right from the beginning to the end. This enables him to evaluate the accounting system and internal controls.
(e) Cost audit
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.
Following are the advantages of cost audit
a) Cost audit helps in detection of errors and frauds.
b) The management gets accurate and reliable data based on which they can make day-to-day decisions like price fixation.
c) It helps in cost control and cost reduction.
d) It facilitates the system of standard costing and budgetary control.
e) It helps the management in inter-unit / firm comparison.
f) It enables the management to identify loss making propositions.
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(f) Error of principle
Ans: Errors of Principles (2015): These are the errors committed by not properly following the accounting principles. These arise mainly due to the lack of knowledge of accounting. E.g.: Revenue expenditure may be treated as Capital Expenditure.
Also Read: Auditing Solved Question Papers (Dibrugarh University BCOM 6th SEM)
3. (a) Define audit. What are the essential qualities required by an auditor apart from the statutory qualifications? 4+7=11
Ans: 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”.
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.
Or
(b) What is audit programme? State the advantages and disadvantages of conducting audits in accordance with fixed audit programme. 3+4+4=11
Ans: 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”.
Advantages of audit programme
1. Audit programme is prepared to locate exactly the responsibility of every clerk in the auditor’s staff.
2. It promotes division of work in a well organized manner.
3. Since the programme takes into consideration all the details involved in the work to be followed during audit, no portion of the work is left from checking.
4. It helps the auditor to monitor the progress of the work.
5. It will be easier to fix responsibilities for omissions and commissions.
6. It serves as a valuable evidence for the work done.
7. It serves as a guide for future audit.
8. It ensures that audit process in a systematic manner.
9. It eliminates inefficiency and saves time.
10. Incase if any audit assistant goes on leave, his work can be easily continued by others.
11. Before signing the report, it is easily possible for the auditor to have the final review of the work done by him. At this stage, it may be explored whether everything has been completed or not.
12. It avoids duplication of work.
Disadvantages of Audit Programme
1. Due to fixed and strict audit programme, the audit work becomes mechanical and monotonous.
2. As the audit programme prescribes the rigid routine, the audit staff does not display initiative in exploring more efficient ways of completing work.
3. Audit programme is suitable for large business concerns and not for small concerns.
4. Any defect in audit programme may leave certain items from being checked.
5. Lack of proper audit procedure for different business concerns as each of these may be following different accounting procedures or may have a separate problem of its own.
The above disadvantages can be minimized if the audit programme is made more flexible and audit staff encourages to go beyond the work mentioned in the audit programme. The auditors should also periodically review the programme in the light of experiences gained in the previous year. He should impress upon the audit staff. The audit programme is only guidance and they should use their initiatives, intelligence and common sense at all times during the course of the audit.
4. (a) Describe the objectives of vouching. How would an auditor proceed to vouch credit purchase? 5+6=11
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.
Objectives of Vouching
Vouching is a substantive audit procedure which aims at verifying the genuineness and validity of a transaction contained in the accounting records. It involves examination of documentary evidence to support the genuineness of transaction. Main object of vouching the payments is not only to find out that money has been duly paid but also to vouch payments for the following purposes. Some of the objectives of vouching are mentioned below:
(a) To verify that all transactions have been duly authorized.
(b) To check that there is no omission of any entry and all transactions relate to the period under audit.
(c) To check that all transaction and related to the nature of business and expenditures are proper business charge.
(d) To verify cash in hand and a Bank.
(e) To detect if there is any misappropriation of cash or goods.
(f) To see that the payments have been duly received by the correct payees.
(g) The vouching in support of the entries are legally valid with regard to its date, authority, related to business concern etc.
It is through vouching that the auditor comes to know the genuineness of transactions recorded in the client’s books of account wherefrom the financial statements are drawn up. Apart from genuineness, vouching also helps the auditor to know the regularity and validity of the transaction in the context of the client’s business, nature of the organisation and organisational rules.
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.
