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GNDU Question Paper-2022
Bachelor of Commerce
(B.Com) 5
th
Semester
AUDITING
Time Allowed: Three Hours Max. Marks: 50
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) 'Auditing begins where accountancy ends. Discuss the scope of an audit
(ii) Describe the essential qualities required of an auditor apart from the statutory
qualifications.
2. (1) What is an Internal audit? Explain the difference between internal audit and
independent audit.
(ii) Write a detailed note on Audit planning.
SECTION-B
3.(i) What are the main aims of internal check? How far does internal check give safety to
the auditor?
(ii) Describe a suitable internal check system for purchases and sales.
4.(i) Define internal audit and describe its objectives.
(ii) Explain the scope of internal control.
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SECTION-C
5. (i) Describe the auditor's duties during vouching credit purchases.
(ii) How would you vouch the receipt side of your client's cash book?
6.(i) Write a detailed note on the valuation of stock for balance sheet purpose and also,
examine the auditor's position in this respect.
(ii) In auditing the balance sheet of a limited company, state what steps you would take to
verify sundry debtors and creditors. Also, state auditor duties in this regard.
SECTION-D
7. "Auditor's report should contain adepuate disclosures of the facts but it should not be
too detailed." Discuss the statement and draft a specimen of Audit report.
8.(i) What do you understand by 'Management Audit'? Discuss, in detail, the scope of such
an audit and the benefits management can derive from such an audit.
(ii) Write a detailed note on Tax Audit.
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GNDU Answer Paper-2022
Bachelor of Commerce
(B.Com) 5
th
Semester
AUDITING
Time Allowed: Three Hours Max. Marks: 50
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) 'Auditing begins where accountancy ends. Discuss the scope of an audit
(ii) Describe the essential qualities required of an auditor apart from the statutory
qualifications.
Ans: A Fresh Start: The Story of a Bridge Between Accounting and Auditing
Imagine a grand building project. The architects have carefully drawn blueprints, the
engineers have ensured that every measurement is precise, and the builders have
completed their work beautifully. Now the building stands tall, ready for people to move in.
But wait—before anyone is allowed inside, the authorities must check whether the building
is safe, strong, and free from hidden faults. This inspection doesn’t change the structure
but ensures that it can be trusted.
This story is exactly what happens in the world of business. Accountancy is like the
construction of the building—it prepares financial statements, balances figures, and
presents the results of a business. Auditing is like the inspection—it doesn’t rebuild the
accounts but checks whether everything built (prepared) by the accountants is true, fair,
and reliable.
And that’s why people often say:
“Auditing begins where accountancy ends.”
Now, let us slowly and clearly explore both parts of the question.
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Part (i): “Auditing begins where accountancy ends.” – Scope of an Audit
Understanding the Meaning
• Accountancy: This is the process of recording, classifying, and summarizing
transactions. It produces the final accounts—the profit and loss statement, balance
sheet, and cash flow.
• Auditing: This starts after the accountant has completed the books. The auditor
steps in to verify, check, and report whether those accounts are correct and
trustworthy.
In short, accountancy creates the picture, auditing verifies if the picture is real or
photoshopped.
The Scope of an Audit
The scope of an audit means the extent of the auditor’s work. What exactly does the
auditor do? Let’s unfold this in story-like clarity:
1. Checking the Accuracy of Records
The auditor examines whether the entries made by accountants are accurate. For
example, if the business shows that it purchased goods worth ₹10,000, the auditor
checks the invoice, receipts, and stock register to ensure that the figure is genuine.
2. Verification of Assets and Liabilities
Think of a shopkeeper showing a list of all items he owns. The auditor doesn’t just
accept it blindly—he physically verifies assets like machinery, stock, or furniture, and
confirms liabilities like loans. The aim is to see whether what is written in the books
actually exists in reality.
3. Detection of Errors
Errors are innocent mistakes—like entering ₹1,000 instead of ₹10,000. The auditor’s
role is like a detective with a magnifying glass who spots such slips.
4. Detection of Frauds
Fraud is intentional cheating—like an employee making fake bills or pocketing
money. Auditors are not policemen, but they are trained to sense red flags. For
instance, if cash balances don’t match, or if stock records are fishy, the auditor
investigates further.
5. Ensuring Compliance with Law
Every business has to follow certain rules—like the Companies Act, Income Tax Act,
or GST law. Auditors check whether the financial statements follow these legal
requirements.
6. Expressing an Opinion
At the end, the auditor doesn’t just keep quiet. He issues an audit report, which
states whether the financial statements give a true and fair view of the business.
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Scope in one line:
The scope of audit covers checking truth, fairness, accuracy, compliance, and reliability of
the accounts prepared by accountants.
Why Audit is Necessary Beyond Accounting
• Accountancy presents the financial picture, but it can be influenced by human error
or manipulation.
• Auditing builds trust for owners, investors, government, and even employees.
• It assures that the accounts are not just numbers on paper but genuine reflections
of business reality.
