Easy2Siksha.com
GNDU Question Paper-2025
B.Com 5
th
Sem
AUDITING
Time Allowed: Three Hours Max. Marks: 100
Note: Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. (i) Write a detailed note on Audit Planning.
(ii) Explain the various limitations of an Audit.
(Not From our prediction papers)
2. (i) Describe the different qualities to be possessed by an auditor.
(100% match with prediction papers)
(ii) Write a detailed note on the following types of audit:
(a) Internal audit
(b) Cash audit
(c) Continuous audit
(d) Interim Audit
(50% match with prediction papers)
SECTION-B
3. Discuss, in detail, the need and elements of an effective Internal Control system for a
manufacturing organization.
(100% match with prediction papers)
4.(i) Differentiate between Internal Check and Internal Control,
(ii) Deline Internal Audit. What are the essential features of an effective Internal Audit
system?
Easy2Siksha.com
(100% match with prediction papers)
SECTION-C
5. (i) Explain the steps in Audit Procedure for vouching of cash book.
(ii) Explain the Audit procedure for vouching the following:
(a) Bad debts recovered
(b) Income tax
(c) Bills receivable
(d) Payments made by debtors
(100% match with prediction papers)
6.Explain the procedure for verification of the following .
(a) Goodwill
(b) Freehold property
(c) Motor vehicles
(d) Trademarks
(c) Cash-in-hand
(100% match with prediction papers)
SECTION-D
7. (i) Discuss, in detail, the various contents of an Audit report.
(ii) Write a detailed note on Management Audit.
(80% match with prediction papers)
8. Explain, in detail. rights and duties of an auditor under Companies Act.
(100% match with prediction papers)
Conclusion : Approx 87% Comes From Our (Prediction Paper)
Easy2Siksha.com
GNDU Answer Paper-2025
B.Com 5
th
Sem
AUDITING
Time Allowed: Three Hours Max. Marks: 100
Note: Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. (i) Write a detailed note on Audit Planning.
(ii) Explain the various limitations of an Audit.
Ans: Meaning of Audit Planning
Audit Planning means deciding in advance how an audit will be conducted. Before starting
the actual checking of books and accounts, the auditor makes a proper plan about what has
to be checked, how it will be checked, when it will be checked, and who will perform each
task.
In simple words, audit planning is like making a roadmap before starting a journey. If the
auditor starts checking accounts without a plan, important areas may be missed and
unnecessary time may be wasted.
Objectives of Audit Planning
The main objectives are:
1. To understand the business The auditor studies the nature, size and activities of
the organisation.
2. To identify risky areas Areas where errors or fraud may occur are given greater
attention.
3. To decide the scope of audit The auditor determines which books, records and
transactions need detailed checking.
4. To use time and resources properly Audit staff and working hours are allocated
efficiently.
5. To ensure proper supervision Junior auditors are given suitable work and their
work is reviewed.
6. To complete the audit on time Proper planning helps avoid unnecessary delays.
Easy2Siksha.com
7. To obtain sufficient evidence The auditor decides what evidence will be required
to form an opinion.
Steps in Audit Planning
1. Understanding the Organisation:
The auditor first understands the nature of business, management structure, accounting
system and internal controls.
2. Assessment of Audit Risk:
The auditor identifies areas where there is a greater possibility of material error or fraud.
3. Determining Materiality:
The auditor decides which errors or omissions could significantly affect the financial
statements.
4. Studying Internal Control:
The auditor examines whether the organisation has proper systems for authorisation,
recording, safeguarding assets and preventing fraud.
5. Deciding Audit Procedures:
The auditor decides whether to use inspection, observation, confirmation, calculation,
analytical procedures or other methods.
6. Allocation of Work:
Different audit tasks are assigned to appropriate members of the audit team according to
their knowledge and experience.
7. Preparation of Audit Programme:
A written programme is prepared showing the work to be performed during the audit.
8. Supervision and Review:
The work performed by assistants is supervised and reviewed by senior members of the
audit team.
Simple Diagram of Audit Planning
AUDIT PLANNING
│
▼
Understand the Business
│
▼
Identify Audit Risks
│
▼
Determine Materiality
│
Easy2Siksha.com
▼
Study Internal Controls
│
▼
Decide Audit Procedures
│
▼
Allocate Audit Work
│
▼
Prepare Audit Programme
│
▼
Supervise & Review
│
▼
AUDIT COMPLETION
Thus, audit planning makes the audit systematic, efficient and effective. A good plan
reduces the chances of overlooking important matters.
1. (ii) Limitations of an Audit
An audit provides reasonable assurance about financial statements, but it cannot guarantee
that every error or fraud will be discovered. This is because auditing has certain limitations.
1. Audit is based on Test Checking
An auditor normally cannot examine every single transaction of a large organisation.
Therefore, many transactions are checked on a sample basis.
For example, if a company has 1,00,000 sales transactions, checking every transaction may
be impractical. The auditor may examine selected transactions.
2. Possibility of Fraud Remaining Undetected
Fraud can sometimes be carefully planned and hidden through false documents, collusion
between employees or management manipulation. Therefore, an audit may fail to discover
sophisticated fraud.
3. Dependence on Management
Auditors receive information, explanations and documents from management and
employees. If incorrect or incomplete information is provided, the auditor's work may be
affected.
4. Audit Evidence is Generally Persuasive, Not Conclusive
Easy2Siksha.com
Audit conclusions are normally based on evidence that provides reasonable support rather
than absolute proof. Therefore, the auditor gives reasonable assurance, not a 100%
guarantee.
5. Time and Cost Limitations
An audit must generally be completed within a particular period and budget. The auditor
therefore has limited time and resources for detailed investigation.
6. Human Errors
Auditors are human beings and may make mistakes in judgement, calculations,
interpretation or evaluation of evidence.
7. Limitations of Internal Control
If the organisation's internal control system is weak, errors and fraud may occur. Even a
good audit cannot completely eliminate the risks arising from poor internal controls.
8. Use of Estimates
Financial statements contain estimates such as depreciation, provisions and valuation of
assets. These estimates involve judgement, so the auditor cannot always determine their
exact future outcome.
9. Collusion
Two or more employees or employees and management may work together to conceal
fraud. Such collusion can make detection difficult.
