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Sunday, February 01, 2015


Answer of Question No.1.
“Auditing begins where Accountancy ends”
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”. 
In the words of Montgomery,”Auditing is a systematic examination of the books and records of a business or other organization, in order to ascertain or verify and report upon the facts regarding its financial operation and the result thereof”. 
In the words of Lawrence R. Dicksee,”An audit is an examination of records undertaken with a view to establishing whether they correctly and completely reflect the transactions to which they relate. In some circumstances it may be necessary to ascertain whether the transactions are supported by authority. 
In the words A.W. Hanson,”An audit is an examination of such records to establish their reliability and the reliability of statement drawn from them”. 
In the words of R.B. Bose,”Audit may be said to the verification of the accuracy and correctness of the books of accounts by independent person qualified for the job and not in any way connected with the preparation of such accounts”. 
The main purpose of Auditing or object is to find the opinion of an auditor about the correctness and reliability of accounts and the financial position of the business concern. For this purpose auditor has to check the arithmetical accuracy of the books of account and to find out that whether the transactions entered in the books of account are correct or incorrect. This is done by various methods like inspecting comparing and checking. So all that work that is done by the auditor ensures him that figures are facts.
From the above definitions it is clear that the auditor’s basic duty is to examine the accounts and its arithmetical accuracy. He must ensure than the financial statements depicts true and fair view of the state of affairs of the business. Since, Auditing is a full and critical examination of the books of accounts to find out their accuracy. That is why it is said that  auditing begins where accounting ends.

a)      Scope:  Accounting is concerned with preparing of financial statements. Auditing is concerned with checking of financial statements.
b)      Purpose: The purpose of accounting is to show the performance and financial statement. The purpose of auditing is to certify the true and fair view of financial statement.
c)       Nature: Accounting is concerned with current data. It constructive in nature. Auditing is concern with past data. It is analytical nature.
d)      Knowledge: Accounting works requires that accountant must have accounting knowledge. Auditing work required that an auditor must have accounting as well as auditing knowledge.
e)      Status: The accountant is permanent employee of the business. The auditor is an independent person.
f)       Start: The work of an accountant starts when the work of bookkeeper ends. The work of an auditor starts hen the work of an accountant ends.
g)      Qualification: An accountant may not be a Chartered Accountant as per law. An auditor must be Chartered Accountant for public companies.
h)      Principles: The accounting principles include going concern accrual consistency and prudence. The auditing principles include independence, objectivity, full disclosure and materiality.
i)        Methods: The accounting methods include depreciation, amortization and valuation. The auditing method include manual and computerized.
j)        Techniques: Accounting technique includes depreciation rate interest rate and installment payment. Auditing technique include vouching, verification and valuation.
k)      Rules: Accounting is not governed by any code of conduct laid down by any institute. Auditing is governed by code of conduct as laid down by institute of chartered accountants.
l)        Necessity: Accounting is necessity of every business entity whether small or large. Auditing is not necessity of every business.
m)    Report: The accounting work requires no report to any party. The auditing work requires separate report to shareholders director or owners.

Answer of Question no.2.
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 labor, where in performance of each individual is automatically checked by another. This is possible by properly allocation the work and integration of function of the employees in such a manner their work complements each others.
a)      Eliminates frauds and errors to prevent misappropriation of goods in cash.
b)      To encourage specialization of labor.
c)       To reduce the time spent on a particular work.
d)      To exercise moral pressure over staff members.
e)      To make accounting system more reliable.

Essentials of good internal check system
a.       No single staff shall have absolute control over recording of all the aspects of business transactions by himself.
b.      The same staff shall not be allowed to have access to all books of accounts as well as physical custody of the assets.
c.       Each member of the staff should be made responsible for a specific work.

d.      All officials and employees holding responsibility towards cash, securities or stock should be encouraged to proceed on annual leave to prevent the concealed fraud.

e.      The duties of the members of the staff should be changed from time to time.

f.        Attempt should be made to introduce mechanical devices to prevent mis-appropriation of cash.

g.       Each transaction should pass through a definite route and through several hands.

h.      All books, vouchers, documents should be classified and made available for easy reference.

i.         Proper record must be maintained of the incoming and outgoing of goods from the business premises.

j.        Self balancing ledger system should be introduced to make the system more efficient and effective.

k.       No undue importance should be given to any staff member and too much reliance on any staff member should be avoided.

l.         Division and allocation of duties among the staff members must provide for an automatic check by others.

