Auditing Solved Question Paper May’ 2024
Dibrugarh University BCOM 6th SEM CBCS Pattern
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: 1×4=4
(i) Remuneration of internal auditor is fixed by shareholders.
Ans: False, fixed by management
(ii) Carbon copy
of sales invoices is an example of primary voucher.
Ans: False (Secondary Vouchers)
(iii) Under
Section 5 of the Companies Act, 2013, every company is required
to have Articles of Association.
Ans: True
(iv) CARO 2016 is applicable to the banking companies also.
Ans: False, CARO, 2016 shall apply to every company including a foreign
company as defined in Sec. 2(42) of the Companies Act, 2013, except: (i) a
banking company; (ii) an insurance company; (iii) a company licensed to operate
u/s 8 of the Companies Act (iv) OPC (v) Private Company
(b) Fill in the
blanks with appropriate words:
1X4=4
(i) When financial transactions are examined at the time of
happening, it is called _____ audit.
Ans: Concurrent Audit
(ii)
Preliminary expenses are of _________________ nature.
Ans: Deferred revenue
(iii) No
company shall have more than ________ directors.
Ans: 15
(iv) Violation of any of the provisions of Sections 139, 143, 144 and
145 of the Companies Act implies a fine which shall not be less than:
Ans: If an auditor violates any of these sections, they are subject to a
fine that's not less than ₹25,000 but can extend up to ₹5,00,000.
2. Write short
notes on (any four): 4×4=16
(a) Statutory
audit
Ans: Statutory audit is the checking of accounts as required by law. A
statute or law may require having an annual audit of financial records of a
company or any other entity. The law may require the audit to be conducted in
the specified manner. The manner of reporting, contents of the report and the
authority to which the report of auditors should be presented are all specified
by the statute. Statutory audits are mandatory in nature.
The statutory auditor is generally the principal auditor in an
organization.
(i) In the case of companies, the Companies Act, 2013 governs the audit
of accounts, its reporting, and manner of preparing the audit report.
(ii) In the case of audit of a government body, the scope and audit
programmes are set by the Comptroller and Auditor General (CAG) of India and
the Companies Act, 2013.
(iii) In the case of audit of an insurance company or a nationalized
bank, the audit is governed by specific statutes and IRDAI/RBI (Insurance
regulatory & Development Authority of India & Reserve Bank of India)
guidelines. Co-operative banks are also governed by the Co-operative Societies
Act, 1912.
The statutory auditor of a company is appointed by the board
/shareholders in the General Meeting and shareholders cannot delegate this
power to directors even by passing a special resolution. A statutory auditor
can be appointed by the Central Government if shareholders fail to appoint an
auditor. A statutory audit should be performed by a qualified Chartered
Accountant holding a valid Certificate of Practice (COP) and not by any other
person.
(b) Vouching of ledger
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.
Importance
of vouching: 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.
6.
It is the foundation stone for any accounting
process.
7.
Effective vouching makes the rest of audit
easy and fast.
8.
Vouching helps the auditor to determine
whether the voucher belongs to the period of audit.
From the above discussion, it is clear that
vouching is the essence of audit.
(c) Branch
auditor
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(d) Joint
auditor
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(e) Feature of good
audit report
Ans:
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.
3. (a) "An
audit is not a complete safeguard and insurance against all financial
ills." Discuss. 14
Ans: The
objective of an audit of financial statements is to enable an auditor to
express an opinion on such financial statements which helps in determination of
the true and fair view of the financial position and operating results of an
enterprise. But such expression by the auditor is neither an assurance as to
the future viability of the enterprise nor the efficiency or effectiveness with
which management has conducted affairs of the enterprise. Further, the process
of auditing is such that it suffers from certain inherent limitations, i.e.,
the limitation which cannot be overcome irrespective of the nature and extent
of an audit procedure. The inherent limitations are:
I.
First of all, auditor’s work involves exercise of judgment, for example, in
deciding the extent of audit procedures and in assessing the reasonableness of
the judgment and estimates made by the management in preparing the financial
statements. Further much of the evidence available to the auditor can enable
him to draw only reasonable conclusions there from. The audit evidence obtained
by an auditor is generally persuasive in nature rather than conclusive in
nature. Because of these factors, the auditor can only express an opinion.
Therefore, absolute certainty in auditing is rarely attainable. There is also
likelihood that some material misstatements of the financial information
resulting from fraud or error, if either exists, may not be detected.
II.