So yes, accountancy may end after preparing the balance sheet, but the journey of financial
reliability begins only with auditing.
Part (ii): Essential Qualities of an Auditor (Beyond Statutory Qualifications)
Now let’s move to the second part of the question.
Think of the auditor as a watchdog for the financial world. For this role, the law prescribes
certain statutory qualifications (like being a Chartered Accountant in India). But apart from
those, the auditor needs certain personal qualities and professional traits.
Let’s humanize this with an example:
Imagine two doctors. Both have medical degrees (the statutory qualification). But one
doctor is careless, rude, and impatient, while the other is attentive, honest, and empathetic.
Whom would you trust more with your health? Of course, the second one.
The same applies to auditors. The degree is not enough—the qualities matter.
Essential Qualities of an Auditor
1. Integrity and Honesty
An auditor must be like a mirror—clear, unbiased, and truthful. If he compromises
his honesty, the whole purpose of auditing collapses. For example, if management
pressures him to hide losses, an honest auditor must boldly refuse.
2. Independence of Judgment
Independence means the auditor should not be influenced by anyone—whether by
the company directors, employees, or personal benefits. He should think and decide
purely on facts and evidence.
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3. Confidentiality
Auditors often gain access to sensitive business secrets. They must not leak this
information to outsiders. For instance, if an auditor learns that a company is about
to launch a new product, he should keep it private.
4. Professional Skepticism
A good auditor should never blindly trust. Even if the manager says, “Everything is
correct,” the auditor must verify with evidence. Healthy doubt is the auditor’s best
friend.
5. Patience and Perseverance
Auditing is not glamorous—it involves going through piles of vouchers, receipts, and
ledgers. An auditor must have patience to go through details without losing focus.
6. Technical Knowledge
Beyond accounting, auditors must know taxation laws, company law, and auditing
standards. They should also stay updated with modern tools like computerized
accounting systems and data analytics.
7. Good Communication Skills
At the end of the audit, the auditor has to prepare a report. The report should be
written clearly, without jargon, so that even non-experts can understand.
Sometimes, the auditor also needs to explain findings to management or
stakeholders.
8. Tact and Diplomacy
Suppose an auditor finds a serious mistake by the chief accountant. Pointing it out
harshly could create conflict. Instead, the auditor should explain issues
diplomatically while still standing firm on facts.
9. Team Spirit and Leadership
Large audits are not done alone—they involve teams. An auditor should guide
juniors, allocate work wisely, and review their tasks carefully.
10. Strong Analytical Mind
Auditing is like solving puzzles. The auditor must connect clues, analyze trends, and
spot unusual patterns. For example, if sales have doubled but cash hasn’t increased,
something may be wrong.
Wrapping it All Together
So, let’s summarize in a way that feels natural:
• Accountancy is the art of preparing financial statements. Auditing is the science of
verifying them.
• That’s why we say: “Auditing begins where accountancy ends.”
• The scope of audit includes verifying records, detecting errors and frauds, checking
compliance, confirming assets and liabilities, and giving an independent opinion.
• But to perform this role effectively, an auditor needs more than just qualifications.
He must possess qualities like honesty, independence, patience, skepticism,
technical knowledge, and communication skills.
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In simple words, an auditor is like the final guardian of truth in the world of business.
Without him, the accounts may be complete, but they cannot be trusted.
2. (1) What is an Internal audit? Explain the difference between internal audit and
independent audit.
(ii) Write a detailed note on Audit planning.
Ans: Part (1): Internal Audit — The In-House Detective
A Story to Begin
Imagine a large company, “Sunrise Textiles Ltd.” It’s a busy place — machines whirring,
shipments going out, money flowing in and out every day. The management wants to be
sure that:
• No fraud is happening.
• Rules and policies are being followed.
• Operations are running efficiently.
So, they appoint Priya, an internal auditor. She’s not an outsider — she’s part of the
organisation, but works independently from the departments she audits. Her job is to check,
advise, and improve.
Definition
As per the Institute of Internal Auditors, internal auditing is:
“An independent, objective assurance and consulting activity designed to add value and
improve an organisation’s operations. It helps an organisation accomplish its objectives by
bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk
management, control, and governance processes”.
In simpler words: An internal audit is a continuous, in-house review of systems, processes,
and controls to ensure everything is working as it should — and to suggest improvements.
Key Features of Internal Audit
• Appointed by: Management of the organisation.
• Scope: Decided by management; can cover financial, operational, compliance, and
even environmental aspects.
• Objective: Improve efficiency, ensure compliance, detect and prevent errors/frauds.
• Reporting: Reports to management or the board’s audit committee.
• Frequency: Continuous or periodic, as decided internally.
Independent Audit — The External Examiner
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Now, meet Arun, a chartered accountant from an external audit firm. He’s been appointed
by the shareholders of Sunrise Textiles to conduct the statutory audit of the company’s
annual financial statements.
