Auditing,types of auditing,accounting,investigation,report writing,control management

A S S I G N M E N T S U B M I T T E D B Y
C H . D E V A D A T T A S A I
AUDITING
D.D.S

AUDITING
2 D.D.S
INDEX
Unit - 1 INTRODUCTION TO AUDITING 3 - 18
Unit -2 PLANNING OF AUDIT AND CONTROL 19 - 39
Unit -3 VOUCHING AND AUDIT OF FINANCIAL
STATEMENTS
40 - 58
Unit -4 AUDIT OF INSTITUTIONS 59 - 68
Unit -5 REPORT WRITING 69 - 80

AUDITING
3 D.D.S
UNIT – I
INTRODUCTION TO AUDITING
Essay Questions
1. Define Book-keeping, Accountancy and Auditing? Explain the differences between
them?
Book – Keeping: It is the art of recording day-to-day transactions systematically in books
of accounts. This part of work is performed by book-keeper. His job includes
journalizing, posting, totaling and balancing of ledger accounts.
Accountancy: The work of accountant is to check arithmetical accuracy of accounts
prepared by book-keeper. If any error or omission arises, it should be rectified. Finally,
accountant is to prepare Trail balance, Trading and profit & loss A/c and Balance Sheet,
incorporating necessary adjustments there in.
Auditing: He is concerned with critical examination and verification of accounts
prepared by others. After completing his work, auditor has to submit a report of fact
whether or not profit & loss a/c and balance sheet exhibit true and fair position of
business.
The various points of differences between accountancy and auditing are as follows:
S.
No.
Basis of
Difference
Accountancy Auditing
1. Nature In accounting, final accounts are
prepared. Accountancy is
constructive.
Auditing aims at examining
the correctness of accounts
prepared by Accountant.
Auditing is analytical.
2. Scope Its scope is restricted to
preparation of financial
statements and their
interpretation.
It is determined by the
agreement between auditor
and his client.
3. Qualification As accountant need not be a
Chartered Accountant.
An auditor must be a
4. Object The primary object of
accountancy is to ascertain the
trading results of business during
a financial year and show the
financial position of the concern.
The primary object of
auditing is to certify the
correctness and justification
of financial statements
prepared by accountant.
5. Commencement Accountancy begins where
Book-keeping ends.
Audit begins where
accountancy ends.
6. Reporting The accountant is not required to
submit a report on accounts and
statements prepared by him.
The auditor has to submit a
report about correctness and
presentation of accounts
audited by him.
7. Basis of
Remuneration
The accountant is paid monthly
salary.
The Auditor gets a fixed
amount as per agreement
with his client.
8. Appointment The accounting work is done by
an employee of the concern and
works directly under the control
of management.
The auditor is an
independent outsider
appointed on contractual
basis for a year.
9. Level of
Knowledge
An Accountant is not required to
have knowledge of audit
An Auditor must have
knowledge of accounting as

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techniques and procedures. well audit techniques and
procedures.
10. Position An accountant cannot act as an
auditor. Therefore, not every
accountant is an auditor.
But, every auditor is an
accountant. An auditor can
also act as an accountant.
11. Status An accountant is a permanent
employee of the business
concern.
An auditor is not a
permanent employee of the
concern.
12. Duration Accounting work is undertaken
throughout the year.
Auditing is generally done
at the end of financial year.
13. Regulations
applicable
Accounting is governed by any
professional regulations.
Auditing is governed by
code of conduct and
standards laid down by the
ICAI.
14. Compulsion Keeping of accounts is a must to
know exact financial position
and profitability of business at
the end of financial year.
Audit is not compulsory
except where this is
required by the statute.
2. What is the difference between auditing and investigation?
Auditing: He is concerned with critical examination and verification of accounts
prepared by others. After completing his work, auditor has to submit a report of fact
whether or not profit & loss a/c and balance sheet exhibit true and fair position of
business.
Investigation: An investigation of books of account is conducted with a specific purpose
in mind. It may cover an inquiry relating to earning capacity, financial position extent of
fraud and misappropriation etc.
The various points of differences between auditing and investigation are as follows:
S. No. Basis of differences Auditing Investigation
1. Scope The main purpose of
auditing is to see whether
the Balance Sheet show true
and fair view of statement
of affairs of business and
Profit and Loss Account
show true and fair view of
operating results during the
year.
Investigations have certain
specified objects, like
future earning capacity,
extent of suspected fraud
and misappropriations,
matters concerning
purchase of business.
2. Period covered Audit of accounts is usually
for a financial year.
Investigation covers
several years say 2,3 or 5
years to find out average
earning capacity, financial
position etc.
3. Statutory
requirement
Audit of accounts is
statutory requirement as per
Companies Act 1956.
Investigation of accounts
may or may not be
statutory requirement.
4. Initiated by outsiders
or proprietors
Audit is always conducted
by proprietors only.
Investigation may be
normally carried out on
the behalf of outsiders
who either want to

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purchase the business or
to become partners and to
advance loans etc.
5. Investigation of
audited accounts
In the ordinary sense
investigated accounts are
not audited.
The audited accounts are
further investigated for
some special purpose in
view.
6. Evidence In case of auditing, the
auditor is concerned only
with prima facie evidence.
The investigator looks for
substantive evidence and
even conclusive evidence
are also seen.
7. Qualification Audit of companies can
only be conducted by a
The investigator may not
be necessarily a Chartered
Accountant.
3. What is meant by “Auditing”? Mention the objects of auditing? (OR) What is an
‘Audit’? What are the principal objects of an audit?
The word audit is derived from Latin term ‘Audire’ which means ‘to hear’. It is
verification of financial position as is disclosed by Balance Sheet and Profit & Loss
account.
Definition of auditing: “Auditing is the examination of the books, accounts and vouchers
of the business. The purpose is to satisfy that the balance sheet shows a true and fair view
of the state of affairs of the business and the Profit or loss derived by the business during
the financial period. The auditor, to satisfy himself of the above facts, may obtain such
information and explanation that would be necessary in the matter, further, if he is not
satisfied with the position of the business as shown in the balance sheet and profit and
loss account. He must report as to why he is not satisfied”. – SPICER AND PEGLER.
Objectives of auditing: The principal objectives of auditing are changing with the
advancement of business techniques. They are broadly classified as follows:
A. Main object: As per section 227 of Companies Act, 1956 main object of auditing is to
state whether the accounts give a “true and fair view” in case of balance sheet, of
company at the end of financial year and in case of profit and loss account, of the profit or
loss for its financial year. The auditor has to conduct an independent review of financial
statement about their reliability. To form such an opinion, auditor must examine system
of internal control and internal check; arithmetical accuracy of books validity of
transactions and confirms existence and values of assets and liabilities.
B. Subsidiary objects: While examining and verifying the accounts certain errors or frauds
or both may be detected. Such detection and prevention of errors and frauds can be
regarded as subsidiary object.
1. Detection and prevention of frauds: When something is being done with an intension to
deceive to mislead or to conceal truth, it is an art of fraud. It may involve:
a. Manipulation, falsification or alteration of records or documents.
b. Misappropriation of assets.
c. Suppression or omission of effect of transactions from records or documents, etc.
Classification of frauds: Frauds may be divided into following categories:
1. Misappropriation of cash: In big business houses individual owner has no direct control
over receipts and payments of cash. The paid employees are dealing with cash hence
there is more opportunity of committing frauds by inflating payments and suppressing
receipts, entering fewer amounts than what has been actually received. Such frauds can be

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detected by vouching of all items of receipts and payments. The cash book, salesmen’s
reports, counterfoils of receipt books, agents’ return and other records like vouchers,
wage sheets, salary register and invoices should be vouched.
2. Misappropriation of goods: The chances of misappropriation of goods are more in case
of less bulky and more valuable goods. This type of fraud can be prevented by
maintaining proper records of goods inwards and outwards, establishment of efficient
system of internal check and arrangement of adequate external security.
3. Manipulation of accounts: This type of fraud is usually committed by directors or
managers with a view to get more commission on profit, sell the shares at higher price,
obtain further credit, and avoid payment of tax and to give wrong impression about
success of business. Manipulation of accounts may be carried on in many ways. They are:
1. Recording fictitious sales or purchases; 2. Overvaluation and undervaluation of stock
or other assets or liabilities; 3. Charging more or less depreciation or provisions;4.
Creation or utilization of secret reserves.
2. Detection and prevention of errors: Generally errors are the result of carelessness on
the part of the person preparing the accounts. Auditor should be very careful because
sometimes an accounting manipulation may appear to be an error. Errors are committed
innocently. The errors are of various types.
Classification of errors: Errors may be divided into following categories:
1. Clerical Errors: These errors arise due to wrong posting, totaling and balancing. They
are subdivided into the following two types. They are:
a. Errors of omission: If some transaction is completely omitted from books of accounts,
such types of errors are known as ‘errors of whole omission’. If transaction is partially
omitted, such types of errors are known as ‘errors of partial omission’. Where transaction
is totally omitted, it will not affect trail balance and is more difficult to detect. It can be
done only by careful scrutiny.
b. Errors of Commission: When incorrect entries are made in books of accounts either
wholly or partially such errors are called errors of commission. Usually these errors arise
due to negligence in recording of some business transactions in books. These errors may
or may not affect trail balance, profit & loss account and balance sheet. For example cash
received from ‘Shah’ is wrongly credited to ‘Shaw’.
2. Compensating errors: When an error set off the effect of another error, such error is
known as compensating error. These errors do not affect the agreement of trial balance,
hence can’t be located by it. Ex: A sale of Rs. 500 worth of goods to Ram is debited to
Ram account as Rs. 50. A sale of Rs. 50 to Venu is debited to Venu’s account Rs. 500.
3. Errors of principle: When principles of book-keeping and accountancy are not followed
in recording of a transaction, it is known as error of principle. Sometimes such errors are
committed with object of manipulation of accounts or unintentionally. Ultimately it leads
to inflate or deflate profits. Such errors are not disclosed in trail balance and can be
detected by thorough checking of each and every transaction.
4. Errors of Duplication: When a transaction is recorded twice and also posted twice in
ledger. Such an error will not affect trail balance. It is more difficult to locate such errors
only thorough checking and comparing of vouchers with entries in books of original entry
will reveal such errors.
4. What are the advantages and disadvantages of auditing?
Importance of auditing can be judged from the fact that even those organizations which
are not covered by Companies Act, 1956 get their financial statements audited. People are
interested to know the true facts about their business which are helpful to them for future
planning and improvements in operations.

