➥ University: Dibrugarh University
➥ Subject: Auditing
➥ Semester: BCom 6th Semester
➥ Paper Code: C-613
➥ Maximum Marks: 80
➥ Passing Marks: 32
➥ Duration: 3 hours
➥ Program Name: BCom (Bachelor of Commerce)
Dibrugarh University BCom 6th Semester: Auditing Solved Question paper 2024
6 SEM TDC AUDG (CBCS) C 613
2024 (May)
(CORE) COMMERCE
Paper: C-613
(Auditing)
Full Marks: 80
Pass Marks: 32
Time: 3 hours
The figures in the margin indicate full marks for the questions
Q.1. (a). State whether the following statements are True or False: 1×4= 4 Marks
(i) Remuneration of the internal auditor is fixed by shareholders.
Answer: False, The remuneration of the internal auditor is fixed by the Board of Directors, not the shareholders.
(ii) Carbon copy of sales invoices is an example of a primary voucher.
Answer: False, No, a carbon copy of a sales invoice is an example of a secondary voucher, not a primary voucher.
(iii) Under Section 5 of the Companies Act, 2013, every company is required to have an Articles of Association.
Answer: False, Under Section 5 of the Companies Act, 2013, Articles of Association are not mandatory for all companies. Companies limited by guarantee and unlimited companies are required to have Articles of Association, but Table F (model Articles) applies by default in case of companies limited by shares.
(iv) CARO 2016 is applicable to the banking companies also.
Answer: False, CARO (Companies Auditor's Report Order) 2016 is not applicable to banking companies; it applies to certain classes of companies specified under the order.
(b). Fill in the blanks with appropriate words: 1×4= 4 Marks
(i) When financial transactions are examined at the time of happening, it is called continuous audit.
(ii) Preliminary expenses are of capital nature.
(iii) No company shall have more than 15 directors.
N.B:- unless approved by a special resolution.
(iv) Violation of any of the provisions of Sections 139, 143, 144, and 145 of the Companies Act implies a fine which shall not be less than ₹25,000.
Q.2. Write short notes on (any four) 4×4= 16 Marks
(a) Statutory Audit
Answer:- A statutory audit is an audit required by law for certain businesses to make sure their financial statements are accurate and follow the rules. The main aim is to check whether the company's financial statements show a true and honest picture of its financial position. Statutory audits are required for certain businesses based on their size or turnover. The auditor is usually an external expert, like a Chartered Accountant (CA), appointed by the company's shareholders. The auditor’s report is then shared with relevant authorities, such as the government or regulatory bodies.
(b) Vouching of Ledger
Answer:- Vouching of ledger is the process of checking the entries in the ledger against original documents like bills, receipts, and contracts to make sure the transactions are genuine and accurate. The goal is to confirm that all transactions recorded in the books of accounts are legitimate and properly authorized. By checking these documents, the auditor ensures that no errors or fraud have occurred in the recording of transactions.
(c) Branch Auditor
Answer:- A branch auditor is someone appointed to audit the accounts of a branch of a company. In large companies with many branches, each branch might have its own auditor who checks the records for that branch. The branch auditor works with the main auditor to provide a complete view of the company’s financial position. The branch auditor’s job is to ensure that the branch follows the correct rules for financial records and that its financial reports are accurate.
(d) Joint Auditor
Answer:- A joint auditor is when more than one auditor is appointed to audit the financial statements of a company. This is common in large companies where the work is too much for one auditor to handle, or where different experts are needed for different areas of the audit. Each auditor looks after a specific part of the accounts or a particular location, but they work together to create a full audit report. All auditors share the responsibility, and each signs the audit report. This helps ensure a more thorough check of the company’s finances.
(e) Features of good audit report
Answer: The following are the characteristics of an ideal or a good audit report:
(i) It should be in a simple language, which can be understood easily.
(ii) It should be divided into separate paragraphs.
(iii) The audit report must bear date on it.
(iv) It should be addressed to them for whom it is. written, as
(a) Audit report of a company should be addressed to the shareholders.
(b) In case of special audit, the report should be addressed to the Central Government.
(v) The report should be fully clear, not illusory.
(vi) It should be impartial.
(vii) The auditor should write it in his office only.
(viii) It must be brief but no fact should be left out.