Definition
An independent audit (often called a statutory or external audit) is:
An examination of the financial statements of an entity by an independent auditor,
appointed as per law, to express an opinion on whether the statements give a true and fair
view of the financial position and performance.
Key Features of Independent Audit
• Appointed by: Shareholders (in companies) or as per statutory requirement.
• Scope: Defined by law (e.g., Companies Act, 2013) and auditing standards.
• Objective: Give an independent opinion on the truth and fairness of financial
statements.
• Reporting: To shareholders or other stakeholders as per law.
• Frequency: Usually annual.
Differences Between Internal Audit and Independent Audit
Basis
Internal Audit
Independent Audit
Appointment
By management
By shareholders or as per
statute
Objective
Improve internal controls, efficiency,
compliance
Express opinion on financial
statements
Scope
Decided by management; can be wide
Fixed by law and auditing
standards
Independence
Independent within the organisation, but
still an employee/agent
Completely independent of
the organisation
Reporting
To management/audit committee
To shareholders or statutory
authority
Frequency
Continuous or periodic
Usually once a year
Legal
Requirement
Not always mandatory (except in certain
companies as per law)
Mandatory for specified
entities under law
Nature of Work
Assurance + advisory
Assurance only
In short:
• Internal audit = “Doctor on the payroll” — checks health regularly and advises on
lifestyle changes.
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• Independent audit = “Annual health inspector” — comes once a year to certify
you’re fit (or point out problems).
Part (2): Audit Planning — The Blueprint Before the Battle
Why Planning Matters — A Story
Before Priya (internal auditor) or Arun (independent auditor) starts their work, they don’t
just walk into the office and start checking random files. That would be like a builder starting
construction without a blueprint.
Audit planning is that blueprint — it ensures the audit is efficient, focused, and effective.
Definition
Audit planning is the process of developing a general strategy and a detailed approach for
the expected nature, timing, and extent of the audit. It’s about deciding in advance:
• What to check.
• How to check it.
• When to check it.
• Who will check it.
Objectives of Audit Planning
1. Focus on Important Areas: Identify high-risk areas needing more attention.
2. Efficient Use of Resources: Assign the right people to the right tasks.
3. Avoid Surprises: Understand the client’s business and anticipate issues.
4. Meet Deadlines: Schedule work to finish on time.
5. Comply with Standards: Ensure the audit meets professional and legal
requirements.
Steps in Audit Planning
1. Understanding the Client’s Business
• Nature of operations, industry, regulatory environment.
• Organisational structure, key personnel.
• Accounting systems and internal controls.
Example: For Sunrise Textiles, Arun studies the textile industry trends, export regulations,
and the company’s production cycle.
2. Understanding the Accounting System and Internal Controls
• How transactions are recorded.
• Who authorises payments.
• How inventory is tracked.
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• Identify strengths and weaknesses.
3. Assessing Audit Risk
Audit risk = Risk of giving a wrong opinion. It has three parts:
• Inherent risk: Risk due to the nature of the business (e.g., high cash transactions).
• Control risk: Risk that internal controls won’t catch errors/frauds.
• Detection risk: Risk that the auditor’s own procedures miss something.
4. Determining Materiality
Materiality = The size or nature of an error that would influence the decision of a user of
financial statements. Set thresholds to decide what’s worth investigating deeply.
5. Developing the Audit Programme
A detailed list of audit procedures:
• What documents to check.
• What confirmations to send.
• What analytical reviews to perform.
6. Scheduling and Staffing
• Allocate work among team members.
• Set timelines for each phase.
7. Coordination with Internal Audit
If there’s an internal audit function, decide how much reliance can be placed on their work.
8. Documentation
Record the plan in the audit file — it’s evidence that the audit was properly planned.
Benefits of Proper Audit Planning
• Efficiency: No wasted time on low-risk areas.
• Effectiveness: High-risk areas get proper attention.
• Team Clarity: Everyone knows their role.
• Client Confidence: Shows professionalism.
• Compliance: Meets auditing standards (SA 300 in India).
An Analogy — The Audit as a Road Trip
• Destination: Audit opinion.
• Map: Audit plan.
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• Stops: Audit procedures.
• Fuel: Resources and time.
• Driver: Audit team leader. Without a map, you might still reach the destination —
but with delays, wrong turns, and wasted fuel.
Exam-Ready Summary
Internal Audit:
• Continuous, in-house, appointed by management.
• Improves controls, efficiency, compliance.
• Reports to management.
Independent Audit:
• Annual, external, appointed by shareholders/statute.
• Gives opinion on financial statements.
• Reports to shareholders.
Differences: Appointment, objective, scope, independence, reporting, frequency, legal
requirement, nature of work.
Audit Planning:
• Blueprint for the audit.
• Objectives: focus, efficiency, avoid surprises, meet deadlines, comply with standards.
• Steps: Understand business → Understand controls → Assess risk → Set materiality
→ Develop programme → Schedule/staff → Coordinate → Document.
