Auditing Solved Question Paper 2022 (June/July)
Dibrugarh University BCOM 6th Sem Hons CBCS Pattern
Paper: C-613 (Auditing)
Full Marks: 80
Pass Marks: 32
Time: 3 hours.
The figures in the margin indicate full marks for the questions
In this post you will get Auditing Solved Question Paper 2022 for Dibrugarh University BCOM 6th Sem Hons CBCS Pattern.
1. (a) Fill in the blanks: 1 x 4=4
(1) The auditor is accountable to the Shareholders.
(2) Routine checking is a total process of accounting verification.
(3) A company can function within the limits prescribed by the documents on the basis of which it has been incorporated.
(4) A report is nothing but a systematic presentation of facts.
(b) Write True or False: 1 x 4=4
(1) The auditor helps in preparation and filing of tax returns of the firm.
(2) The verification of most of the assets is based on personal opinion guided by sound judgement and well-established practices.
(3) A company auditor is not an agent of the shareholders.
(4) A qualified report means an audit report which is clear.
2. Write short notes on any four of the following: 4 x 4=16
(a) Internal control.
Ans: Internal Control is a Systematic measure such as reviews, checks and balances, methods and procedures instituted by an organization to conduct its business in an orderly and efficient manner, safeguard its assets and resources, determine and detect errors, fraud, and theft, ensure accuracy and completeness of its accounting data, produce reliable and timely financial and management information, and ensure adherence to its policies and plans.
According to W.W. BIGG: “Internal Control is best regarded as indicating the whole system of controls, financial and otherwise, established by the management in the conduct of a business, including internal check, internal audit and other forms of control.”
Thus, Internal control is the process, affected by an entity’s Board of Trustees, management, and other personnel, designed to provide reasonable assurance regarding the achievement of the following objectives:
1. To detect and prevent commission of errors and frauds.
2. To promote accuracy and reliability in accounting and reporting data.
3. To safeguard resources of the organisation against undue wastage or other such inefficiencies.
4. To help in attaining sound company policies and measuring compliance with such policies.
5. To help management in formulation of plans and policies regarding the working of the company.
6. To promote and judge efficiency of all operations in all division of the organisation.
(b) Vouching of cashbook.
Ans: Cash book contains transactions relating to cash received and cash paid. Cash book can be vouched by the auditor in the following way:
1. Internal Check: Auditor should evaluate the internal check and if it is proper system then he should rely on it.
2. Checking of Memos: Auditor should check the cash sales and cash purchases memos and compare it with the daily summaries of salesman and cashier.
3. Checking of Cash Register: If cash register is used, auditor should check the total daily rolls with the entries in the cash book.
4. Checking of Cash Book: Auditor should compare the cash book with the general ledger.
5. Checking of Counter Foil Receipts: Auditor should verify the counter foils of the receipts and payments with the cash book.
6. General Checking: Auditor should make all types of calculations to check the accuracy of the amount.
7. Guidance to Client: If internal check system is not effective than auditor should inform the client about the dangers of frauds. He should also suggest some measures.
(c) Qualification of a company auditor.
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.
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.
(d) Removal of an auditor.
Ans: 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.
(e) Standard report.
Ans: Statutory Report: A General meeting of the members should be held by every company limited by shares and every company limited by guarantee and having a share capital within a period of neither less than one month nor more than six months from the date at which the company is entitled to commence business. Such a meeting is called statutory meeting and the board of directors shall, at least 21 days before the day on which the statutory meeting is scheduled to be held, forward a report called statutory report to every member of the company.
Content of statutory report:
a) It sets out the total number of shares allotted and the mode of allotment.
b) The total amount of the cash received by the company in respect of the shares allotted.
c) An abstract of receipt and payment of the company. This report has to be duly certified by at least two directors. Out of which one shall be a managing director along with auditor of the company.
d) Agenda of the meeting regarding the formation and prospects of the company.
e) Particulars of directors, auditors, etc.
f) Particulars of contract.
g) Under writing contract.
h) Arrears of call.
i) Commission or brokerage.
3. (a) Define ‘auditing’. Discuss its advantages and limitations. 2+6+6=14
Ans: 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”.