10. Audit Does Not Mean Investigation
An ordinary audit is primarily performed to express an opinion on financial statements. It is
not the same as a detailed investigation into every transaction or suspected fraud.
Easy Way to Remember
Think of an audit as a security check at an airport. Security officers check passengers and
luggage carefully, but they cannot guarantee that absolutely nothing dangerous will ever
pass through. Similarly, an auditor performs appropriate procedures and obtains evidence,
but cannot guarantee that every error or fraud will be detected.
Conclusion
Easy2Siksha.com
Audit Planning provides a systematic roadmap for conducting an audit. It helps the auditor
understand the business, identify risks, determine the scope of work, allocate resources and
complete the audit efficiently.
However, an audit has limitations such as sampling, human judgement, time constraints,
dependence on management, hidden fraud, collusion and the nature of audit evidence.
Therefore, an audit provides reasonable assurance rather than absolute assurance about
the reliability of financial statements.
2. (i) Describe the different qualities to be possessed by an auditor.
(ii) Write a detailed note on the following types of audit:
(a) Internal audit
(b) Cash audit
(c) Continuous audit
(d) Interim Audit
Ans: Auditing is an important part of accounting. An audit means the systematic
examination of the books of accounts, records, vouchers and financial statements of an
organisation to find out whether they are correct and reliable. The person who performs
this work is called an auditor.
An auditor does not merely check calculations. He has to examine evidence, identify
mistakes or fraud, judge the reliability of records and finally give an independent opinion.
Therefore, an auditor must possess certain important qualities.
(i) Qualities to be Possessed by an Auditor
An efficient auditor should possess the following qualities:
1. Independence
The auditor should be independent and impartial. He should not allow personal
relationships, pressure from management or financial interests to influence his opinion.
2. Honesty and Integrity
An auditor must be honest in his work. He should report the actual position of the business
even if the findings are unfavourable to management.
3. Professional Knowledge
He should have sound knowledge of accounting, auditing, taxation, company law and
business practices. Proper knowledge helps him identify errors and irregularities.
Easy2Siksha.com
4. Intelligence
Auditing requires the ability to understand complicated transactions and financial
statements. An intelligent auditor can quickly identify unusual or suspicious transactions.
5. Accuracy
The auditor must carefully check figures, calculations, vouchers and records. Even a small
mistake can sometimes have a significant effect on financial statements.
6. Patience
Auditing can involve examining a large number of documents. Therefore, an auditor should
be patient and willing to examine records carefully without rushing.
7. Good Observation
An auditor should have a sharp eye for unusual transactions, missing documents, incorrect
entries and other irregularities.
8. Confidentiality
During an audit, the auditor obtains confidential information about the organisation. Such
information should not be disclosed to unauthorised persons.
9. Communication Skills
The auditor should be able to clearly communicate his findings, queries and suggestions to
management and other concerned persons.
10. Professional Skepticism
An auditor should not blindly accept everything presented by management. He should ask
questions and obtain sufficient evidence before reaching a conclusion.
Simple way to remember:
Auditor = Honest + Independent + Knowledgeable + Accurate + Observant + Confidential +
Patient
(ii) Types of Audit
Different types of audits are conducted according to the purpose and timing of examination.
Easy2Siksha.com
A simple classification is:
TYPES OF AUDIT
│
┌────────────────┼────────────────┐
│ │ │
Internal Audit Cash Audit Continuous Audit
│
Interim Audit
Easy2Siksha.com
(a) Internal Audit
Internal audit is an independent examination conducted within an organisation to check its
accounting system, internal controls, operations and compliance with policies.
The main purpose is to help management detect mistakes, prevent fraud and improve the
efficiency of the organisation.
For example, suppose a company receives ₹50,000 in cash. Internal auditors may check
whether the amount was properly recorded, deposited into the bank and supported by
appropriate documents.
Main features of Internal Audit
It is generally conducted for the benefit of management.
It examines accounting records and internal controls.
It helps in detecting and preventing fraud and errors.
It evaluates whether organisational procedures are being properly followed.
It can suggest improvements in the accounting and control system.
It may be conducted regularly throughout the year.
In simple words: Internal audit acts like an organisation's internal checking system.
(b) Cash Audit
Cash audit means the detailed examination of transactions relating to cash receipts and
cash payments.
The auditor checks whether cash received has been properly recorded and whether cash
payments are supported by proper vouchers and documents.
For example, if the cash book shows that ₹10,000 was paid for office expenses, the auditor
may check the relevant bill, receipt and approval before accepting the transaction.
Main objectives of Cash Audit
1. To verify cash receipts.
2. To verify cash payments.
3. To check the cash book.
4. To compare the cash book balance with actual cash.
5. To detect errors and fraud relating to cash.
6. To ensure that payments are properly authorised.
7. To verify bank transactions and relevant records where applicable.
Importance
Easy2Siksha.com
Cash is one of the most easily misappropriated assets of a business. Therefore, careful
checking of cash transactions is extremely important.
In simple words: Cash audit answers the question
Has every rupee received or paid been properly recorded and supported?
(c) Continuous Audit
A continuous audit is an audit in which the auditor examines the accounts continuously or
at regular intervals throughout the accounting year, rather than waiting until the end of
the year.
For example, an auditor may visit a large business every month and examine sales,
purchases, cash, bank transactions and other records.
Features of Continuous Audit
Audit work is performed throughout the year.
The auditor visits the organisation at regular intervals.
Transactions are checked soon after they occur.
Errors and fraud can be detected relatively early.
It is useful for large organisations having a large number of transactions.
It helps keep accounting records up to date.
Advantages
Early detection: Errors can be discovered before they become difficult to correct.
Regular checking: Employees know that records are being checked regularly.
Quick completion: Much of the audit work is completed before the end of the financial
year.
Useful for large businesses: Businesses with thousands of transactions can benefit from
regular auditing.
Limitation
Continuous audit can be more expensive because the auditor has to visit and perform audit
work repeatedly during the year.
In simple words:
Continuous audit means checking the accounts regularly throughout the year.
Easy2Siksha.com
(d) Interim Audit
An interim audit is an audit conducted during the accounting year before the final
accounts for the complete year are prepared.
It is generally conducted when management needs financial information for a particular
period or when an early audit is desirable.