• Benefits: Efficiency, effectiveness, clarity, compliance.
Final Takeaway: An internal audit is like your in-house coach, constantly helping you
improve. An independent audit is the official referee, giving a verdict on your performance.
And audit planning? That’s the game plan — without it, even the best players can lose the
match.
SECTION-B
3.(i) What are the main aims of internal check? How far does internal check give safety to
the auditor?
(ii) Describe a suitable internal check system for purchases and sales.
Ans: The Story Begins
Imagine you are the owner of a big supermarket called “SmartMart.”
Every day, thousands of products are bought, sold, shifted, billed, and recorded. You have
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cashiers at the counters, storekeepers in the warehouse, delivery boys moving stock, and
managers keeping an eye on things.
Now, think for a moment—if one person was allowed to do everything—buy goods, receive
them, record them in the books, and even approve payments—what do you think would
happen?
Exactly! The chances of mistakes, fraud, or even theft would be very high. That is where the
idea of Internal Check comes in.
Internal check is like a watchdog system inside the business itself, where duties are divided
in such a way that no single person has full control over a transaction. Everyone’s work
automatically gets checked by someone else’s work.
So, let’s break the question into two parts and explain it beautifully.
(i) Main Aims of Internal Check and Its Safety to the Auditor
1. Ensuring Accuracy
The very first aim of internal check is accuracy in recording transactions. For example, in
SmartMart, the cashier collects money but does not record it in the accounts. The
accountant records it, but he does not handle the actual cash. The store manager checks
both. This chain ensures that no single person can manipulate figures easily.
2. Preventing Frauds and Errors
One of the most important goals is to minimize frauds. If one person could order goods,
receive them, and make the payment, he could easily create a fake supplier and pocket the
money. But if different people handle each stage, the fraud is caught early.
3. Saving Time of the Auditor
Now think of the auditor—the person who has to check if SmartMart’s accounts are true
and fair. If there is a strong internal check system, the auditor doesn’t have to waste too
much time checking every tiny entry. He can rely on the system, test it, and focus on bigger
issues.
4. Fixing Responsibility
Another aim is responsibility fixing. If there is a mistake, the auditor or the owner can
quickly identify who was responsible because every duty is clearly defined. For example, if
wrong prices were entered on sales bills, it’s clear that the billing clerk is answerable, not
the storekeeper.
5. Efficiency in Business Operations
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Internal check is not only about fraud prevention; it also improves efficiency. Employees
know their role, and because one person’s work is automatically checked by another, the
business runs smoothly with fewer disruptions.
How Far Does Internal Check Give Safety to the Auditor?
Now, here comes the tricky part—does internal check completely protect the auditor?
The answer is No.
Internal check gives reasonable safety, but not absolute safety.
Let’s explain with examples:
1. Reasonable Assurance:
If SmartMart has a solid internal check system, the auditor can rely on it to a good
extent. For example, if the purchasing process is well-divided (purchase order,
receiving goods, and payment all done by different people), the auditor feels
confident that fraud risk is low.
2. Not a Guarantee:
However, auditors cannot blindly trust internal check. Why? Because people may
collude. Suppose the purchase manager and the storekeeper secretly join hands.
They can create fake bills and share the extra profit. In such a case, even internal
check may fail.
3. Auditor’s Responsibility Remains:
The auditor cannot escape his duty by saying “Oh, there was an internal check
system, so I didn’t verify.” He still has to test the system, check samples, and ensure
it is actually working.
So, in short: Internal check makes the auditor’s job easier, reduces his workload, and
provides reasonable safety, but it does not remove his responsibility.
(ii) Suitable Internal Check System for Purchases and Sales
Now let’s enter into the heart of the question—what does a good internal check system for
purchases and sales look like?
Let’s again imagine SmartMart and see how things should ideally work.
Internal Check System for Purchases
Purchases are a sensitive area because this is where money goes out. If not controlled, the
business may lose heavily. A proper system should have the following steps:
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1. Purchase Requisition:
o Whenever stock is running low, the storekeeper prepares a requisition.
o He cannot directly place an order; he just informs the purchase department.
o This ensures that only necessary goods are bought.
2. Purchase Order:
o The purchase department checks requisitions, finds suppliers, and prepares a
purchase order.
o The order is sent to the supplier, but copies are also sent to the accounts
department and the receiving department.
o This prevents fake or duplicate orders.
3. Receiving Goods:
o When goods arrive, the receiving department checks quantity and quality.
o They prepare a Goods Received Note (GRN).
o This note is sent to the accounts department for matching.
4. Invoice Verification:
o The supplier’s invoice is matched with the purchase order and the GRN.
o Only if all three match (order, receipt, invoice) is the payment processed.
5. Payment Authorization:
o Payment is never made by the purchase department.
o The accounts department prepares the cheque.
o The cashier issues it, but only after approval from a senior manager.
This way, at every step, different people are involved. No single person has full control,
making fraud extremely difficult.