Q.3. (a). "An audit is not a complete safeguard and insurance against all financial ills." Discuss. 14 Marks
Answer: An audit plays a vital role in ensuring the accuracy and reliability of financial statements. However, it is not a foolproof safeguard against all financial issues or fraud. The statement highlights the limitations of an audit in providing absolute assurance. Below are the key points to support this discussion:
Detection of Fraud and Errors:
Auditors aim to detect material misstatements in financial statements, but they are not responsible for uncovering all instances of fraud or errors, especially if they involve collusion or sophisticated techniques.Dependence on Sampling:
Auditing involves examining financial transactions and records on a test basis rather than reviewing every single transaction, which might result in some irregularities being overlooked.Reliance on Representations:
Auditors often rely on management's representations, which may not always be truthful or complete, especially in cases where management intentionally conceals fraud.Judgment and Subjectivity:
Auditors exercise professional judgment in areas such as valuation of assets, liabilities, or provisions. These judgments may vary, leading to potential differences in interpretation.Inherent Limitations of Internal Controls:
Even a robust system of internal controls cannot prevent all frauds or misstatements, especially if there is management override or collusion among employees.Materiality Concept:
Auditors focus on material misstatements that could influence decisions of users of financial statements. Minor errors or frauds may go undetected as they fall below the materiality threshold.Time Constraints:
Audits are conducted within a limited time frame, which might restrict the extent of testing and investigation, leaving room for some irregularities to remain undetected.Auditor's Scope is Limited:
The scope of an audit is limited to financial statements and does not cover operational inefficiencies, market risks, or strategic failures that may lead to financial difficulties.Collusion Among Employees:
Fraud involving collusion among employees or management may be challenging for auditors to detect, as such acts are designed to bypass internal controls.Management Responsibility:
The primary responsibility for preventing fraud and errors lies with management, not the auditor. The auditor’s role is only to provide reasonable assurance about the financial statements.Expectation Gap:
There is often a gap between what stakeholders expect from an audit and what an audit actually delivers, leading to misconceptions about its ability to prevent all financial issues.Post-Event Nature of Audit:
An audit reviews past transactions and records, making it reactive rather than proactive. It cannot predict or prevent future financial problems.Limitations in Auditing Standards:
Auditing standards provide guidelines but do not guarantee that an audit will uncover all potential risks or misstatements.External Influences:
Factors such as economic downturns, legal disputes, or market volatility are beyond the auditor’s control but may still cause financial distress for the company.
Conclusion:
While audits are critical for enhancing the credibility of financial statements, they are not a comprehensive solution to all financial ills. Auditors provide reasonable assurance, not absolute assurance, and their work is subject to inherent limitations. Therefore, reliance on audits alone is insufficient; companies must also strengthen internal controls, ethical practices, and risk management strategies to address financial challenges effectively.
Or
(b). What is meant by internal check? Describe the system of internal check with regard to stores (stock) of a manufacturing concern. 4+10= 14 Marks
Answer: Internal Check is a system of organizing accounting and administrative duties within a business in such a way that the work performed by one employee is automatically checked by another. It is designed to ensure accuracy, prevent errors and fraud, and promote efficiency in operations. Internal check is a part of the internal control system and is particularly important for safeguarding assets and maintaining accurate financial records.
System of Internal Check with Regard to Stores (Stock) of a Manufacturing Concern
In a manufacturing concern, an effective internal check system for stores (stock) ensures proper recording, safe custody, and efficient management of materials. The key points of an internal check system for stores are:
Separate Responsibility for Ordering and Receiving Materials:
The responsibility for placing purchase orders and receiving goods should be assigned to separate individuals to prevent fraud.Proper Documentation of Purchases:
Goods received should be recorded in a Goods Received Note (GRN) and cross-checked with the purchase order and supplier’s invoice.Inspection of Goods Received:
A designated team should inspect goods for quality and quantity upon arrival to ensure they meet the required specifications.Maintenance of Bin Cards:
Bin cards should be maintained for each type of material in stock, recording receipts, issues, and balances.Periodic Stock Verification:
Physical verification of stock should be conducted periodically and compared with book records to detect discrepancies.Authorization for Issue of Materials:
Materials should only be issued against authorized requisition slips approved by the department head.Segregation of Duties:
Different individuals should handle the receipt, storage, and issue of stock to ensure transparency and accountability.Stock Ledger Maintenance:
A stock ledger should be maintained to record all transactions relating to materials, and it should be reconciled with bin cards regularly.Proper Storage of Materials:
Materials should be stored in designated areas with adequate security to prevent theft, pilferage, or damage.Economic Order Quantity (EOQ):
The internal check system should include procedures for determining EOQ to avoid overstocking or understocking.Monitoring of Slow-Moving or Obsolete Stock:
Regular reviews should be conducted to identify slow-moving or obsolete items, and appropriate action should be taken.Control over Scrap and Wastage:
A proper system should be in place to record and monitor scrap and wastage to prevent misappropriation.