For example, if a company's financial year ends on 31 March, the auditor may examine
accounts up to 30 September. This examination is an interim audit.
Features of Interim Audit
It is conducted before the end of the financial year.
It covers a particular period of the financial year.
It helps management obtain reliable financial information before the year-end.
It may reduce the amount of work required after the financial year ends.
It can help identify errors and irregularities before the final audit.
Difference between Continuous and Interim Audit
Basis
Continuous Audit
Interim Audit
Meaning
Audit conducted regularly
throughout the year
Audit conducted for a particular period
before year-end
Frequency
Repeated at regular intervals
Usually conducted at a specific interim
date
Purpose
Regular checking of accounts
Obtain/check financial position before
year-end
Coverage
May cover transactions
continuously
Covers accounts up to a specified
interim date
Conclusion
An auditor is much more than a person who checks accounting figures. He must be honest,
independent, knowledgeable, careful, patient, observant and confidential. His professional
judgment helps ensure that financial information can be trusted.
The different types of audit serve different purposes. Internal audit focuses on internal
controls and management improvement, cash audit focuses particularly on cash
transactions, continuous audit involves regular checking throughout the year, while interim
audit examines accounts for a particular period before the end of the financial year.
Therefore, auditing provides an important safeguard for a business by improving the
accuracy, reliability and credibility of its financial records.
Easy2Siksha.com
SECTION-B
3. Discuss, in detail, the need and elements of an effective Internal Control system for a
manufacturing organization.
Ans: An Internal Control System is a set of rules, procedures, checks and practices used by
an organization to make sure that its work is done properly, safely and efficiently. In a
manufacturing organization, it is especially important because the business deals with raw
materials, machines, workers, production processes, finished goods, cash and sales.
For example, imagine a factory manufacturing shoes. Thousands of metres of leather, soles,
thread and other materials enter the factory. If there is no proper control, materials may be
wasted, stolen, wrongly recorded or used inefficiently. Therefore, internal control helps the
management keep everything under control.
Simple Diagram
INTERNAL CONTROL SYSTEM
│
┌─────────────────┼─────────────────┐
↓ ↓ ↓
Protect Assets Accurate Records Efficient Work
│ │ │
↓ ↓ ↓
Raw Material Proper Accounts Less Waste
Machines Correct Stock Better Production
Cash & Finished Reliable Reports Higher Efficiency
Goods
└─────────────────┼─────────────────┘
↓
Achieve Business Goals
Need for Internal Control in a Manufacturing Organization
1. Protection of Assets
A manufacturing company owns expensive machines, raw materials, finished goods, cash
and other assets. Internal control protects these assets from theft, misuse, damage and
unauthorized use.
For example, only authorized employees should be allowed to operate costly machinery or
access the warehouse.
2. Prevention and Detection of Fraud
Easy2Siksha.com
Fraud can occur through fake purchases, false bills, manipulation of stock records, theft of
cash or materials, etc. Internal controls such as authorization, verification and separation of
duties make fraud more difficult.
For example, the person who purchases raw material should not be the same person who
approves the payment.
3. Accurate Accounting Records
A manufacturing organization needs correct information about purchases, production costs,
wages, inventory, sales and profits. Internal controls ensure that transactions are properly
recorded and supported by documents.
Accurate records help management make better decisions.
4. Control Over Inventory
Inventory is one of the most important areas of a manufacturing business. Internal control
helps maintain proper records of:
Raw Materials → Work-in-Progress → Finished Goods
It reduces the chances of shortage, excess stock, wastage, damage and theft.
5. Reduction of Wastage
Manufacturing involves the use of raw materials, electricity, labour and machines. Proper
controls help identify unnecessary wastage and improve production efficiency.
For example, if a factory regularly uses more raw material than the standard quantity,
management can investigate the reason.
6. Proper Use of Resources
Internal control ensures that employees, machines, materials, money and time are used for
authorized business purposes. This improves productivity and reduces unnecessary
expenses.
7. Compliance with Rules and Policies
A manufacturing organization must follow government laws, accounting rules, safety
requirements, tax regulations and company policies. Internal controls help ensure that
employees follow these requirements.
8. Reliable Management Information
Easy2Siksha.com
Management needs reliable information to decide how much to produce, what price to
charge and where costs can be reduced. Internal control improves the reliability of reports
and information.
Elements of an Effective Internal Control System
An effective internal control system generally contains the following important elements:
1. Control Environment
The control environment is the overall attitude of management and employees towards
discipline, honesty and control.
Management should establish clear rules and demonstrate ethical behaviour. If
management itself ignores rules, employees are also likely to ignore them.
2. Risk Assessment
The organization should identify possible risks and assess their impact.
For a manufacturing company, risks may include:
Theft of raw materials
Machine breakdown
Fire or accidents
Fraudulent purchases
Poor-quality production
Excessive wastage
Incorrect inventory records
After identifying risks, appropriate controls should be introduced.
3. Control Activities
These are the actual procedures used to control business activities.
Examples include:
Authorization of purchases
Approval of payments
Physical checking of inventory
Regular stock counting
Password protection
Inspection of finished goods
Budgetary control
Verification of invoices
Easy2Siksha.com
4. Segregation of Duties
This is one of the most important principles of internal control.
One person should not control the entire transaction.
For example:
Purchase Department
↓
Orders Material
↓
Receiving Department
↓
Checks Material
↓
Accounts Department
↓
Checks Invoice & Makes Payment
This separation reduces the possibility of fraud and errors.
5. Proper Authorization
Important transactions should be approved by the appropriate authority.
For example, a purchase officer may be allowed to purchase materials up to a certain
amount, while larger purchases may require approval from the purchase manager or
general manager.
6. Documentation and Records
Every important transaction should have proper documentary evidence such as:
Purchase orders
Goods received notes
Material issue slips
Invoices
Payment vouchers
Sales invoices
Stock records
Proper documentation makes transactions easier to verify and audit.
7. Physical Controls
Physical controls protect company assets from theft or unauthorized access.
Easy2Siksha.com
Examples include:
CCTV cameras
Security guards
Locked warehouses
Restricted access
Fire protection systems
Password-protected computer systems
8. Information and Communication
Employees should receive correct information at the right time. Departments such as
purchase, production, stores, accounts and sales must communicate with each other.