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Advantages: The following are various advantages of auditing.
I. For the Businessmen and share holders:
1. In case of sole trader, he can depend on audited accounts for the purpose of sale of
business or for admitting a new partner. He is interested in knowing whether the business
is conducted efficiently or not.
2. To maintain healthy relations among partners, and disputes over the correctness of profits
can be avoided. In case of valuing goodwill at the time of admission and retirement of a
partner, audited accounts will be useful in Partnership firm.
3. Shareholders can value their shares on the basis of audited financial statements.
II. For the Management:
1. It helps management in detecting and preventing errors and frauds.
2. It keeps the accountants and staff vigilant while preparing books and records as they
know in advance that all the accounts are to be audited
3. Claims due to fire, theft and accident can be estimated from audited accounts.
4. Management gets advice on financial affairs from auditors who have expert’s knowledge.
III.For the Creditors: Long-term and Short-term creditors can depend on audited financial
statements while taking decision to grant credit to business houses.
IV. For the Government Bodies: Audited accounts can be produced in court to provide as
evidence. Audited accounts are useful for government while granting subsidies etc.
V. For Others:
1. It can be used by insurance co. to settle claims arising on account of loss by fire.
2. In case of amalgamation and absorption, purchasing company can calculate purchase
consideration on the basis of audited accounts.
3. It safeguards the interests of the workers because audited accounts are useful for settling
trade disputes for higher wages or bonus.
Disadvantages: The audit of accounts suffers from several following limitations also.
1. The audit may not give complete picture. If accounts are prepared with bad intentions.
2. Sometimes the auditor has to depend on explanations, clarifications and information from
staff and client. He may or may not get correct or complete information.
3. Under law, share holders appoint auditors with the consultation of directors. Under such
situation he may be under the influence of directors.
4. Auditor has to seek opinion of experts on certain matters on which he may not have
expert’s knowledge. Such reports which may not be always correct.
5. The auditing may not serve its purpose unless the auditors are independent and bold.
6. Auditing is considered as a mechanical work. Auditors may not frame audit programme
from the view point of particular situation.
7. Auditing is a post-mortem examination. There is no use of such examination when events
have already happened.
8. An audit cannot give a guarantee that everything in the accounts is correct. The auditor
can only ascertain and state whether accounts show a true and fair view or not.
9. The auditor as to do merely checking and vouching the books.
5. Briefly explain various types of audit?
The classification is meant to give understanding of the approaches to look upon the
exercise of audit. Various classes of audit are given below in the chart.
A. On the basis of scope: An audit examination can be general or specific. A general audit
will cover all areas of business. On the other hand specific audit concentrates on
particular areas or object. It can be further classified as follows.

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1. Partial audit: When an auditor is asked to audit certain category of transactions or
transactions made during a part of period it is known as partial audit. Ex: The auditor may
be asked to audit the payment side of cash book.
2. Occasional audit: It is conducted as a special event, normally in those organizations
where routine audits are not taking place. Ex: Where government orders a special audit to
investigate into certain matters.
3. Interim audit: When an audit is conducted between two annual audits, such audit is
known as interim audit. Sometimes it is concluded to enable directors to declare an
interim dividend and also for purpose of dealing with interim figures of sales.
4. Cost audit: Cost audit is the complete checking and verification of cost accounts, to see
whether the concern has followed cost accounting principles or not.
5. Management audit: A detailed and critical review of all objectives, policies, procedures
and functions of management is made with a view to bring about an overall improvement
in managerial efficiency.
6. Performance audit: Performance audit is to determine whether the various activities of
organization are being carried out efficiently. It is aimed at ensuring an effective control
in the organization.
7. Standard audit: The standard audit is defined as, “a complete check and analysis of
certain items and contingent upon effective check, an appropriate test check on remaining
items, the whole of the work being in accordance with general audit standards quite
adequate to justify an unqualified opinion.” Thus, it is a sample checking after a
satisfactory and detailed checking of some of the items.
8. Audit in depth: It is another type of sample checking. In this type of audit selected
transactions are subjected to a detailed stepwise verification. Such an audit gives the
understanding of the procedures being adopted to carry out any transactions.
9. Post and vouch audit: It involves verification of every transaction from book of original
entry and it’s posting in ledger. The auditor uses different types of ticks for each aspect of
examination like, posting and balancing etc. This type of audit can be adopted in small
organizations and is not advisable in large organizations.
10. Operational audit: This audit aims at improving the operations of business. It is an aid to
management in the following ways: A. To make recommendations for improvement of
profitability of organization. B. To help in achieving other objectives of business such as
worker’s satisfaction, improvement in company’s image etc.
11. Cash audit: When an audit is conducted of all the items of cash book, it is known as cash
audit. Auditor will check receipt and payments made by cash and bank with the vouchers
and other documents. It is only partial audit.
12. Tax audit: Sometimes, specific information may be required by certain people, which
may not be available in financial statements. Under Income Tax Act, profits shown by
profit and loss account have to be adjusted as per the provisions of the Act. In this way
profits for accounting and profits for taxation are not the same. Some of the causes of
difference in such profits are: A. Method of depreciation may differ. B. Only actual
expenses and bad debts are allowed under Income Tax Act.
13. Secretarial audit: Secretarial audit is concerned with verification compliance by the
company of various provisions of companies act and other relevant laws, any default
thereof may attract leaves penalties for the company, directors and other officials. The
secretarial audit report includes 1. Whether various books are maintained as per
Companies Act, 1956. 2. Whether necessary approval as required from Central
government, company law board were obtained. 3. Whether meetings of shareholders and
directors were held as per law and necessary records thereof maintained.

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B. On the basis of nature of activity: The activities which are the subject matter of an audit
may be commercial or non-commercial. While the audit of profit motive organizations
can be called commercial audit. The audit of nonprofit organizations will fall under non-
commercial audit.
C. On the basis of form of organization: On this basis audit may be classified as Private
and Government. Audit of Government offices and departments is covered under this
heading. A separate department is maintained by Government of India, known as
Accounts and Audit Department. This department is headed by comptroller and Auditor
General of India. When the audit is not a statutory requirement, but is conducted at the
desire of owners, such audit is a private audit.
D. On the basis of who conducts the audit: On this basis, audit is classified into
independent and internal audit. An independent audit is conducted by an independent,
professionally qualified person who is not an employee of organization. On the other
hand internal audit is conducted by employees of organization to enable better exercise of
managerial control.
E. On the basis legal necessity: On this basis audit can be classified into statutory and non-
statutory audit. An audit by qualified persons which is a compulsory requirement under
law is known as statutory audit. The various matters relating to conduct of audit
appointments, duties, and rights, liabilities of auditors are provided in concerned statute.
Ex: Co-operatives, Trust, Banking, Insurance and electricity companies etc. Where audit
is conducted without any legal necessity or requirement, audit is called non-statutory
audit such as individuals and others.
F. On the basis of method of examination: On this basis audit can be classified as
continuous audit and completed audit. When auditor and his staff are constantly engaged
in work during whole year or period at regular or irregular intervals, the audit is known as
continuous audit. On the other hand the audit conducted after annual closure of accounts
is known completed, periodical, annual or final audit. When the audit is concerned with
items of balance sheet only it is called balance sheet audit.
6. What is meant by continuous audit? Explain its advantages, disadvantages and also
suggest measures to overcome shortcomings of it?
Continuous audit is conducted throughout the year or at regular short intervals of time.
Auditor visits his clients regularly and checks each and every transaction.
Definition: “A continuous or detailed audit involves a detailed examination of all the
transactions by the auditor attending at regular intervals say weekly, fortnightly or
monthly during the whole of trading.” – J. R. BATLIBOI.
Continuous audit is useful in the following situations:
1. Where periodical statements are required after a short interval.
2. Where internal check is not effective.
3. Where business is very large and number of transactions are to be checked.
4. Where audited statements are required immediately after the close of financial year.
5. Where final accounts are prepared immediately after the last day of financial year.
Advantages of continuous audit:
1. Complete checking of all the records: Since audit is carried out throughout the year,
sufficient time is available for detailed checking. Any enquiry and doubt arising in course
of audit can be tackled in a better way.
2. Proper planning: Auditor can plan his audit work in a systematic manner. He can evenly
spread his work throughout the year. It will improve the efficiency of auditor.
3. Preparation of Interim accounts: Interim accounts can be prepared without much delay.
It will help the board of directors to declare interim dividends.

