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Q.

1
a) Define auditing. Distinguish between auditing and accountancy.
Audit in an independent, scientific, intelligent and critical examination of the books of
accounts or accounting records of a business. Such examination enables the auditor to
satisfy himself that the balance sheet and the profit and loss account are properly drawn
up, and the account exhibits a true and fair view of the financial state of affairs of the
business for the accounting period.
Detection of errors and frauds is an integral part of auditing. The job of auditing is
performed by an independent person or body of persons qualified for the job.
In order to report on the financial health of the business, the auditor has to go through
vouchers and other related documentary evidence (both internal as well as external)
The auditor has to satisfy himself about the correctness, authenticity and reliability of
accounting information and submit his report accordingly.
Comparison between Auditing and Accounting
Many financial information users and members of the public often think of auditing as
being part of accounting.
The confusion results because most auditing is concerned
with accounting (i.e. examination thereof) information and almost all auditors are
accountants also. Giving the title “chartered accountants” to individuals performing a
major portion of the audit function increases the confusion. Therefore, in order to
understand the true nature and role of auditing as a discipline, one must know how
auditing is different from accounting besides what relationship it maintains with the latter.
Accounting : Accounting is the process of recording, classifying, and summarizing
economic information in monetary terms. Accounting aims at providing financial
information for decision making. The person who performs this function is called an
accountant. His job include following:
(a)
(b)
(c)
(d)

Recording business transactions in monetary terms.
Classifying and summarizing them
Preparing financial statements
Communicating the final information in a summary from to management and other
users to make decisions.

Auditing: “Auditing begins where accounting ends” This implies that an auditor comes
into the picture only when the accountant has done his job. In auditing accounting data,
the auditor has to determine whether the recorded information properly reflects the
economic events that occurred during the accounting period. Thus an auditing is
basically a review function. An auditor examines the final product of the accounting
system and, on the basis of his examination and audit evidence accumulated by him,

the two maintain a close relationship..expresses (through a formal report) his impartial opinion-whether the accounting information is properly recorded and fairly reflects the state of affairs of firms business. 2. “The relationship of auditing to accounting to close. An accountant may not comfortable with audit techniques and procedures. they are business associates. 6.”. Hierarchy: Auditing begins where accounting ends. Process. through knowledge of accounting is s prerequisite to carry out an audit effectively. Auditing. Internal control implies the whole system of control employed by the management in order to carry on the business of the enterprise in an orderly an efficient way by having an automatic check and balance overall the transactions. Auditing. There can be no auditing without the prior existence of accounting data. The system also helps to ensure that assets are secure and management policy is being followed properly. However. being primarily a review of accounting information. classification. Expertise required. not parent and child . is referred as a analytical and critical aspect of accounting since it reviews the measurement and communication of financial results and condition of business. Accounting is a four-step process that involves collection and record. on the other hand. Whereas the object of audit is to judge the correctness and reliability of financial statement prepared by the internal staff of the business enterprise. summarization and communication of accounting information and results thereof. What are its principal forms? Explain its objectives. 3. yet their nature are very different. It includes internal check. From the above discussion. the person concerned should involve himself in the process of accounting for. however. Auditing. Auditing on the other hand. 5. on the other hand. It is the expertise that distinguishes auditors from accountants. the audit cannot be an independent assessment. b) Define internal control. and reporting the findings. Its efficient . is concerned with examination or review of financial information so furnished. includes three principal steps. This. Internal control system assures the management that the information it receives is both reliable and accurate. 4. internal audit and other devices of control. In the words of Mautz and Sharaf. separation of these steps is not always clear. performing the audit work.. classification and summarization of economic events in a logical manner for the purpose of providing financial information for decision-making. The main points of difference between accounting and auditing may be summarized as below: 1. Nature: Accounting is constructive in nature as its measures business events in terms of profit or loss and communicates the financial condition of the business as depicted by financial statement. viz. but an auditor must be well versed with the principles and techniques of accounting. Subject matter: Accounting is concerned with collection. preliminary planning. does not mean that to be an effective auditor. Object: The main object of accounting is to know the trading results or state of affairs of a business during the accounting period. it should be clear that auditing is not a part or subset of accounting. in that case.