For example, the production department should inform the purchase department when raw
material is reaching its minimum stock level.
9. Monitoring
Internal controls should not simply be created and forgotten. Management should regularly
check whether they are actually working.
Monitoring may include:
Internal audits
Stock verification
Performance reviews
Surprise inspections
Comparing actual production with planned production
Reviewing financial reports
Conclusion
In simple words, an effective Internal Control System acts like a safety and checking
mechanism for a manufacturing organization. It protects assets, prevents fraud, controls
inventory, reduces wastage, ensures accurate records and improves efficiency.
A good system works through proper management, risk assessment, authorization,
segregation of duties, documentation, physical protection, communication and
continuous monitoring.
Therefore, internal control is not only an accounting procedure. It is a complete
management system that helps a manufacturing organization operate safely, efficiently
and profitably while achieving its objectives.
Easy2Siksha.com
4.(i) Differentiate between Internal Check and Internal Control,
(ii) Deline Internal Audit. What are the essential features of an effective Internal Audit
system?
Ans: (ii) Internal Audit and Features of an Effective Internal Audit System
To understand this question easily, imagine a large shop or company where many
employees are working. One person receives cash, another purchases goods, another
records transactions, and another checks the accounts. If only one person controls
everything, mistakes and fraud can easily happen. Therefore, businesses use systems such
as Internal Check, Internal Control, and Internal Audit.
(i) Difference between Internal Check and Internal Control
Meaning of Internal Check
Internal Check is a system in which the work of one employee is automatically checked by
the work of another employee.
In simple words:
One person's work is arranged in such a way that another person's work checks it.
For example, in a shop, the person who receives cash should not be the same person who
records the cash transactions. The cashier receives the money, while another employee
records or verifies the transactions. This reduces the possibility of fraud and mistakes.
Meaning of Internal Control
Internal Control is a much broader concept. It includes all the policies, procedures, rules and
methods adopted by an organisation to protect its assets, prevent fraud, ensure accurate
accounting and achieve business objectives.
So, we can remember:
Internal Check = One employee's work checks another employee's work.
Internal Control = Complete system of controls used by the organisation.
Main Differences
Basis
Internal Check
Internal Control
Meaning
Arrangement of duties so that
one person's work checks
another's work
Overall system of policies and
procedures for controlling the
organisation
Easy2Siksha.com
Scope
Narrow
Broad
Main
purpose
Prevent and detect errors and
fraud
Protect assets, ensure accuracy and
achieve organisational objectives
Nature
Mainly concerned with division
of duties
Includes policies, procedures,
authorisation, supervision, internal
check, etc.
Relationship
It is a part of internal control
It is the wider system
Example
Cash received by one
employee and recorded by
another
Cash controls, authorisation rules, stock
controls, employee supervision,
accounting procedures, etc.
Easy Diagram
INTERNAL CONTROL
│
┌───────────────┼────────────────┐
│ │ │
Internal Check Authorisation Supervision
│ │ │
Division of Approval of Monitoring
Duties transactions activities
Therefore, Internal Check is a component of Internal Control, whereas Internal Control
covers a much wider area.
(ii) Definition of Internal Audit
What is Internal Audit?
Internal Audit is an independent examination of the activities, records, accounts and
operations of an organisation by its internal audit department or internal auditors to
determine whether the organisation is working properly and according to established
policies and procedures.
In simple language:
Internal Audit means regularly checking the company's work from inside the organisation
to find mistakes, fraud, weaknesses and opportunities for improvement.
For example, suppose a company has ₹10 lakh worth of stock according to its records. The
internal auditor may check whether the physical stock actually exists, whether purchases
have been properly recorded, and whether any stock has been lost or misused.
Internal audit is not limited only to checking accounts. It may also examine purchases, sales,
cash, inventory, employees, procedures, compliance and efficiency of operations.
Easy2Siksha.com
Essential Features of an Effective Internal Audit System
An effective internal audit system should have the following important features:
1. Independence
The internal auditor should be sufficiently independent from the activities being audited.
This allows the auditor to give an unbiased opinion.
2. Proper Planning
Internal audit should be properly planned. The auditor should decide what to check, when
to check it and how to check it.
3. Regular and Continuous
Internal audit should not be performed only once a year. Important activities should be
checked regularly and continuously.
4. Qualified Staff
Internal auditors should have proper knowledge of accounting, auditing, taxation, business
procedures and relevant technology.
5. Proper Examination of Records
The auditor should carefully examine books of accounts, invoices, receipts, vouchers, bank
records, stock records and other relevant documents.
6. Prevention and Detection of Fraud
An effective internal audit system should help identify suspicious transactions and
weaknesses that may lead to fraud, theft or misuse of assets.
7. Proper Reporting
The internal auditor should prepare clear reports showing:
Problems found
Reasons for the problems
Financial or operational impact
Suggestions for improvement
8. Follow-up Action
Simply finding mistakes is not enough. Management should take corrective action, and the
internal auditor should later check whether the suggested improvements have actually been
implemented.
Easy2Siksha.com
9. Evaluation of Internal Controls
The auditor should regularly examine whether the organisation's internal control system is
working effectively.
10. Use of Technology
Modern internal audit should make appropriate use of computers, accounting software,
data analysis and other technological tools to identify unusual transactions and improve
efficiency.
Easy Way to Remember the Whole Concept
BUSINESS ORGANISATION
│
INTERNAL CONTROL
│
┌──────────────┴──────────────┐
│ │
INTERNAL CHECK Other Controls
│ │
Division of duties Authorisation
Cross-checking Supervision
Rotation of work Security of assets
│
└──────────────┬──────────────┘
↓
INTERNAL AUDIT
│
┌─────────────┴─────────────┐
↓ ↓
Find weaknesses Give suggestions
│ │
└─────────────┬─────────────┘
↓
Corrective Action
↓
Better Business Control
In Short
Internal Check is a method of dividing duties so that one employee's work checks another
employee's work.
Internal Control is the broader system of rules, procedures and methods used to protect
assets, prevent errors and fraud, maintain reliable records and achieve organisational
objectives.
Easy2Siksha.com
Internal Audit is the systematic examination of an organisation's activities and controls to
identify weaknesses, ensure compliance and improve efficiency.