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4. Early detection of frauds ad errors: The work of auditor becomes easier for detecting
frauds and errors otherwise it will involve more time.
5. Up-to-date Accounts: The efficiency of accounts staff will increase and their work will
be up-to-date and accurate.
6. Valuable suggestions: Continuous audit will help auditor to understand technicalities of
business. This will help auditor to make suggestions for improvement of business.
7. Early presentation of accounts: Audited accounts can be presented just after end of
financial year.
8. Moral check: Continuous audit provides preventive and moral check against frauds.
Disadvantages of continuous audit:
1. Expensive: It is an expensive system as it may not suit budget of small organizations.
2. Dislocation of routine work: Frequent visit by auditor may dislocate smooth flow of
office work.
3. Alteration of figures: After the accounts have been audited, the figures may be
fraudulently altered by the staff.
4. Losing link in the audit work: As the work is not completed continuously, auditor may
lost continuity and certain questions and inquires may be left unanswered.
5. Monotony: The work of auditor may become mechanical.
6. Unhealthy relationship: Frequent visits by auditor may provide scope for unhealthy
relationship between him and clerks.
How to avoid shortcomings of continuous audit: With the following precautions,
shortcomings of continuous audit can be avoided.
1. Auditor should make surprise checks without informing date and time of his visits.
2. Before starting the audit work a review of finding of previous audit work should be made
to establish link with the past work done.
3. All nominal accounts shall be checked only in the final sitting at the end of the year.
4. Audit of a particular transaction must be completed in one sitting.
5. Special ticks should be used while checking, altered or overwritten figures.
6. Alteration of audited work should be strictly prohibited. Any alteration in the audited
work must be done only after permission from auditor.
Short Questions:
1. What is meant by Window Dressing?
The financial position is shown in such a way that it seems to be better than what it is.
Window dressing is more of misrepresentation than fraud. Window dressing may be done
in any of the following ways:
a. Purchase of a year, may be shown as of next year.
b. Income of preceding year may be recorded in the current year.
c. Expenses of current year may be shown as of next year.
d. Showing short-term liabilities as long-term liabilities.
e. Providing inadequate depreciation and bad debts.
f. Charging revenue expenditure as capital expenditure.
g. Over or under valuation of assets and liabilities.
h. Inflating profits, or deflating losses by entering non-existent items of sales, purchase.
i. Utilizing secret reserves during depression period without making fact known to
shareholders.

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11 D.D.S
2. “An auditor is a watch-dog and not a blood-hound.” Discuss.
In the famous case of Kingston Cotton Mills Company (1896) “An Auditor is not bound
to be detective or to approach his work with suspicion, or with the foregone conclusion
that there is something wrong. He is a watch-dog but not a blood-hound. He is justified in
believing tried servants of the company, and is entitled to reply upon their representation
provided he takes reasonable care.” From the above references, it can be made out that
auditor is a watch-dog which means he has to look after the interests of those who are
owners of business. He should make every effort to protect interests of his clients by
detecting errors and frauds. All this should be conducted by him honestly and tactfully.
Duty of audit is not as that of blood-hound. He is fully justified in believing that tried
servants of company and is entitled to rely upon their representation, provided he takes
reasonable care. He is supposed not to cause any harm to persons whose work he has to
certify. The detection and prevention of errors and frauds are an important part of
auditor’s duties.
1. Detection of errors and frauds: Auditor has to exercise a certain degree of skill and care
for detecting errors and frauds. This can be accomplished through checking and vouching
thoroughly books of accounts, ledger accounts and vouchers. If he certifies accounts as
correct, to the best of his knowledge and belief, he can’t be held responsible for an error
or fraud which is still there in accounts.
2. Prevention of errors and frauds: Auditor cannot do anything directly for the prevention
of errors and frauds. After completing audit work, auditor can advise his client by making
some suggestions regarding way to prevent frauds in future. Ex: Changes in accounting
systems, improvement in internal control system.
3. Distinguish between Continuous and Final or Periodic Audit?
The following are the differences between continuous and periodic audit.
S.
No.
Basis of
distinction
Continuous audit Periodic audit
1. Time Period Continuous audit is done
Periodical audit is done at the
end of the year.
2. Visit by the
auditor
Auditor visits the client’s
office frequently.
Auditor visits the client’s
office at the end of the year.
3. Nature of
Business
Concern
It is quite suitable of big
concerns
It is suitable for small
concerns.
4. Checking of
transaction
Detailed checking of
transactions is possible.
Detailed checking is not
possible.
5. Expensive It is very expensive. It is not expensive.
6. Interim accounts It helps in preparation of
interim accounts.
It does not help in preparation
of interim accounts.
7. Detection of
Errors and Fraud
It reduces the opportunities for
Fraud.
It does not reduce the
opportunities of fraud.
8. Nature of work Work becomes mechanical and
boring.
Work does not become
mechanical.
9. Relationship
with staff of the
client
There is a possibility for
developing unhealthy
relationship between the audit
staff and the client’s staff.
There is no possibility for
developing unhealthy
relationship between audit
staff and client’s staff.
10. Quick Financial accounts can be Not possible to do so.

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12 D.D.S
submission of
accounts
submitted immediately after
the close of financial year.
11. Declaration of
dividends
It facilitates early declaration
of dividend.
It does not facilitate early
declaration of dividend.
12. Moral Check There will be moral check on
the staff of the client.
There will not be any moral
check on staff of the client.
4. Distinguish between Statutory Audit and Private Audit?
The following are the differences between Statutory and Private audit.
S. No. Statutory Audit Private Audit
1. This relates to the audit of
companies, trusts and public
corporations etc.
This relates to the audit of sole traders,
partnership firms, charitable institutions
etc.
2. It is legally compulsory. It is voluntary.
3. Auditor is appointed under statute. Auditor is appointed under an
agreement.
4. Auditor must be a Chartered
Accountant.
Auditor need not be a Chartered
Accountant.
5. Rights, duties and liabilities of
auditor are statutory. They are
defined by statute.
They are customary and contractual.
They are defined by agreement.
6. Full audit must be conducted. There
is no scope for partial audit.
There is scope for partial audit.
7. Auditor has to give a report in the
prescribed form.
Auditor can give a report in any form he
likes.
8. The purpose of audit is to comply
with the requirements of law.
The purpose of audit varies from one
enterprise to another and is done to suit
needs of enterprise and its purpose.
9. This audit is to be carried out
compulsorily every year.
It may be carried out at the desire of
concern and not compulsory yearly.
5. How does “Internal Audit” differ from “Independent Audit”.
The following are the main differences between internal audit and independent audit.
S. No. Internal Audit Independent Audit
1. It is conducted by the employees. It is conducted by an independent
professional auditor.
2. It serves primarily needs of
management.
It is conducted to safeguard interests of
proprietors and third parties directly.
3. It is aimed at improving and
complying with established policies
and procedures.
It is aimed at ensuring accuracy and
reliability of financial accounts.
4. The main concern of an internal
auditor is with detection and
prevention of errors and frauds.
The main concern of an auditor is to
ensure that annual accounts are true
and fair.
5. The internal auditor is dependent on
the management.
The independent auditor is independent
of the management.
6. The internal auditor is appointed by The independent auditor is appointed

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13 D.D.S
the management. by the proprietors.
7. The remuneration of internal auditor
is fixed by the management.
The remuneration of the independent
auditor is fixed by the proprietors or
shareholders.
8. The duties of an internal auditor may
be reduced as desired by the
management.
The duties of independent auditor
cannot be reduced by the management.
9. Internal audit is carried on
continuously throughout the year.
Independent audit is carried on
periodically and usually once a year.
10. Internal auditor has to submit a
report, if any, to the management.
Independent auditor has to submit a
report to shareholders or proprietors.
11. The services of an internal auditor
can be easily terminated by
management.
The services of an independent auditor
can be terminated by shareholders or
proprietors but not by the management.
6. Distinguish between Continuous Audit and Internal Audit?
The points of distinction between internal audit and continuous audit are as follows:
S.
No.
Points of
distinction
Continuous Audit Internal Audit
1. Object To present true and fair
financial statements of concern
to the shareholders.
To fulfill the needs of
management.
2. Scope It involves a detailed
examination of all transactions
at regular intervals, say,
fortnightly or monthly etc.
It is carried on continuously
3. Nature It is an independent
examination work.
It is an integral part of
existing internal control
system in the concern.
4. Status It is done by an independent and
professional auditor.
The internal auditor who
conducts internal audit is the
employee of the concern.
5. Qualification The auditor must be Chartered
Accountant.
The auditor need not be a
6. Responsibility Auditor is responsible to
shareholders.
Auditor is responsible to
managers.
7. Report The auditor’s report is
submitted at the end of financial
year.
There is no question of
submitting the auditor’s
report.
7. Distinguish between Continuous audit and Interim audit?
The points of distinction between continuous audit and interim audit are as follows:
S.
No.
Points of
distinction
Continuous audit Interim audit
1. Period The audit work is carried on up to
any date according to the
convenience of auditor and client.
The audit work is carried on
up to a definite period,
generally half year.