Internal Check System for Sales
Sales are equally important because this is where money comes in. A good system should
look like this:
1. Sales Order:
o Orders are received by the sales department.
o They prepare a sales order and send copies to the accounts department and
dispatch section.
2. Credit Approval:
o If the buyer is purchasing on credit, the accounts department checks the
customer’s credit history before approval.
3. Dispatch of Goods:
o The dispatch department packs and sends goods.
o They prepare a Delivery Note, which is signed by the customer.
4. Invoicing:
o The billing department prepares the sales invoice based on the delivery note.
o One copy goes to the accounts department.
5. Recording and Collection:
o The accounts department records the sale.
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o If payment is in cash, the cashier collects it and issues a receipt.
o If it’s credit, the accounts team follows up for timely collection.
6. Periodic Review:
o A senior manager or internal auditor reviews sales records and outstanding
debtors regularly.
Here too, no single person handles everything. Orders, dispatch, invoicing, and
collection are divided among different employees.
Wrapping It Up – Like a Moral of the Story
So, if we step back and look at SmartMart’s system, what do we see?
• Internal Check is not just about accounting—it is about building a culture of trust,
division of work, and responsibility.
• Its aims are to ensure accuracy, prevent frauds, fix responsibility, improve efficiency,
and help the auditor.
• For the auditor, it is like a safety net—useful but not foolproof. He can rely on it, but
he cannot ignore his own duty of careful checking.
• For purchases and sales, the golden rule is: divide work, don’t let one person
control everything, and keep cross-checking.
Just like in a cricket match where one player bowls, another fields, and another keeps
wickets—everyone checks each other’s performance. If only one player did everything, the
game would be chaos.
That’s exactly what internal check does in the business world—it makes sure the “game” of
business is played fairly, transparently, and smoothly.
4.(i) Define internal audit and describe its objectives.
(ii) Explain the scope of internal control.
Ans: Part (i) — Internal Audit: The In-House Detective and Advisor
A Story to Begin
Imagine “Galaxy Foods Ltd.” — a large company making packaged snacks. Every day, raw
materials come in, machines run, products are shipped, and money changes hands. The
directors want to be sure:
• No fraud or theft is happening.
• Rules and policies are being followed.
• Operations are efficient and cost-effective.
• Risks are spotted early.
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So they appoint Ananya, the internal auditor. She’s part of the organisation but works
independently from the departments she reviews. Her mission? To check, evaluate, and
improve.
Definition of Internal Audit
In simple words:
Internal audit is an independent, objective assurance and consulting activity carried out
within an organisation to evaluate and improve the effectiveness of risk management,
control, and governance processes.
It’s like having a permanent “health check” function inside the company — not just to find
problems, but to make the whole system healthier.
Objectives of Internal Audit
Ananya’s work revolves around some clear objectives:
1. Review of Internal Controls
o Check whether the company’s internal control system is working as intended.
o Example: Are purchase orders properly authorised? Are cash payments
double-checked?
2. Detection and Prevention of Errors and Frauds
o Spot irregularities before they cause damage.
o Example: Identifying duplicate vendor payments or fake expense claims.
3. Ensuring Compliance
o Verify that laws, regulations, and internal policies are being followed.
o Example: Labour law compliance, GST filings, safety standards.
4. Evaluating Operational Efficiency
o Suggest ways to reduce waste, improve productivity, and cut costs.
o Example: Streamlining the supply chain to reduce delays.
5. Risk Management
o Identify potential risks — financial, operational, reputational — and suggest
mitigation.
o Example: Highlighting over-dependence on a single supplier.
6. Safeguarding Assets
o Ensure physical and intangible assets are protected from loss or misuse.
o Example: Checking security of warehouses, IT systems, and intellectual
property.
7. Advisory Role
o Recommend improvements for better governance and decision-making.
o Example: Suggesting a new inventory tracking system.
In short: Internal audit is not just about “catching mistakes” — it’s about building a
stronger, safer, and more efficient organisation from the inside.
Part (ii) — Scope of Internal Control: The Invisible Safety Net
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A Story to Begin
Now, let’s walk into the “Control Room” of Galaxy Foods. You won’t see flashing lights or
levers — instead, you’ll find policies, procedures, and systems quietly working in the
background.
Every time a cashier counts the till, every time a password is required to access data, every
time two signatures are needed on a cheque — that’s internal control in action.
Definition of Internal Control
According to the American Institute of Certified Public Accountants (AICPA):
Internal control is the plan of organisation and all the coordinated methods and measures
adopted within a business to safeguard its assets, check the accuracy and reliability of its
accounting data, promote operational efficiency, and encourage adherence to prescribed
managerial policies.
In simpler terms: It’s the entire system of checks and balances — financial and non-financial
— designed to keep the organisation safe, accurate, efficient, and compliant.
Objectives of Internal Control
Before we explore its scope, here’s what internal control aims to achieve:
• Orderly and efficient conduct of business.
