Auditing Solved Question Paper 2023 (May / June)
COMMERCE (Core)
Paper: C-613 (Auditing)
Full Marks: 80
Pass Marks: 32
Time: 3 hours
The figures in the margin
indicate full marks for the questions
1. (a) State whether the following statements are True or False: 1x4=4
(1) Auditing starts where accounting ends.
Ans: True
(2) Patents must be valued at cost less depreciation.
Ans: False
(3) An auditor is not liable to third parties.
Ans: False, an auditor is never appointed by the third party and as
such, he has nothing to do with such a party. There is virtually no contract
between the auditor and the third party.
(4) U/S 129(2), the auditor’s report is attached to every financial
statement.
Ans: True
(b) Fill in the blanks
with appropriate word(s): 1x4=4
(1) When audit is conducted without any legal necessity, the audit
is called Private Audit.
(2) When written evidence is available in original, it is known as primary voucher.
(3) Share Premium A/c may be used for writing off any preliminary expenses of the company.
(4) Audit report with reservation is known as Qualified Audit Report.
2. Write short notes on
any four of the following: 4x4=16
(a) Errors of omission.
Ans:
These are the errors which arise on account of transaction into being recorded
in the books of accounts either wholly partially. If a transaction has been
totally omitted it will not affect trial balance and hence it is more difficult
to detect. On the other hand, if a transaction is partially recorded, the trial
balance will not agree and hence it can be easily detected.
(b) Verification of
contingent liabilities.
Ans: CONTINGENT
LIABILITIES: Certain liabilities may or may not
arise after the preparation of the Balance Sheet. These are called contingent
liabilities. In the words of Montgomery, “The term ‘contingent liability’
should be used in the accounting sense to designate a possible liability of
presently determinable or indeterminable or indeterminable amount which arise
from past circumstances or action which may or may not become a legal
obligation in the future, and which, if paid, gives rise to cost or an expenses
or an asset of doubtful value” A contingent liability is different from an
actual liability.
Types of Contingent Liabilities
1.
Liabilities on Bills Receivable
Discounted and not Matured.
2.
Liability for Calls on Partly
Paid Shares
3.
Liability under a Guarantee.
4.
Liability for Cases against the
Company Not Acknowledged as Debts.
5.
Liability for Penalties under
Forward Contracts.
6.
Liability in respect of Arrears
of Dividend on Cumulative Preference Shares.
Auditor’s
Duties
1.
Check the various contingent
liabilities named above.
2.
Some liabilities may have no
provision made in the books but merely a note made at the foot of the Balance
Sheet, e.g., bills receivable which have been discounted and which have not
matured at the date of the balance Sheet, arrears of fixed accumulated
dividends, etc. In case for liabilities in respect of which provision has to be
made on the Balance Sheet, e.g., liability which may arise in connection with a
suit, etc., the auditor should examine such cases and ascertain the amount to
be specifically reserved for the purpose.
3.
Examine the Directors Minute
Book, correspondence made with the legal advisers and the information obtained
from the officials of the business. Ensure that proper provision has been made
for all such liabilities and if he is not satisfied mention the fact in the
report. The requirements of the Companies Act regarding the contingent
liability should be complied with in the Balance Sheet on the liabilities side.
(c) Audit of forfeiture of
shares.
Ans: Forfeiture of shares: A company has no inherent power to forfeit shares. The power
to forfeit shares must be contained in the articles. Where a shareholder fails
to pay the amount due on any call, the directors may, if so authorized by the
articles, forfeit his shares. Shares can only be forfeited for non-payment of
calls. An attempt to forfeit shares for other reasons is illegal. Thus where
the shares are declared forfeited for the purpose of reliving a friend from
liability, the forfeiture may be set aside.
Audit of Forfeiture of shares
1.
To examine the Articles to
verify authorization and compliance of the Provisions of the Articles. The fact
that Articles authorized the company to expel a member is not sufficient to
enable the company to deprive the expelled members of the shares also.