Advantages of Auditing 2014,
A. Benefits of Business:Business may get many advantages of conducting audit by a qualified auditor. The advantages are discussed below:
(a) True and Fair view: With the help of audit of accounts, it is possible get a true and fair view of the financial position of the business.
(b) Detection of errors and frauds: If books of accounts are audited, errors and frauds can be detected and necessary action can be taken to prevent it.
(c) Moral pressure on the employees: If audit is conducted by the organization, employees should be cautions and there should be a moral pressure on them. As a result, chances of errors and frauds will be minimized.
(d) Proper accounting control: A system of regular audit helps the organization to maintain proper books of accounts regularly and books of accounts are kept up to date.
(e) Acceptable evidence: Audited accounts are very strong financial document acceptable to many interested parties e.g. taking loan from financial institution, determination of income tax, sales tax, amalgamation of companies, determination of purchase consideration, admission, retirement, death of a partner etc.
(f) Increase in goodwill: Audit of business on a regular basis increases confidence to the interested parties and general public. As a result, goodwill of the business increases.
B. To the Owner: The owners of the business are also interested to know the financial position of the business. There are discussed below:
(a) Benefit to the sole proprietor: In case of large business, the proprietor can get a true and fair view of the accounts maintained by his employees and also able to know the state of affairs and profit made by him. The proprietor is also benefited for getting loan from financial institutions, to pay income tax etc.
(b) Benefits to the partners: Shareholders are the owners of a company. With the help of audited accounts help to the partners to settle their unsettled disputed, for taking loan from financial institutions, to get off the books of accounts maintained by the employees etc.
(c) Benefits to the shareholders: Shareholders are the owners of a company. With the help of audited accounts, they get a real picture of the financial position of The company and they can assure that business is running efficiently.
(d) Benefit to the non-profit seeking organizations: There are different non-profit seeking organizations e.g., charitable institution, club, religious institute, school, college etc. This organization run with public money. Whether public money is properly utilized or not can be revealed from the audited accounts.
C. To the third parties:Besides business and the owners, there are different outside interested parties who required audited accounts for different purposes: These are:
(a) Government may be interested to get the audited accounts to show the deficiency of the business for giving grant and subsidy.
(b) Financial institutions sections loan to the organization on the basis of verification of financial soundness form the audited accounts.
(c) Tax authorities may depend on audited accounts for determination of income tax, sales tax, excise duty etc.
(d) Prospective buyers who want to invest money in shares and debentures of a company may rely on audited accounts.
(e) Creditors who supply goods to the business may asses the solvency and liquidity position of the business on the basis of audited accounts.
(f) For settlement of insurance claim, insurance companies can barely on audited accounts.
Inherent Limitations of Auditing
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.
(b) What is ‘internal check’? What are its objectives? Distinguish between internal check and internal audit. 2+5+7=14
Ans: Internal Check (IC)
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.
Objectives/Purpose of Internal Check
1. To have accurate record of business by preventing errors and frauds.
2. To fix responsibility for particular default or omission on a definite person
3. To have confirmation of facts and entries of transactions
4. To facilitate division of labour for the smooth flow of work
Internal Audit Vs. Internal Check
1. Meaning: Internal check is the organization of staff for checking the work of one by the other. Internal audit is continuing audit of accounts by employees of the business concern.
2. Object: Internal check aims to prevent errors and frauds. Internal audit aims to detect errors and frauds. Internal audit aims to detect errors and frauds.
3. Nature: In the case of internal check, recording and checking of entries is simultaneously done. In the case of internal audit, only checking of already recorded entries is done.
4. Scope: The scope of internal check is limited. The scope of internal audit is comparatively broad.
5. Appointment: In the case of internal check, no new member is employed as duties are so assigned that involved cross checking. In the case of internal audit, process of auditing is carried by special staff appointed for this purpose.
6. Detection: In the case of Internal Check, any error or fraud is detected at the time of inter checking. In the case of internal audit, any error or fraud is only detected at the end of audit work.
4. (a) What is ‘routine checking’? Discuss its advantages and limitations. 3+6+5=14
Ans: Routine checking
Routine checking is a checking of books of original entry and ledgers as a matter of routine work to determine the arithmetical accuracy and to detect errors and frauds and ensures the reliability of final accounts. It includes checking of casting of ledger accounts, posting to ledger accounts, preparation of trial balance and final accounts.
