Auditing Solved Paper May’ 2019 (Semester Exam)
Dibrugarh University B.Com 4th/6th SemCBCS and Non-CBCS Pattern
a) The object of internal audit is
1) To improve financial control.
2) To detect errors and frauds.
3) To prevent errors and frauds.
4) All of the above.
b) Not providing adequate depreciation is
1) Errors of omission.
2) Errors of commission.
3) Errors of principles.
4) Compensating errors.
c) A continuous audit is specially needed for
1) Manufacturing concern.
2) Any trading concern.
3) Smaller concern.
4) Banking company.
d) In case of a company, external auditor is appointed by the
1) Company Law Board.
2) Shareholders.
3) Management
4) Shareholders or government.
e) Any casual vacancy in the office of an auditor of a company shall be filled up as per the provisions under which Section of the Companies Act, 2013?
1) Section 139.
2) Section 139(6).
3) Section 139(8).
4) Section 140(2).
f) Which one of the following examples are not contingent liabilities?
1) Liabilities on bills receivable discounted and not matured.
2) Liabilities under a guarantee.
3) Liabilities arising out of litigation in respect of trademark.
4) Liabilities for outstanding salary.
g) No dividend shall be declared or paid by a company for any financial year expect out of three specific sources as per provision of the Companies Act, 2013 under
1) Section 73.
2) Section 123(1).
3) Section 123(6).
4) Section 143(6).
h) As per Section 139(6) of the Companies Act, the first auditor of a company other than a Government Company shall be appointed by the Board of Directors within how many days from the date of registration?
1) 15 days.
2) 30 days.
3) 45 days.
4) 60 days.
2. (a) Write short notes on any two of the following: 4x2=8
1) Importance of Audit Report.
2) Routine checking.
3) Managerial Remuneration.
4) Scope of Internal Control.
Ans: 1) 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.
2) 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
3) Managerial remunerations and auditor’s duties: Managerial remunerations consist of remuneration paid by a company to its managerial personal such as managers, whole time directors, chief financial officer. Managerial remuneration can be fixed by board of director or shareholders of the company. According to Sec. 197 (1), the total managerial remuneration payable by a public company, to its directors, including managing director and whole-time director, and its manager in respect of any financial year shall not exceed eleven percent of the net profits of that company for that financial year.
Auditor’s duties:
1) He must ensure that the provisions of Sec. 196 to 202 regarding managerial remuneration are followed.
2) He must also ensure that managerial remuneration is paid as per the provisions of MOA and AOA.
3) If managerial remuneration is paid in the form of reimbursement of expenses, he must ensure that proper vouching of these expenses are done.
4) Scope of Internal Control:
Internal control is mainly applicable in the following areas:
a) Cash Control: It includes control on cash receipts and payment to prevent misappropriation of cash.
b) Financial control: It involves efficient system of accounting, adequate recording and duplicating systems, etc.
c) Control over Trading Transactions: In includes development of proper system to have complete control over purchases and sales transactions.
d) Control on employees’ management: This area concerns itself with the preparation and maintenance of records for remuneration to employees, proper method of remuneration and incentive system etc.
e) Capital Expenditure Control : The expenditure on capital assets must be kept under proper control. It should be properly sanctioned and used for the purposes for which it is sanctioned.
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(b) Distinguish between any two of the following: 4x2=8
1) Internal Audit and External Audit.
2) Verification and Valuation.
3) Management Audit and Financial Audit.
4) Clean Audit Report and Qualified Audit Report.
Ans: 1) Difference between Internal audit and Statutory/External audit
An internal audit is conducted by the permanent staff of the same office to detect weakness in system, procedures and for the improvement. But statutory audit is the act of checking books of accounts as per the provision of company act. Both of them check books of account; detect errors and frauds even though they have certain differences which are as follows:
1. Appointment: An internal auditor is generally appointed by the management but statutory auditor is appointed by the shareholders or Annual General Meeting.