Or
(b) What is the general procedure of valuing and verifying stock-in-trade? How far an auditor is responsible for verification of stock-in-trade? 7+4=11
Ans: Stock/ Inventories: Stock is the life blood of the business. It consists of stores and spares, raw materials, work in progress, and finished goods. If stock is incorrectly recorded, verified or valued, the P&L a/c doesn’t show correct balances. It also affects the BS if stock if overvalued profit is inflated and if its understated it encourages creation of secret reserves. The objective of verifying stock is to see that it exists and is correctly valued. It may not be possible to verify the entire stock. Hence he has to go for the checks to ascertain the accuracy of stock. In the case of Kingston cotton mills co., ltd the judge observed that, “it is no part of the auditor’s duty to take stock, he must rely on other people for details of stock in trade.” It was further observed that “an auditor is not bound to b a detective. He should not start his work with a foregone conclusion that there is something wrong. He is a watch dog and not a blood hound to be a detective. He is justified in believing in trust worthy servants of the company provided it takes reasonable care”.
In another case it was decided that ‘it is certainly not the duty of the auditor to take stock. He should check the calculation with proper care’. While verifying stock, auditor must follow the following procedure:
a) He must ascertain the method of valuation of stock in trade such as lifo method, fifo method, average method etc.
b) Ensure that proper stock ledger has been maintained and there is an adequate internal check system for verification of stock in trade.
c) Checking calculations and additions.
d) Examining some of the quantities in stock sheets those shown in books.
e) Ascertaining that the stock is valued on the same basis as in the previous year.
f) Ensuring that the goods entered as sold and not delivered are not included in stock in trade.
g) Ensuring that the goods bought and not entered in the invoice book are not included.
Auditor’s duties in Valuation of stock in trade:
As the correctness of the profit of a business depends to a large extent on the accuracy of the valuation placed on the closing stock, so the valuation and verification of stock forms one of the most important part of an auditor’s duty. Stock in trade includes raw materials, semi-finished goods and finished goods, goods on consignment, goods with customers under HP agreements, verification of loose tools. Different methods are followed to value different kind of stock so auditor must be very careful while valuation stock in trade. Methods adopted by auditor for different kind of stock:
a) Raw material: Raw materials are valued at cost or market price whichever is lower.
b) Semi-finished goods: These should be valued at the cost price of raw material plus the proportionate cost of manufacture.
c) Finished goods: These goods are valued at cost of raw material plus all manufacturing expenses.
d) Goods on consignments: These goods are valued at lower of cost or market prices.
e) Loose tools: These are valued at cost less provisions for wear and tear. The auditor must ensure that the inventories contain no items of plant and machinery.
Liability of auditor with regard to valuation and verification of stock-in-trade:
1. Examination of the accuracy and validity of accounting records: The auditor should verify the accounting work performed in connection with the stock-in-trade to ensure him that totals, castings, calculations and summarizations are correct. He is liable for damages if he fails in his duty. The scope of verification will depend upon the system of inventory control, size of inventory and its physical composition to ascertain the correctness of stock-taking system.
2. Physical verification of the stock-in-trade: As the physical examination of the items of the stock-in-trade is complicated and technical, different views are held as to whether the auditor is responsible for the physical verification of the stock-in-trade or not.
Legal provisions relating to physical verification:
a) The auditor has no duty to take stock. He must rely on other people for details of the stock in hand.
b) The auditor is not a valuer, he could rely on the certificates given by responsible officials of the client.
c) The auditor is not an insurer. His duty does not extend beyond exercising reasonable care and skill in the tasks performed by him which depends on the facts and circumstances of each case.
5. (a) Discuss the position of an auditor under the Companies Act, 1956 with reference to his liabilities and powers. 6+6=12
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.
The Liabilities of a Company Auditor: In the case of companies the liabilities of auditors can be Civil liabilities and Criminal liabilities
A. THE CIVIL LIABILITIES of a company auditor can be for (i) negligence, (ii) misfeasance.
(1) Liability for negligence: A auditor performs his duties as an agent of the shareholders, so he is expected to safeguard the interests of his shareholders. He must exercise his reasonable care and diligence in the performance of his duties. If he fails to do so and in consequence the principal suffers any loss, he may be liable to compensate loss caused to the company resulting from his negligence.