Advantage or importance of Routine Checking: There are many advantages of routine checking. These are discussed below:
(i) Examination of arithmetical accuracy of books of accounts.
(ii) Through checking of books of accounts to detect errors and frauds and to prevent them.
(iii) Ensuring reliability of final accounts
(iv) Prevent to alter figures in books of accounts
(v) Easy examination
Disadvantages or Limitations of Routines Checking: The following are the limitations of routine checking.
(i) All errors cannot be detected with the help of routine checking.
(ii) All frauds cannot be detected with the help of routine checking.
(iii) Highly mechanical and monotonous in nature.
(iv) Lack of reliability due to involvement of junior staff in routing checking
(b) What do you understand by ‘verification’? How would you verify the following assets? 2+(4 x 3)=14
(1) Freehold property.
(3) Cash at Bank.
Ans: Meaning of Verification: Verification is a process carried out to confirm the ownership valuation and existence of items at the balance sheet date. Spicer and Pegler have defined verification as “it implies an inquiry intothe value, ownership and title, existence and possession and thepresence of any charge on the assets”. Verification is a process by whichan auditor satisfies himself about the accuracy of the assets and liabilitiesappearing in the Balance Sheet by inspection of the documentaryevidence available. Verification means proving the truth, or confirmation ofthe assets and liabilities appearing in the Balance Sheet.Thus, verification includes verifying:
a) The existence of the assets
b) Legal ownership and possession of the assets
c) Ascertaining that the asset is free from any charge, and
d) Correct valuation
Land and Building: For verifying land and building the auditor should differentiate between free hold and lease hold properties. In case of free hold land and building, the auditor should verify with the title deeds to ensure that the property is in the name of the client. He should check the other documents like the life encumbrance certificate etc. to see whether the property is free of any charge. If it is mortgaged, he should verify the mortgage deed.
As long as the title deeds are in order the auditor can’t be held liable for frauds. However, the auditor should obtain a certificate from the client’s legal advisor confirming the validity of ownership. Land is valued at cost price which includes purchase, price, commission pay registration and legal charges, etc. it should be remembered that the land is not depreciable assets. On the other hand, building is always valued at cost less depreciation. It should be remembered that is to be charged even if the building is not used during the year. In case of building under construction valuation is made based upon the architect certificate.
A) Investment 2019
It may consist of govt., bonds, shares, securities etc. The auditor should examine whether the company is authorized to make investments. He should see whether the legal formalities have been completed. If the investments are larger in number, he should obtain the schedule of investments certified by a responsible official. The statement should include name of the investment date of purchase, book value, market price, rate and date of interest, tax deducted etc.
It is advisable to verify all investment at a time. It is always advisable that the auditor should personally inspect the investments in the case of city equitable fire insurance company limited. Where the investments were in the possession of brokers who had pledged them, the judge observed that “had the auditors not depended on the certificate form, their brokers and had demanded the actual production of securities, the fraud might have been detected. Dividend received on investment should be examined by checking the counter foils of dividend warrants. Investments are valued depending upon the purpose for which they are held.
If they are held as fixed assets (e.g.: trusts) they are valued at cost price, if they are held as current assets, they are valued at cost price or market price whichever is less.
Cash at Bank: The following steps are taken in verifying cash at bank:
a) Comparison of B.S as shown in the cash book and the pass book.
b) Preparation of Reconciliation Statement.
c) Obtaining a letter of confirmation from the bank.
5. (a) Discuss about the different rights, duties and liabilities of a company auditor. 5+5+4=14
Ans: Rights and Powers of Company Auditors [Sec. 143]
A company auditor has the following rights:
1. Right of Access Books of Accounts: As per Section 143(1) of the Companies Act every auditor of the company has the right to access at all times to the books of accounts and vouchers of the company, whether kept at the head office of the company or elsewhere. According to Sec. 148, A company auditor has the right to examine the cost records also which are required to be maintained by certain companies relating to production sales, stores etc.
