Q. 1 Explain in brief meaning and objects of audit.
Ans
(i) Audit is critical and comparative examination of books of accounts, records, and statements.
(ii) It is done by on Independent agency.
(iii) It is done with the help of relative documentary evidences (vouchers)
(iv) It is done to ascertain true and fair view of affairs /financial position of organization.
(v) This examination is done on a particular data and certifying the financial position on this date.
(vi) Making a report on findings of audit to the management of a company (To all stake holders thorough AGM)
Objective of Audit----------
1. To ascertain and certify true and fare financial position and business.
2. To detect errors
- Errors of omission.
- Errors of Commission.
- Errors of Duplication
- Compensatory errors.
- Errors of Principles
3. To detect Frauds
- Mis appropriation of cash
- Mis appropriation of goods, assets.
- Manipulation of accounts
4. To avoid recurrence of errors and frauds.
5. Offering suggestions to the management.
True and fare view means:
- No over or under valuation of assets.
- No material asset or liability has been left out.
- No charge on assets.
- B/S has been prepared as per provisions of companies Act.
- Accounting policies has been followed uniformly.
- Contingent/exceptional/non-recurring items have been shown separately in financial statements.
Q.2 Explain in brief classification of audit & kinds of audit.
Ans
Classification /kinds of Audit
Depending upon the nature and scope, audit may be classified as
(i) Private Audit: - Where organization gets its accounts audited by a person under an agreement. It is optional and qualification of auditor and his responsibilities are not prescribed by law.
(ii) Statutory Audit: - Where getting accounts audited is statutory or compulsory under law e.g. audit of a company, trust, bank etc. There, qualifications duties and responsibilities and the appointment of auditor is as per law.
(iii) Government audit:- Audit of govt. departments and organizations. The highest authority is comptroller & Auditor General of India appointed by President of India. He has different units under him for auditing govt. accounts. In each state there is office of Accountant General for this purpose.
(iv) Local Fund Audit Dept. which conducts audits of Panchayat Samities,Gram Panchayat & Municipal Boards.
While practically conducting audit, we may classify audit in different kinds such as:-
(i) Complete Audits (vii) Partial Audit
(ii) Continuous Audits (viii) Periodical Audit
(iii) Interim Audit (ix) Internal Audit
(iv) Efficiency Audit (x) Propriety Audit
(v) Performance Audit (xi) Cost Audit
(vi) Social Audit
(1) Complete Audit: - When accounts are fully or completely examined by the auditor, it is called complete audit. This examination may be six monthly or annual.
(2) Partial Audit: -When only part of accounts of a business concerned are examined. This partial examination may be period wise or portion of accounts e.g. only cash transactions.
(3) Continuous or Concurrent Audit: - When auditor visits the client at certain intervals or daily and completes, the checking of account up to his date of visit, it is known as continuous audit. In big organizations, auditor deploys his staff permanently and audit work continues nonstop. This is most common in large/ big business houses/undertakings as volume of examination is quite large.
(4) Periodical Audit: - When audit is conducted at end after final accounts are ready and this process continues till completion of audit, it is known as periodical audit. It is also known as final audit and balance sheet audit.
(5) Interim Audit: - Complete audit for an interim period say six months or a quarter for a specific purpose is known as interim audit. At times, it is conducted for declaring interim dividend.
(6) Internal Audit: - Audit done by persons specifically appointed to check the accounts by internal person so that least possible errors/mistakes are observed by statutory/external auditor. This audit also aims at helping management in taking key management decisions.
(7) Efficiency Audit :- Checking of efficiency of organization which is achieved by:
- Optimum utilization of all available resources (financial, human, material, technological).
- Enhancement in profit
- Reduction in cost without compromising on quality.
(8) Propriety Audit:- Checking of propriety of decisions taken by the management i.e. decision has been taken wisely, taken in good faith and decision taken leads to economy in expenditure.
(9) Performance Audit: - Means audit of actual performances of the business organization with reference to predetermined targets and costs involved. Big business houses are also preparing performance budget.
(10) Cost Audit: - Refers to audit which aims at ascertaining and ensuring that cost of the unit has been correctly worked out. Such audit has been made compulsory in items of mass public consumption such as bread, cycle etc.
(11) Social Audit: - Audit which evaluates social good to the society in general. It is generally resorted to examination of those schemes which has been started for common social uplift ment of poor. Recently Rajasthan govt. has started "Social Audit" of National Employment Guarantee Scheme commonly known as "NAREGA"
Q.4 What are advantages and limitations of Audit?