(2) Liability for Misfeasance: Misfeasance means breach of duty or breach of trust. If the auditor does something wrongfully in the performance of his duties or he does not perform his duties properly resulting in a financial loss to the company, he may be held liable for misfeasance.
B. CRIMINAL LIABILITIES: The criminal liabilities of a company auditor under sections 139, 143,144 and 145 of the Companies Act, 2013 are as follows:
1. Sec. 139 provides for appointment of auditors. Sec. 143 deals with powers and duties of auditors. Sec. 144 in on certain services which an auditor cannot render and sec. 145 is on signing of the audit report and other documents by the company auditors. On contravention of the provisions of these sections, auditor shall be punishable with fine which shall not be less than Rs.25, 000 but which may extend upto Rs.5, 00, 000. If an auditor has contravened such provisions knowingly or willfully with the intention to deceive the company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a term which may extend to a year and with fine which shall not be less than Rs. 1,00,000 but which may extend to Rs. 25,00,000. Convicted officer shall refund the remuneration received by his from the company and pay for damages to the company.
2. Penalty for failure to disclose fraud: As per sec. 143(12), if in the course of the performance of his duties as auditor, he 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, auditor shall immediately report the matter to the central government. In case of any failure on his part with his duty, he shall be punishable with fine which shall not be less than Rs. 1,00,000 but which may extend to Rs. 25,00,000.
3. Penalty for professional misconduct: National Financial Review Authority (NFRA) shall have power to investigate, either suo-moto or on a reference made to it by the Central Government into the matters of professional or other misconduct committed by any member or firm of chartered accountants, registered under the Chartered Accountants Act, 1949. Where professional or other misconduct is proved, NFRA shall have the power to make order for :
(A) imposing penalty of:
(I) not less than Rs. 1,00,000/-, but which may extend to 5 times of the fees received, in case of individuals; and
(II) not less than Rs. 10,00,000/-, but which may extend to 10 times of the fees received, in case of firms;
(B) debarring the member or the firm from engaging himself or itself from practice as member of the Institute of Chartered Accountant of India referred to in clause (e) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 for a minimum period of 6 months or for such higher period not exceeding 10 years as may be decided by the National Financial Reporting Authority.
4. Section 477: If the auditor is found guilty of destruction, alteration, falsification of any books, papers or securities, he can be held personally responsible. And if he makes any fraudulent entry in any register, books of accounts or documents of the company, he will be punishable with imprisonment up to 10 years and also be liable to fine which may extend to 3 times the amount of fraud.
5. Liability of firm: Where, in case of audit of a company being conducted by an audit firm, it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner, then for such act partner or partners concerned of the audit firm are liable jointly and severally.
6. Class suit action: Any 100 or more members/deposit holders of the company or 10% of the total number of members/deposit holders of the company can file a class action suit to claim damages or compensation or demand any other suitable action against the auditor in the manner prescribed under Section 245 of the Act.
7. Punishment for false evidence: If any person intentionally gives false evidence:
(a) upon any examination on oath or solemn affirmation, authorised under this Act; or
(b) in any affidavit, deposition or solemn affirmation, in or about the winding up of any company under this Act, or otherwise in or about any matter arising under this Act,
he shall be punishable with imprisonment for a term which shall not be less than 3 years but which may extend to 7 years and with fine which may extend to Rs. 10,00,000/.
Or
(b) How will you examine the following items while auditing the accounts of limited company? 6+6=12
(i) Bonus share
(ii) Share transfer
(i) Auditor’s duties regarding Bonus share
The undistributed profits, after the necessary provisions for taxation, are the property of the equity shareholders and the same may be used by the company for distribution as dividends to them. But the sound financial policy demands that some of the profits at least must be ploughed back into the business. Thus when a company has accumulated substantial amount of past profits as might be found in the credit of capital reserves, revenue or general reserve of profit and loss account; it is desirable to bring the amount of issued share capital closer to the actual capital employed as represented by the net assets (Assets – Liabilities) of the company. This would reflect the true amount of capital invested by the shareholders in the company.