SECTION-C
5. (i) Explain the steps in Audit Procedure for vouching of cash book.
(ii) Explain the Audit procedure for vouching the following:
(a) Bad debts recovered
(b) Income tax
(c) Bills receivable
(d) Payments made by debtors
Ans: Before understanding the individual items, remember one simple idea: vouching
means checking whether the transactions recorded in the books of accounts are genuine
and supported by proper evidence. An auditor does not simply trust the entries made by
the accountant; he verifies them with receipts, bills, bank statements, agreements and
other documents.
(i) Audit Procedure for Vouching of Cash Book
The Cash Book records all cash and bank receipts and payments of a business. Since cash is
highly vulnerable to fraud and mistakes, the auditor gives special attention to it.
Simple Flow of Cash Book Vouching
Cash Book Entry
↓
Check supporting document
↓
Verify amount & date
↓
Check authorization
↓
Compare with related records
↓
Ensure correct accounting
Main Steps
Easy2Siksha.com
1. Examine the Cash Book carefully
The auditor first checks whether the Cash Book is properly maintained and whether all cash
and bank transactions are recorded in chronological order.
2. Check opening balance
The opening cash and bank balances are compared with the previous year's audited closing
balances.
3. Vouch cash receipts
Cash received is checked with supporting documents such as cash receipts, counterfoils,
sales records, bank deposit slips and other evidence. The auditor makes sure that cash
actually received has been recorded.
4. Vouch cash payments
Payments are checked with bills, invoices, vouchers, receipts, salary sheets, purchase
documents and other supporting evidence. The auditor verifies that the payment was
actually made and relates to the business.
5. Check dates and amounts
The auditor compares the date and amount appearing in the Cash Book with the supporting
documents. Any difference is investigated.
6. Check authorization
Important payments should have proper approval from the responsible person. The auditor
checks whether unauthorized payments have been recorded.
7. Check bank transactions
Bank receipts and payments are compared with the bank statement/passbook. Bank
reconciliation statements are also examined where necessary.
8. Check for missing or duplicate entries
The auditor ensures that receipts and payments have neither been omitted nor recorded
twice.
9. Check closing cash balance
The auditor may physically count the cash available and compare it with the Cash Book
balance. Any shortage or excess must be investigated.
In short: Vouching of the Cash Book ensures that cash received is genuine, cash paid is
genuine, entries are accurate, and the closing cash balance is correct.
(ii) Audit Procedure for Vouching the Following
(a) Bad Debts Recovered
Easy2Siksha.com
Bad debts recovered means money received from a customer whose debt had previously
been written off as bad.
For example, Ram owed ₹10,000 but could not pay, so the amount was written off as bad
debt. Later Ram pays ₹6,000. This ₹6,000 is bad debts recovered.
Audit Procedure
1. The auditor checks the original bad debt entry to confirm that the amount had
actually been written off earlier.
2. He examines the receipt issued to the debtor.
3. He checks the cash book or bank statement to confirm that the money was actually
received.
4. The amount recovered is compared with the debtor's account.
5. The auditor checks whether proper authorization was obtained for accepting the
amount.
6. He ensures that the recovered amount is correctly credited to Bad Debts Recovered
Account.
7. If the amount was received through bank, the auditor verifies the bank statement.
Purpose: To ensure that the recovery is genuine and has not been falsely recorded.
(b) Income Tax
Income tax paid by a business should be properly verified because it involves payment to
the government.
Audit Procedure
1. The auditor examines the income-tax challan as evidence of payment.
2. He checks the bank statement to confirm that the amount was actually paid.
3. The amount is compared with the income-tax records and relevant tax documents.
4. He checks whether the payment relates to the business and the correct assessment
period.
5. Any outstanding income-tax liability is also examined.
6. The auditor checks whether the payment has been properly recorded in the books.
7. He ensures that personal income-tax payments of owners/directors have not been
wrongly treated as business expenses.
Purpose: To ensure that the tax payment is genuine, correctly calculated/recorded and
properly classified.
(c) Bills Receivable
Easy2Siksha.com
A Bill Receivable is a written document under which a customer promises to pay a specified
amount on a future date.
For example, a customer accepts a bill of ₹20,000 payable after 3 months. The business
records it as a Bill Receivable.
Audit Procedure
1. The auditor examines the Bills Receivable Book.
2. He physically verifies the bills, where applicable.
3. He checks the name of the drawer, acceptor, amount and date.
4. The auditor checks the due date of each bill.
5. He verifies bills that have been discounted with the bank by examining bank
records.
6. Bills that have been dishonoured are checked with the dishonour notice and related
entries.
7. Bills that have been collected are compared with bank statements and receipts.
8. The auditor checks whether bills still outstanding at year-end are properly shown.
9. He ensures that cancelled or retired bills have been properly accounted for.
Purpose: To confirm the existence, ownership, value and status of Bills Receivable.
(d) Payments Made by Debtors
Payments made by debtors mean amounts received from customers against the money they
owe to the business.
For example, if A owes ₹15,000 to the business and pays ₹10,000, the auditor verifies that
₹10,000 has actually been received and correctly adjusted against A's account.
Audit Procedure
1. The auditor examines the receipts issued to debtors.
2. He compares the receipt amount with the Cash Book or Bank Book.
3. The debtor's individual account is checked to confirm that the payment has been
properly credited.
4. For cheque payments, the auditor examines the bank statement to confirm
realization of the cheque.
5. He checks whether any discount allowed to the debtor has been properly
authorized.
6. If payment is received through online banking, bank records are examined.
7. The auditor checks for any unusual or suspicious entries, such as delayed recording
of receipts.
8. He compares the total collections with the Debtors Ledger.
9. Special attention is given to large or unusual payments.
Easy2Siksha.com
Easy Revision Table
Item
Main Evidence Checked
Main Purpose
Cash Book
Receipts, bills, vouchers, bank
statement
Verify cash receipts and
payments
Bad Debts
Recovered
Receipt, debtor's account, bank
statement
Confirm genuine recovery
Income Tax
Tax challan, bank statement, tax
records
Confirm actual tax payment
Bills Receivable
Bills, Bills Receivable Book, bank
records
Verify existence and status of
bills
Payments by
Debtors
Receipts, debtor accounts, bank
statement
Confirm actual receipt from
debtors
Remember the Core Principle
Vouching = Book Entry + Documentary Evidence + Verification
So, whenever you see an audit-vouching question, think:
What document proves that this transaction actually happened?