2.
To examine the Director’s
Minute Book to see the resolution forfeiting the shares. The auditor must see
that the forfeiture has been correctly accounted for and that necessary
adjustments have been made in the Register of Members.
3.
To inspect the directors’
resolution about the forfeited shares reissued. To trace the receipt of money
and to verify that the amount of discount, if any, does not exceed the amount
already received thereon from the defaulter shareholders.
4.
To vouch the cancellation by
reference to the Directors’ Minute Book and the Register of Members, in case
the forfeiture is cancelled by the directors.
5.
To see that any premium
received on the original issue of the forfeited shares is not transferred to
‘Forfeited Shares Account’ but remains in the ‘Share Premium Account’.
6.
To examine that in case some
excess money has been realized, it should be transferred to the Capital Reserve
Account as it represents capital profit and not divisible profits.
(d) Government audit.
Ans:
(e) Importance of audit
report.
Ans: In case of a company management is separated from the ownership
shareholders 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 shareholders 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.
3. (a) What do you mean by
auditing? Discuss the basic principles while conducting an audit. 4+10=14
Ans: Meaning of Audit: 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”.
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) coordinating 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.
8. Accounting System and Internal
Control: Management is responsible for
maintaining an adequate accounting system incorporating various internal
controls to the extent appropriate to the size and nature of the business.
The auditor should reasonably assure himself that the accounting system is
adequate and that all the accounting information which should be recorded
has in fact been recorded. Internal controls normally contribute to such
assurance. The auditor should gain an understanding of the accounting
system and related controls and should study and evaluate the operation of
those internal controls upon which he wishes to rely in determining the
nature, timing and extent of other audit procedures. Where the auditor
concludes that he can rely on certain internal controls, his
substantive procedures would normally be less extensive than would
otherwise be required and may also differ as to their nature and timing.
9. Audit conclusions and
reporting: The auditor should review and
assess the conclusions drawn from the audit evidence obtained and from his
knowledge of business of the entity as the basis for the expression of his
opinion on the financial information. This review and assessment involves
forming an overall conclusion as to whether:
a)
the financial information has
been prepared using acceptable accounting policies, which have been
consistently applied;
b)
the financial information
complies with relevant regulations and statutory requirements;
c)
there is adequate disclosure of
all material matters relevant to the proper presentation of the financial
information, subject to statutory requirements, where applicable.
Or
(b) What is ‘Continuous
Audit’? Discuss the limitations of Continuous Audit. Distinguish between
Continuous Audit and Periodical Audit. 4+5+5=14
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.”
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 leave unchecked same audit work which was pending
during his last audit work.
(v)
Adverse effect on employee’s morale:
(vi)
monotony in Work
(vii)
Chances of collusion between organization’s staff and auditor’s staff
Difference
Between Continuous Audit and Periodical Audit 2018
|
Basis |
Continuous Audit |
Periodical Audit |
|
i.
Timing of audit |
Continuous
audit is conducted throughout the year. |
Periodical
audit is conducted after the preparation of final account. |
|
ii. Organisation |
It is
suitable for Large organization. |
It is
suitable for small organization |
|
iii. 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. |
Since
audit is conducted after the preparation of final account, it is not possible
to prepare final accounts just at the end of the financial year. |
|
iv. Costs |
It is
costly. |
It is
less costly as compared to continuous audit. |
|
v. Detection of frauds and errors |
It helps
in early detection of frauds and errors. Staff do have sufficient time to
manipulate accounts. |
It is
very hard to detect frauds and errors because audit is done only after the
preparation of final accounts. |
|
vi. Reliability |
If
continuous audit is done throughout the year, all the interested parties can
rely much on the audited accounts. |
It is
less reliable as compared to continuous audit. |
4. (a) Discuss the duties
of an auditor in connection with the vouching of credit purchases and purchase
returns. 14
Ans: 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) Define vouching. What
are the objectives of vouching? Distinguish clearly between the terms
‘Vouching’, ‘Verification’ and ‘Valuation’. 3+4+7=14
Ans: Vouching (2013, 2015):
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.