Object behind the issue of bonus shares:
a) Company’s cash resources may not be sufficient to pay dividend in cash and company wants to pay bonus to the shareholders of the company without affecting its liquidity and the earning capacity of the company.
b) Company wants to build up cash resources for expansion or for repayment of a liability.
The following circumstances warrant the issue of bonus shares:
(1) When a company has accumulated huge profits and reserves and it desires to capitalise these profits so as use them on permanent basis in the business.
(2) When the company is not able to declare higher rate of dividend on its capital, in spite of sufficient profits, due to restrictions imposed by the Government in regard to payment of dividend.
(3) When higher rate of dividend is not advisable for the reason that the shareholder may expect the same higher rate of dividend in future also.
(4) When the company cannot declare a cash bonus because of unsatisfactory cash position and its adverse effects on the working capital of the company.
(5) When there is a large difference in the nominal value and market value of the shares of the company.
Auditor must ensure that the SEBI guidelines regarding issue of bonus shares are duly followed. He must also ensure that bonus is issued only when there is huge reserve with the company. Bonus must not be issued to affect the market price of the share.
(ii) Auditor’s Duties regarding Transfer of Share
1. To verify the Articles of Association of the company to know the procedure to be followed for the transfer of shares.
2. To examine the Directors’ Minute Book to confirm approval of transfers and authorization of issuing new share certificates.
3. To verify that transfer forms are duly completed, duly stamped and signed by transferor.
4. To ensure that no forgery is committed.
5. To vouch the transfer fee with the Cash Book or Bank Statement. It should be credited to Profit and Loss Account. To make an enquiry where the consideration for transfer appears to be inadequate.
6. To check transferor names and class, number and distinctive numbers of shares as stated in the transfers and that the old certificates have been cancelled.
7. To inquire whether a notice was given to the transferee in the case of partly paid shares and find out whether the ‘no objection’ letter has been received from the transferee within two weeks from the receipt of the notice.
8. To inquire whether the transferee is in any way disqualified to be a member of the company.
9. To see whether a notice was given to the mortgagee and whether the shares, which are mortgaged, are lodged for transfer.
10. To check the transfer with the Share Register and to see whether shares have not be transferred twice.
6. (a) Discuss the various points to be considered by the auditor in the audit of an educational institution. 11
Or
(b) What is investigation? Discuss the general procedure followed in an investigation. 3+8=11
7. (a) “Audit report is a significant document bearing financial implication”. Explain the statement. 11
Ans: Audit Report: Audit report is a statement on financial position of the company which is issued after the conclusion of audit. It is a medium through which an auditor expresses his opinion on the financial statements under audit. It generally shows the nature and scope of audit conducted by the auditor and his opinion on the final accounts of the company. It is an important part of audit because it provides the results of the audit conducted by the auditor. The audit report is the final and ultimate report of audit process.
Objective and significance of audit report
The main purpose of financial statements is providing information about the operating efficiency and financial position of the company. To make financial statements reliable, it must be audited by professional auditor. The role of the auditor in lending, credibility to those financial statements is vital in establishing and maintaining confidence on the profession. In case of a company management is separated from the ownership share holders appoint the auditor to check the accounts and submit a report to them. However, the report doesn’t guarantee accuracy of the accounts. The auditor is neither a guarantor nor an insurer. In one of the cases it was held that “the auditor must not be held liable for not tracing fraud, when there is nothing to arouse their suspicion and when those frauds are perpetrated by the trusted servants of the company”.
The auditor is expected to act honestly with reasonable skill and care. Audit report is an extremely significant document as share holders rely upon it. The auditor will be guilty of professional misconduct if he deliberately fails to disclose material facts known to him. Conceals misstatements and fails to obtain necessary information to complete his audit.