6.Explain the procedure for verification of the following .
(a) Goodwill
(b) Freehold property
(c) Motor vehicles
(d) Trademarks
(c) Cash-in-hand
Ans: Verification of Assets
Verification means checking whether an asset shown in the books of accounts actually
exists, belongs to the business, is correctly valued, and is properly recorded. An auditor
does this by examining documents, physical evidence, ownership records and accounting
entries.
A simple way to remember the process is:
Books of Accounts → Documents → Physical/Legal Evidence → Ownership → Valuation →
Final Verification
(a) Verification of Goodwill
Easy2Siksha.com
Goodwill is an intangible asset representing the reputation and good name of a business. It
has no physical form, so the auditor cannot simply see it.
The auditor should:
1. Check the basis on which goodwill has been created, such as purchase of a business,
merger or admission of a partner.
2. Examine the agreement or purchase deed to confirm the amount of goodwill.
3. Check whether goodwill is actually owned by the business.
4. Verify the calculations used to determine its value.
5. Check the accounting treatment of goodwill and ensure that any impairment or
write-off has been properly recorded.
6. Compare the opening balance with previous financial statements and verify
additions or reductions during the year.
Main purpose: To ensure that the goodwill recorded in the books is genuine, properly
calculated and correctly accounted for.
(b) Verification of Freehold Property
Freehold property means land or buildings owned by the business without a fixed lease
period.
The auditor should:
1. Examine the title deed or sale deed to confirm ownership.
2. Check the registration documents relating to the property.
3. Verify the purchase price from the relevant agreement and payment records.
4. Physically inspect the property, where practical, to confirm its existence.
5. Check whether there is any mortgage, charge, dispute or legal restriction on the
property.
6. Examine property tax receipts and other relevant documents.
7. Verify additions, improvements or construction costs during the year.
8. Ensure that the property is correctly shown in the balance sheet.
Main purpose: To establish that the property exists and legally belongs to the business and
that its recorded value is correct.
(c) Verification of Motor Vehicles
Motor vehicles are tangible fixed assets such as cars, vans, trucks and other vehicles owned
by the business.
The auditor should:
Easy2Siksha.com
1. Examine the vehicle registration certificate (RC) to confirm ownership.
2. Check the purchase invoice and payment records.
3. Physically inspect the vehicle and compare its registration number, model and
identification details with the records.
4. Check insurance documents and other vehicle-related records.
5. Verify additions and disposals during the year.
6. If a vehicle has been sold, check the sale agreement and receipt of sale proceeds.
7. Verify depreciation charged on the vehicle.
8. Check whether any vehicle has been given as security for a loan.
Main purpose: To confirm that the vehicles exist, belong to the business and are correctly
valued in the accounts.
(d) Verification of Trademarks
A trademark is a legally protected name, logo, symbol or mark used to identify a business's
goods or services.
The auditor should:
1. Examine the trademark registration certificate.
2. Verify that the trademark is registered in the name of the business.
3. Check the period of registration and renewal details.
4. Examine documents relating to the purchase or acquisition of the trademark.
5. Verify the amount recorded in the books.
6. Check whether the trademark has been sold, transferred, cancelled or become
invalid.
7. Verify any amortisation or impairment adjustment required under the applicable
accounting rules.
8. Ensure that the trademark is properly disclosed in the financial statements.
Main purpose: To confirm the legal ownership, existence and correct accounting value of
the trademark.
(e) Verification of Cash-in-Hand
Cash-in-hand means the physical cash held by the business at the office, shop or other
authorised location.
This is one of the easiest assets to verify because cash can be physically counted.
The auditor should:
1. Conduct a physical cash count, preferably without prior notice.
Easy2Siksha.com
2. Compare the cash counted with the cash book balance.
3. Check whether there is any difference between physical cash and the book balance.
4. Examine cash receipts and payments around the balance-sheet date.
5. Check whether any personal or unauthorised payments have been included in
business cash.
6. Verify large or unusual cash transactions.
7. Ensure that cash belonging to someone else is not incorrectly included as the
business's cash.
8. Record any shortage or excess and investigate the reason.
Main purpose: To prove that the cash shown in the balance sheet actually exists and agrees
with the accounting records.
Easy Revision Diagram
VERIFICATION OF ASSETS
│
┌────────────────┼────────────────┐
↓ ↓ ↓
Goodwill Freehold Property Motor Vehicles
│ │ │
Agreements Title Deeds RC + Physical Check
Calculations Registration Invoice + Insurance
│ │ │
└────────────────┼────────────────┘
↓
Trademarks
│
Registration Certificate
Ownership + Value
│
↓
Cash-in-Hand
│
Physical Cash Count
↓
Compare with Cash Book
In simple words
The auditor's basic question for every asset is:
Does this asset really exist, does the business own it, and is the amount shown in the
books correct?
For goodwill, documents and calculations are important. For freehold property, title and
ownership documents are most important. For motor vehicles, the RC and physical
inspection are important. For trademarks, registration and legal ownership are checked. For
cash-in-hand, the auditor physically counts the cash and compares it with the cash book
Easy2Siksha.com
SECTION-D
7. (i) Discuss, in detail, the various contents of an Audit report.
(ii) Write a detailed note on Management Audit.
Ans: (ii) Detailed Note on Management Audit
An audit report is the final written statement prepared by an auditor after examining the
books of accounts, financial statements, documents and other relevant records of an
organisation. It tells the owners, shareholders and management whether the financial
statements present a true and fair view of the financial position of the business.
A management audit, on the other hand, goes beyond checking accounts. It examines
whether management is using the organisation's resources efficiently and whether its
policies, plans and decisions are helping the organisation achieve its objectives.
(i) Contents of an Audit Report
Think of an audit report as the auditor's final answer sheet. After checking the accounts and
evidence, the auditor communicates the result through this report.