The entire audit process is generally dependent upon the existence of an
effective system of internal control. Further, it is clearly evident that there
always be some risk of an internal control system failing to operate as
designed. No doubt, internal control system also suffers from certain inherent
limitations. Any system of internal control may be ineffective against fraud
involving collusion among employees or fraud committed by management. Certain
levels of management may be in a position to override controls; for example, by
directing subordinates to records transactions incorrectly or to conceal them,
or by suppressing information relating to transactions. Such inherent
limitations of internal controls system also contribute to inherent limitations
of an audit.
Generally
following are the Limitations of auditing
1.
Non-detection of errors/frauds: Auditor
may not be able to detect certain frauds which are committed with malafide
intentions.
2. Dependence on explanation by others: Auditor has to depend on the
explanation and information given by the responsible officers of the company.
Audit report is affected adversely if the explanation and information prove to
be false.
3.
Dependence on opinions of others: Auditor has to rely on the views or opinions
given by different experts viz Lawyers, Solicitors, Engineers, Architects etc.
he cannot be an expert in all the fields
4.
Conflict with others: Auditor
may have differences of opinion with the accountants, management, engineers
etc. In such a case personal judgement plays an important role. It differs from
person to person.
5.
Effect of inflation: Financial
statements may not disclose true picture even after audit due to inflationary
trends.
6.
Corrupt practices to influence the
auditors: The management may use corrupt practices to influence the
auditors and get a favourable report about the state of affairs of the
organisation.
7.
No assurance: Auditor cannot
give any assurance about future profitability and prospects of the company.
8.
Inherent limitations of the financial
statements: Financial statements do not reflect current values of the
assets and liabilities. Many items are based on personal judgement of the
owners. Certain non-monetary facts cannot be measured. Audited statements due
to these limitations cannot exhibit true position.
9.
Detailed checking not possible: Auditor
cannot check each and every transaction. He may be required to do test
checking.
Or
(b) What is meant
by internal check? Describe the system of internal check with regard to stores
(stock) of a manufacturing concern.
4+10=14
Ans: Internal Check: 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 other.
System of Internal Check with Regard to Stores
(Stock) in a Manufacturing Concern
In a
manufacturing concern, an effective internal check system is crucial for managing
stores (stock). The following are the key aspects of an internal check system
concerning stores management:
1.
Receipt of Goods
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4. (a) What is
voucher? Discuss the duties of an auditor in respect of verification of purchase and sales ledger.
2+6+6=14
Voucher: Voucher
is the original document in support of any payment or receipt of money
pertaining to a transaction in a business.
It forms the basis of accuracy of any entry in the books of accounts. It
is of two types – primary vouchers and secondary vouchers. Primary vouchers are
original written evidence of supporting a transaction. Collateral vouchers are
duplicate copies of primary vouchers.
According
to J.P. Batliboi “A voucher may be defined as a documentary
evidence in support of an entry appearing in the books of accounts.”
According
to Arthur W. Halmes,” A voucher is any documentary evidence in support of a
transaction.”
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.
VOUCHING
OF SALES BOOK (Credit Sales): Auditor should examine the following points
while vouching the sales book.
1. Internal Checks System: Auditor should check the working of internal
control and test the few entries.
2. Checking of Invoices:
a. Debtor's name.
b. date and amount.
c. The authority.
d. Trade discount.
e. Authority for gaining discount.
3. Duplicate Invoices: Auditor should check the entries in the sales
book with the duplicate invoices.
4. Authority Checking: It should also be checked by the auditor that
the invoice should be authorized by the responsible officer.
5. Comparison with Order Book: Auditor should compare the sales book with the
order received book and goods outward book. It will show that no fictitious
sale is made.
6. Verification of Year: It should be also checked by the auditor that
all the entries made in the sale book belongs to the year under audit.
7. Fixed Assets Sale: Auditor should check that if fixed assets are
sold then these are recorded in the sales book. He should also check that these
are posted in the sales account in the general ledger or not.
8. Dispatch of Goods: Auditor should verify the sales invoices with
the documentary evidence to ensure the dispatch of goods.
9. Over All Checking: The auditor should check the casts and carry
forwards of the sales book.
Or
(b) What are the
duties of an auditor regarding the valuation of intangible assets? Distinguish
between verification and valuation. 10+4=14
Ans: Auditor’s duties regarding valuation of intangible assets:
Goodwill: goodwill is an intangible assets representing
the value of the reputation of the firm which enables it to earn more than
normal profit. The value of goodwill varies with the earning capacity of the
business. When a business has been purchase and goodwill is paid for the
auditor should verify the agreement with the vendors. Whenever a business is
acquired, goodwill is the difference between the value of acquisition and cost
of acquisition. Sometimes, goodwill may also be created by spending huge
amounts to innovate new products. Such goodwill is known as Deferred Goodwill.