Conclusion
An efficient internal check system for stores ensures accurate stock records, prevents theft or misuse, and promotes the smooth functioning of the manufacturing process. It also minimizes wastage and enhances overall operational efficiency in a manufacturing concern.
4. (a). What is a voucher? Discuss the duties of an auditor in respect of verification of purchase and sales ledger. 2+6+6= 14 Marks
Answer: A voucher is a written document or piece of evidence that serves as proof of a business transaction. It validates the authenticity of transactions recorded in the books of accounts. Examples include invoices, receipts, cash memos, purchase orders, and credit notes.
Duties of an Auditor in Respect of Verification of the Purchase Ledger
Examine Purchase Invoices:
Verify the purchase invoices for correctness of quantities, prices, and terms of purchase.Check Purchase Orders:
Cross-check the purchase orders issued by the company with the respective invoices to confirm that purchases are authorized.Match Goods Received Notes (GRNs):
Compare goods received notes with invoices and purchase orders to ensure all purchases are recorded for goods actually received.Verify Payments:
Match payments made against purchases with bank statements and ensure no fictitious transactions exist.Review Accounting Entries:
Ensure that all purchase transactions are properly recorded in the purchase ledger and classified under appropriate accounts.Check Cut-Off Procedures:
Verify whether purchases at the year-end are accounted for in the correct financial period to avoid overstatement or understatement of liabilities.
Duties of an Auditor in Respect of Verification of the Sales Ledger
Check Sales Invoices:
Verify sales invoices for correctness in terms of quantities, prices, and terms of sale.Cross-Check Sales Orders:
Match sales orders with delivery challans and invoices to ensure that all recorded sales are genuine.Verify Revenue Recognition:
Confirm that sales are recorded in accordance with applicable revenue recognition standards, such as Ind AS 115.Examine Payments Received:
Match payments received for sales with bank statements to detect any irregularities or fictitious transactions.Analyze Debtors’ Accounts:
Verify that debtors' accounts are accurately maintained and reconciled with the sales ledger.Check Cut-Off Procedures:
Ensure that sales occurring at the year-end are recorded in the correct accounting period to avoid overstatement or understatement of revenue.
Conclusion:
The auditor’s primary duty is to ensure that purchase and sales ledgers are free from errors, fraud, and misstatements, and that all transactions are properly recorded in compliance with accounting standards and company policies.
or
(b).What are the duties of an auditor regarding the valuation of intangible assets? Distinguish between verification and valuation. 10+4=14 Marks
Answer: Duties of an Auditor Regarding the Valuation of Intangible Assets:-
Verify the existence and ownership of intangible assets through relevant documents like registration certificates or agreements.
Ensure compliance with applicable accounting standards such as Ind AS 38 or AS 26, depending on the company’s framework.
Examine the method of valuation (cost, market, or income approach) to confirm its appropriateness.
Verify the capitalization of costs incurred for self-generated intangible assets based on established criteria.
Assess the amortization and impairment testing applied to intangible assets, especially those with indefinite useful lives.
Confirm the validity of legal rights such as trademarks, patents, copyrights, or licenses associated with intangible assets.
Review revaluation or changes in valuation, ensuring they are justified and consistent with prior periods.
Check the adequacy of disclosures in the financial statements as per statutory and regulatory requirements.
Ensure that no fictitious or overstated intangible assets are recorded in the books.
Verify the records for any disposal, expiration, or loss of value of intangible assets.
Distinction Between Verification and Valuation
5. (a). Discuss the provisions Companies Act, 2013 regarding qualification, disqualification of the and removal of an auditor. 14 Marks
Answer:
Qualification of an Auditor (Section 141(1) and (2)):
The following individuals or entities are qualified to be appointed as auditors of a company:
Chartered Accountants (CA):
Only a Chartered Accountant (CA) who is a member of the Institute of Chartered Accountants of India (ICAI) can be appointed as an auditor.
In the case of a firm, the majority of the partners must be Chartered Accountants.