AUDITING
14 D.D.S
2. Verification
of assets and
liabilities
They are verified at the close of
the financial year.
They are verified at the time
of audit and again at the time
of final audit.
3. Trial balance Trial balance is not prepared at
each time.
Trial balance must be
prepared.
4. Financial
statements
It is not necessary to prepare and
check financial statements
periodically.
Financial statements are
prepared and checked for the
purpose of interim audit.
5. Audit report Audit report is given only at the
close of the financial year.
Audit report is to be
submitted after completion
of interim audit.
6. Extent of
work
More detail checking is possible. More detail checking is not
possible.
7. Cost It is costly. It is not so costly.
8. Alteration Figures may be altered. Figures may not be altered.
9. Moral check There will be moral check on staff. There cannot be such moral
check.
10. Object It aims at detailed checking. It aims to find out the real
profit or loss during the
interim period.
11. Detection Errors and frauds are detected
earlier.
Errors and frauds are
detected at the end of a fixed
period.
12. Inconvenienc
e to staff
It causes inconvenience to the staff
of client.
It does not do so.
8. Differences between Interim and Internal Audit?
The points of distinction between interim and internal audit are as follows:
S. No. Internal audit Interim audit
1. Internal audit is conduct throughout
the year.
Interim audit may be conducted at any
time during the year.
2. Internal audit is a constant review
of accounts conducted
continuously.
Interim audit is conducted for a part of
the year for which accounts have been
prepared.
3. Internal auditor is an
employee/official of the company.
Interim audit is not an employee rather
an outsider.
4. Internal audit is not on a particular
date but a continuous process.
Interim audit is conducted on a
particular date.
5. Internal audit is an administrative
procedure.
Interim audit is for a special purpose as
per circumstances.
Internal auditor does not submit his
report.
Interim auditor has to certify and
submit his report.
9. Distinguish between Financial Audit and Management Audit?
The points of distinction between financial and management audit are as follows:

AUDITING
15 D.D.S
S.
No.
Points of
distinction
Financial audit Management audit
1. Nature It is concerned with financial
aspects of business
transactions of the year under
audit.
It is concerned with review of
past performance to ascertain
whether it is in tune with
objectives, policies and
procedures of enterprise.
2. Examination The auditor examines the past
financial records to report his
opinion on the truth and
fairness of the representations
made in the financial
statements.
The management auditor reports
on performance of the
management during a particular
period and suggest ways to
remedy the deficiencies,
including modification of
objectives policies, etc.
3. Scope It covers business transaction
of the past financial year.
There is no limitation as to the
period to be covered.
4. Compulsion Financial audit is compulsory
in case of enterprises, such as
companies, trusts and societies.
There is no compulsion as
regards management audit.
5. Submission
of report
The auditor reports to the
shareholders in case of a
company.
The auditor reports to
management.
10. Distinguish between “Cost Audit”, and “Management Audit”?
The points of distinction between them are as follows:
S. No. Points of
distinction
Cost audit Management audit
1. Object Cost auditor checks cost
accounting records with a
view that these are presenting
a true and fair view.
The Management auditor
investigates the aims and
objects of the concern.
2. Compulsory Cost audit is compulsory to
some companies under the
Indian companies Act.
Management audit is not
compulsory under the law.
3. Nature It is the verification of cost
records to measure or
determine the internal
efficiency of the concern.
It investigates and develops
relationship with outside world
and internal efficiency of
concern. It involves a review of
past performance.
4. Term Under cost audit, a continuous
audit programme is fixed for
one year. Cost audit usually
covers the cost accounts of
financial year.
It covers a wide area and it will
involve appraisal of long-term
policies and plans. It may thus
cover a period longer than
financial year.
5. Qualification The auditor must be a Cost
Accountant or Chartered
Accountant.
No particular qualification is
prescribed. Any person having
knowledge about the
management control can be
appointed.

AUDITING
16 D.D.S
6. Submission
of report
Cost auditor is required to
submit his cost audit report to
the Central Government
within 120 days.
Management auditor is
required to submit his report to
management of company. No
time limit is fixed for the same.
11. How is a cost audit different from financial audit?
The points of distinction between them are as follows:
S.
No.
Points of
differences
Cost audit Financial audit
1. Compulsion It is not statutorily compulsory
for all the companies except for
specified and limited
companies.
It is compulsory for all
companies under the
Companies Act.
2. Object The object is to see that
expenses have been incurred
properly and wisely in the best
interest of the company.
The object is to see that the
books of accounts have
been properly maintained.
3. Nature It certifies that unit cost of
production has been properly
determined.
It certifies that profit and
loss account shows a true
and fair view of affairs of a
company.
4. Scope The scope is wider as it is
carried on with broader
objectives.
The scope of financial audit
is a bit limited.
5. Emphasis Cost auditor is concerned with
those aspects of accounts which
are mainly related to the cost.
Financial auditor is
concerned mainly with the
financial aspect of the
accounts audited.
6. Examination Cost auditor has to examine
cost records in detail.
Financial auditor depends
upon sample and test
checking of accounts and
cost records.
7. Interests of
shareholders and
management
Cost auditor has to guide and
serve the interest of
management of company.
Financial auditor has to
serve and safeguard the
interest of shareholders
mainly.
8. Appointment of
auditor
Cost auditor is appointed by
Board of Directors with
previous approval of the
Central Government.
Financial auditor is
normally appointed by
shareholders in the annual
general meeting.
9. Time of audit It may not be conducted every
year.
It is conducted every year.
10. Submission of
report
Cost auditor submits his report
to the Central Government.
Financial auditor submits
his report to the
management of company.
12. What do you mean by “Management audit”? What are its objectives, advantages
and disadvantages?
It is an audit to examine, review and appraise the various policies and actions of
management on the basis of objective standards.

AUDITING
17 D.D.S
Definition: “Management audit is a method to evaluate the efficiency of management at
all levels through the organization”. – TAYLOR AND PERRY.
Objectives of management audit:
1. To assist at all levels of management in effective discharge of their responsibilities.
2. It helps in forming a good relationship between staff and management.
3. A motivation system can be operated whereby incentives are given to various personnel
on the basis of results of management audit.
4. Through management audit, a comparative study of actual performance with pre-
determined targets can be made.
Advantages of Management audit:
1. Management audit is a means of executive control over the functions of subordinates.
2. It ensures proper utilization of the authority.
3. It aims at securing co-ordination between different effective and at different levels.
4. It attempts to make internal control system more effective and objective.
5. It provides an excellent ground for training of new executives.
6. It can suggest the methods of improving administrative and accounting systems.
Disadvantages of Management audit:
1. Management audit will not pay much attention to higher production.
2. It discourages initiative and dynamism of management to take risk because their decision
may prove to be wrong even though intentions were for the good of firm.
3. It always tries to find out some fault in order to justify his appointment and existence.
13. Define “Cost Audit” and describe the objects and advantages of Cost Audit?
Cost audit is an effective tool of control in the hands of management. It is a special
branch of audit. It implies the complete examination of cost records.
Definition: “Cost audit is the verification of the correctness of cost accounts and the
adherence of the cost accounting plan”. – W.W. BIGG.
Objectives of cost audit:
1. To find out that cost accounts have been properly maintained according to principles of
cost accountancy.
2. To ensure that the cost accounts are correct to detect all errors and frauds.
3. To exercise moral check on staff and secure efficiency in cost accounting system.
4. To pinpoint inefficiencies in the use of material, labour and machines and assist
management thereby.
5. To find out how far prevailing practices of cost records are helpful for management to
take decisions.
Advantages of cost audit:
1. It gives management a detailed insight into costing of various operations of company.
2. It helps to find out the correct cost of production and fix the price.
3. It can help the efficiency of cost procedure introduced to avoid leakage of resources of
the company, their theft, fraud and negligence.
4. It would facilitate the management in fixing the responsibility of the individuals in case of
inefficiency, less productivity and wastage.
5. It helps in making comparison of the unit cost of production of different plants,
departments or sections under the management properly.
6. If cost audit is done thoroughly, labour also stands to gain through increased profitability
in the shape of bonus and other benefits.
14. Government Audit
A. Audit of Government offices and departments is covered under this heading. A separate
department is maintained by Government of India, known as Accounts and Audit

AUDITING
18 D.D.S
Department. This department is headed by Comptroller and Auditor General of India.
This department works only for government offices and departments.
Objectives of Government Audit:
i) To ensure that every payment is made as per rules and regulations.
ii) Payments have been sanctioned by the proper authority.
iii) To see that the expenditure is incurred by the right person.
iv) To verify the allowances granted to employees as per sanctions and rules.
v) To check the existence of stock and their proper valuation.
15. Balance sheet audit:
A. Balance sheet audit relates to the verification of various items of balance sheet such as
assets, liabilities reserves and surplus, provisions and profit and loss balance. The
procedure under this audit is to follow a backward process. First the item is located in
balance sheet, then it is located in the original records for the purpose of verification.
Under this audit, auditor assumes that there exists a reliable system of internal
control. It is presumed that auditor is highly skilled and experienced.
It is similar to an annual audit. In India, no distinction is made between Balance
Sheet audit and annual audit. Balance sheet is more popular in USA. Although, it
concentrates on the item of Balance sheet, it does not exclude audit of other business
operations. As the balance of profit and loss account itself is part of the Balance sheet, it
will invariably include the examination of the items recorded in the profit and loss
account.
************************

AUDITING
19 D.D.S
UNIT – II
PLANNING OF AUDIT AND CONTROL
Essay Questions
1. State the provisions of Companies Act, 1956 regarding appointment of auditors?
Audit is voluntary to sole trading and partnership firms but it is legally compulsory to
joint stock companies. Sec 224 of the Companies Act, 1956 deals with appointment,
reappointment and remuneration of auditor. The Companies Act has empowered three
authorities for appointing an auditor to a company. The legal provisions relating to
appointment of auditor are as follows:
1. First Auditor: Sec 224(5) provides for the appointment of first auditor by Board of
Directors within one month of the date of registration of company and the auditor so
appointed shall hold office until the conclusion of first annual general meeting. Who has
been nominated for appointment and of whose nomination notice has been given to
members of the company not less than 14 days before the date of meeting. If they fail to
exercise its power, company may appoint first auditor in Annual General Meeting.
Sometimes, first auditors of company are named in the Articles of Association. In the
case of first auditor, it is not necessary condition that he shall be informed about his
appointment and similarly, he is not required to inform the Registrar about refusal or
acceptance of appointment.
2. Subsequent Auditors: According to sec 224(1) subsequent auditors of a company are
appointed every year by shareholder in annual general meeting by passing an ordinary
resolution. Notice of their appointment should be given before 7 days to the auditors so
appointed. Section 224(I-A) requires the auditor so appointed to communicate his
acceptance or refusal to the Registrar within a period of 30 days of the intimation of his
appointment. If the auditor does not accept appointment another general meeting has to be
convened to appoint new auditor.
3. Appointment by Central Government: According to sec 224(3) where at an annual
general meeting no auditors are appointed or reappointed, it must intimate this
information to the Regional Director, to whom the Central government’s power to
appoint an auditor in such an event has been delegated under section 637. Failure to give
such notice will make company and every officer of company in default with a fine which
may extend to Rs. 5,000/-.
4. Appointment against a casual vacancy: According to sec 224(6) due to death, insanity,
insolvency or other disqualification, a casual vacancy of auditor arises; Board of
Directors can fill the same. The vacancy arising out of resignation or his refusal to accept
appointment is not a casual vacancy. The auditor appointed against such a vacancy will
hold office till the conclusion of next annual general meeting. The Board has no power to
fill such vacancy. Even if shareholders have authorized in this, behalf such a vacancy
should be filled by shareholders in general body meeting.
5. Appointment by Special Resolution: According to Sec 224A of the Companies Act, in
the case of a company in which not less than 25% of subscribed capital is held by a public
financial institution or a government company or a nationalized bank or an insurance
company, appointment or reappointment of an auditor at each annual general meeting
shall be made by a special resolution. If company fails to pass such a special resolution
for making appointment of an auditor; it shall be deemed that no auditor had been
appointed by company at its annual general meeting and in such a case, the central
government may appoint an auditor.