2. Legal Requirement: Internal audit is the need of management but it is not legal obligation but statutory audit is the legal requirement.
3. Qualification: An internal auditor does not required specific qualification as per the provision of law but qualification of statutory auditor is specified.
4. Conducting Of Audit: Internal audit is of regular nature but final audit is conducted after the preparation of final account.
2) Differences between Verification and Valuation 2019
| Basis | Verification. | Valuation. |
| Objective | Verification is done to prove the existence, ownership and title to assets. | It certifies the correct value of the asset at the date of the BS. |
| Applicability | Verification is done or both assets and liabilities. | Usually only values of assets are certified. |
| Auditor’s involvement | Verification is done by the auditor. | It’s done by the experts and responsible officials. |
| Evidence | Verification is made on the basis of evidence. | Valuation is made based upon the certificate issued by the officials. |
3) Difference between Financial Audit and Management Audit
| Financial Audit | Management Audit |
| Financial audit is the scientific and systematic examination of the books, accounts, vouchers and other financial records that will help the auditor to give opinion regarding true and fair view of the state of affairs of the business and to verify that profit and loss account reflects a true and fair view of profit or loss for the financial year. | 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. |
| The scope of financial audit is given in the company's act, 2013. This audit is only relating to financial transactions, so its scope is limited. | The scope of management audit is to asses the efficiency of the employees at all levers of management which is related to production, marketing, finance, human resources, sales etc, so its scope is larger than financial audit. |
| The person who conducts financial audit must have professional qualification, knowledge, skill, ability and expertise in the field of financial accounting except in some cases where he may not be a Chartered Accountant. | The person who conducts management audit should have a strong background in different subjects and expertise in different fields in addition to financial matters. |
| Financial' audit generally starts after the close of the financial year and after' making all accounts ready. | Management audit may be conducted at any time depends on the needs and circumstances. |
4) Differences between clean and qualified report:
| 1. A clean report 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 | 1. A qualified report is given by the auditor if he is not satisfied with the fairness of balance sheet and profit and loss account. |
| 2. In a clean report, an auditor will state something along with the lines,” In our opinion, the financial statements give a true and fair view of the financial position.” | 2. In a qualified report, an auditor will state something along with the lines,” In our opinion, with the exceptions of some areas, the financial statements give a true and fair view of the financial position.” |
3. (a) Explain the basic principles governing an audit. Discuss the essential qualities of an auditor. 7+7=14
Also Read:
Ans: Basic principles governing an Audit
The basic principles as stated in this guideline are:
1. Integrity, objectivity and independence : The auditor should be straightforward, honest and sincere in his approach to his professional work. He must be fair and must not allow prejudice or bias to override his objectivity. He should maintain an impartial attitude and both be and appear to be free of any interest which might be regarded, whatever its actual effect, as being incompatible with integrity and objectivity.
2. Confidentiality : The auditor should respect the confidentiality of information acquired in the course of his work and should not disclose any such information to a third party without specific authority or unless there is a legal or professional duty to disclose.
3. Skills and competence : The audit should be performed and the report prepared with due professional care by persons who have adequate training, experience and competence in auditing. The auditor requires specialized skills and competence which are acquired through a combination of general education, knowledge obtained through study and formal courses concluded by qualifying examination recognized for this purpose and practical experience under proper supervision. In addition, the auditor requires a continuing awareness of developments including pronouncements of the ICAI on accounting and auditing matters, and relevant regulations and statutory requirements.
4. Work performed by others : When the auditor delegates work to assistants or uses work performed by other auditors and experts he continues to be responsible for forming and expressing his opinion on the financial information. However, he will be entitled to rely on work performed by others, provided he exercises adequate skill and care and is not aware of any reason to believe that he should not have so relied. In the case of any independent statutory appointment to perform the work on which the auditor has to rely in forming his opinion, as in the case of the work of branch auditors appointed under the Companies Act, 1956 the auditor’s report should expressly state the fact of such reliance. The auditor should carefully direct, supervise and review work delegated to assistants. The auditor should obtain reasonable assurance that work performed by other auditor or experts is adequate for his purpose.