• Adherence to management policies.
• Safeguarding of assets.
• Prevention and detection of frauds and errors.
• Accuracy and completeness of accounting records.
• Timely preparation of reliable financial information.
Scope of Internal Control
The scope is broad and all-encompassing — it covers every area where control is needed to
achieve the above objectives. Let’s break it down:
1. Financial Controls
These ensure the accuracy and reliability of financial records and reports.
• Proper authorisation of transactions.
• Segregation of duties (no one person handles a transaction from start to finish).
• Regular bank reconciliations.
• Control over cash receipts and payments.
• Verification of assets and liabilities.
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Example: In Galaxy Foods, the person approving supplier payments is different from the one
preparing them, reducing the risk of fraud.
2. Operational Controls
These aim to improve efficiency and effectiveness in day-to-day operations.
• Standard operating procedures (SOPs) for production, sales, procurement.
• Quality checks at different stages.
• Inventory management systems.
Example: A barcode system in the warehouse to track stock movement and reduce losses.
3. Compliance Controls
These ensure the organisation follows laws, regulations, and internal policies.
• GST, income tax, and labour law compliance.
• Adherence to environmental and safety regulations.
• Following internal HR policies.
Example: Regular checks to ensure all factory workers have safety gear and training.
4. Administrative Controls
These relate to decision-making and policy implementation.
• Clear organisational structure.
• Defined authority levels.
• Proper documentation of decisions.
Example: Only senior managers can approve contracts above a certain value.
5. Asset Safeguarding Controls
These protect physical and intangible assets from loss, theft, or misuse.
• Physical security (locks, CCTV, guards).
• IT security (passwords, firewalls, backups).
• Insurance coverage.
Example: Restricted access to the storeroom and periodic stock counts.
6. Personnel Controls
These ensure the right people are in the right jobs and are performing well.
• Background checks before hiring.
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• Training and development programmes.
• Performance appraisals.
Example: Training cashiers on fraud detection and customer handling.
7. IT and Cybersecurity Controls
In today’s digital world, internal control must cover technology.
• Access controls for systems and data.
• Regular software updates and patches.
• Disaster recovery and backup plans.
Example: Multi-factor authentication for accessing financial systems.
Relationship Between Internal Audit and Internal Control
Think of internal control as the safety net and internal audit as the person who tests the net
regularly to ensure it’s strong and has no holes. Internal audit evaluates the effectiveness of
internal controls and suggests improvements.
Bringing It All Together — A Day in the Life
At Galaxy Foods:
• Morning: Ananya (internal auditor) reviews yesterday’s sales reports, checks if
discounts given match policy, and notes a mismatch in one branch.
• Afternoon: She inspects the warehouse, finds that some high-value items are stored
without proper locks — a gap in asset safeguarding controls.
• Evening: She meets the finance team to discuss improving bank reconciliation
frequency.
Behind all this, the internal control system is quietly at work — authorisation limits, CCTV
cameras, SOPs, compliance checklists — making sure the business runs smoothly.
Exam-Ready Summary
Internal Audit — Definition: An independent, objective assurance and consulting activity
within an organisation to evaluate and improve the effectiveness of risk management,
control, and governance.
Objectives:
1. Review internal controls.
2. Detect and prevent errors/frauds.
3. Ensure compliance.
4. Evaluate operational efficiency.
5. Manage risks.
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6. Safeguard assets.
7. Advise management.
Internal Control — Definition: The whole system of financial and other controls established
by management to safeguard assets, ensure accuracy of records, promote efficiency, and
enforce policies.
Scope:
1. Financial controls.
2. Operational controls.
3. Compliance controls.
4. Administrative controls.
5. Asset safeguarding controls.
6. Personnel controls.
7. IT and cybersecurity controls.
Key Link: Internal control is the system; internal audit is the evaluator and improver of that
system.
Final Takeaway: Internal audit is like the organisation’s in-house doctor — constantly
checking its health and prescribing improvements. Internal control is the immune system —
always on guard, preventing problems before they happen. Together, they keep the
organisation safe, efficient, and trustworthy.
SECTION-C
5. (i) Describe the auditor's duties during vouching credit purchases.
(ii) How would you vouch the receipt side of your client's cash book?
Ans: A New Beginning – The Story of the Watchful Auditor
Imagine you are walking into a giant supermarket—not as a customer but as a watchdog.
You aren’t there to buy vegetables or chocolates, but to quietly observe how the store
keeps track of its money—both what it spends and what it receives.
This is exactly what an auditor does. When an auditor begins the process of vouching, it’s
almost like detective work. Every document, every bill, every receipt is like a clue. The
auditor’s job is not just to look at papers but to read the story hidden behind the
numbers—a story of purchases made, payments given, and money received.
Now, in this story, let’s break down the two chapters of your question:
1. The auditor’s duties while vouching credit purchases.
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2. The method of vouching the receipt side of the cash book.