Eligibility of a Firm:
A firm or a Limited Liability Partnership (LLP) where a majority of partners are qualified Chartered Accountants can also act as an auditor.
2. Disqualification of an Auditor (Section 141(3)):
The following individuals or entities are disqualified from being appointed as auditors:
Body Corporate:
A company or a body corporate cannot be appointed as an auditor.
Officers or Employees of the Company:
Any officer or employee of the company, including directors, is disqualified.
Persons with Business Relationships:
A person who is a partner or in the employment of an officer or employee of the company.
A person who is indebted to the company for an amount exceeding ₹5 lakh.
A person who has given a guarantee or security for a debt exceeding ₹1 lakh.
Persons Holding Shares or Securities:
A person or a relative holding shares or securities of the company with a face value exceeding ₹1 lakh is disqualified.
Relative with Financial Interest:
If a relative of the auditor has a significant financial interest in the company.
Persons Providing Certain Services:
A person providing specific services, such as bookkeeping, accounting, or financial consultancy, is disqualified.
3. Removal of an Auditor (Section 140):
Resignation by Auditor (Section 140(2)):
If an auditor resigns before completing their term, they must file a resignation notice with the company and the Registrar of Companies (RoC) within 30 days, specifying the reasons for resignation.
Removal by Company (Section 140(1)):
The company may remove an auditor before the expiry of their term by passing a special resolution at a general meeting.
Prior approval of the Central Government is required before removing the auditor.
Procedure for Removal of Auditor:
A board resolution must be passed to propose the removal.
An application must be filed with the Central Government in Form ADT-2 within 30 days of the resolution.
A general meeting must be held within 60 days of Central Government approval to pass the special resolution.
Tribunal's Authority (Section 140(5)):
If the Tribunal is satisfied that the auditor acted fraudulently or with an intent to deceive the company or its stakeholders, it may direct the company to change the auditor.
The Tribunal may also order that the disqualified auditor cannot be appointed as an auditor of any company for up to 5 years.
Conclusion:
The Companies Act, 2013, lays out clear qualifications, disqualifications, and procedures for the removal of an auditor to ensure independence, transparency, and ethical conduct in the audit process. These provisions aim to protect the interests of stakeholders by maintaining the integrity of financial reporting.
Or
(b). Describe the various sources from which the dividend be paid by a company. Mention the auditor's duties with regard to payment of dividends. 7+7= 14 Marks
Answer:
6. (a). What do you mean by audit report? Explain the provisions of the Companies Act regarding audit reports.
Answer: An audit report is a formal opinion or statement issued by an auditor after examining the financial statements of an organization. It provides an independent assessment of whether the financial statements present a true and fair view of the company's financial position, performance, and compliance with applicable laws and regulations. Audit reports are crucial for stakeholders such as shareholders, investors, and regulatory authorities to make informed decisions.
Provisions of the Companies Act Regarding Audit Reports
Under the Companies Act, 2013 in India, the following provisions are significant regarding audit reports:
Preparation and Submission (Section 143):
The auditor of a company is required to prepare a report after examining the financial statements.
The report should include the auditor's opinion on whether the financial statements comply with the provisions of the Companies Act and accounting standards.
Contents of the Audit Report: The report must include:
Whether the financial statements give a true and fair view.
Compliance with accounting standards.
Observations, qualifications, or adverse remarks, if any.
Whether the company has adequate internal financial controls and their operational effectiveness.
Auditor’s Duties:
Report on frauds (Section 143(12)): If the auditor detects fraud exceeding a prescribed amount, they must report it to the central government.
Include comments on defaults in repayment of dues to financial institutions, banks, or debenture holders.
Types of Audit Opinions:
Unqualified Opinion: When the financial statements are free from material misstatements.
Qualified Opinion: When the auditor identifies certain exceptions or issues.
Adverse Opinion: When the financial statements do not represent a true and fair view.
Disclaimer of Opinion: When the auditor cannot provide an opinion due to insufficient evidence.
Submission to Members (Section 134):
The audit report must be attached to the financial statements and presented to the members of the company in the annual general meeting (AGM).
Penalty for Non-Compliance:
If the auditor fails to comply with the requirements, they may be subject to penalties, including fines and imprisonment as per the provisions of the Companies Act.
Role of the National Financial Reporting Authority (NFRA):
The NFRA oversees compliance by auditors and ensures audit quality, as prescribed under the Companies Act, 2013.