AUDITING
20 D.D.S
6. Appointment of Auditors of Government or certain other companies: Sec 619
provides that the auditor of a Government company shall be appointed or reappointed by
the Central Government on the advice of “Comptroller and Auditor General of India”
(CAG). The auditor should submit a copy of his audit report to CAG.
2. Explain provisions of the Indian Companies Act for the removal of an auditor?
Removal of auditor: Sections 224 and 225 contains provisions regarding removal of an
auditor which are mainly designed to safeguard independence of auditors against unfair
and unjust removal. The removal of the auditor can be studied under two heads:
1. Removal of auditor before expiry of the term: According to sec 224(7) any auditor
appointed under sec 224 may be removed from office before expiry of his term after
obtaining previous approval of the Central Government. If there are no adequate grounds
for removal, the Central Government may not grant permission. The first auditor of a
company appointed by directors prior to AGM may be removed by members in general
meeting even if their tenure of office has not expired. In this case, previous approval of
Central Government is not necessary. Only a nominal notice of at least 14days is required
for appointment of another auditor. But for removal of subsequent auditors, besides
passing an ordinary resolution prior permission is essential. According to sec 225, auditor
proposed to be removed has following rights:
a. He has a right to make written representation to the company.
b. He has a right to ask company to circulate his written representation to shareholders.
c. He has a right to attend the meeting where his removal is being discussed.
d. He has a right also to speak at such a meeting.
2. Appointing a new auditor in place of a retiring auditor: If an auditor is to be removed,
at expiry of his term, an ordinary resolution will be sufficient. However, provisions of sec
225 must be complied with. They are:
1. A special notice of such an intention must be given providing expressly that a retiring
auditor shall not be re-appointed.
2. On receipt of notice of resolution, company must send a copy to retiring auditor.
3. The retiring auditor, on receiving a copy of such special notice may make written
representations in writing to company. He may also request company to circulate his
representations to members of the company.
4. If the copy of representation is not sent to members, either because it was received too
late, or because of default by the company, auditor may insist that representation shall be
read in the meeting.
5. It is not necessary to read out or circulate the copy of representation in the meeting, if on
the application of the company; the court is satisfied that the auditor is abusing his rights,
to secure needless publicity. In such a case the court can order auditor to meet the
company’s cost in making application to the court fully or partially.
6. The auditor has a right to attend and to speak at the general meeting where his removal is
to be discussed.
7. The newly appointed auditor in place of another should communicate with retiring auditor
in writing before accepting appointment as part of his professional conduct.
3. What are the rights of the auditor of a public limited company under the Indian
Companies Act?
Rights and duties are inter-connected. To enable the auditor of a company to discharge
his duties properly, the Companies act, give him the following rights:
1. Right to access books of accounts: According to Sec 227(1) auditor of a company has a
right to free and complete access at all times to the books, accounts and vouchers of

AUDITING
21 D.D.S
company. The term ‘vouchers’ includes all documents, agreement etc. The term ‘all
times’ means only during normal business hours.
2. Rights to obtain information and explanation: According to Sec 227(1) an auditor is
authorized “to receive from the officers of the company such information and explanation
for the performance of his duties as auditor”. If he does not get the proper information, he
should mention this fact in his report.
3. Right to visit branches and to inspect books of accounts: According to sec 228(2),
where accounts of any branch office are audited by a person other than company’s
auditor, he shall be entitled to visit branch office. He shall also have access at all times to
the books, accounts and vouchers at a branch office. However, in case of banking
companies having a branch office outside India transmitted to principal office in India.
The auditor should depend on copies.
4. Right to receive notices: According to sec 231 all notices and other communications
relating to a general meeting of a company, which any member of the company is entitled
to have sent to him, shall also be forwarded to auditor of company.
5. Right to seek legal and technical advice: The auditor has a right to take legal, expert or
technical advice on any matter relating to business, in order to perform his work
satisfactorily. But he must give his own opinion in report and not that of experts.
6. Right to claim remuneration: The auditor has a right to claim remuneration for the work
done by him as per the contract.
7. Right to be indemnified: For many purposes, an auditor is considered to be an officer of
company. He has a right to be indemnified out of assets of company against any liability
incurred by him in defending himself against any civil or criminal proceedings by the
company.
8. Right to sign the audit report: According to sec 209, only 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. The auditor is to make report to members of company
and not to Board. Auditor has the right to recommend to board the change in accounting
system which may be necessary. If his recommendations are not acted upon he has right
to report the fact to members through his report.
9. Right to report to the members of the company: The auditor has a right to report to
members, if the accounts audited by him show an unsatisfactory state of affairs.
10. Right to refuse to start the audit work: The auditor has a right to refuse to start the
audit work, until the management balances the accounts.
11. Right to correct any wrong statements: The auditor has a right to correct wrong
statements made by the directors relating to accounts.
12. Right of Lien: The auditor has no right of lien on the books of accounts. However, he
can exercise lien on working papers. The rights of an auditor cannot be limited by the
Articles or by resolution of the members.
4. What are the duties of an auditor of a public limited company under the Indian
Companies Act?
The duties of an auditor of a company are discussed below:
I. Statutory Duties or duty to report to members (Sec 227(2)):
1. On the accounts examined by him he has to state in his report, whether, in his opinion,
proper books of accounts as required by law have been kept by the company.
2. Whether he has obtained all information and explanations required by him for the purpose
of his audit.
3. Whether reports on the accounts of any branch office audited under section 228 by a
person other than company auditor has been forwarded to him.

AUDITING
22 D.D.S
4. Whether or not balance sheet and profit & loss a/c have been drawn up according to
requirements of the Companies Act and whether balance sheet and profit & loss a/c gives
a true and fair view of company’s affairs and profit or loss for its financial year.
5. The auditor has to mention in his report if he is not satisfied with information and
explanations given to him with regard to any points.
II. Duties under Section 227(IA): An auditor is required to enquire:
1. Whether loans and advances made by company on basis of security have been properly
secured and terms on which they have been made are not prejudicial to the interest of
company or its members.
2. Whether transactions of company which are represented merely by book entries are not
prejudicial to the interest of company.
3. Whether company is not an investment company or banking company, whether so many
of assets of company as consist of shares, debentures and other securities have been sold
at a price less than that at which they were purchased by company.
4. Whether loans and advances made by company have been shown as deposits.
5. Whether personal expenses have been charged to revenue account.
6. Whether it is stated in books and papers of company that any shares have been allotted for
cash, has actually been so received, whether the position as stated in account books and
balance sheet is correct, regular and not misleading.
If any of the above matters is answered in negative auditor’s report must state reasons.
1. Duties Under Section 227 (4A): It is duty of auditor to include in audit report of such
specific companies a statement on all such matters as may be specified in government
orders. They are: 1. Manufacturing, mining or processing; 2. Supplying and rendering
services; 3. Trading; and 4. Financing and investment, chit fund (excluding banks).
III.Other Duties under Companies Act:
1. According to sec 229 it is duty of an auditor, or a partner of firm of accountants practicing
in India to sign audit report.
2. It is duty of an auditor to report on certain matters included in prospectus. Sec 56(1).
3. An auditor is required to report on certain matters relating to accounts and allotment of
shares required to be included in statutory report. Sec 165(4).
4. If a company goes into voluntary winding up, directors are required to file a declaration
of solvency. It is duty of an auditor to give a report to be attached to such a declaration.
Sec 488(2).
5. According to Sec 240(v) (b), it is duty of an auditor “to preserve and produce to an
inspector or any other person authorized by him in this behalf with previous approval of
central government all books and papers relating to company which are in their custody
and to give inspector all assistance in connection with investigation.
IV. Contractual Duties: A professional accountant may be hired by a company for the
purposes other than statutory audit. In all such cases duty of auditor will depend upon
terms and conditions of his appointment.
Duty of Care: An auditor of a company must be honest and must exercise reasonable
skill and care; otherwise he may be sued for damages.
Duties of Auditor in Relation to Mandatory Accounting Standards: According to
decision of Council of ICAI, it is duty of auditor, to ensure that Accounting Standards are
implemented in presentation of financial statements. In the event of any deviation from
standards, it will also be their duty to make adequate disclosures in their reports.
Duty to Know the Duties: It is duty of an auditor to become aware of their duties under
the Companies Act. Sometimes they may contain some additional duties. Their ignorance
will not be an excuse to avoid liability on account of negligence.