Simple Diagram
AUDIT PROCESS
│
▼
Examination of Records
│
▼
Verification of Accounts
│
▼
Evaluation of Evidence
│
▼
AUDIT REPORT
│
┌──────────┼──────────┐
▼ ▼ ▼
Opinion Findings Information
The important contents of an audit report are as follows:
1. Title
Easy2Siksha.com
The report normally has an appropriate title such as "Independent Auditor's Report." The
title indicates that the report has been prepared by an independent auditor.
2. Addressee
The report states to whom it is addressed. In the case of a company, it is generally
addressed to the members or shareholders of the company.
3. Introduction
The auditor identifies the financial statements that have been audited. These may include:
Balance Sheet
Statement of Profit and Loss
Cash Flow Statement
Notes to Accounts
Other related financial information
This makes clear exactly what information the auditor has examined.
4. Management's Responsibility
The report explains that the management is responsible for preparing the financial
statements and maintaining appropriate accounting records and internal controls.
In simple words, management prepares the accounts, while the auditor independently
examines them.
5. Auditor's Responsibility
The auditor explains that his or her responsibility is to examine the financial statements and
express an independent opinion based on the audit evidence obtained.
The auditor does not normally prepare the accounts on behalf of management.
6. Scope of Audit
This section explains the general scope of the audit. It indicates that the auditor has
performed procedures such as examining records, checking evidence, testing transactions
and evaluating accounting policies.
The purpose is to obtain reasonable assurance that the financial statements are free from
material misstatement.
7. Auditor's Opinion
This is one of the most important parts of the audit report.
Easy2Siksha.com
The auditor gives an opinion about whether the financial statements present a true and fair
view.
Depending upon the circumstances, the opinion may be:
Unmodified/Clean Opinion accounts are fairly presented.
Qualified Opinion generally satisfactory, but there is a specific issue.
Adverse Opinion financial statements contain material and pervasive
misstatements.
Disclaimer of Opinion auditor cannot obtain sufficient appropriate evidence to
express an opinion.
8. Basis for Opinion
Where applicable, the report explains the basis on which the auditor reached the opinion. It
also states whether the auditor obtained sufficient and appropriate audit evidence.
9. Key Audit Matters
For applicable entities, the report may discuss Key Audit Matters (KAMs). These are matters
that, in the auditor's professional judgment, were of most significance during the audit.
10. Other Information
Where relevant, the auditor may discuss information contained in documents
accompanying the financial statements and explain the auditor's responsibility regarding
such information.
11. Signature of Auditor
The report is signed by the auditor or the authorised audit firm. This gives authenticity and
responsibility to the report.
12. Date and Place
The audit report normally contains the date and place of signing. The date is important
because it indicates when the auditor completed the relevant audit work.
In Short
AUDIT REPORT
│
├── Title & Addressee
├── Financial Statements Audited
├── Management's Responsibility
├── Auditor's Responsibility
├── Scope of Audit
├── Basis for Opinion
Easy2Siksha.com
├── Auditor's Opinion
├── Key Audit Matters (where applicable)
├── Signature
└── Date & Place
(ii) Detailed Note on Management Audit
A management audit is a systematic examination and evaluation of the performance of
management. Its purpose is to determine whether management is performing its functions
efficiently, economically and effectively.
A financial audit mainly asks:
"Are the accounts correct?"
A management audit asks a broader question:
"Is the organisation being managed properly and achieving its objectives?"
For example, suppose a company has enough money and good employees but sales are
continuously falling. A normal financial audit may check whether the sales figures are
correctly recorded. A management audit would go further and investigate why sales are
falling, whether marketing is effective, whether employees are properly utilised, whether
management decisions are appropriate, and whether the company's plans are working.
Main Objectives of Management Audit
The major objectives are:
1. To evaluate management performance
It examines how effectively managers perform their responsibilities.
2. To check efficiency
It determines whether available resources such as money, employees, machines and
materials are being used efficiently.
3. To examine effectiveness
It checks whether the organisation is actually achieving its planned objectives.
4. To identify weaknesses
Management audit helps identify weaknesses in policies, procedures, planning and
decision-making.
5. To suggest improvements
It does not merely identify mistakes; it also provides recommendations for
improvement.
6. To evaluate policies and plans
It examines whether the organisation's policies and strategies are suitable for
achieving its goals.
Easy2Siksha.com
7. To improve profitability and performance
Better utilisation of resources and improved management practices can increase
overall performance.
Areas Covered by Management Audit
Management audit can cover almost every important managerial function:
MANAGEMENT AUDIT
│
┌───────────────┼────────────────┐
▼ ▼ ▼
Planning Organisation Decision Making
│ │ │
├───────────────┼────────────────┤
▼ ▼ ▼
Finance Marketing Human Resources
│ │ │
└───────────────┼────────────────┘
▼
Overall Performance
It may examine:
Planning whether proper future plans exist.
Organisation whether duties and responsibilities are clearly divided.
Finance whether financial resources are properly managed.
Production whether production is efficient and economical.
Marketing whether marketing policies are achieving sales objectives.
Human resources whether employees are properly selected, trained and utilised.
Purchasing whether materials are purchased at suitable prices and in proper
quantities.
Internal control whether effective controls exist to prevent errors and misuse.
Decision-making whether management decisions are timely and logical.
Advantages of Management Audit
Management audit provides several benefits:
Improves managerial efficiency.
Helps detect weaknesses and inefficiencies.
Encourages better use of resources.
Improves planning and decision-making.
Helps achieve organisational objectives.
Can reduce unnecessary costs.
Improves coordination between departments.
Easy2Siksha.com
Provides useful suggestions to management.
Helps management identify areas requiring corrective action.
Difference Between Financial Audit and Management Audit
Basis
Financial Audit
Management Audit
Main purpose
Examine financial statements
Evaluate management performance
Main focus
Accounts and financial
records
Overall management and
operations
Question
answered
Are accounts fairly
presented?
Is management working efficiently?
Nature
Mainly financial
Broad and managerial
Result
Audit opinion
Findings and recommendations
Scope
Comparatively limited
Wider
Conclusion
Thus, an audit report is the auditor's formal communication about the examination of
financial statements. Its most important feature is the auditor's opinion, supported by the
necessary information and explanations.
A management audit is much broader. It examines the quality and effectiveness of
management, including planning, organisation, finance, production, marketing, human
resources and decision-making. Its ultimate purpose is not simply to find faults but to help
management improve efficiency, effectiveness and overall organisational performance.