By the end, you’ll feel like you’ve walked through the auditor’s journey in such a way that
you can never forget it.
Part I: Duties of the Auditor While Vouching Credit Purchases
Let’s begin with credit purchases.
Setting the Scene
Imagine a company—say a clothing brand. Every day, it buys fabric, buttons, zippers,
packaging material, and other supplies. But the company doesn’t pay instantly for
everything. Some items are purchased on credit, meaning, “We’ll pay later.”
This “buy now, pay later” system creates a risk. If not recorded properly, it can lead to fake
purchases, inflated expenses, or wrong balances with creditors. And this is where the
auditor steps in, like a guardian with sharp eyes.
The Auditor’s Duties
When vouching credit purchases, the auditor has several responsibilities. Let’s unfold them
like pages in a diary:
1. Check Purchase Invoices
o The first duty is to verify purchase invoices. Each invoice should be genuine,
addressed to the client, and correctly dated.
o The auditor checks whether the details—like quantity, price, terms of
credit—match the purchase order and the goods received.
o Why? Because sometimes a fake invoice may be slipped in, or the company
may be charged for goods it never received.
2. Cross-Check with Purchase Orders and Goods Inward Notes
o The company usually issues a purchase order before buying and maintains a
goods inward note when items are received.
o The auditor ensures that invoices tallied with these records.
o For example: If the invoice says “100 meters of cloth,” the auditor checks
whether 100 meters were actually ordered and received.
3. Verify Authority of Purchases
o The auditor must confirm whether purchases were authorized by the
responsible officer.
o If a junior clerk placed an unauthorized order, it could mean misuse or fraud.
4. Check Ledger Postings
o The auditor ensures that the entries for credit purchases are correctly posted
in the Purchase Book and ultimately in the Creditors’ Ledger.
o If wrongly posted, it might show that the company owes less or more than
the truth.
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5. Look for Cut-Off Errors
o Imagine goods arriving on 31st March but recorded in April books. That
would misstate profits.
o The auditor must carefully check that purchases are recorded in the correct
accounting period.
6. Test for Over- or Under-Invoicing
o Sometimes, suppliers may inflate prices or send lower-quality goods at higher
rates.
o The auditor compares rates with earlier invoices or market prices to spot
anomalies.
7. Check for Duplicate Invoices
o Fraudsters may try to pass the same invoice twice. The auditor ensures there
is no double payment.
8. Examine Credit Terms
o The auditor reviews the terms of credit: Was the credit for 30 days, 60 days,
or longer?
o This affects working capital and liabilities, so it must be accurate.
9. Confirm with Creditors (if necessary)
o Sometimes, the auditor may even send letters to suppliers (creditors) to
confirm the balances, ensuring the company isn’t hiding liabilities.
In Short
The auditor’s duty in vouching credit purchases is to act like a truth-seeker, ensuring that
every purchase recorded is:
• Genuine,
• Authorized,
• Correctly valued,
• Properly recorded,
• And shown in the right accounting period.
Part II: Vouching the Receipt Side of the Cash Book
Now, let’s turn the page and move to the other side of the story—the receipt side of the
cash book.
The Scene
The cash book is like the daily diary of money for the business. The “receipt side” records
every rupee that comes in. This may include:
• Cash sales,
• Collections from debtors,
• Loans taken,
• Interest received,
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• Rent received, etc.
But here lies the danger—cash is slippery. If not checked properly, it can easily be misused
or stolen. That’s why the auditor’s job here is even more crucial.
How the Auditor Vouches the Receipt Side
Think of this as a treasure hunt. Each receipt recorded in the cash book must be matched
with a supporting clue (document).
1. Cash Sales
o The auditor compares entries with Cash Memos and Sales Register.
o He ensures that sales were genuine and money was actually received.
o He also checks whether the correct amount was deposited into the bank.
2. Receipts from Debtors
o If a customer pays back money owed, the auditor verifies with counterfoils of
receipts issued.
o He checks the Debtors’ Ledger to see if the account was correctly reduced.
o Example: If debtor Ram paid ₹10,000, the auditor ensures it is properly
shown in Ram’s account.
3. Receipts from Loans or Advances
o If money was borrowed from a bank or lender, the auditor looks at the Loan
Agreement, Bank Advice, or Sanction Letter.
o This ensures the receipt isn’t fake or wrongly classified.
4. Receipts of Bills Receivable
o When a bill is collected, the auditor checks the Bank Pass Book or the
Endorsed Bill to confirm.
5. Rent, Interest, or Dividend Received
o If rent is received from tenants, he verifies it with Rent Agreements and Rent
Receipts.
o For interest/dividend, he looks at Bank Advices, Company Warrants, or
Dividend Counterfoils.
6. Sale of Assets
o If the company sells machinery, land, or any other asset, the auditor checks
the Sale Agreement and whether the money was deposited in full.
7. Check for Contra Entries
o Sometimes, money is transferred from cash to bank or bank to cash. These
are contra entries.
o The auditor ensures both sides (cash and bank) match.