AUDITING
23 D.D.S
Professional Duties: Every profession governs itself through code of conduct. The
auditors are also expected to observe ethics given to them by the ICAI.
5. Explain about liabilities of an auditor?
Liabilities of a company auditor: The question of auditor’s liability for any error will
depend upon nature of his work and contract. The liabilities of an auditor are:
I. Civil Liabilities: It arises when there are dispute between two parties for a loss caused to
one due to the act of another when there is absence of reasonable care and skill that can
be expected.
1. Liability of Negligence: Negligence is breach of “duty to take care”. If auditor is
negligent in performing his duties and consequently company suffers a loss, then auditor
is held liable for damages.
2. Liability under Statute (Misfeasance): Misfeasance may be defined as “improper
performance of a lawful act or the doing of a lawful act in an unlawful manner”.
1. Duty has been imposed on auditor u/s 227(2) of Companies Act to state in his report.
a. On the accounts examined by him i.e., auditor has to state in his report, whether, in his
opinion, proper books of accounts have been maintained by company.
b. Whether or not he has obtained all the information and explanations which to the best of
his knowledge was necessary for discharging his duties.
c. Whether the report on accounts of any branch office audited by a person other than the
company audited is forwarded to him u/s Sec 228.
d. He has also to state whether the Balance Sheet and Profit & Loss account are drawn up
according to requirements of the Companies Act.
e. The auditor has to mention in his report if he is not satisfied with information and
explanations given to his with regard to any points.
If he does not comply with these requirements, he is guilty of misfeasance and is liable to
be fined up to Rs. 1000/-
3. According to Sec 229: It is the duty as well as right of auditor to sign the report prepared
by him. In case the auditor is a firm, then only a partner practicing in India can sign
report. Failure to comply with requirements of this section may make an auditor liable to
fine up to Rs. 1000/- provided default is willful.
4. Sec 543: Deals with court’s power to assess in the event of winding up of company if it
appears that any director or auditor may be held liable to repay or restore the money or
property together with interest to the assets of company by way of compensation they
misapplied or retained any money or property of company. However court may relieve an
auditor according sec 633 if it is proved by him that he has acted honestly.
II. Criminal Liabilities: U/s 2(30) of companies act, an auditor of a company can be held
liable for proven acts of omission or commission on his part which constitutes an offence
under the act. The penalty for such offence is fine or imprisonment or both.
1. Misstatement in Prospectus Sec (63): An auditor is criminally liable for any
misstatement in prospectus. He shall be punishable with imprisonment which may extend
up to two years or with fine which may extend up to Rs. 5,000/- or both unless he proves
either that statement was immaterial or he has reasonable ground to believe.
2. Failure to assist investigation Sec (240): Auditor has duty to assist any investigator
appointed by the central Government in collecting any information of company otherwise
he shall be punished with imprisonment which may extend up to six month or with a fine
up to Rs. 2,000/- or both for continuous default Rs. 200/- per day.
3. Failure to return property or books Sec (477): At the time of winding up, auditor has
to return any property or books of company to court otherwise he can be arrested.

AUDITING
24 D.D.S
4. Falsification of Books of accounts Sec (539): If any officer of company including
auditor intends to defraud any person by making any fraudulent entry in books of
accounts or documents belonging to company, he shall be punishable with imprisonment
for a term which may extend up to 7 years and shall be liable to fine.
5. Penalty for deliberate art of commission or omission (Sec 628): If an auditor in any
report and prospectus etc., required by or for the purpose of any of this Act, makes a
statement a) which is false in any material particular, knowing it to be false or b) omits
any material fact, knowing it to be material, punishment on conviction is imprisonment
for a term which may extend to 2 years and shall also be liable to fine.
III.Criminal Liability under Indian Penal Code Sec 197: If auditor issues or signs any
certificate required by law admissible in evidence, knowing that such certificate is false in
any material, shall be punishable in same manner as he gave false evidence.
IV. Liability under Other Statutes:
a. Liability under Income Tax Act: Sec 278 of Act, prescribes rigorous imprisonment up
to 2 years for a person who induces in any manner another person to make and deliver to
Income Tax authorities a false account statement relating to any income chargeable to tax
which he knows to be-false.
3. Liability for Professional Misconduct: If auditor fails to follow rules of their own
profession he is liable for criminal liability. The liability for professional misconduct will
be removal of name from the register of members for 5 years or more.
V. Other Liabilities:
Liability of Joint Auditor: When two auditors carried out the work of audit it is called
as joint audit. The main recommendations of the ICAI are: a. The joint auditor should
divide work as far as practicable between themselves. Therefore, an auditor should not be
held responsible for work done by other joint auditor; b. The actual division of work to be
performed by each auditor be communicated to client then each of the joint auditors’ will
be liable for work performed by him. If they find it difficult to give a joint report they can
give separate reports.
6. What steps would you take before commencing actual work of audit upon being
appointed as Auditor?
Proper execution of any work requires appropriate planning and programme of action.
Before commencing a new audit an auditor should take the following steps.
1. Ascertain scope of duties: First of all an auditor should ascertain nature and scope of his
duties. He should get instructions in writing whether he has to do accountancy work or
audit work or both. He should also find out the type of audit is to be undertaken.
2. Procure engagement letter: When auditor decides to accept an audit work, he should
procure an engagement letter from client. It should lay down terms of audit contract and
understanding reached between auditor and client. In case auditor is to perform special
assignments, same should be included in engagement letter or audit contract.
3. Knowledge about business: An auditor should clearly understand nature of business. He
can make a beginning by going through document available, e.g. Memorandum of
Association in case of a company and Partnership Deed in case of Partnership firm. In
case of audit of a banking company and insurance company, he must know typical
aspects and procedures of related business in order to do his work efficiently.
4. Knowledge of the Accounting system: The system of accounts depends upon nature of
business. If the system is not sound, he should ask client to modify the system. The extent
of his work will be greatly influenced by reliability of internal control and accounting
system.

AUDITING
25 D.D.S
5. Condition of internal check: He should obtain a written statement of internal check, if
any, in operation and should decide whether to rely or not to rely upon it. He should
enquire about adequacy and reliability of internal check.
6. List of books: He should obtain a list of all books maintained by concern and the names
of the in-charges of various books. The list should be signed by some responsible officer
of the concern.
7. List of officers: He should obtain a list of the officers of the company together with their
powers and duties.
8. Instructions to client: After completing the above steps, he should issue clear
instructions to his client on the following lines.
1. Accounts should be finalized and kept ready for audit.
2. The necessary schedules be prepared and made available. Ex: Schedule of debtors and
creditors, including bad and doubtful debts and schedule of outstanding expenses etc.
3. He should instruct his client to balance the books, prepare profit & loss a/c and balance
sheet. He should make it a point not to start work until the books have been balanced. He
must obtain at least the following information from his client.
a. Last year financial statements: He should study the previous balance sheet to be
familiar with various assets and liabilities. If the accounts of previous year were audited,
he should scrutinize them for his guidance.
b. Reasons for change: If he is appointed in the place of a retiring auditor, he should
enquire the reasons for the change.
c. Study of documents: He should carefully study all documents which have a bearing on
accounts. He should study the Partnership deed in case of a partnership audit,
Memorandum and AOA in case of a company audit, and trust deed in case of trust.
7. What is an “Audit Programme”? What are its types, advantages and disadvantages?
And also suggest measures to overcome disadvantages of Audit Programme?
An auditor while preparing audit programme must keep in mind size and composition of
organization and nature and extent of internal control. It is auditor’s plan of action.
Definition: “An outline of all procedures to be followed in order to arrive at an opinion
concerning client financial statements”. – STETTLER.
Features of an audit programme:
1. It should contain full details of the work to be conducted in writing.
2. It should be drawn by the auditor himself.
3. It should be very flexible.
4. It should refer to distribution of work among audit staff and state their responsibility.
Preparation of the audit programme: In drawing up satisfactory audit programme,
auditor should give attention to the following matters.
1. Ascertain exact scope of his duties and study different aspects of client’s business.
2. Obtain financial and statistical records, legal documents and also a list of all books, in use
in business, together with the names of the person’s in charge of them.
3. Examine carefully the system of accounting employed and make a special note of any
weakness and technicalities of the system.
4. Obtain a written statement of internal check in operation and examine it thoroughly.
5. Audit programme should be drawn up for each audit according to work involved.
Types of audit programme: There are two types of audit programmes. They are:
1. Fixed audit programme: It includes all possible audit procedures, although all of them
may not be applicable in a situation. It attempts to take care of every possible audit
situation. The problem with this kind of audit programme is that it is very rigid.