5. Documentation : The auditor should document matter which are important in providing evidence that the audit was carried out in accordance with the basic principles. 6. Planning : The auditor should plan his work to enable him to conduct an effective audit in n efficient and timely manner. Plans should be based on a knowledge of the client’s business. Plans should be made to cover, among other things :
(a) acquiring knowledge of the client’s accounting system, policies and internal control procedures;
(b) establishing the expected degree of reliance to be placed on internal control;
(c) determining and programming the nature, timing, and extent of the audit procedures to be performed; and
(d) co-ordinating the work to be performed. Plans should be further developed and revised as necessary during the course of the audit.
7. Audit Evidence : The auditor should obtain sufficient appropriate audit evidence through the performance of compliance and substantive procedures to enable him to draw reasonable conclusions therefrom on which to base his opinion on the financial information. Compliance procedures are tests designed to obtain reasonable assurance that those internal controls on which audit reliance is to be placed are in effect. Substantive procedures are designed to obtain evidence as to the completeness, accuracy and validity of the data produced by the accounting system. They are of two types : (i) test of details of transactions and balances; and (ii) analysis of significant ratios and trends including the resulting enquiry of unusual fluctuations and items.
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 internal control? Explain the elements of a good system of internal control. How far does internal check give security to the auditor? 2+8+4=14
Ans: Internal Control is a Systematic measures such as reviews, checks and balances, methods and procedures instituted by an organization to conduct its business in an orderly and efficient manner, safeguard its assets and resources, determine and detect errors, fraud, and theft, ensure accuracy and completeness of its accounting data, produce reliable and timely financial and management information, and ensure adherence to its policies and plans.
According to W.W.BIGG: “Internal Control is best regarded as indicating the whole system of controls, financial and otherwise, established by the management in the conduct of a business, including internal check, internal audit and other forms of control.”
Elements, features characteristics principles of a good Internal Control System: An effective internal control system should have the following factors:
1. Competent and trust worthy staff: people in charge of internal control system must be reliable and highly competent about the work. Lack of knowledge and dishonesty will spoil the efficiency of the system.
2. Records of financial and other organizational plans: A good internal control system must have good documentation system. Filing, recording, classifying, etc will help in this regard.
3. Segregation of duties: normally, there should be a separate department for internal control this reduces frauds, bias etc. normally, a clerk in charge of accounting function should not be in charge of assets also.
4. Supervision: proper reviewing of the operations of the company regularly makes the control system effective.
5. Authorization: all transactions must be properly authorized. In other words, the authority of each person should be well defined.
6. Sound practices: the company should have well established procedures, policies, delegations organizational manuals etc.
7. Internal Audit: it’s a part of internal control and it should be independent of internal check.
8. Accounting Controls: proper accounting information systems should be established so that the information relating to accounts is properly collected, recorded and accounts prepared.
Internal Check helps the auditor in the following ways:
1. Adequate subdivision and allocation of work: An ideal system of internal check enables to subdivide the whole of work into small units which are allocated to different employees on the basis of each one’s ability, training, qualifications, experience and field of specialization.
2. Early detection of errors and thus prevention of frauds: In an efficient system of internal check, none is allowed to complete any job independently but the whole of job is divided among many workers. The work of each such employee is cross checked during the ordinary course of business, knowledge of such cross checking acts as a moral check to commit errors and frauds.
3. Efficient and economic functioning: Proper allocation of work based on qualification, ability and specialization of each employee helps to promote efficiency in each department of the business concern. With such efficiency among the staff, there is over all economy in the operations of the business leading to higher profits.
4. Quick preparation of final statements: Having efficient system of internal check, one can rely on the accounting records of the business concern. Thus the books of accounts can be used directly and quickly to prepare the final statements as there is no need to check he business transactions so thoroughly.