Principal Forms: Accounting Controls. Objectives of Internal Control The clients internal control system aims at providing reasonable assurance that: 1. and correctly summarized. checking transactions as per the prescribed procedures and safeguarding the assets. and accurate. Administrative Control. Q. accounting control concerns the controls related to the accounting system. The last phrase of the definition. Transactions are properly posted to the ledger accounts. Transactions are recorded at proper time. Recorded transations are duly authorized. Administrative control comprises the following: (a) Time studies (b) Motions studies (c) Quality control (d) Performance appraisal (e) Statistical analysis etc. nature and extent of their audit work. complete. Transactions are properly classified and valued. i. Accounting control comprises the following: (a) Budgeting Control (b) Standard costing and deviation analysis (c) Internal Check (d) Internal Audit (e) Bank Reconciliation (f) Self –balancing ledgers etc.2 a) Explain “Teeming and Lading”. According to the first part of the said definition. independent auditors also rely on system of internal control in determining the timing. indicates towards administrative control. Describe the procedure adopted in vouching various items of capital expenditure. 3. 2. 4. Records are valid. 5.working not only guarantees management as to the reliability of accounting information.”…operational efficiency and encourage adherence to prescribed managerial policies”. Teeming and lading method of Fraud This is a method by which deficiencies of cash (misappropriation of cash already committed) are concealed for some time in the following way: .e.

his account is not credited but the account of the firs debtor is credited. These are the methods by which the past defalcations are covered up by the present receipts. The procedure for vouching will differ depending upon the nature of acquisition of the plant and machinery. receipts etc) Purchase of free hold and leasehold property.” So far we have presumed that all remittances have been received in cash. agreements. Let us make this point clear by an example. but there is a danger that if A does not received a receipt for the amount. If the purchase has been effected through a broker. B’s account will be credited for Rs. These methods of fraud are knows as “teeming and lading” or “lapping”. and payees acknowledgements should be seen. If the building has been constructed. his account is not credited but that of the second debtor is credited. labor of overheads should be carefully checked so that correct amount is capitalized. The cheque for Rs.When cash is received from some debtor. This is a method by which the past defalcations are covered up by the present receipts. Suppose another cheque for two hundred rupees from B is received. contract for construction and the payee’s acknowledgement should be examined. Again. the architect’s certificate. This method of fraud is known as “short banking” or “delayed accounting of money received”. A sends one hundred rupees in settlement of his account. But in case remittances are received by means of cheques. 200 instead of Rs. sold note and/or his statement of account should be seen that all legal charges incurred in connection with the acquisition of the property and brokerage paid have been capitalized. absconds. This process is knows as “splitting cheques”. 100. and cash is debited. Purcahse of plant machinery. The cashier misappropriated he amount and does not either debit cash or credit A’s account. Later on. thus. then the cheques will have to be split up. If it was got constructed under a . he will write to the company for the receipt or the company itself may remind A for the settlement of account. This method of fraud is also known “teeming and lading” ir “Lapping” has been defined by professor Meigs as “concealment of a shortage by delaying the recording of cash receipts. The procedure adopted in vouching various items of capital (Vouchers – Invoice. closing his account while C’s account will be credited to Rs.300 Thus. when cash is received from any other debtor. brokers. later on when cash is received from a third debtor. letter of contract. The whole of the amount will not be credited to B’s account. 200 will be sent to the bank for collection. If the construction was made by the staff of the organization then the allocation of materials. it’s is not recorded in the cash book and is misappropriated. The agreement for sale together with the title and conveyance deeds should be vouched for the real property. Suppose later on C sends a cheque for Rs. 300. and the cash is debited. this process goes on and the defalcation is transferred from one account to another till the fraud is discovered or the cashier. This process goes on for some time till the cashier is in a position to pay back the money embezzled or the fraud is discovered. having embezzeled a large sum of money.

Contract of purchase. Closing entries: These should be checked with reference to the audited closing balances of the general ledger. or minutes. Patents and copyrights. The several classes of journal entries would be vouched as follows: Opening entries : These should be checked with reference to previous year’s audit working papers or audited balance sheet.contract. Payment for furniture and fixtures. payee’s acknowledgement. the actual contract should be inspected and the certificate for the completion of construction and erection be seen. the statement of agent’s account should also be examined and his commission be capitalized. In the absence of any special subsidiary book for recording transactions of a particular nature the entries for such transactions can also be passed through the journal. which cannot be passed through any other book of original or prim entry. The transaction has been authorized by some responsible officer. the auditor should ensure that the following points are adhered to: 1. brokers note. it should be seen that renewal fees are not capitalized. invoice. Patent means an exclusive right or privilege to make or produce something for example. The transaction is supported by documentary evidence. the patent and the receipt acknowledging the purchase consideration should be seen. Every journal entry has a narration 2. If it was purchased through an agent. bills rendered by the contractor and payee’s acknowledgement. contracts. The evidence to vouch the entries would be in form of vouchers. . Motor vehicles. Similar considerations apply for vouching this head of capital expenditure as were discussed in the case of plant and machinery. While vouching journal proper. correspondence. 3. asset receiving report and the registration book showing the ownership in the name of the client should be examined. formula for bottling soft drink. If a patent has been purchased. whereas copyright on the other hand is a right to produce an item of particular design. are passed through the journal proper. b) What is journal proper? How should various entries of journal proper be vouched? Entries. The amounts paid should be checked with the contract.