Or
7. Write notes on the following: 14 Marks
(i). Elements of audit report
Answer: An audit report is a formal statement that reflects the financial position of a company, issued upon the conclusion of an audit. It serves as a medium for the auditor to express their opinion on the financial statements under review. The report typically outlines the nature and scope of the audit conducted and provides the auditor's opinion on the company's financial statements. As the final outcome of the audit process, it holds significant importance, as it communicates the results of the audit to stakeholders.
Elements or Essentials of a Good Audit Report:-
1. Title: The audit report should have an appropriate title, such as "Auditor's Report." This helps the reader identify it as the auditor's report and distinguish it from other reports, such as management reports on business performance.
2. Addressee: The report should be addressed to the appropriate party, such as the shareholders or the board of directors of the company. The addressee depends on the engagement letter and legal requirements.
3. Date of Report: The audit report must include a date, indicating the point up to which the auditor considered events or transactions that could affect the financial statements.
4. Identification of Financial Statements: The report should clearly identify the financial statements that were audited, such as the trading and profit-and-loss account, balance sheet, and cash flow statement. It should also include the name of the entity and specify the date and period covered by the financial statements.
5. Reference to Auditing Standards: The report should mention the auditing standards or practices followed during the audit, such as international auditing guidelines, to assure readers of compliance with professional standards.
6. Opinion: The auditor's opinion on whether the financial statements present a true and fair view of the entity's financial position and performance must be clearly stated. This opinion is usually based on national or international accounting standards.
7. Signature: The report must be signed either in the name of the audit firm, the auditor's personal name, or both, as appropriate.
8. Auditor's Address: The auditor’s address, including the city name, should be included for the readers' reference.
(ii). Qualified audit report
Answer: A qualified audit report is issued by an auditor when there are certain issues or exceptions in the company’s financial statements. These issues are not serious enough to completely misrepresent the financial position of the company but still need to be mentioned in the report.
A qualified audit report is considered mostly acceptable, but the auditor includes specific remarks or qualifications regarding the issues found.
The report typically highlights minor errors, missing information, or deviations from accounting standards. While these exceptions exist, the financial statements as a whole are still regarded as true and fair. The auditor explains the reasons for the qualifications clearly within the report.
There are several common reasons for a qualified audit report. One reason is insufficient evidence, where the auditor cannot verify certain transactions due to a lack of proper records. Another reason could be non-compliance with accounting standards if the company has not followed specific guidelines. Lastly, limitations on audit scope occur when the company restricts the auditor from examining certain records or areas.
An example of a qualified opinion would be:
"Except for the incomplete disclosure of inventory valuation, the financial statements give a true and fair view of the company’s financial position."
A qualified audit report can reduce confidence among stakeholders but does not entirely harm the company's reputation. It serves as a signal for the management to address the highlighted issues and improve their financial practices.
In summary, a qualified audit report points out small problems in the financial statements but assures that they do not significantly affect the overall reliability of the financial position.
(iii) Importance of audit report
Answer: An audit report is very important for a company and its stakeholders because it provides key information about the company’s financial health and performance.
The Following are the main reasons why an audit report is important:
1. Ensures Accuracy: The audit report confirms that the company’s financial statements are correct and free from big mistakes or fraud.
2. Legal Compliance: It ensures that the company is following all laws, rules, and accounting standards properly.
3. Builds Trust: Shareholders, investors, and creditors trust the company more when it has a positive audit report.
4. Promotes Transparency: The report gives a clear and honest view of the company’s finances, making it easier for everyone to understand.
5. Helps in Decision-Making: Investors and lenders use the audit report to decide whether to invest in or lend money to the company.
6. Checks Internal Controls: It helps the company identify weaknesses in its processes and improve them.
7. Detects Fraud: Audits help find and prevent fraud in the company’s financial records.
8. Improves Creditworthiness: A clean audit report helps the company get loans or attract investors easily.
9. Mandatory for Compliance: Many countries require companies to submit an audit report as part of legal obligations.
10. Encourages Accountability: It ensures that the company’s management is responsible and accountable for its financial actions.
11. Boosts Reputation: A positive audit report enhances the company’s reputation and market confidence.
12. Identifies Risks: The report helps the company understand and manage any financial risks.
In simple terms, an audit report helps ensure the company is honest, legal, and trustworthy in its financial dealings. It is essential for good management and to build confidence among stakeholders.
(iv) Specimen of clean report
Answer:
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