Difference between Internal Check, Internal audit and Internal Control
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.
Large scale organizations usually develop a system to review their activities to identify areas of non performances. Internal audit is a tool used in this regard. Internal auditing involves a continuous critical review of financial and operating activities by a staff of auditors functioning as full time salaried employees.
Internal control is a broad term which is normally used to control financial and non-financial activities. It involves a number of checks and controls exercised in a business to ensure efficient and economic working.
Main points of distinction are given below:
Internal Check
Internal Audit.
Internal Control
1. It is an arrangement of duties allocated in such a way that the work of one person is automatically checked by another.
1. It is independent appraisal of operation and records of the company.
Internal control is the whole system of controls, financial and otherwise, established by the management in order to carry on the business of the company in an orderly manner.
2. The purpose of IC is to prevent minimize possibilities of errors and frauds.
 2. The purpose is to detect errors and frauds that are already committed.
2. The purpose is to ensure adherence to management policies, safeguard assets and completeness of records
3. IC doesn’t require separate staff. It represents only the arrangement of duties.
3. It requires separate staff employed only for this purpose.
3. It requires separate staff employed for internal audit and internal check.
4. IC is a continuous process.
4. The Internal auditor has to report periodically about various inefficiencies and suggest improvements.
4. Internal control is a wider term which includes internal check, internal audit, etc.
5. It is devices of doing the work.
5. It is a device for monitoring the work.
5. It is a device of managing the work.
6. Scope of Internal Check is limited especially to the accounting department.
6. The scope of internal audit goes on beyond accounting department.
6. It covers whole organisation.

Answer of Question no.3.
Vouching is the backbone of auditing
The act of examining vouchers is referred to as vouching.  It is the practice followed in an audit, with the objective of establishing the authenticity of the transaction recorded in the primary books of account.  It essentially consists of verifying a transaction recorded in the books of account with the relevant documentary evidence and the authority on the basis of which the entry has been made; also confirming that the amount mentioned in the voucher has been posted to an appropriate account which would disclose the nature of transaction on its inclusion in the final statements of account.  After examination, each voucher is marked in a manner to ensure that it may not be presented again in support of another entry.
Vouching 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.  Thus the object of vouching the payments of a business is not merely to ascertain that money has been paid away; but the auditor aims to obtain reasonable assurance in respect of following assertions in regard to transactions recorded in the books of account that:
(i)      a transaction is recorded in the proper account and revenue or expense is properly allocated to the accounting period;
(ii)    a transaction pertains to entity and took place during the relevant period;
(iii)   all transactions which have actually occurred have been recorded;
(iv)  all transactions were properly authorised; and
(v)    transactions have been classified and disclosed in accordance with recognised accounting policies and practices.
It is through vouching that the auditor comes to know the genuineness of transactions recorded in the client’s books of account wherefrom the financial statements are drawn up.
Apart from genuineness, vouching also helps the auditor to know the regularity and validity of the transaction in the context of the client’s business, nature of the organisation and organisational rules.
Thus, the auditor’s basic duty is to examine the accounts, not merely to see its arithmetical accuracy but also to see its substantial accuracy and then to make a report thereon.  This substantial accuracy of the accounts and emerging financial statements can be known principally by examination of vouchers which are the primary documents relating to the transactions.  If the primary document is wrong or irregular, the whole accounting statement would, in turn, become wrong and irregular.  Precisely auditor’s role is to see whether or not the financial statements are wrong or irregular, and for this, vouching is simply imperative.  Thus, vouching which has traditionally been the backbone of auditing does not merely involve checking arithmetical accuracy but goes much beyond and aims to check the genuineness as well as validity of transactions contained in accounting records

Important points to be considered while vouching :
a)      All the vouchers must be printed and serially numbered. Any hand written voucher must be seen with suspicion.

b)      Accounting entries must correspond to serial number of vouchers.

c)       Voucher should belong to the period under audit and it should be in the name of client.

d)      Receipt voucher should have signature of recipient if received in cash.

e)      Payment should be made through cheques only. Cash payment voucher should be examined in detail to  detect embezzlement or misappropriation of money.

f)       All voucher should be seen and  signed by  the competent authority of business.

g)      voucher is duly authorised;
1)      the voucher comprised all the relevant documents which could be expected to have been received or brought into existence on the transactions having been entered into, i.e., the voucher is complete in all respects; and

2)      the account in which the amount of the voucher is adjusted is the one that would clearly disclose the character of the receipts or payments posted thereto on its inclusion in the final accounts.

h)      All expenses and expenditure should be reasonable in the eyes of auditor. He can always raise his eyebrows if any excessive payment is noticed.

i)        All vouchers should relate to business. Any voucher of personal expense should not be paid by the business.