(a) Real Accounts. The impersonal ledger contains most of the records based on entries made in the books of original or prime entry. he should check their postings to the impersonal ledger. revenue etc. (b) Nominal Accounts. 1. The necessary entries must be authorized bye a responsible official. and not as the affect persons. losses. The auditor must see that direct transfer from one account to another is not made. interest paid account. income received in advance. Adjustment in respect of expenses prepaid should also be closely scrutinized. Further. In other words. Account which relate to expenses. Rectification entries: The details of actual mistakes should be scrutinized and transactions must be thoroughly checked with reference to the available evidence. a) What do you mean by impersonal ledgers? Describe the general considerations for vouching impersonal ledgers Impersonal accounts means the accounts. which are not personal such as. Transactions for which there is no other book of original entry: Reference must be made to correspondence. proper authorization should be obtained. Adjusting entries: The auditor should examine if all adjusting entries in respect of expenses relating to the period under audit. He should therefore check the casts and sub- . He should check the journal carefully and should ensure that each and every is supported by sufficient evidence. Impersonal ledger is also called general ledger and it can further be subdivided in to two categories.Transfer entries : For the transfer from one ledger account to another ledger account. are known as impersonal accounts. salary account. These accounts record aspects of financial transactions as they affect the business. 2. viz. land and building account. e. cash account etc. acquisition of different assets or liabilities taken over from the vendors. The auditor should also check the casts of journal vouchers and journal entries and then the postings to the respective ledger accounts. gains. and income earned and not received are duly made. wages account. rent account.g. bills receivable dishonored. These account records assets. bad debts. minutes of board/shareholders and other relevant documentary evidence to vouch the transactions for which there is no other book of original entry. GENERAL LEDGERS CONSIDERATIONS WHILE VOUCHING IMPERSONAL The auditor should keep the following points in mind at the time of vouching impersonal ledgers. real accounts relate to the asset of the firm. commission received account etc.

3. If the auditor found that a company in the course of its business was incurring liabilities of a particular kind. Therefore. He should ensure that these entries have been posted to the right accounts maintained for the purpose. Like verification and valuation of assets. If liabilities are not properly verified and valued. 4. The auditor should also check and verify the various adjustments entries made at the time of preparation of final accounts. it was held that the auditor should take reasonable care to satisfy himself that all the expenses and liabilities which the company could be expected to have incurred had been duly recorded in the books of account. the auditor might be held liable for the payment of dividend out of capital. What are its objects? Distinguish between verification and vouching. have been included in the books account. the balance sheet of a business enterprise will not exhibit a true and fair view of its state of affairs. The term liability in its usual and ordinary sense refers to a state of being under legal obligation. and that when he was making his audit a sufficient time had not elapsed for the invoices relating to such liabilities to have been received and recorded in the . the auditor should be see that liabilities are genuine and duly authorized. i. 5. He should also check and ensure that no capital expenditure is treated as revenue expenditure and all revenue expenditures are duly shown in the profit and loss account. stating that to the best of his knowledge and belief: 1. It was settled last than an auditor did not discharge his duty if he merely saw that the balance sheet accurately represented what was shown by the books on the material date. profit and loss account reveals more profit and consequently more profits are distributed among the shareholders. b) Define verification.4 a) Explain clearly the meaning of ‘Verifications of Liabilities’ as shown in a Balance Sheet. -============================== Q. He should check the postings of cash payments and receipts in respect of nominal accounts from the cash book to the impersonal ledger. All liabilities. or depreciation. verification of liabilities is an equally important aspect of auditing.casts of the various books of the prime entry. 2. He must also obtain a certificate from a responsible official of the client. subsidiary books and their postings in the relevant nominal accounts in the impersonal ledgers. all the contingent liabilities have either been disclosed in a footnote to the balance sheet or have been provided for. and that liabilities of the kind in question must have been incurred during the accountancy period under audit.e. If due to wrong allocation of expenditure. whether for purchases (supplies) or expenses or on any other account existing at the date of the balance sheet. and that the creditors sent in their invoices after an interval. Such adjustment entries may release to outstanding assets and liabilities.