Its capitalized over a period of time. Goodwill is shown in the books at cost
less the written off amount.
Patents:
patent rights should be verified with the certificates granting such rights. If
a patent is purchased, he should verify the assignment deed. He should see
whether the deed is registered in the name of his client and patents are the
property of the client. The auditor should also examine whether fees paid to
purchase patents are treated as capital expenditure. If renewal fees are paid,
it should be treated as revenue expenditure. If the client has number of patents
he should get the list of patents with details such as the date of acquisition,
the period of which it acquired etc. Patents are written off over the period of
which they are acquired. Hence, they are shown in the BS at cost less written
off amount.
Copy
Rights: copy rights are those rights to produce or reproduce any creative work.
The auditor should verify the agreement between the holder of the copy right
and his client. Copy right is shown is BS at cost price less written off
amount.
Trademarks:
they are registered brands. It gives the holder exclusive right to own the
brand and protect it from imitation. An auditor should verify the certificate
issued by the concerned authority, the fees paid for renewal etc trademarks are
valued at cost price less written off amount.
Differences between Verification and Valuation
|
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. |
5. (a) Discuss
the provisions of the Companies Act, 2013
regarding qualification, disqualification and removal of an
auditor. 14
Ans: 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.
In
this context, the meaning of the term ‘Chartered Accountant’ shall be
interpreted based on the provisions
of
The Chartered Accountants Act, 1949 as follows:
(i)
“Chartered Accountant” means a person who is a member of the Institute [Section
2].
(ii)
A person is a member of the Institute if his name appears in the Register of
the Institute [Section 3].
(iii)
The following persons shall be entitled to have his name entered in the
Register [Section 4]:
(a)
any person who is a registered accountant or a holder of a restricted
certificate at the commencement of this Act.
(b)
any person who has passed such examination and completed such training as may
be prescribed for members of the Institute.
(c)
any person who has passed the examination for the Government Diploma in
Accountancy or an examination recognized as equivalent thereto by the rules for
the award of the Government Diploma in Accountancy before the commencement of
this Act and fulfils such conditions as specified by the Central Government in
this behalf.
(d)
any person who, at the commencement of this Act, is engaged in the practice of
accountancy in any State and fulfils such conditions as specified by the
Central Government in this behalf.
Disqualification of a Company Auditor
[Sec. 141(3)]:
According
to section 141(3) of the Companies Act, 2013, the following persons shall not
be appointed as auditors of a company:
i.
A body corporate: A company other than a limited liability
partnership cannot audit any other company,
ii. An officer or employee of the company.
iii. A person who is either a partner or
employee of an officer or employee of the company.
iv. A person who or his relative or his
partner has taken debt from the company for amount exceeding Rs. 5,00,000.
v. A person who or his relative or his
partner has taken guarantee of another person who has taken a loan exceeding
Rs. 1,00,000 from the company.
vi. A person who is or his relative or his
partner is holding any security in the company or its subsidiary company or its
holding company or its associate company or a subsidiary of such holding
company.
vii. A person whose relative is a director
or is in the employment of the company as a director or key managerial
personnel.
viii. A person who has been convicted by a
court of an offence involving fraud and a period of 10 years has not elapsed
from the date of such conviction.
ix. Any person whose subsidiary or
associate company or any other form of entity, is engaged as on the date of
appointment in consulting and specialised services as provided u/s 144.
A person, who is disqualified for being appointed as auditor of a
company, is automatically disqualified for being auditor of its holding company
or its subsidiary company or any other subsidiary of holding company.
Provisions relating to removal of auditor
before the expiry of term [Sec. 140 (1)]: As per section 140(1), the auditor
appointed under sec. 139 may be removed from his office before the expiry of
his term only by a special resolution of the company, after obtaining the
previous approval of the central government in that behalf.
Procedure
for removal:
a)
Holds board meeting to pass the resolution
b)
Make an application to the central government along with prescribed fees within
30 days of the board’s resolution.
C)
Hold the general meeting to pass the special resolution within 60 days of
receipt of approval of the central government.
d)
Before taking any action for removal before expiry of terms, the auditor
concerned shall be given a reasonable opportunity of being heard.