2. Right to Obtain Information and Explanations: An auditor can call for any information or explanation from different officers of the company which he may think necessary for the performance of his duties.
Apart from the auditor’s right to obtain information and explanation it is the duty of every officer of the company to furnish without delay the information to the company auditor.If the directors or officers of the company refuse to supply some information on the ground that in their opinion it is not necessary to furnish it, then the auditor has the right to mention that in his audit report.
3. Right to Receive Notices and Other Communication Relating to General Meetings and to attend them: According to section 146 of the companies act an auditor of a company has the right to receive notices and other communications relating to the general meetings in the same way as that of the members of the company.
Similarly, an auditor also has the right to attend any annual general meeting and also to be heard at those meetings which he attends and which concerns him as an auditor.
The auditor also has the right to make a statement or explanation with regard to the accounts he has audited. But he auditor is not expected to answer questions in the general meeting.
4. Right to Visit Branches: According to section 143(8) of the companies act the auditor of the company has the right to visit the branch office or offices of the company. He can also audit such accounts of eh offices of the company provided that there is not qualified auditor to audit the accounts of the branch office or offices of the company, in such cases, the auditor has the right to access at all times to the books of accounts and vouchers that the company maintains at branch office or offices.
5. Right of Lien: Auditor can exercise lien on books and documents placed at his possession by the client for nonpayment of fees, for work done on the books and documents. [Sec. 128]
6. Right to Correct Any Wrong Statement: The company auditor is required to make a report to the members of the company on the accounts examined by him of the final accounts and the related documents which are laid down before the company in the general meeting.
7. Right to sign the Audit Report: As per section 145 of the companies act only the person appointed as auditor of the company or where a firm is so appointed, only a partner in the firm practicing in India, may sign the audit report or authenticate any other document of the company required by law to be signed.
8. Right to Being Indemnified: An auditor is considered to be an officer of the company and he has the right to be indemnified out of the assets of the company against any liability incurred by him in defending himself against any civil and criminal proceedings by the company if it is proved that the auditor has acted honestly or the judgment is delivered in his favour.
9. Right to seek Legal and Technical Advice: The company auditor has the full right to seek the opinion of the experts and to take their legal and technical advice so as to discharge his duties efficiently.
10. Right to Receive Remuneration: As per Section 142 of the Companies Act, the company auditor has the right to receive remuneration provided he has completed the work which he has undertaken to do so.
Duties of a Company Auditor
According to Sec. 143 of the Companies Act, 2013, the duties of auditors are classified under the following headings:
a) Duty to Enquire: It is the duty of auditor to inquire into the following matters:
i. Whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the company or its members.
ii. Whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company.
iii. Whether loans and advances made by the company have been shown as deposits.
iv. Whether personal expenses have been charged to revenue accounts.
v. Whether or not cash has actually been received from allotment of shares.
vi. Where the company not being an investment company or a banking company, whether so such of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than at which they were purchased by the company.
b) Duty to make report: The auditor shall make a report to the members of the company. In his report, the auditor shall report on:
i. Whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief necessary for the purpose of his audit and if not, the details thereof and the effect of such information on financial statements.
ii. Whether in his opinion, proper books of account are required by law have been kept by the company so far as appears from his examination.
iii. Whether the company’s balance sheet and profit and loss account dealt with in the report are in agreement with the books of accounts and returns.
iv. Whether in his opinion, the financial statements comply with the accounting standards.
v. Whether any director is disqualified from being appointed as a director.
vi. Whether the company has adequate internal financial control system in place and the operating effectiveness of such control.
vii. Such other matters as may be prescribed under rule 11: The auditor’s report shall also include views and comments on the following matters.
1) Whether the company has disclosed the impact, if any, of pending litigations on its financial position in its financial statement.
2) Whether the company has made provisions, as required under any law or accounting standards, for material losses, if any on long term contracts including derivative contracts.
3) Whether there has been any delay in transferring amounts, required to be transferred, to the investor education and protection fund by the company.
c) Duty to report on frauds u/s 143 and rules 13: If an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offense involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the central government within such time and in such manner prescribed in rule 13.