Some of the financial implications of audit report are stated below:
(a) Proof of correctness of financial statements: Audit of financial statements are done by independent auditor due to which it is a conclusive proof correctness of financial statements.
(b) Management integrity towards shareholders: As auditor is independent from management, the auditors report is a conclusive proof that managements are honest to their shareholders. This is related to principle and agency theory.
(c)Requirement of law: Every company registered under the Companies Act, 2013 must get its financial statements audited from professional independent auditor.
(d) True and fair view of the financial statements: An audit report by professional auditor gives a true and fair view on the financial statements of a company to its users. Users of financial statements will be able to judge the strength and weakness of financial position of the company with the help of audit report.
(e) Holding companies requirement: Many holding companies having subsidiaries in different areas or country requires that their financial statements must be audited by a professional auditor. This report could help them to manage their subsidiary effectively.
Or
(b) State the importance of audit report. Briefly discuss the various types of audit report. 4+7=11
Ans: Audit Report: Audit report is a statement on financial position of the company which is issued after the conclusion of audit. It is a medium through which an auditor expresses his opinion on the financial statements under audit. It generally shows the nature and scope of audit conducted by the auditor and his opinion on the final accounts of the company. It is an important part of audit because it provides the results of the audit conducted by the auditor. The audit report is the final and ultimate report of audit process.
Importance of Audit Report
In case of a company management is separated from the ownership share holders appoint the auditor to check the accounts and submit a report to them. However, the report doesn’t guarantee accuracy of the accounts. The auditor is neither a guarantor nor an insurer. In one of the cases it was held that “the auditor must not be held liable for not tracing fraud, when there is nothing to arouse their suspicion and when those frauds are perpetrated by the trusted servants of the company”.
The auditor is expected to act honestly with reasonable skill and care. Audit report is an extremely significant document as share holders rely upon it. The auditor will be guilty of professional misconduct if he deliberately fails to disclose material facts known to him. Conceals misstatements and fails to obtain necessary information to complete his audit.
TYPES OF AUDIT REPORT:
There are four types of audit report which are given below:
a) Clean Report: It is also known as Unqualified Report. It is given by the auditor if he is satisfied with the fairness of Balance Sheet and Profit and Loss account with all the contents of the financial statements and he is satisfied with evidences, documents and explanation given by his clients.
b) Qualified Audit Report: A qualified report means an audit report which is not clean. In case auditor has any reservation in respect of certain methods mentioned in the financial statements he may qualify his report. A qualified opinion shall be expressed as being subject of or except for the effects of the matter to which the qualification matters. If the accounting standards issued by Institute of Chartered Accounts of India is not followed by the company the auditor may qualify his report. The company Act doesn’t lay down any specific requirement regarding the manner in which the auditor should qualify his report. It should not lead any confusion to the reader. Before submitting a qualified report he should discuss the issued with that of the management. He should see that qualified report is free from ambiguity, vague statements etc.
Circumstances for Qualification of Audit Report: In following circumstances the auditor has to qualify his report.
(a) He cannot conduct audit satisfactorily due to non availability of certain books of accounts or records, information or explanations necessary for conduct of his audit.
(b) He finds that the Balance Sheet and Profit & loss Account have not been prepared in accordance with accepted accounting principles.
(c) He detects that provisions for Bad & Doubtful Debts, Depreciation etc. are not adequate.
(d) He detects that the company has created certain secret reserve.
(e) The stock in trade has been valued at market price which is more than cost price.
(f) He finds that the contingent liability for bills discounted has not been disclosed.
c) Adverse Opinion: The worst type of financial report that can be issued to a business is an adverse opinion. This indicates that the firm’s financial records do not conform to GAAP. In addition, the financial records provided by the business have been grossly misrepresented.
d) Disclaimer of Opinion: On some occasions, an auditor is unable to complete an accurate audit report. This may occur for a variety of reasons, such as an absence of appropriate financial records. When this happens, the auditor issues a disclaimer of opinion, stating that an opinion of the firm’s financial status could not be determined.
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