5. External Auditing not required: Unless required under some rules and regulations, books and accounts of such business concerns need not be audited. Even when there is need to go for auditing, the efficient system of internal check enables auditor to avoid thorough checking of all the transactions. At the most, the auditor selects certain facts randomly to test the reliability of the internal check system.
6. Determination of Responsibility: Since in the system of internal check the total work is divided and allocated among different employees, staff can be held responsible for any lapse or irregularity committed.
4. (a) What is importance of vouching? Explain the general and specific considerations which the auditor should keep in mind while checking vouchers. 4+10=14
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 transactions is the most important audit step in any type of auditing. Voucher is the document which describes any transaction and whole building of accounting stands on vouchers. Such is the importance of voucher and vouching. The importance and objectives of vouching are given below:
1. Back bone of auditing: Vouching is first step in detailed auditing. It gives grounds and reasons for further investigation. It is primary activity to know the worth of any business.
2. Careful vouching helps the auditor to detect fraud, misappropriation of money, errors, falsification etc.
3. Detailed vouching acts as a moral check on employees.
4. Vouching helps in separation of revenue with capital items.
5. Vouching helps in ascertaining whether the transaction is in relation to business or some other activity outside the business.
General and Specific consideration while 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.
Or
(b) State the importance of verification and valuation of assets from the point of view of an auditor of business concern. What are the duties of an auditor regarding the valuation of investment in the Balance Sheet? 7+7=14
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”.
Valuation of assets means determining the fair value of the assets shown in the Balance Sheet on the basis of generally accepted accounting principles. The valuation of assets is very important because over-statement or under-statement of the value of assets in the Balance sheet not only distorts the true and fair view of the financial position but also gives wrong position of profitability.
Importance of valuation and verification of assets:
1. To show the true financial position: Balance sheet is prepared to present the financial position the firm. To show true financial position, it becomes necessary to correctly value the assets and liabilities as on the date of balance sheet. Balance sheet exhibits a true and fair view of the state of affairs of the business if assets and liabilities are properly valued.
2. To show the correct operating result: Profit and loss account is prepared to show the operating efficiency of the firm. Operating results are arrived after charging depreciation on assets. If assets are not properly valued, then the depreciation provided on such assets are inaccurate which results in under or overstatement of profit. So, to show correct operating results, proper valuation of assets is necessary.
3. Ownership of assets: Verification of assets and liabilities are done to find out the ownership and title of the assets at the time of preparation of balance sheet. It also helps in improper use of assets.
4. To find out whether assets were in existence: Proper verification of assets helps in knowing whether or not assets were in existence during the accounting period.
5. Prevention of frauds: Proper verification and valuation of assets and liabilities helps in detecting frauds and errors in presentation of assets and liabilities in the balance sheet.
6. To check internal control system: To find out whether there is an adequate internal control regarding acquisition, utilisation and disposal of assets verification and valuation of assets are necessary.
5. (a) Discuss the provisions of the Companies Act, 2013 regarding qualifications, appointment, rights and duties of an auditor of a limited company. 3+3+4+4=14
Ans: Qualification of a Company Auditor
According to Section 141 of the Companies Act, 2013 the prescribed qualifications of an auditor are as follows:
a. An individual shall be eligible for appointment as an auditor of a company only if he is a chartered accountant.
b. A firm shall be eligible for appointment as an auditor of a company in the name of the firm only if majority of its partners are practicing in India as chartered accountants. Where a firm including a limited liability partnership is appointed as an auditor of a company, only the partners who are chartered accountants shall be authorised to act and sign on behalf of the firm.
Appointment of a Company Auditor: 2014
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.
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.
Apart from the auditor’s right to obtain information and explanation it is the duty of every officer of the company to furnish without delay the information to the company auditor. If the directors or officers of the company refuse to supply some information on the ground that in their opinion it is not necessary to furnish it, then the auditor has the right to mention that in his audit report.
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.
