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,

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

working not only guarantees management as to the reliability of accounting information,

independent auditors also rely on system of internal control in determining the timing,
nature and extent of their audit work.
Objectives of Internal Control
The clients internal control system aims at providing reasonable assurance that:
1. Records are valid, complete, and accurate.
2. Recorded transations are duly authorized.
3. Transactions are properly classified and valued.
4. Transactions are recorded at proper time.
5. Transactions are properly posted to the ledger accounts, and correctly summarized.
Principal Forms:
Accounting Controls. According to the first part of the said definition, accounting
control concerns the controls related to the accounting system, i.e. checking
transactions as per the prescribed procedures and safeguarding the assets.
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.
Administrative Control. The last phrase of the definition.operational efficiency
and encourage adherence to prescribed managerial policies, indicates towards
administrative control.
Administrative control comprises the following:
(a) Time studies
(b) Motions studies
(c) Quality control
(d) Performance appraisal
(e) Statistical analysis etc.
Q.2
a) Explain Teeming and Lading. Describe the procedure adopted in vouching various
items of capital expenditure.
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:

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

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

Transfer entries : For the transfer from one ledger account to another ledger account,
proper authorization should be obtained. The auditor must see that direct transfer from
one account to another is not made.
Rectification entries: The details of actual mistakes should be scrutinized and
transactions must be thoroughly checked with reference to the available evidence. The
necessary entries must be authorized bye a responsible official.
Adjusting entries: The auditor should examine if all adjusting entries in respect of
expenses relating to the period under audit, income received in advance, and income
earned and not received are duly made. Adjustment in respect of expenses prepaid
should also be closely scrutinized.
Transactions for which there is no other book of original entry: Reference must be
made to correspondence, minutes of board/shareholders and other relevant documentary
evidence to vouch the transactions for which there is no other book of original entry, e.g.
bad debts, bills receivable dishonored, 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.
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, land and
building account, wages account, rent account, cash account etc. are known as impersonal
accounts. These accounts record aspects of financial transactions as they affect the
business, and not as the affect persons. Impersonal ledger is also called general ledger
and it can further be subdivided in to two categories.
(a) Real Accounts. These account records assets. In other words, real accounts relate
to the asset of the firm.
(b) Nominal Accounts. Account which relate to expenses, losses, gains, revenue etc.
viz. salary account, interest paid account, commission received account etc.
GENERAL
LEDGERS

CONSIDERATIONS

WHILE

VOUCHING

IMPERSONAL

The auditor should keep the following points in mind at the time of vouching
impersonal ledgers.
1. He should check the journal carefully and should ensure that each and every is
supported by sufficient evidence. Further, he should check their postings to the
impersonal ledger.
2. The impersonal ledger contains most of the records based on entries made in the
books of original or prime entry. He should therefore check the casts and sub-

casts of the various books of the prime entry, i.e. subsidiary books and their
postings in the relevant nominal accounts in the impersonal ledgers.
3. He should check the postings of cash payments and receipts in respect of nominal
accounts from the cash book to the impersonal ledger. He should ensure that these
entries have been posted to the right accounts maintained for the purpose.
4. The auditor should also check and verify the various adjustments entries made at
the time of preparation of final accounts. Such adjustment entries may release to
outstanding assets and liabilities, or depreciation.
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. If due to wrong allocation of expenditure, profit and loss account reveals
more profit and consequently more profits are distributed among the shareholders,
the auditor might be held liable for the payment of dividend out of capital.
b) Define verification. What are its objects? Distinguish between verification and
vouching.
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Q.4
a) Explain clearly the meaning of Verifications of Liabilities as shown in a Balance
Sheet.
The term liability in its usual and ordinary sense refers to a state of being under legal
obligation. Like verification and valuation of assets, verification of liabilities is an
equally important aspect of auditing. If liabilities are not properly verified and valued,
the balance sheet of a business enterprise will not exhibit a true and fair view of its state
of affairs. Therefore, the auditor should be see that liabilities are genuine and duly
authorized. He must also obtain a certificate from a responsible official of the client,
stating that to the best of his knowledge and belief:
1. All liabilities, whether for purchases (supplies) or expenses or on any other
account existing at the date of the balance sheet, have been included in the books
account.
2. all the contingent liabilities have either been disclosed in a footnote to the balance
sheet or have been provided for, 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.
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.
If the auditor found that a company in the course of its business was incurring liabilities
of a particular kind, and that the creditors sent in their invoices after an interval, and that
liabilities of the kind in question must have been incurred during the accountancy period
under audit, 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

companys books, 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, to go through the invoice files of the company, in order to see that no invoices
relating to liabilities had been omitted.
In the light of the above decision, 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.
b) All the liabilities stated in the balance sheet relate to the business itself.
c) They represent genuine and duly authorized transactions, and
d) No item of liabilities has been omitted, under or over stated. i.e. all liabilities
appear at their actual figures in the balance sheet.
It should also be noted that liabilities are not valued like assets, therefore, 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.
b) Explain in brief the powers and duties of company auditor.
An auditors job is independent of the management of a company. He has to report to the
shareholders on the financial statements examined by him during the audit. The rights of
a company auditor cannot be limited or abridged in anyway. The rights or powers of the
auditors are given below:
1. Right of access to the books and accounts and vouchers, an auditor of a company
has a right of access at all times to the books and accounts and vouchers of the
company.
2. Right to obtain information and explanation, the company auditor is entitled to
obtain all such information and explanations from the officers of the company,
which he thinks necessary for performing his duties and auditor.
3. Right to receive notices and attend the general meeting
4. Right to make corrections in Financial Statements
5. Right to report to the members
6. Right to visit branches and to have access to branch accounts.
7. Right to sign audit report.
8. Right to take experts opinion.
9. Right of indemnity
10. Right to receive remuneration
11. Right of lien on working papers
12. 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. Statutory duties
2. Duties arising out of common law

3. Duties arising out or professional ethics and etiquette

4. General duties.
Q.5
a) How as a company auditor you would audit transmission of shares?
b) Discuss the concept of true and fair in an auditors report.
Auditors report normally shows the scope and nature of the audit work and the opinion
of the auditor. The scope part of the audit report consists of a representation as to the
work performed. It shows the extent to which the auditor has conducted his examination
and the nature of such examination. 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. In the audit report an auditor is required to express an opinion on various
matters. For instance, in the case of a financial audit, 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. 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.
Place of signature.
Auditors signature
Date of the report.

It should however, 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. It does not
establish absolute, i.e. cent percent accuracy of each and every figure in the accounts.
Some of the figures may be just estimates. 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.
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, and shall, subject to the provisions of this
section, be in the form set out in Part I of Schedule VI, 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, and in preparing the balance sheet
due regard shall be had, as far as may be to the general instructions for preparation of
balance sheet under the being Notes at the end of that part.
Profit and loss to be true and fair

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, so far as they are applicable thereto.
Q.6
A. Discuss in brief the liabilities of an auditor under
the Companies Act, 1956.
The status of a company auditor differs from that appointed
by a private concern. His appointment, remuneration,
duties, power and responsibilities are defined and laid down
in the Companies Act 1956.
The liabilities of the company auditors may be classified
and studied under the following four heads:
1. Statutory liabilities
2. Contractual liabilities
3. Liabilities under common law
4. Other liabilities.

B. Define cost audit and state in which cases it may be

ordered. What are the objectives of cost audit?
C. Distinguish clearly between financial, cost and
management audit.