8. Right to receive remuneration 11. it would be sufficient on the part of auditor to satisfy himself about the correct disclosure of information in respect of every item appearing in the liabilities side of the balance sheet of a business concern. all liabilities appear at their actual figures in the balance sheet.company’s books. Right to sign audit report. Right to visit branches and to have access to branch accounts. Statutory duties 2. in order to see that no invoices relating to liabilities had been omitted. In the light of the above decision. therefore. 7. Right of indemnity 10. it because his duty to make specific enquiries as to the existence of such liabilities and also before he signed a certificate as to the accuracy of the balance sheet. and d) No item of liabilities has been omitted. which he thinks necessary for performing his duties and auditor. c) They represent genuine and duly authorized transactions. Right of access to the books and accounts and vouchers. under or over stated. the company auditor is entitled to obtain all such information and explanations from the officers of the company. to go through the invoice files of the company. 2. Right of lien on working papers 12. Duties arising out of common law . It should also be noted that liabilities are not valued like assets. The rights of a company auditor cannot be limited or abridged in anyway.e. Right to obtain information and explanation. 9. Right to make corrections in Financial Statements 5. The rights or powers of the auditors are given below: 1. Right to receive notices and attend the general meeting 4. Right to report to the members 6. He has to report to the shareholders on the financial statements examined by him during the audit. an auditor of a company has a right of access at all times to the books and accounts and vouchers of the company. b) All the liabilities stated in the balance sheet relate to the business itself. i. Right to take expert’s opinion. it can be inferred that it is quite essential for an auditor to see that: a) all liabilities have been clearly stated in the balance sheet. An auditors job is independent of the management of a company. Right of lien on the books of account and other relevant documents The duties of a company auditor can broadly be classified into four categories 1. 3. b) Explain in brief the powers and duties of company auditor.

General duties.5 a) How as a company auditor you would audit transmission of shares? b) Discuss the concept of ‘true and fair’ in an auditor’s report. as far as may be to the general instructions for preparation of balance sheet under the being ‘Notes’ at the end of that part. For instance. The auditor is supposed to assess the accounts as a whole and to inform and express an opinion on the basis of his overall impression about these accounts. subject to the provisions of this section. The opinion part contains judgment or impression of the auditor about the truth and fairness of the accounts and balance sheet and profit and loss account.3. Q. cent percent accuracy of each and every figure in the accounts. It does not establish absolute. or as near thereto as circumstances admit or in such other form as may be approved by the Central Government either generally or in any particular case. Auditor’s report normally shows the scope and nature of the audit work and the opinion of the auditor. Auditors signature Date of the report. and shall. It should however. be in the form set out in Part I of Schedule VI. Place of signature. The scope part of the audit report consists of a representation as to the work performed. The basic elements of the audit report are as follows: a) b) c) d) e) f) g) Title Proper disclosure of the clients name Addressee Period of financial statements. i. in the case of a financial audit. Duties arising out or professional ethics and etiquette 4. Some of the figures may be just estimates.e. and in preparing the balance sheet due regard shall be had. It shows the extent to which the auditor has conducted his examination and the nature of such examination. he has to state whether in his opinion the financial statements exhibit a true and fair view of the affairs of the company under audit. In the audit report an auditor is required to express an opinion on various matters. be noted that the ‘true and fair’ concept just incorporates the auditors opinion as to truth and fairness of the financial information examined by him. Profit and loss to be true and fair . Balance sheet to be true and fair Every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year.

Statutory liabilities 2.Every profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year and shall comply with the requirements of Part II of schedule VI. Distinguish clearly between financial. Contractual liabilities 3. Liabilities under common law 4. 1956. His appointment. duties. Q. Discuss in brief the liabilities of an auditor under the Companies Act. so far as they are applicable thereto. What are the objectives of cost audit? C. Define cost audit and state in which cases it may be ordered. .6 A. The liabilities of the company auditors may be classified and studied under the following four heads: 1. remuneration. B. The status of a company auditor differs from that appointed by a private concern. cost and management audit. power and responsibilities are defined and laid down in the Companies Act 1956. Other liabilities.