Resignation by auditor [Sec. 140 (2)
and Sec. 140(3)]: When an auditor resigns, he is required to
file a statement in the prescribed form with the company and the registrar
stating the reasons and other facts which are relevant with regard to his
resignation. In case of a government company, the statement shall also be
filled with the CAG. The above mentioned statement shall be filled within 30
days from the date of resignation.
Special notice for not appointing the
retiring auditor [Sec. 140(4)]: According
to Sec. 140:
a) special notice at an AGM shall be
required for appointing as auditor a person other than the retiring auditor or
providing expressly that the retiring auditor shall not be reappointed.
However, special notice shall not be required if the retiring auditor has
completed consecutive tenure of 5 years/ 10 years as provided u/s 139(2).
b) On receipt of notice of such a
resolution, the company shall forthwith send a copy thereof to the retiring
auditor.
c) The retiring auditor is entitled to
make a representation against his removal. The representation shall be in
writing and shall be sent to the company.
d) The company shall send a copy of the
representation to every member of the company to whom notice of the meeting is
sent.
e)
If a copy of the representation is not sent because if was
received too late or because of the company’s default, then the auditor may
require that the representation shall be read out at the meeting and a copy of
representation shall be filed with the registrar.
Or
(b) Describe the
various sources from which the dividend
be paid by a company. Mention
the auditor's duties with regard to payment of dividends. 7+7=14
Ans: Sources of Declaring Dividend: As per
Section 123 of the Companies Act, 2013 dividend may be declared out of the
following three sources:
1) Out of Current Profits: Dividend may be declared out of the
profits of the company for the current year after providing depreciation. The
company must transfer the prescribed percentage of its profits to general
reserve before declaring dividends. This percentage depends on the percentage
of dividend declared.
2) Out of Past Reserves: Dividend may be declared out of the profits of the company for
any previous financial year or years arrived at after providing for
depreciation in accordance with the provisions of Schedule II of the Companies
Act, 2013 and remaining undistributed. Section 123 of the Act, requires that
dividend can be declared out of the reserves only in accordance with the rules
framed by the Central Government in this behalf.
3) Out of Money provided by the Government: A company can also declare dividend
out of the moneys provided by the Central Government for payment of such
dividend in pursuance of guarantee given by the Government.
Divisible
Profits and Rules regarding Dividends and Transfer to reserves
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. The principles of determination
of the divisible profit are given below:
1) According to Section 123 of the
Companies Act, 2013 no dividends can be declared unless:
Ø Depreciation has been provided for in
respect of the current financial years for which dividend is to be declared;
Ø Arrears of depreciation in respect of
previous years have been deducted from the profits; and
Ø Losses incurred by the company in the
previous years.
2) Section 123 of the Companies Act, 2013
provides that before any dividend is declared or paid a certain percentage of
profits for that financial year depending upon the rate of dividend to be paid
or declared should be transferred to the reserves of the company.
Provided
that nothing in this sub-section shall be deemed to prohibit the voluntary
transfer by a company of a higher percentage of its profits to the reserves in
accordance with such rules as may be made by the Central Government in this behalf.
3) No dividend shall be payable except in
cash;
4) There is no prohibition on the company
for the capitalization of profits or reserves of a company for the purpose of
issuing fully paid-up bonus shares or paying up any amount for the time unpaid
on any shares held by the members of the company.
5) Any dividend payable in cash may be
paid by cheque or warrant sent through the post directed to the registered
address of the shareholder entitled to the payment of the dividend or in the
case of joint shareholder to the registered address of that one of the joint
shareholder which is first named on the register of members or to such person
and to such address as the shareholder or the joint shareholder may in writing
direct.”
Transfer to Reserves: Section 123 of the
Companies Act, 2013 provides that
No
dividend shall be declared or paid by a company for any financial year out of
the profits of the company for that year arrived at after providing for
depreciation in accordance with the provisions of Schedule II, except after the
transfer to the reserves of the company a certain percentage of its profits for
that year as specified:
i.
Where the dividend proposed exceeds 10 percent but not 12.5
percent of the paid-up capital, the amount to be transferred to the reserves
shall not be less than 2.5 percent of the current profits;
ii.
Where the dividend proposed exceeds 12.5 percent but does not
exceeds 15 percent of the paid-up capital, the amount to be transferred to the
reserves shall not be less than 5 percent of the current profits;
iii.
Where the dividend proposed exceeds 15 percent, but does not
exceed 20 percent of the paid-up capital, the amount to be transferred to the
reserves shall not be less than 7.5 percent of the current profits; and
iv.
Where the dividend exceeds 20 percent of the paid-up capital, the
amount to the transferred to reserves shall not be less than 10 percent of the
current profits.