Similarly an auditor also has the right to attend any annual general meeting and also to be heard at those meetings which he attends and which concerns him as an auditor.
The auditor also has the right to make a statement or explanation with regard to the accounts he has audited. But he auditor is not expected to answer questions in the general meeting.
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]
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.
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.
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 terms ‘divisible profit’ and ‘dividend’. State how you will examine share transfer and dividend while auditing the accounts of a limited company. 3+3+4+4=14
Ans: The term “Divisible Profit” is a very complicated term because all profits are not divisible profits. Only those profits are divisible profits which are legally available for dividend to shareholders. Dividends cannot be declared except out of profits, i.e. excess of income over expenditure; ordinarily capital profits are not available for distribution amongst shareholders because such profits are not trading profits. Thus, profits arising from revaluation or sale of fixed assets or redemption of fixed liabilities should not be available for distribution as dividend amongst shareholders.
Shareholders expect some return for the money invested by them in the company. They get the return on their investment in the form of dividends given to them from time to time. Thus, dividends are the profits of the company distributed amongst the shareholders. The company may declare dividends in general meeting, but no dividend shall exceed the amount recommended by the Board of Directors. Thus, shareholders in annual general meeting can only reduce the amount of dividends but cannot increase the amount of dividends recommended by the Board of Directors. The directors may no recommend dividend even if there are profits if they think that distribution of dividend will impair the financial position of the company.
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.
Duties of auditor relating to payments of dividend
1. Rules Of Company: The auditor should check the rules of a company. He should examine that articles of association and resolution of board meeting allow the management to propose dividends out of revenue profits.
2. Rate Of Dividend: The auditor should check that rate of dividend must not be above the rate of profit. It should also not exceed the market rate.
3. Reasonable Profit: The auditor should check that amount of revenue profits is reasonable. If it is not reasonable then dividend should not be paid.
4. Account: Dividend amount is payable within 30 days. The auditor should check that dividend account is opened in the bank and amount equal to dividend must be deposited.
5. Tax: It is also the duty of the auditor to check that corporate dividend is paid by the company.
6. (a) Discuss in brief about different types of audit reports. Under what circumstances an auditor considers it necessary to qualify audit report? 8+6=14
Ans: 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.
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.
Or
(b) Explain the advantages of cost audit. Write about the qualifications of a cost auditor. Discuss about the provisions of cost audit in the Companies Act, 2013. 5+3+6=14
Ans: Following are the advantages (Justification) of cost audit
To The Management
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.
To The Government
a) Cost audit ensures efficient functioning of the industry. This in turn, nurtures a healthy competition among the different companies and paves a path for fast progress.
b) It helps in identification of sick units and enables the Government to make relevant decisions.
c) It helps in fixing prices in the case of essential commodities and checking undue profiteering.
d) It enables to take decisions as to granting of subsidies, incentives and protection to various industries.
e) It helps to take decisions as to levies, duties and taxes.
To the Society
a) Cost audit enables the Government to fix prices of essential commodities. This safeguards the interests of the society.
b) Cost audit enables the Government to keep a check on undue profiteering by the manufacturers and avoids artificial price rise due to monopolistic tendencies.
To the Shareholders
a) Cost audit reveals whether any of the products of the company are making losses. Thus though the company making an overall profit, a loss making line may eating up the company’s profits. This is brought to the notice of the shareholders and the management is forced to take remedial measures, thereby making optimum utilisation of resources.
b) Cost audit ensures that the shareholders get a fair return on their investments.
Who can be appointed cost auditor?
Only a Cost Accountant, as defined under section 2(28) of the Companies Act, 2013, can be appointed as a cost auditor. Clause (b) of sub-section (1) of section 2 of the Cost and Works Accountants Act, 1959 defines “Cost Accountant”. It means a Cost Accountant who holds a valid certificate of practice under sub-section (1) of section 6 of the Cost and Works Accountants Act, 1959 and is in whole-time practice. Cost Accountant includes a Firm of Cost Accountants and a LLP of cost accountants.