Answer of Question no. 4.
A person can be appointed as Company only if he has the following Qualification(Section 226) :
a)      He/She be practicing chartered accountant. Section 226

b)      If auditor is a firm, all the partners must be practicing chartered accountants. Sec. 226

c)       To audit the cost records of the firm maintained u/s 209(1)(d) of Company's Act 1956, the auditor must be a practicing cost accountant. Section 233 B.

d)      If a firm of cost accountants is appointed as cost auditor to audit the cost records, all the partners of the firm must be practicing cost accountants. Section 233B

Appointment of Company Auditor: (Section 224) :
Appointment of First Auditor: The first auditor of the company is to be appointed by BOD within 30 days from the date of incorporation of company. Note here that this is not from the date of commencement of business. First auditor shall hold office upto the conclusion of first AGM. If BOD fails to appoint the first auditor, the auditor can be appointed in first general meeting. If no auditor is appointed in general meeting, the CG will appoint the first auditor.
Appointment of subsequent auditor : All subsequent auditors will be appointed in AGM except in certain circumstances.
Appointment by Special Resolution Section  224A :(Special resolution means 75% votes in favour). In case of a company in  which 25% or more of subscribed capital is held by any Govt., Govt. Company, Financial Institutions, Nationalized Bank or Insurance company, then the auditor  will be appointed in AGM by passing special resolution.
If the company fails to pass the special resolution, then CG will make the appointment. The detailed description of the above is as follows: An auditor will be appointed by passing special resolution in the following case When the 25% or more of the subscribed share capital is held (singly or jointly) by :
a)      Central govt. or State govt. or a Govt. company ;
b)      A public financial institution ;
c)       Any financial institution or other institution in which state govt. has 51% of subscribed capital
d)      A nationalized bank or an insurance company carrying on general insurance business.
Appointment in case of Casual Vacancy : Casual vacancy created due death, insolvency or disqualification (but not due to resignation) of the present auditor can be filled by the BOD. Casual vacancy created due to resignation of auditor, can be filled only in the general meeting. An auditor appointed under casual vacancy will hold office upto the end of next AGM.
Appointment by CG : When no auditor is appointed by the company, the company will inform the CG within 7 days of such meeting and the CG will appoint the auditor.

Removal of an auditor:
                To secure the independence and authority of auditor, his removal before the expiry of his term has been deliberately made hard in the Company's Act 1956. Following procedure should be adopted for removal of auditor before the expiry of his term ;
1)      The company must obtain the prior permission of CG.
2)      After obtaining permission from CG, the company will give 14 days notice to shareholders with a copy to concerned auditor.
3)      The auditor may send his representation to the company. The company will circulate such representation to all shareholders or such representation may be read out in the general meeting.
4)      If general meeting passes a resolution to remove the auditor, the auditor stands removed.
5)      If the auditor is to be removed by the company after the expiry of his term (which is conclusion of next AGM), the company has to give 14 days notice to its members with a copy to the concerned auditor.

Duties of Company Auditor (Section 227) :
Duties towards the shareholders :
a.       Report shareholders about true and fair state of affairs of the company;
b.      State that balance sheet and profit and loss a/c give all information required by law;
c.       State that balance sheet and profit and loss a/c agree with the books of account;
d.      State that balance sheet and profit and loss a/c agree with accounting standards;
e.      State that he has obtained all the necessary information ;
f.        State whether the company has maintained all books as required by law;
g.       State the reasons of qualification in his report;
h.      State that he has received the audit report on the branch accounts audited by other auditor and how he has dealt with the same in preparing his report;
i.         Auditor shall state in his report whether :
j.        The loans taken are properly secured and the terms of loans are not against the interests of the company ;
k.       Loans given are shown as fixed deposits and the terms of loans are not against the interests of the company;
l.         Transactions recorded as book entry are not against the interests of the company
m.    Personal expenses of directors have not been charged to revenue a/c of company;
n.      The company fulfills the requirements of CARO 2003.

Duties towards Company :
a.       Prospectus : According to Sec 56, the auditor is required to certify profits or losses, assets & Liabilities and dividend paid etc in the prospectus.
b.      Statutory Report: Section 165 requires that the auditor has to certify the statutory report. (what is statutory report any way?)
c.       Public Deposits : Section 58AA requires the auditor to report about whether the company has followed all rules and guideline of RBI in regard to public deposits or not.
d.      Signature on Audit Report : Section 229 :It is duty of auditor to sign on his report.
e.      Insolvency : Section 488 : If the company wants itself to be declared insolvent, it is duty of auditor to prepare profit and loss a/c for the current period.

Duties towards government :
a.       CARO − 2003 : The auditor has to report para-wise that the company has fulfilled all the requirements of CARO − 2003.
b.      Assist the Investigation u/s 237: It is duty of auditor to assist the investigation ordered by the CG u/s 237.

Duties towards General Public :
a.       His office is of confidence and faith. He must be reliable in all respects.
b.      He should reveal all material information regarding the state of affairs of the company to the company as well as to the general public.
c.       While issuing prospectus u/s 56, he should see that the prospectus does not include any misleading information or material.

