Auditing लेखापरीक्षण

Quick summary

Auditing (लेखापरीक्षण) is an independent examination of the books, accounts and vouchers of a business to give an opinion on whether the financial statements show a true and fair view. This topic covers the meaning, objectives, advantages, limitations and basic principles of auditing.

Key points

• The word audit comes from the Latin "audire", meaning to hear. In the past, accounts were read aloud to the auditor.
• Spicer and Pegler: auditing is an examination of books, accounts and vouchers to report whether the balance sheet and P&L show a true and fair view.
• Accounting ends where auditing begins: the accountant prepares, the auditor examines.
• Primary objective: to express an opinion on whether the financial statements give a true and fair view (SA 200).
• Secondary objectives: detection and prevention of errors and frauds.
• Types of errors: errors of omission, commission, principle, and compensating errors.
• Frauds: misappropriation of cash or goods, and manipulation (window dressing) of accounts.
• Auditing is done according to Standards on Auditing (SAs) issued by the ICAI (Institute of Chartered Accountants of India).
• The auditor is "a watchdog, not a bloodhound" (Kingston Cotton Mill case, 1896): he must be careful but is not expected to suspect everything.
• Limitations: test checking, dependence on management's explanations, judgement-based opinion, cost and time limits.

Important terms

• True and fair view – accounts are free from material misstatement and follow accepted principles.
• Audit evidence – information used by the auditor to reach a conclusion (SA 500).
• Test checking – checking a sample of entries instead of all entries.
• Materiality – an item is material if its misstatement could change users' decisions (SA 320).
• Professional scepticism – a questioning mind, alert to possible misstatement.

Key facts

Basic principles of auditing: integrity, objectivity and independence; confidentiality; skill and competence; work done by others; documentation (SA 230); planning; audit evidence; internal control evaluation; reporting.

5 important questions

Q1. Define auditing.

Auditing is the independent examination of the books of account, vouchers and records of an organisation to enable the auditor to report whether the financial statements show a true and fair view of its affairs.

Q2. What is window dressing?

Window dressing is the deliberate manipulation of accounts to show a better (or sometimes worse) financial position than the real one, e.g. overvaluing closing stock to show higher profit.

Q3. Explain the objectives of auditing.

Outline: primary objective – reporting on true and fair view; secondary – detection and prevention of errors (four types, with examples) and frauds (misappropriation of cash and goods, manipulation of accounts); how the auditor's presence acts as a moral check.

Q4. Explain the advantages and limitations of auditing.

Outline: advantages to the business (errors found, reliable accounts, loans easier), to owners and shareholders (protection of interest), to government and tax authorities, to creditors; limitations – test checking, inherent limitations of internal control, reliance on management, opinion not a guarantee, time and cost.

Q5. Explain the basic principles governing an audit.

Outline: list from SA 200 and the ICAI Code of Ethics; explain integrity, independence, confidentiality, skill and competence, documentation, planning, evidence, reporting, each with one line of explanation.

Exam tip

Use the "watchdog, not a bloodhound" quote and the Latin word "audire" in theory answers; they show reading and earn presentation marks.

Quick summary

Audits can be classified by who requires them (statutory or voluntary), by who does them (external or internal), and by when and how they are done (continuous, periodical, interim, balance-sheet audit). Each type suits a different kind of organisation and purpose. This topic explains the main types with their merits and demerits.

Key points

• Statutory audit – compulsory under a law, e.g. companies (Companies Act 2013), co-operative societies, banks, public trusts, and tax audit (Sec 44AB of the Income-tax Act).
• Voluntary (private) audit – done by choice, e.g. audit of a sole trader's or partnership's accounts (unless a law requires it).
• Internal audit – a continuous review of operations and controls by the organisation's own staff or by an outside firm appointed by management. Compulsory for certain companies under Sec 138 of the Companies Act.
• External audit – by an independent auditor who reports to the owners or shareholders.
• Continuous audit – auditor checks the accounts regularly (weekly or monthly) throughout the year. Suitable for large concerns and banks.
• Periodical (final/annual) audit – done once, after the accounts are closed for the year. Suitable for small concerns.
• Interim audit – between two annual audits, often to declare an interim dividend.
• Balance sheet audit – focuses on verifying the items in the balance sheet; common in the USA.
• Government audit – by the Comptroller and Auditor General (CAG) under Article 148 of the Constitution.
• Other types: cost audit (Sec 148 of the Companies Act), management audit, social audit (e.g. MGNREGA works by Gram Sabha), performance audit, forensic audit and environmental audit.