Provisions of Companies Act relating to Cost Audit
1. Applicability of Cost Audit
Every company, including foreign companies defined in clause (42) of section 2 of the Act, engaged in the production of the goods or providing services, specified in Tables A and B, having an overall turnover from all its products and services of rupees thirty five crore or more during the immediately preceding financial year, shall be required to maintain cost accounting records.
2. Appointment of Cost Auditor
The cost auditor is to be appointed by the Board of Directors on the recommendation of the Audit Committee, where the company is required to have an Audit Committee. The cost auditor proposed to be appointed is required to give a letter of consent to the Board of Directors (Refer Appendix-2 for Specimen Consent Letter). The company shall inform the cost auditor concerned of his or its appointment as such and file a notice of such appointment with the Central Government within a period of thirty days of the Board meeting in which such appointment is made or within a period of one hundred and eighty days of the commencement of the financial year, whichever is earlier, through electronic mode. Any casual vacancy in the office of a cost auditor, whether due to resignation, death or removal, shall be filled by the Board of Directors within thirty days of occurrence of such vacancy and the company shall inform the Central Government in Form CRA-2 within thirty days of such appointment of cost auditor.
3. Remuneration of Cost Auditor
The remuneration recommended by the Audit Committee under shall be considered and approved by the Board of Directors and ratified subsequently by the shareholders.
4. Obligation to report offence of fraud
As per sub-section (12) of section 143 of the Companies Act 2013, extract of which is given above, it is obligatory on the part of cost auditor to report offence of fraud which is being or has been committed in the company by its officers or employees, to the Central Government as per the prescribed procedure under the Rules.
5. Form for filing Cost Audit Report with the Central Government
Every company to whom cost auditor submits his or its report shall, within a period of thirty days from the date of receipt of a copy of the cost audit report, furnish the Central Government with such report along with full information and explanation on every reservation or qualification contained therein, in form CRA-4 along with fees.
(OLD COURSE)
Full Marks: 80
Pass Marks: 32
1. (a) Fill in the blanks: 1x4=4
1) The Constitution of India has envisaged the office of the _______ to be the Supreme Audit Institution of the country.
2) A continuous audit is specially needed for _______ companies.
3) An internal auditor is appointed by _______.
4) A company can issue redeemable preference shares if authorized by the _______.
(b) Write whether the following are True or False: 1x4=4
1) Auditing is compulsory for all partnership firms.
2) Interim audit refers to examination of accounts continuously.
3) Preliminary expenses are of capital nature.
4) Cost audit has got a wider scope as compared to financial audit.
2. (a) What are the objects of an audit? Explain the advantages of audit to the different users. 4+7=11
Or
(b) What are the advantages of an audit programme? State the contents of an audit notebook. 5+6=11
3. (a) Explain the meaning and objects of vouching. What are the duties of an auditor in connection with vouching of payments (credit) side of the cashbook? 6+6=12
Or
(b) Discuss the duties of an auditor with regard to verification and valuation of assets. How would you verify the balance at bank? 6+6=12
4. (a) Discuss the provisions of the Companies Act regarding appointment, qualification and remuneration of auditor. 4+4+3=11
Or
(b) How will you examine the following items while auditing the accounts of a limited company? 4+4+3=11
1) Shares issued at a discount.
2) Shares issued at a premium.
3) Forfeited shares.
5. (a) Discuss the special points to be considered by the auditor in the audit of a college. 11
Or
(b) Explain the general procedure followed in an investigation. State the differences between an investigation and audit. 5+6=11
6. (a) State the importance of audit report. What are the differences between clean audit report and qualified audit report? 5+6=11
Or
(b) What is cost audit? What are the qualifications of a cost auditor? Distinguish between cost audit and management audit. 2+5+4=11
7. Write short notes on the following: 4x4=16
a) Continuous Audit.
b) Routine Checking.
c) Frauds and Errors.
d) Sources of Dividend.
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