8. Explain, in detail. rights and duties of an auditor under Companies Act.
Ans: An auditor is an independent person who examines the accounts and financial
statements of a company and gives an opinion about whether they present a true and fair
view of the company's financial position. In simple words, an auditor works like a financial
examiner of a company.
The Companies Act, 2013 gives auditors certain rights (powers) so that they can perform
their work properly, and also imposes several duties (responsibilities) so that they do their
work honestly and carefully. The main provisions are contained in Sections 143 to 147.
Simple Diagram
AUDITOR
│
┌─────────┴─────────┐
│ │
RIGHTS DUTIES
│ │
┌──────┼──────┐ ┌─────┼────────┐
Easy2Siksha.com
│ │ │ │ │ │
Access Ask for Attend Examine Report Report
books info meetings accounts fraud
│ │ │ │ │ │
└──────┴──────┴──────┴─────┴────────┘
│
True & Fair View
1. Rights of an Auditor
1. Right to access books and records
The most important right of an auditor is the right of access to the books of account and
vouchers of the company at all times. These records may be kept at the registered office or
at another location.
For example, if the company says that it purchased machinery for ₹10 lakh, the auditor can
examine the invoice, payment record, bank statement and other supporting documents.
2. Right to obtain information and explanations
An auditor can ask the company's officers for any information or explanation necessary for
performing the audit.
For example, if an unusually large payment is made to a supplier, the auditor can ask the
management why the payment was made and request supporting documents.
3. Right to examine important transactions
The auditor has the right and responsibility to investigate certain matters, such as:
Whether loans and advances are properly secured.
Whether the terms of loans are harmful to the company or its members.
Whether transactions recorded only through book entries are prejudicial.
Whether certain securities were sold below their purchase price where applicable.
Whether loans and advances have been wrongly shown as deposits.
Whether personal expenses have been charged to the company's revenue.
Whether cash stated to have been received for shares was actually received.
4. Right of access to subsidiary records
Where necessary for consolidation, the auditor of a holding company has access to relevant
records of its subsidiary and associate companies. This helps the auditor properly examine
consolidated financial statements.
5. Right to receive notice of general meetings
Easy2Siksha.com
Under Section 146, the auditor is entitled to receive notices and communications relating to
general meetings and may attend the meeting.
The auditor can also be heard at the meeting on matters concerning the auditor.
6. Right to remuneration
The auditor is entitled to receive remuneration for the audit. Section 142 provides that the
remuneration is generally fixed by the company in general meeting or in the manner
determined there, with specific provision for the first auditor's remuneration.
2. Duties of an Auditor
Rights give the auditor the power to investigate, while duties tell the auditor what he must
actually do.
1. Duty to examine financial statements
The auditor must examine the company's accounts and financial statements and give a
report to the members.
The main purpose is to determine whether the financial statements give a true and fair
view of the company's affairs, profit or loss and cash flows, taking into account applicable
law, accounting standards and auditing standards.
2. Duty to make an audit report
After completing the examination, the auditor must prepare an audit report for the
members of the company.
The report should communicate the auditor's opinion and the matters required by the
Companies Act.
3. Duty to obtain necessary information
The auditor should obtain the information and explanations that are necessary for
conducting the audit.
If necessary information cannot be obtained, this must be appropriately dealt with in the
auditor's report. Section 143 specifically requires the report to address whether the auditor
obtained the information and explanations necessary for the audit.
4. Duty to check proper books of account
Easy2Siksha.com
The auditor has to consider whether the company has maintained proper books of account
as required by law and whether adequate returns have been received from branches not
visited by the auditor.
5. Duty to follow auditing and accounting standards
An auditor must conduct the audit according to the applicable auditing standards and
consider the applicable accounting requirements while forming the audit opinion.
6. Duty to report fraud
If, during the performance of audit duties, the auditor has reason to believe that an offence
involving fraud is being or has been committed against the company by its officers or
employees, the auditor has reporting obligations under Section 143(12). Depending on the
prescribed threshold and circumstances, the matter is reported to the Central Government
or to the Audit Committee/Board as applicable.
For example, suppose an employee creates fake purchase invoices and diverts company
money to his own account. The auditor should not simply ignore it. The auditor has a legal
responsibility to follow the prescribed fraud-reporting procedure.
7. Duty to remain independent
An auditor must maintain independence and should not allow personal interests or
management pressure to influence the audit opinion.
The Act also restricts auditors from providing certain services that could create conflicts of
interest. Section 144 prohibits services such as accounting/bookkeeping, internal audit,
certain financial-system design services, investment advisory and investment banking
services, among others.
8. Duty to attend general meetings
The auditor should attend the general meeting where required and be available to answer
questions relating to the audit.
9. Duty to sign the audit report
The auditor is responsible for signing the audit report and other documents where required
under the Act. This makes the auditor accountable for the opinion expressed.
Difference Between Rights and Duties
Rights of Auditor
Duties of Auditor
Access books and vouchers
Examine the books properly
Ask officers for information
Obtain necessary information
Easy2Siksha.com
Examine important transactions
Report significant findings
Access relevant subsidiary records
Give a true and fair audit opinion
Attend general meetings
Attend meetings as required
Receive remuneration
Maintain independence
Investigate suspicious matters
Report fraud as required by law
Easy way to remember
Think of an auditor as a financial detective.
Rights = Tools of the detective
Books + Vouchers + Information + Explanations + Meeting access
Duties = Work of the detective
Examine + Verify + Evaluate + Report + Maintain independence + Report fraud when legally
required
Conclusion
Thus, under the Companies Act, 2013, an auditor has strong rights so that management
cannot prevent him from examining the company's financial records. At the same time,
these rights come with important responsibilities. The auditor must carefully examine the
accounts, obtain necessary information, follow auditing standards, give an independent
opinion on the financial statements, report required matters such as fraud, and maintain
professional independence.
In short, the rights of an auditor help him to perform the audit, while his duties ensure
that the audit is performed honestly, carefully and according to law. The ultimate purpose
is to protect the interests of the company's shareholders, creditors and other stakeholders
by increasing confidence in the financial statements.
This paper has been carefully prepared for educational purposes. If you notice any mistakes or
have suggestions, feel free to share your feedback.