Difference between Verification and
Vouching
|
BASIS |
VOUCHING |
VERIFICATION |
|
1. Nature |
It examines the entries relating to the transactions recorded in
the books of accounts with the help of documentary evidence. |
Verification examines truth about assets and liabilities appearing
in the Balance Sheet of the concern. |
|
2. Basis |
It is based
on documentary evidences. |
It is based on personal investigation as well as documentary
evidences. |
|
3. Time |
It is done
during the whole year. |
It is done at the end of the year when the Balance sheet of the
concern is prepared. |
|
4. Valuation |
It is not
concerned with valuation. |
Verification
includes valuation in its Scope. |
|
5. Utility |
It
certificates correction of records. |
It certifies the existence of assets and liabilities at balance
sheet date. |
|
6. Personnel |
It is done by the junior staff of the auditor like audit clerk. |
It is done by the auditor himself or by his assistant. |
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. |
|
Scope |
It
is a complete process of examination and checking. It includes verification
of existence of assets, ownership, title etc. |
Valuation
is a part of the process of examination. It is not concerned with existence,
ownership and title. |
|
Auditor’s
liability |
An
auditor is held liable for improper verification of assets and liabilities. |
An
auditor cannot be held liable for any improper valuation of assets as
valuation of assets is done by valuers or owners. |
Difference between valuation and
vouching
|
Basis |
Valuation |
Vouching |
|
Meaning |
Valuation
means to test the correct value of the assets and liabilities. |
Vouching
means the process of comparing the entries in the books of accounts with
reference to relevant documentary evidence. |
|
Object |
It
aims to see that the assets and liabilities have been correctly valued
according to the accepted accounting principles. |
It
aims to verify the accuracy, authenticity and genuineness of transactions
recorded in the books of accounts. |
|
Person
involved |
It
is done by valuer or owners or trusted officials. |
Vouching
is usually carried on by junior clerks. |
|
Timing |
Valuation
is done at the end of financial year i.e. at the time of preparation of final
accounts. |
Vouching
is done after the entry of transactions are recorded in the books of
accounts. |
5. (a) How will you
examine the following items while auditing the accounts of a limited company?
5+5+4=14
(1) Issue of Bonus Share.
Ans: 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.
(2) Redemption of
Preference Share.
Ans: Auditor’s duties regarding redeemable preference shares:
1. To examine whether or not the provisions of Sec. 55
of Companies Act, 2013 regarding redemption of preference are followed.
2. He must ensure that the redeemable preference shares must be
fully paid up. If there is any partly paid share, it should be converted in to
fully paid shares before redemption.
3. He must ensure that the redeemable preference shareholders
is paid out of undistributed profit/ distributable profit or out of fresh issue
of shares for the purpose of redemption.
4. If the shares are redeemed out of undistributed profit, then
the auditor must ensure that the nominal value of share capital, so redeemed is
transferred to Capital Redemption Reserve Account.
5. He must also ensure that CRR may be utilised only for the
purpose of issuing fully paid bonus shares to the members.
(3) Forfeiture of Share.
Ans: A company has no inherent power to forfeit shares. The power to
forfeit shares must be contained in the articles. Where a shareholder fails to
pay the amount due on any call, the directors may, if so authorized by the
articles, forfeit his shares. Shares can only be forfeited for non-payment of
calls. An attempt to forfeit shares for other reasons is illegal. Thus where
the shares are declared forfeited for the purpose of reliving a friend from
liability, the forfeiture may be set aside.
Auditor’s Duties regarding to Forfeiture and Reissue
1. To examine the Articles to verify authorization and compliance of
the Provisions of the Articles. The fact that Articles authorized the company
to expel a member is not sufficient to enable the company to deprive the
expelled members of the shares also.