AUDITING
26 D.D.S
2. Flexible audit programme: It does not prescribe exact audit procedure to be followed. It
prefers to give an outline of scope, nature and limitations of audit assignment. Most of the
things are decided as the work proceeds and the reliability of procedures and internal
control system becomes known to the auditor.
Modification of audit programme: An audit programme lay down and followed during
a year acts as guide for next year’s audit programme. Modifications in a fixed audit
programme are not easy. However, there is no such difficulty in case of flexible audit
programme. While modifying the following points need attention:
1. Any change in the ownership of organization and organizational structure resulting in to
changes in authority or responsibilities of employees.
2. Changes, if any, in internal control system and its implication of the audit programme.
3. Changes in business due to introduction of new products, entry into new territories.
Advantages of audit programme: They are as follows:
1. Once an audit programme is made ready audit work can be started immediately.
2. Fixing of responsibility of audit assistants becomes easier.
3. It enables auditor to keep in touch with work done and general progress of work.
4. It serves as evidence, if any action is brought against auditor alleging negligence in
performance of his duties.
5. It provides a check against possibility of certain important items requiring verification
which are being omitted.
6. Continuity is not lost even if the person on duty is changed.
7. The chief auditor is saved from issuing instructions to the staff repeatedly.
8. It serves as a guide for the future audits.
9. It helps to complete the work within the scheduled time.
Disadvantages of audit programme: The disadvantages are as follows:
1. An audit programme makes clerks mechanical and specialized in only one work.
2. It discourages initiative and interest of efficient staff as they have to act in accordance
with programme. The juniors have to do what they are asked to do and they will not make
any suggestions also in certain circumstances.
3. Even a well prepared audit programme may not include all important pointes as it is
drawn before commencement of audit.
4. Inefficient auditors try to conceal their defects on the basis of audit programme.
5. It is unnecessary for small business concerns.
6. The task may be finished necessarily to complete it within the schedule time.
7. Uniformity of audit programmes cannot be applied in all units because audit of different
organizations cannot be exactly the same.
8. A rigid programme for all kinds of business is useless. Each business will have a separate
problem of its own.
Overcoming disadvantages of audit programme:
1. The audit staff should be impressed upon to take audit programme only as a guide line.
They should be asked to use their initiative and intelligence in course of audit.
2. The audit staff should be encouraged to make suggestions and review the same every
year. They should be encouraged to keep in mind objectives of an audit based on which
audit is to be conducted.
3. The audit programme should be revised and modified according to experience gained and
changes made in the business. It should never be rigid. It should be flexible.

AUDITING
27 D.D.S
8. What do you meant by “Internal Check”? What are its principles, advantages and
disadvantages?
In small business units owner can personally supervise every operation effectively. So
there is no scope for errors and frauds. But in big business units owner or management
cannot effectively supervise every operation. Lack of effective supervision gives an
opportunity to the employees to commit fraud and errors. To keep these frauds and errors
under control, there exists some ways of which internal check to secure control over the
operations of the business.
Definition: “Internal check is an arrangement of staff duties whereby no staff is allowed
to carry through and record every aspect of transactions so that without collusion
between two or more persons, fraud is prevented and at the same time the possibilities of
error are reduced to the minimum.” – SPICER AND PEGLAR
Principles of a good system of Internal Check:
1. Responsibility: Responsibility of each individual must be properly defined and fixed in
such manner that their duties and responsibilities are clearly & judiciously divided.
2. Completion: The work should be divided in such a way that no single person is allowed
to complete the work solely by himself from beginning to the end.
3. Rotation of employees: A good system of internal check should not allow persons
having custody of assets to have access to books of account.
4. Automatic check: A good system of internal check must provide for an automatic
checking of work of one clerk by the other.
5. Reliance: No clerk of the business should be relied upon too much.
6. Safeguards: It should be prescribed to keep unused cheques, files and securities etc.
7. Supervision: A strict supervision should be exercised to ensure that prescribed internal
checks and procedures are fully operative.
8. Formal sanction: No deviation should be allowed from established procedures till it is
formally sanctioned by top official.
9. Periodical review: The system of internal check should be reviewed from time to time to
introduce improvements.
10. Mechanical devices: These devices should be used, wherever possible.
11. Proper records: There must be directive recording procedure for goods coming in and
going out of business.
Advantages of Internal Check:
1. Proper division of work: It enables proper division of work among the staff keeping in
view their individual qualifications, experience and area of specialization.
2. Detection of errors and frauds: Since no individual worker is allowed to handle a job
completely from the beginning to the end and work of each clerk is automatically checked
by other, this helps in early detection and discovery of errors and frauds.
3. Increased efficiency coupled with economy: A good system of internal check increases
efficiency of work it enables them to learn honesty, straight forwardness and hard work
among the staff and leads to overall economy.
4. Moral check: Knowledge of subsequent checking of each employee’s work by others
acts as a great check to commission of errors and frauds.
5. Quick preparation of final a/c’s: It enables prompt preparation of final accounts.
6. Accuracy of the accounts can be relied upon: If there is a good system of internal
check the owner of concern may rely upon the genuineness and accuracy of accounts.
7. Increase in profits: Overall efficiency in operations results in more profits.
Disadvantages of Internal check:
1. Uneconomical: Division of labour is not possible in small concerns. It is uneconomical
and expensive for small concerns. It is also time consuming.

AUDITING
28 D.D.S
2. Carelessness among higher officials: The owner of concern may become careless
because as they believe though not always rightly, that under a sound system of internal
check nothing can go wrong.
3. Risky for an auditor: If system of internal check is in any way defective, and if auditor
does not apply tests and procedures of his own and if he relies on output of system his
work cannot be free from irregularities.
4. Disorder in the working of a business: In the absence of a properly organized system of
internal check there will be disorder in working of a business.
5. Quality is sacrificed for promptness: In an internal check system, quality of work
declines because clerks of business attach greater importance to become quick or prompt
and do not care about quality.
To provide a safeguard against all these disadvantages it is very much desirable that the
system of internal check should be adopted very carefully and continuously. Auditor’s
position in relation to internal check: Internal check largely determines nature and
scope of audit work. The better the system of internal check in an organization, larger the
extent of test-check by the auditor. If the internal control system is adequate, satisfactory,
sound and effective, he can rely on it, he need not make detailed checking. He can make
some tests to verify the entries. If he does not find any error or fraud in the course of his
tests, he can assume that all entries are correctly recorded. On the other hand, if he finds
any error or fraud in the course of his tests, he should check all entries in detail.
9. What is the difference between internal check internal audit?
The following are the main differences between them:
S.
No.
Points of
distinction
Internal check Internal audit
1. Meaning It is an arrangement of
duties allocate in such a
way that the work of one
person is automatically
checked by another.
It is an independent
appraisal of operations
and records of the
company.
2. Object The purpose is to prevent or
minimize the possibilities
of errors, frauds or
irregularities.
The purpose is to detect
the errors and frauds
which have already
been committed.
3. Need for separate
staff
For internal check, no new
appointment is made. In
fact, represents only the
arrangement of duties of
staff in a particular way.
For carrying out
internal audit, a
separate staff of
employees is engaged
for the purpose.
4. Nature of work Internal check represents a
process under which the
work goes on
uninterruptedly and the
checking too is more or less
automatic.
Internal auditor has to
report, from time to
time, to the
management about
various inefficiencies
and suggest
improvements. It is also
his duty to see that
internal check system
does not become static.

AUDITING
29 D.D.S
5. Timing of work Internal check, on the other
hand is in operation during
the course of transactions.
Internal audit starts
when accounting
process of different
transactions is finished.
6. Device It is a device for doing the
work.
It is a device for
checking the work.
7. Errors and Frauds Errors and frauds are
discovered during the
course of work.
Errors and frauds are
detected after the
completion of work.
8. Scope of work The scope of internal check
is very limited.
The scope of internal
audit is comparatively
broad.
9. Involvement A large number of
employees are needed for
implementation of internal
check system.
A much smaller number
of persons are needed
for its implementation.
10. What do you mean by “Internal Control”? What are its essential features?
Meaning of Internal Control: It means whole system of controls established by
management to safeguard its assets and secure the accuracy and reliability of its records.
Its scope is wider. These controls may be financial controls or non financial controls.
They include internal check and internal audit. These controls are again divided into two
parts. 1. Administrative controls and 2. Accounting controls.
Definition: “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 form of control”. – SPICER AND
PEGLER.
Objectives of internal control: They are as follows:
1. Safeguarding the assets of concern by avoiding frauds, wastes and inefficiency.
2. Measuring the implementation of business policies.
3. Measuring the performance of business activities and the staff.
4. Ensuring maximum accuracy of all data and statements and policy decisions.
5. Aid in the management planning.
Different types of internal control: It takes the shape of financial and non-financial
controls, internal check and internal audit systems. Financial controls regulate the income
and expenditure of business. They take the shape of budgetary controls and other
techniques such as periodical reconciliation of cash book and bank pass book.
Non-financial controls are employed to prevent errors and frauds. They are:
1. Installation of time recording clocks to record arrival and departure time of workers.
2. Introduction of mechanical devices for the preparation of wage sheets and totaling of
accounts and analyzing the transactions.
3. Use of franking machines for affixing postage stamps.
4. Physical verification of stock at regular intervals.
5. Obtaining confirmation of balance from customers at periodical intervals.
6. Physical verification of assets at periods.
Essentials of a good internal control system:
1. There should be a complete plan of organization with proper delegation of authority and
responsibility.
2. There should be a scientific system for authorization or recording of transactions or
procedures for custody of books, records and various documents.