Ans
Advantages of Audit :-
1. Reliability and Credibility of accounts improve.
2. It leads to better discipline in staff due to audit fear.
3. Irregularities/errors/frauds are exposed and their rectification is possible.
4. True and fare view of financial position emerges.
5. Audit acts as a watchdog for investors.
6. Proves honesty and sincerity of organization- image building.
7. Audited accounts are helpful for assessment of taxes.
Limitations of Audit
1. Audit does not guarantee 100% correctness of accounts as it is done on test checking basis.
2. Many frauds done intelligently may remain undetected
3. Opinion expressed by the auditor may not be 100% correct.
4. Independence of an auditor is difficult as his appointment and remuneration are fixed by company.
5. Auditor does not see petty transactions and there may be chances of some manipulations in such transactions.
Q.3 How you would proceed for conducting audit?
Ans Planning & Procedure of Audit & Audit Programme.
Before starting audit, auditor has to prepare a complete plan of audit work to be done. If present audit is second or third audit of an organization, he has to refer his earlier audit working papers. If it is first audit of a company or organization, he shall have to collect information about following:-
1. Scope of work:- Quantum of work to be done in the light of terms of appointment and provisions of law, articles of association/ bye laws.
2. Information about Organization:- in respect of the following :-
- Technical features of business, manufacturing, trading, fixed and current assets etc.
- Accounting system followed
- List of books being maintained and guidelines of AAS-20
- Internal control system (internal check and internal audit.)
- Staffing pattern and division of work amongst staff.
- Acquire copy of bye-laws or articles of association.
3. Other Information :-
- Type of audit whether if would be final audit or continuous audit.
- Span of time allotted for completing audit and remuneration for audit.
Q.4 What do you understand by Audit Programme?
Ans Audit Program :-
After getting full knowledge of business, auditor has to prepare his work plan or audit programme. It is a predetermined flexible plan which functions as a guideline for audit. Audit Programmers consists of:-
- Out line of work to the done.
- Time to be allotted to each audit staff for completing work.
- Assignment of work to staff looking to their experiences and capability.
- Scope of audit work and guide lines to control audit clerks/staff.
The crucial aspect of audit program is to determine as to:-
- Who will do which work
- In how much time
- In what manner
A good audit program should be
(i) Flexible -may be changed when need arises.
(ii) Clarity in dividing work amongst staff.
(iii) Proper classification/ assignment of work amongst audit staff.
(iv) Logical flow of checking
(v) Per iodic review of program
(vi) Proper monitoring of Progress.
Advantage of Audit Program
(i) Quality of audit improves as division of work as per ability of employee's
(ii) Determining responsibility is easy
(iii) Review of progress is easy.
(iv) It ensures complete examination as planned
(v) It ensures timely completion of audit.
Q.5 Explain various steps in conducting audit.
Ans
Starting of audit: - After preparing programme auditor asks employer/organization to keep ready following:-
- Vouchers in proper file in agreement with account books.
- Completion of preliminary books and ledgers
- Trial balances and final accounts
- List of debtors & creditors and doubtful debts.
- list of investments
- schedule of closing stock
- adjustments made in accounts
- schedule of fixed assets
- details of management
After asking for getting above ready, auditor sends audit staff to start audit work. This work starts with routine checking which includes.
- Checking of casts/carry forwards, checking of trial balance, with ledgers and ensure that correct balances have been taken in to trial balance.
This routine checking ensures arithmetical correctness of account books as well as trial balances. Form trial balances, checking of trading and manufacturing accounts, profit and loss account and balance sheet is done.
Test checking:-Auditor generally resorts to test checking which means checking of sample transactions out of all if these transactions checked in sample are found in order, it is presumed that other transactions which did not form part of sample world also the correct. Auditor resorts to test checking at his own responsibility. .
Auditor's working papers /notes: - Are personal papers which are prepared with regards to audit and information he received from his employer/organization with reference to accounts and other related aspects. A complete file is maintained in which auditor keeps all relevant paper such as:-
- Agreement of appointment
- Audit programme
- Statements , information, certificates received in connection with audit
- Copy of bye-law/articles of association
- Copy of minutes of important decisions
- list of missing vouchers
- irregularities/ deserepenceis/ errors & frauds noticed during audit
- Important points observed during vouching/verification of assets/valuation of assets
- key points for discussions with management
- copy of audit report
The working papers/notes are of immense help to the auditor to defend/protect him
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