2. To examine the Director’s Minute Book to see the resolution
forfeiting the shares. The auditor must see that the forfeiture has been
correctly accounted for and that necessary adjustments have been made in the
Register of Members.
3. To inspect the directors’ resolution about the forfeited shares
reissued. To trace the receipt of money and to verify that the amount of
discount, if any, does not exceed the amount already received thereon from the
defaulter shareholders.
4. To vouch the cancellation by reference to the Directors’ Minute
Book and the Register of Members, in case the forfeiture is cancelled by the
directors.
5. To see that any premium received on the original issue of
the forfeited shares is not transferred to ‘Forfeited Shares Account’ but
remains in the ‘Share Premium Account’.
6. To examine that in case some excess money has been realized,
it should be transferred to the Capital Reserve Account as it represents
capital profit and not divisible profits.
Or
(b) (1) Explain the
provisions of depreciation applicable to companies’ u/s 123 (2) of Companies
Act, 2013. 7
(2) Discuss the duties of
an auditor as regards provisions for depreciation. 7
6. (a) What is Audit
Report? Explain briefly about the various types of Audit Report. 4+10=14
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.
TYPES OF AUDIT REPORT: 2015, 2017
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. From the above discussion, we find the
following 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.” |
Necessity
of qualified audit report: 2018
a) It ensures accountability of the management.
b) It helps in improving reliability of the financial statements.
c) It state that whether the company has maintained the proper books
of accounts or not.
d) It helps in ensuring that whether or not financial statements
gives a true and fair view of the affairs of the company or not.
Circumstances
for Qualification of Audit Report: In
following circumstances the auditor has to qualify his report. 2017
(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.
Or
(b) Discuss the elements
and features of a good Audit Report. 7+7=14
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.
The following are the
characteristics of an ideal or a good audit report:
(i) It should be in a simple
language, which can be understood easily. (ii) It should be divided into
separate paragraphs.
(iii) The audit report must
bear date on it.
(iv) It should be addressed
to them for whom it is. written, as
(a) Audit report of a
company should be addressed to the shareholders.
(b) In case of special
audit, the report should be addressed to the Central Government.
(v) The report should be
fully clear, not illusory.
(vi) It should be impartial.
(vii) The auditor should
write it in his office only.
(viii) It must be brief but
no fact should be left out.
(ix) At the end of the
report, the auditor should put his signature on the right-side. He should write
'Chartered Account' below the signatures.
Elements
of Audit Report or Essentials of Good Audit Report
1. Title: An auditor report must have appropriate title, such as "Auditor's
Report". It is helpful for the
reader to identify the auditor's report. It is easy to distinguish it from
other reports. The management can issue any report about the business
performance. The title of the report is essential.
2. Addressee: The addressee may be shareholder or board of director of a
company. The auditor can audit financial statements of any business unit as per
agreement. The report should be appropriately addressed as required by
engagement letter and legal requirements. The report is usually addresses to
the shareholders or the board of directors.
3. Date of Report: The report should be dated. It informs the reader that the
auditor considered the effect on the financial statements and in his report of
events or transactions about which he become aware the occurred up to that
date.
4. Identification: The audit report should identify the financial statement that
have audited. The financial statement may include trading profit and loss
accounts, balance sheet and statement of changes in financial position and
sources and application of frauds statement. The report should include the name
of the entity. Moreover, the data and period covered by the financial statement
are also stated in it.
5. Reference to Auditing Standards: The audit report should indicate the auditing standard or
practice followed in conducting the audit. The international auditing
guidelines need assurance that the audit has been conducted as per set
standards.
6. Opinion: The auditor's report should clearly state the auditor's
opinion on the presentation in the financial statement of the entity's
financial position and the result of its operations. The statement give a true
and fair view is an auditor's opinion. This opinion is usually based on
national standard or international accounting standards.
7. Signature: The audit report should be signed in the name of the audit firm, the
personal name of the auditor or both as appropriate.
8. Auditor's Address: The address of auditor is stated in the audit report. The
name of city is stated in the report for information of the readers.
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