Auditor’s
duties while declaring and paying final dividend:
(i) The auditor should examine the Articles of
Association of the company to ascertain the differential rights of the
shareholders, if any.
(ii) The auditor should also examine the minute
book of directors’ and shareholders’ meetings to verify the dividend was
properly recommended by the directors and whether it was passed by a resolution
in the shareholders’ meeting.
(iii)The auditor should verify whether the amount
of dividend paid was calculated accurately.
(iv) He should ensure that the provisions of
Companies Act, 2013 and Companies (Declaration and Payment of Dividend) Rules,
2014 have been complied with.
(v) Based on the bank statements, the auditor must
verify whether the total amount of dividend was transferred to a separate bank
account in a scheduled bank within five days from the declaration of such dividend
and whether dividend was paid to shareholders only out that account.
(vi) The auditor must ensure that dividend has been
paid to the rightful owner. He should verify the Dividend Register and bank
statements for this purpose. The auditor shall also reconcile the amount of
dividend warrants outstanding with the Dividend Register and the balance in the
Bank Account.
(vii) The auditor shall also verify whether
sufficient effort was made by the management to distribute the dividend within
30 days from its declaration and shall enquire into all the cases where the
dividend could not be paid within such time.
Auditor’s
duties while declaring and paying Interim dividend:
(i) The auditor should examine the Articles of
Association of the company to ascertain whether payment of interim dividend is
permitted by the articles or not.
(ii) The auditor should also examine the minute
book of directors’ meeting to verify resolution approving the payment of
interim dividend.
(iii) The auditor must critically appraise the
justification in paying interim dividend based on interim accounts.
(iv) The amount of interim dividend shall be
deposited in a scheduled bank in a separate account within five days from the
date of declaration of such dividend.
(v) The auditor must ensure that dividend has been
paid to the rightful owner. He should verify the Dividend Register and bank
statements for this purpose. The auditor shall also reconcile the amount of
dividend warrants outstanding with the Dividend Register and the balance in the
Bank Account.
6. (a) What do you mean by
audit report? Explain the provisions of the Companies Act regarding audit
report. 2+12=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.
Provisions
of the Companies Act, 2013 Regarding Audit Report
The Companies Act, 2013 provides comprehensive
guidelines on the audit report, primarily in Sections 143 to 145 and related
rules. The key provisions are:
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Or
(b) Write notes on
the following: 14
(i) Elements of
audit report
Ans: Elements of 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.
(ii) Qualified
audit report
Ans:
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.
(iii) Importance of audit report
Ans: In a company, management is separate from ownership, and
shareholders appoint auditors to examine financial records and submit a report.
However, this report does not guarantee absolute accuracy. The auditor is
neither a guarantor nor an insurer. A legal precedent states that “the auditor
must not be held liable for failing to detect fraud when there is nothing to
arouse suspicion and when the fraud is committed by trusted employees of the
company.”
Auditors
are expected to act with honesty, reasonable skill, and care. The audit report
is crucial as shareholders and stakeholders rely on it for financial
transparency. An auditor may be guilty of professional misconduct if they
deliberately fail to disclose material facts, conceal misstatements, or neglect
obtaining essential audit information.
An audit report is important due to the
following reasons:
1.
Assurance of Accuracy: The report
assures stakeholders that the company’s financial statements are free from material
misstatements caused by fraud or error, enhancing the credibility of financial
information.
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(iv) Specimen of
clean report
Ans:
Specimen of Clear
Report
To,
The Share Holders of ABC Ltd.
We
have audited the attached Balance Sheet of ABC Ltd as on 31.03.2016 and also
Profit and Loss account annexed there to for the year ended on that date.
1. We
have obtained all the information and explanation which to the bet of our
knowledge and belief were necessary for the purpose of audit.
2.Proper
books of accounts are required by the law have been kept by the company so far
as it appears from our examination of books and proper return adequate of our
audit have been received from branches not visited by us.
3.
The Balance Sheet and P&L account dealt with by his court are in agreement
with the books of accounts and returns.
4. In
our opinion and the to the best of our information and according to the explanation
given to us the said Balance Sheet together with the notes thereon given the
information required by the Companies Act of 2013 in manner so required and
gives a true and fair view:
(a) In the case of Balance Sheet of the state of the company as at
31.03.2016; and
(b) In the case of the Profit and Loss Account of the profit of
the company for the year ended on that date.
Date: Signed
Place: (Name,
partner XY Associates)
Charted
Accountant.
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