The Liabilities of a Company Auditor:
In the case of companies, the liabilities of auditors can be Civil liabilities and Criminal liabilities
A. THE CIVIL LIABILITIES of a company auditor can be for (i) negligence, (ii) misfeasance.
(1) Liability for negligence: A auditor performs his duties as an agent of the shareholders, so he is expected to safeguard the interests of his shareholders. He must exercise his reasonable care and diligence in the performance of his duties. If he fails to do so and in consequence the principal suffers any loss, he may be liable to compensate loss caused to the company resulting from his negligence.
(2) Liability for Misfeasance: Misfeasance means breach of duty or breach of trust. If the auditor does something wrongfully in the performance of his duties or he does not perform his duties properly resulting in a financial loss to the company, he may be held liable for misfeasance.
B. CRIMINAL LIABILITIES: The criminal liabilities of a company auditor under sections 139, 143,144 and 145 of the Companies Act, 2013 are as follows:
1. Sec. 139 provides for appointment of auditors. Sec. 143 deals with powers and duties of auditors. Sec. 144 in on certain services which an auditor cannot render and sec. 145 is on signing of the audit report and other documents by the company auditors. On contravention of the provisions of these sections, auditor shall be punishable with fine which shall not be less than Rs.25, 000 but which may extend upto Rs.5, 00,000.
If an auditor has contravened such provisions knowingly or willfully with the intention to deceive the company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a term which may extend to a year and with fine which shall not be less than Rs. 1,00,000 but which may extend to Rs. 25,00,000. Convicted officer shall refund the remuneration received by his from the company and pay for damages to the company.
2. Penalty for failure to disclose fraud: As per sec. 143(12), if in the course of the performance of his duties as auditor, he has reason to believe that an offense involving fraud is being or has been committed against the company by officers or employees of the company, auditor shall immediately report the matter to the central government. In case of any failure on his part with his duty, he shall be punishable with fine which shall not be less than Rs. 1,00,000 but which may extend to Rs. 25,00,000.
3. Penalty for professional misconduct: National Financial Review Authority (NFRA) shall have power to investigate, either suo-moto or on a reference made to it by the Central Government into the matters of professional or other misconduct committed by any member or firm of chartered accountants, registered under the Chartered Accountants Act, 1949. Where professional or other misconduct is proved, NFRA shall have the power to make order for:
(A) imposing penalty of:
(I) not less than Rs. 1,00,000/-, but which may extend to 5 times of the fees received, in case of individuals; and
(II) not less than Rs. 10,00,000/-, but which may extend to 10 times of the fees received, in case of firms;
(B) debarring the member or the firm from engaging himself or itself from practice as member of the Institute of Chartered Accountant of India referred to in clause (e) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 for a minimum period of 6 months or for such higher period not exceeding 10 years as may be decided by the National Financial Reporting Authority.
4. Section 477: If the auditor is found guilty of destruction, alteration, falsification of any books, papers or securities, he can be held personally responsible. And if he makes any fraudulent entry in any register, books of accounts or documents of the company, he will be punishable with imprisonment up to 10 years and also be liable to fine which may extend to 3 times the amount of fraud.
5. Liability of firm: Where, in case of audit of a company being conducted by an audit firm, it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner, then for such act partner or partners concerned of the audit firm are liable jointly and severally.
6. Class suit action: Any 100 or more member’s/deposit holders of the company or 10% of the total number of member’s/deposit holders of the company can file a class action suit to claim damages or compensation or demand any other suitable action against the auditor in the manner prescribed under Section 245 of the Act.
7. Punishment for false evidence: If any person intentionally gives false evidence:
(a) upon any examination on oath or solemn affirmation, authorised under this Act; or
(b) in any affidavit, deposition or solemn affirmation, in or about the winding up of any company under this Act, or otherwise in or about any matter arising under this Act,
he shall be punishable with imprisonment for a term which shall not be less than 3 years but which may extend to 7 years and with fine which may extend to Rs. 10,00,000/.
(b) How would you, as a company auditor, undertake audit of share capital transactions? Discuss. 14
Ans: Share Capital Audit for a New Company / First Issue
Audit involves three stages, namely the application share capital of a new company in the first issue stage, the allotment stage and the call stage. However, the company is required to fulfill a lot of formalities before actually going for public subscription. The auditor should examine compliance of provisions.