Answer of Question no.5.
a) Management Audit:
Objectives of management audit are (i) to detect and correct the human limitations of top management; (ii) to improve upon management’s productivity; (iii) to avoid possible losses arising from inefficient management and (iv) to study the current state of all affairs of the management and suggest suitable measures for improvement.
 The management audit is very useful for society at large. It is intended to review all managerial aspects of the company so as to enhance efficiency and efficacy of the entire system which has a social advantage as well. It serves the interest of different segments of society like customers, creditors, stakeholders, government and people at large.
Management audit is beneficial to every one connected with the organization in any manner because it is intended to make improvements in all processes and functions of management. Foreign collaborators invest their funds in the organization and would always wish for better utilization of it. They would like to ensure that the management is not inefficient; management audit provides them such assurance.
The following are some of the circumstances in which the management audit may be useful :
1)      While advancing loans, the lending institutions may require the management audit to be conducted;
2)      Foreign investors / collaborators usually demand management audit report before releasing funds for growth and expansion;
3)      Company may itself feel the necessity of management audit for evaluating its performance, efficiency and efficacy;
4)      When one company wants to acquire another company, it may insist on conduct of management audit before acquisition;
5)      Social image may be bettered by conduct of management audit as it is not mandatory in nature.

b) Cost Audit
It is an audit process for verifying the cost of manufacture or production of any article, on the basis of accounts as regards utilisation of material or labour or other items of costs, maintained by the company. In simple words the term cost audit means a systematic and accurate verification of the cost accounts and records and checking of adherence to the objectives of the cost accounting.
As per ICWA London’ “cost audit is the verification of the correctness of cost accounts and of the adherence to the cost accounting plan.”
The ICWAI defines cost audit as " system of audit introduced by the government of India for the review, examination and appraisal of the cost accounting records and attendant information required to be maintained by specified industries"
From above definition of cost audit, it is clear that cost audit is a sytematic examination of cost accounts to verify correctness of cost accounting records.
As per the section 233 B of Company Law 1956, there is the provision for cost audit. Under this section, cost audit is compulsory for all the public and govt. companies which are associated with the processing and production. If there aggregate value of net worth exceeds 5 crores or total sale exceeds 20 crores, the cost audit is must.

c) Efficiency Audit
Efficiency audit means whether operations of organization are competent to achieve the goal of organization. Its purpose is to assess that the control and supervision of management are in every functional and operational area of the firm. Efficiency audit means study of competence of people, policy and procedure to achieve goals.
Efficiency audit has two parts :
First part is about people working in the organization. Whether they have proper qualification, experience, quality and facility to work efficiently and effectively. The efficiency and the effectiveness of an executive in discharging his obligation towards the attainment of objectives of the organization will also form part of efficiency audit.
The second part is about functions and operations in the organization. Whether the tools, techniques and terms of functions and operations are effective and efficient with a view to attain optimum utilisation of resources of the organization.
Efficiency audit includes the following :
a.       Reduce the areas of uncertainty of the business;
b.      Remove the bottlenecks to achieve the goals and objectives of the organization;
c.       Remove the inefficiency and ineffectiveness of operations;
d.      Protect against the causes of business failures;
e.      You can also write your own points.

d) Propriety audit
Propriety audit is a method of audit which verifies the reasonableness of expenditure incurred by an organization and is not detrimental to public interest. This audit is generally applicable to the government organizations.
According to E. L. Kohler, " Propriety means that which meets the test of public interest, commonly accepted customs and standards of conduct. Propriety audit is an audit in which various actions and decisions are examined to find out whether they agree in public interest and whether they meet the standards of conduct."
Propriety audit not only determines the accuracy of books of accounts but also justify the expenditure in term of propriety and reasonableness. Therefore, this audit tests the public interest and evaluates its financial propriety in relation to standards or commonly accepted customs. Propriety audit is generally applicable to the government organizations as it involves a huge public money. So, public accountability is the main criteria of propriety audit. It evaluates the efficiency and prudence of government department and its propriety in relation to public money. The scope and objectives are:
a)      Confirm collection of revenue: Propriety audit helps to assess whether revenue are properly collected and recorded in the books of accounts.
b)      Helps to detect fraud and misrepresentation: This audit helps to judge whether there is any fraud and misrepresentation of funds.
c)       Wastage of funds: With the help of propriety audit wastage of public funds can be determined and also its utilization can be verified.
d)      Verify justification of expenditure: Verify Justification of expenditure in relation to generally accepted standards and customs.
e)      Not detrimental: It verifies that the contracts made by the organization with the third parties are not detrimental to the public interest.