Important terms

• Statutory auditor – auditor appointed under a law to audit accounts.
• Internal auditor – person who examines internal controls and operations for management.
• Cost audit – verification of cost records and cost statements.
• Social audit – review of how far an organisation or scheme meets its social duties.

Key facts

5 important questions

Q1. What is an interim audit?

An audit carried out between two annual audits, usually for half a year, often to help the directors declare an interim dividend.

Q2. What is a statutory audit? Give two examples.

An audit required by law. Examples: audit of a company under the Companies Act 2013 and tax audit under Section 44AB of the Income-tax Act.

Q3. Explain continuous audit with its merits and demerits.

Outline: meaning; merits – quick detection of errors and frauds, moral check on staff, interim accounts possible, auditor gets detailed knowledge; demerits – costly, alteration of checked figures, disturbance to staff, mechanical work, auditor may lose the link with work done earlier; precautions (special ticks, instructions not to alter checked figures).

Q4. Distinguish between internal audit and statutory audit.

Outline: use the table above and add points on independence, period, and the use of the internal auditor's work by the statutory auditor (SA 610).

Q5. Write notes on (a) cost audit (b) social audit (c) government audit.

Outline: cost audit under Sec 148 and the cost auditor (CMA); social audit – meaning, MGNREGA example, transparency; government audit by CAG under Articles 148–151, reports placed before Parliament and the State Legislature.

Exam tip

For "distinguish" questions, write at least 6 points in a two-column table; it is faster to write and easier for the examiner to mark.

Quick summary

Internal control (अंतर्गत नियंत्रण) is the whole system of checks that management sets up to run the business in an orderly way, protect assets and keep reliable records. Internal check is one part of it: work is divided so that one person's work is automatically checked by another. A good system reduces errors and frauds and lets the auditor rely on test checking.

Key points

• Internal control has three parts: internal check, internal audit and other controls (budgets, standard costing, physical controls).
• SA 315 requires the auditor to understand the entity and its internal control to judge the risk of misstatement.
• Objectives: orderly conduct of business, safeguarding assets, preventing and detecting fraud and error, accurate and complete records, timely financial information.
• Principles of internal check: division of work, no one person controls a whole transaction, rotation of staff, compulsory leave, physical checks, use of mechanical devices (cash registers, CCTV, software controls).
• Internal check for cash receipts: pre-numbered receipts, daily banking of cash, separate cashier and accountant.
• Internal check for cash payments: payments by cheque or electronic transfer, approval by an authorised person, supporting vouchers.
• Internal check for wages: separate staff for attendance, wage sheet preparation, checking, and payment.
• The auditor reviews internal control using an internal control questionnaire, flow charts and narrative notes.
• A good internal control system reduces the auditor's work but does not remove his responsibility.

Important terms

• Internal check – arrangement of staff duties so that work of one person is checked by another automatically.
• Internal audit – review of operations and records by a special staff during the year.
• Internal control questionnaire – list of questions about controls, answered "yes" or "no".
• Segregation of duties – custody, recording and authorisation done by different persons.

Key facts

5 important questions

Q1. Define internal check.

Internal check is the arrangement of book-keeping and staff duties in such a way that no single person can carry through a transaction from beginning to end, and the work of one is automatically checked by another.

Q2. What is an internal control questionnaire?

A standard list of questions about the controls in each area (cash, purchases, sales, wages, stock) that management answers. A "no" answer shows a weakness for the auditor to test further.

Q3. Explain the objectives and principles of a good internal check system.