Verification of Capital
1. The auditor should confirm that the permission of the Controller of Capital Issues has been obtained in case the issue exceeds Rs. One crore.
2. He should study the terms and conditions of issue contained in the Memorandum and Articles and Prospectus or Statement In lieu of Prospectus and see that these have been fully complied with.
3. He should ensure that the prospectus contains a provision in terms of Sec. 26 A that any person who
a) Makes, in a fictitious name, an application to a company for acquiring or subscribing for, any shares therein, or
b) Otherwise induces a company to allot or register any transfer of shares therein to him, or any other person in a fictitious name, shall be punishable with imprisonment for a term which may extend up to five years.
4. He should verify that preliminary contracts, if any, entered into for the purchase of a property or business, for creating on organisation for management of the company etc., have been carried out strictly as laid down in the prospectus.
5. He should as certain that there exist in internal check on receipts of amount along with the application.
6. He should examine shares issued for cash and shares issued for consideration other than cash, if any.
1. Application stage: The auditor should undertake the following checks:
1) Checking of the original applications with the application and allotment sheets.
2) Checking and comparing entries in the application and the allotment books as regards deposit of money at the time of application with those in the cash book.
3) Vouching that amounts pertaining to rejected applications, non-allotted application or any excess amount there to have been returned by comparing entries in the cash book with that of application and allotment sheets (books) or letters of regret, if any.
4) Examining that the issue is within the limits authorized by the Memorandum and Articles of Association.
5) Examining that the minimum subscription fee, the amount received on application being not less than 5% of the nominal value of shares, has actually been received before making the allotment.
6) Checking the balance on the application and allotment sheets (book) and verify the total capital issued.
2. Allotment stage: Following steps may be taken in this stage.
1) Examining the Director’s Minute Book to verify approval of allotments which may be in stages as spreading over a number of days. He should note that recording at each stage was properly initialed by at least one director. He should also see that the allotment was legally in order.
2) Comparing copies of letters of allotment / letters of regrets with entries in the application and allotment sheets (book).
3) Vouching money receipt on allotment by comparing the entries in the application and allotment sheets with the cash book or bank statement.
4) Confirming the journal entries regarding allotment money, examining the ledger accounts and comparing the balances in the ledger accounts with the number of shares allotted.
5) Verifying the entries in the Register of Members by comparing these with a separate summary of shares allotted. Verifying that the amounts of the shares allotted do not exceed the authorized or nominal capital of the company.
6) Seeing that returns of allotment have been filed with the Registrar of Companies.
3. Calls stage: The auditor should take the following steps:
1) Examining the Director’s Minute Books regarding decisions about calls.
2) Seeing that the calls as resolved are within the provisions in the Articles of Association and statement in the prospectus issued by the company.
3) Vouching amounts received against calls with the counterfoils of receipts.
4) Checking postings of the amounts received from the calls book (for calls due) and the cash book (for cash money received) into the share register.
5) Comparing the application and allotment books with the schedule of calls in arrears showing the difference between calls due and calls received. He should confirm that the call in arrears figure is correct.
6) Checking the calls received in advance either in the cash book or through the journal and seeing that these are transferred to a separate account not meant up with the share capital of the company.
6. (a) What is ‘qualified report’? What are the grounds on which an auditor may qualify his report? Give a specimen of a qualified report. 2+6+6=14
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.
Circumstances for Qualification of Audit Report: In following circumstances the auditor has to qualify his report:
(a) He cannot conduct audit satisfactorily due to non-availability of certain books of accounts or records,information or explanations necessary for conduct of his audit.
(b) He finds that the Balance Sheet and Profit & loss Account have not been prepared in accordance with accepted accounting principles.
(c) He detects that provisions for Bad & Doubtful Debts, Depreciation etc. are not adequate.
(d) He detects that the company has created certain secret reserve.
(e) The stock in trade has been valued at market price which is more than cost price.
(f) He finds that the contingent liability for bills discounted has not been disclosed.
(b) Describe the general considerations which an auditor has to keep in mind while drafting his report. 14
Ans: 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.
Elements of Audit Report or 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 o 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.