AUDITING
30 D.D.S
3. There should be an effective system of control over receipts and payments of cash.
4. Systems of internal check and internal audit should be clearly defined.
5. Modern mechanical appliances should be introduced. The mechanical appliances help in
preventing the commission of errors and frauds.
6. Effective procedures should be laid down for receiving, issuing and maintaining stock.
7. There should be proper managerial supervision for all types of controls.
8. There should be enough provision for review of the entire system of internal control from
time to time by management.
Internal control – auditor: The auditor has to examine and find out as to how far the
internal control system is adequate, effective and reliable. An efficient system of internal
control reduces the work of the auditor but it does not reduce his liability. Hence an
auditor has to use his tack, skill, experience and judgment in the evaluation or
examination of the system of internal control.
11. Give an account of system of internal check you would advocate for payment of
wages?
Internal check in respect of wages: Wages are an important item of expenditure in
many concerns. The payment of wages offers scope for considerable fraud. To avoid such
risks of fraud, errors and irregularities, a sound system of internal check should be
introduced.
Objects of internal check: Any good system shall aim at following:
1. Elimination of inclusion of dummy workers in wage sheets and reduces chances of errors
or fraud.
2. Ensures the correctness of time and piece work records and wage-sheets.
3. Ensures correct payment of wages for right work, to the right worker.
Efficient system of internal check with regard to wages:
A. Maintenance of Wage records:
1. Wages department: There must be a separate department for wages under control of a
responsible official.
2. Identity card: Identity card must be provided to each worker and it must contain his
name, number, department and terms of employment and service details.
3. Time records: A gate-keeper or a time recording clerk must be employed to record the
time of arrival and departure of every worker.
4. Comparison of time records: In respect of time workers, time records maintained by
gate-keeper and the foreman must be compared and checked.
5. Piece-work cards: When wages are paid according to actual work performed by worker.
The foreman must record amount of work done by them on piece-work card.
6. Overtime records: Overtime slips must be issued and when they work overtime, it
should be recorded on slips. Its payment must be passed by responsible authority.
7. Pass-out records: Pass-out slips must be used by workmen to leave factory before the
scheduled time.
8. Rate of pay: Rates of pay and changes should be in writing and properly authorized.
B. Preparation of wage sheet:
9. Preparation of wage-sheets: This work must be done by a separate department. Wage-
sheets should be prepared for time and piece workers separately. The wage-sheets should
contain details as to each worker’s number, time worked, and description of work, rate,
amount, bonus and total amount. All persons engaged in preparation of wage-sheets
should initial each page of wage-sheet. Finally wage-sheets as a whole should be counter-
signed as correct by a responsible official.
10. Testing of wage-sheets: They should be compared with gate-keepers record and
departmental time-records. This enables detection of dummy workers. The totals and

AUDITING
31 D.D.S
calculations must be checked up independently and then pay sheets should be sent to
accounts department. While preparing pay sheets care should be taken that they are
separately prepared departmentally, time & piece-workers and for overtime payments.
C. Payment of wages:
11. Money to be drawn from the bank: Total wages for the period as shown by wage-
sheets should be drawn by a cheque.
12. Payment of wages: Payment of wages must be made by a person who is in no way
concerned with preparation of wages sheets. Generally cashier makes payment.
13. Payment of wages directly to workers: Workers should be asked to receive their wages
personally in the presence of departmental manager who identifies the worker. This will
help in finding out payment made to wrong or to dummy and ghost workers.
14. Payment of absentees: Payment to workers who are absent at the time of disbursement
shall be made only on basis of ‘letter of authorization’ issued by worker.
15. Installments of loans: Care should be taken to deduct installments of loans and advances
regularly from wages.
16. Payment to casual workers: Payment to casual workers should be made in presence of a
responsible official and their records should be verified regularly. As far as possible,
casual workers should be paid separately or may be paid on a different day.
17. Statement of unpaid wages: A statement of unpaid wages should be prepared and to be
signed by both cashier and foreman before crediting amount to unpaid wages a/c.
18. Surprise visit: Surprise visit of a senior official while wages are disbursed will be an
effective measure of control.
12. Explain and suggest effective internal check system for cash sales?
Cash sales may be of three types. They are:
I. Sales at the Counter: In big stores with heavy cash sales and a number of assistants,
following system of control may be introduced:
1. Each salesman should be identified by a letter or a number. He should be provided with
Sales Memo book which should be on letter or number allotted to him.
2. Sales Memo books of different colours may be used for different departments.
3. The salesman should neither deliver goods nor receive cash.
4. On effective a sale, assistant should prepare sales memo with two or three copies. It
should be checked and signed by a senior assistant.
5. The salesman should handover two copies of the sales memo to customer.
6. The customer should take the copies to cashier. After receiving cash, cashier should keep
one copy with him and handover second copy to customer affixing ‘paid’ stamp.
7. At the end of the day, salesman should prepare a summary of the sales. In the same
manner the cashier should prepare a summary for each salesman and a cash statement.
8. The summaries prepared by salesman, cashier and gate-keeper should tally at the end.
9. The total cash sales for the day should then be entered in the general cash book.
10. All summaries should be signed by the General Manager.
11. If any discrepancies are found, they should immediately be investigated.
II. Sales by traveling salesman: In big business houses, generally raveling salesman are
employed to push sales and to collect debts. A good system of check over these salesmen
is vitally essential.
1. Travelling salesman should be issued with pre-numbered rough receipt books. They
should issue rough receipts to customers for cash received and final receipt should be
issued by head office.
2. Customers should be asked to correspond straight with head office if a final receipt is not
mailed to them within a stipulated time.

AUDITING
32 D.D.S
3. They should be instructed to remit entire cash to head office without making any
deduction for commission or any other expenditure out of it.
4. Head office should regularly send statements of accounts to old customers to apprise
them of their debts and balances.
5. Special attention should be given to defaulters.
6. Salesman should also be transferred and this is necessary for increasing the efficiency of
salesman and for avoiding frauds.
III.Postal Sales: The following should be noted in this regard:
1. There should be a separate register to record sales by post or V.P.P.
2. When cash is received against a V.P.P. sale, it should be entered in the register kept.
3. Bank pay-in-slips should be prepared to deposit cash received against postal sales.
4. An officer should be deputed to check carefully this register and special attention should
be given to those goods which have been returned.
The above system of internal check, if implemented rigidly, can reduce chances of fraud
or errors regarding cash sales.
Short Questions
1. What are the qualifications and disqualifications of an auditor?
Qualifications of an Auditor: The Companies Act prescribes the qualifications and
disqualifications of company auditors. According to sec 226(1), “a person shall not be
qualified as auditor of a company unless he is a Chartered Accountant within the meaning
of the Chartered Accountant Act, 1949”. It further provides that a firm where all the
partners practicing in India are qualified for appointment as auditors may be appointed by
firm’s name to the auditor of the company.
Sec 226(2): In addition to practicing Chartered accountants, sec 226(2) allows a holder of
a certificate in an erstwhile Part B, State which entitled him to act as an auditor of
companies in the jurisdiction of that state, to be appointed as an auditor of companies
registered anywhere in India.
Disqualifications of an auditor: According to the Sec 226(3) of the Companies Act, the
following are the disqualifications of an auditor.
1. A body corporate.
2. An officer or employee of the company.
3. A person who is a partner or employee of an officer or employee of the company.
4. A person who is indebted to the company for an amount exceeding Rs. 10,000 or who
has given any guarantee in connection with indebtedness to any third person.
5. A director or member of a private company.
6. An un-discharged insolvent or an insane person.
7. If auditor holds appointment as auditor in specified number of companies as per Sec
224(1-B) he will be disqualified for further appointment as auditor.
If after his appointment an auditor becomes subject to any of the disqualifications listed
above, he shall be deemed to have vacated his office forthwith.
2. What the qualities of an auditor?
Qualities of an auditor: Auditor must possess the following qualities:
1. Auditor must have thorough knowledge of principles and practice of all aspects of
accountancy.
2. He must have adequate knowledge of financial management, industrial administration,
business organization and audit case laws as per various cases decided by courts in and
outside India.
3. An auditor must be honest.
4. He has to extract correct information tactfully from his client where for certain
transactions inadequate information may be available.

AUDITING
33 D.D.S
5. He should be able to understand technical details of client’s business. For this purpose he
may make certain enquiries from client as well as visit place of work of his client.
6. He must have up to date knowledge of companies Act and Mercantile laws.
7. His decision must not be affected when his own interest clash with his duty towards his
client. In such situation he shall be bold enough to discharge his duties honestly.
8. If circumstances of suspicion arise it is his duty to probe them to the bottom.
9. From time to time he should seek clarification on this matters which he is not able to
understand from the information provided to him.
10. He should have high moral standards and should not accept and sign a report or statement
which he does not believe to be true and fair.
11. He should be hardworking and systematic.
12. He must have patience to hear arguments of others.
13. He should not disclose the secrets of his client.
14. He should have adequate skill and courage to write audit report correctly, clearly,
concisely and forcefully.
15. He must be sincere in his profession and must follow professional ethics and customs.
3. Reappointment of an auditor?
Reappointment of an auditor: According to sec 224(2), a retiring auditor by what so
ever authority appointed, shall be automatically reappointed except in some cases:
1. Where he is not qualified for reappointment.
2. Where he has given a notice to company in writing of his unwillingness to be
reappointed.
3. Where a resolution has been passed at meeting appointing somebody instead of him or
providing expressly that he shall not be reappointed.
4. Where a notice has been given of an intended resolution to appoint some persons in place
of retiring auditor, and by reason of death, incapacity or disqualification of that person,
resolution cannot be proceeded with.
5. Reappointment of retiring auditor shall also not be made, if he is already holding auditor
ship in specified number of companies.
4. Remuneration of an auditor?
Remuneration of an Auditor: According to Section 224(8):
1. In the case of an auditor appointed by Board of Directors or the Central Government, his
remuneration may be fixed by Board or Central Government, as the case may be.
2. In all other cases, it must be fixed by the company in general body meeting.
‘Remuneration’ includes any sums paid by company in respect of auditor’s expenses in
carrying out his duties. If an auditor renders services other than audit work, he will be
entitled to separate remuneration for such work. Where an auditor is re-appointed in the
next annual general body meeting, the amount fixed for previous year continues to be the
remuneration of the auditor, unless some specific change is made.
5. What is meant by Audit Note Book? Explain its contents, advantages and
disadvantages?
Audit Note Book is a diary or register maintained by audit staff to note errors, doubtful
queries and difficulties.
Contents of an Audit Note Book: The contents of an audit note book are as follows:
1. A list of books of accounts maintained.
2. The names, duties and responsibilities of principal officers.
3. The particulars of missing receipts and vouchers.
4. Mistakes and errors detected.
5. The points calling for clarifications and explanations.

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