Outline: objectives (prevent fraud, locate responsibility, quick detection, moral pressure, reliable records); principles (division of work, rotation, leave, physical control, self-balancing ledgers, mechanical devices, limits of authority).

Q4. Describe the internal check system for cash receipts and cash payments.

Outline: receipts – cash sales through counter with cash memos, pre-numbered receipt books, daily bank deposit, separate cashier, regular bank reconciliation; payments – authorisation, payments by cheque/electronic mode, petty cash on imprest system, cancelling vouchers after payment.

Q5. What is internal control? Explain the auditor's duty regarding internal control.

Outline: meaning and parts; auditor's duty under SA 315 – understand, document (flow chart, questionnaire), test, evaluate weaknesses; report weaknesses to management (SA 265); on reporting on Internal Financial Controls under Sec 143(3)(i) of the Companies Act.

Exam tip

Draw the three-column table to show the difference between internal check, internal audit and internal control; this is a favourite exam question.

Quick summary

Vouching (प्रमाणन) means checking the entries in the books with the documentary evidence (vouchers) behind them. It is called "the backbone (essence) of auditing" because it proves that transactions really happened, were authorised, and were correctly recorded. This topic explains vouchers, the vouching of common transactions, and the auditor's care points.

Key points

• A voucher is any document that supports an entry: invoice, cash memo, receipt, bank statement, agreement, minutes book, wage sheet.
• Vouchers are primary (original, e.g. supplier's receipt) or collateral (secondary, e.g. copy of invoice, correspondence) when the primary is missing.
• Objectives of vouching: to check that the transaction is genuine, properly authorised, relates to the business, is of a revenue or capital nature as shown, and is recorded in the right period and account.
• Points to check on a voucher: date, name of the business, amount in words and figures, authorised signature, revenue stamp where required, and that it is not altered.
• Vouching of cash sales: cash memos, cash register rolls, daily summary, bank deposit on the same or next day.
• Vouching of credit purchases: purchase order, goods received note, supplier's invoice, approval for payment.
• Vouching of wages: attendance records, wage rates approved, wage sheet arithmetic, statutory deductions (PF, ESI), payment by bank transfer.
• Vouching of capital expenditure (e.g. machinery): board resolution, supplier's invoice, installation charges capitalised, asset register.
• Cut-off: transactions near the year end must be recorded in the correct year.
• Routine checking (casting, posting, balancing) is different from vouching.

Important terms

• Voucher – documentary evidence supporting a transaction.
• Routine checking – checking totals, posting and carry-forward of figures.
• Test checking – vouching a sample of transactions instead of all.
• Teeming and lading – a fraud where cash from one debtor is used to cover cash stolen from another debtor's payment.

Key facts

5 important questions

Q1. What is a voucher?

A voucher is documentary evidence in support of an entry in the books of account, such as an invoice, receipt, wage sheet or agreement.

Q2. Why is vouching called the backbone of auditing?

Because the reliability of all the accounts depends on whether each entry is genuine and authorised; without vouching the auditor cannot give an opinion on the true and fair view.

Q3. Explain the points the auditor should keep in mind while vouching.

Outline: arrangement of vouchers; date, name, amount, authority; capital vs revenue; correct period (cut-off); proper account head; altered vouchers; missing vouchers and collateral evidence; mark vouchers to prevent reuse.

Q4. How will you vouch (a) cash sales (b) wages?

Outline: (a) system of cash sales, cash memos and their serial numbers, counter cash register, daily summary, banking; teeming and lading risk; (b) attendance and job cards, rates, wage sheet calculation, deductions, approval, payment by bank, unclaimed wages.

Q5. Distinguish between vouching and verification.

Outline: vouching checks entries with documents (transactions of the year, mainly P&L items, done during the year); verification confirms existence, ownership and value of assets and liabilities on the balance sheet date; vouching comes first, verification later.

Exam tip

For any "how will you vouch" question, list the documents first, then the checks, then one fraud risk. This three-step answer fits every transaction.