8. Check Arithmetical Accuracy
o He recalculates totals to ensure no mistake in balancing the receipt side.
9. Compare with Bank Statements
o Finally, he cross-checks receipts shown in the cash book with the Bank Pass
Book. If the cash book says ₹50,000 was deposited but the bank shows
₹40,000, something is wrong.
The Spirit of Vouching Receipts
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The auditor here is like a cash gatekeeper. His aim is to confirm:
• Every receipt is genuine,
• Properly supported by documents,
• Correctly entered in the books,
• And fully deposited (not pocketed midway).
Wrapping the Story Together
So, let’s step back.
When vouching credit purchases, the auditor ensures that money spent in the future is not
misstated today. It’s about protecting the company from fake or unauthorized purchases.
When vouching the receipt side of the cash book, the auditor ensures that money claimed
as received actually exists and reaches the company safely. It’s about protecting the
company from cash leakages and fraud.
Both sides—purchases and receipts—are like two pillars. If one is weak, the entire building
of financial statements can collapse. The auditor, therefore, is the silent architect who
ensures these pillars stand strong.
Conclusion
In the end, auditing is not about merely ticking vouchers or writing reports. It’s about
guarding truth in numbers. An auditor while vouching credit purchases acts like a detective
uncovering the reality behind expenses. While vouching the receipt side of the cash book,
he becomes a vigilant gatekeeper ensuring money isn’t slipping away.
If you imagine yourself in the auditor’s shoes, this process becomes less of a boring duty and
more of a thrilling investigation. And that’s the real charm of vouching—it tells the untold
story of money, trust, and responsibility.
6.(i) Write a detailed note on the valuation of stock for balance sheet purpose and also,
examine the auditor's position in this respect.
(ii) In auditing the balance sheet of a limited company, state what steps you would take to
verify sundry debtors and creditors. Also, state auditor duties in this regard.
Ans: Act One — Valuation of Stock for Balance Sheet Purposes
Scene 1: The Warehouse Visit
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It’s the last week of March. The company’s warehouse is buzzing — workers are counting
cartons, weighing raw materials, and ticking off lists. This is the physical stock-taking that
happens before the balance sheet is prepared.
The finance manager explains:
“We need to know the value of this stock for our balance sheet. It’s not just about counting
— it’s about valuing it correctly.”
Why Stock Valuation Matters
Stock (inventory) is a major current asset. Its value affects:
• Profit calculation — Closing stock appears in the trading account; over- or
under-valuation can inflate or deflate profits.
• Financial position — It’s a key part of current assets in the balance sheet.
• Compliance — Accounting Standards (AS 2 in India) require proper valuation.
Principles of Stock Valuation
The golden rule: Value at cost or net realisable value (NRV), whichever is lower.
• Cost includes:
o Purchase price.
o Direct expenses (freight, import duty).
o Conversion costs (labour, factory overheads).
o Other costs to bring inventory to present location and condition.
• NRV = Estimated selling price – Costs of completion – Selling expenses.
Methods of Determining Cost
Depending on the nature of goods, companies may use:
• FIFO (First In, First Out) — Oldest stock issued first; closing stock is from recent
purchases.
• LIFO (Last In, First Out) — Latest stock issued first; closing stock is from older
purchases (not permitted under Ind AS/IFRS now).
• Weighted Average — Average cost per unit based on total cost and quantity.
• Specific Identification — For unique, high-value items (e.g., jewellery, cars).
Adjustments in Valuation
• Damaged/obsolete stock — Valued at NRV, which may be much lower than cost.
• Goods on consignment — If owned by the company, include; if held for others,
exclude.
• Goods in transit — Include if ownership has passed.
• Work-in-progress — Include proportionate cost of materials, labour, and overheads.
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Auditor’s Position in Respect of Stock Valuation
The auditor’s job is not to value the stock themselves — that’s management’s responsibility
— but to verify that:
1. Existence — Stock physically exists (through observation of stock-taking).
2. Ownership — Stock belongs to the company (check purchase records, consignment
notes).
3. Valuation method — Consistent with accounting standards and past practice.
4. Accuracy — Calculations are correct; quantities × rates match records.
5. Cut-off — Purchases and sales recorded in correct period.
6. Disclosure — Stock is properly classified and disclosed in the balance sheet.
Auditor’s steps:
• Attend stock-taking, observe procedures, test-check counts.
• Examine stock sheets and reconcile with ledger.
• Check valuation workings — cost sheets, market price lists.
• Ensure damaged/obsolete stock is written down.
• Confirm that valuation method is consistently applied year to year.
Key point: If the auditor finds valuation not in line with AS 2 or materially misstated, they
must qualify their audit report.
Act Two — Verification of Sundry Debtors and Creditors
Scene 1: The Debtors’ Ledger
In the accounts department, the auditor sits with the debtors’ ledger — a list of customers
who owe the company money.
Steps to Verify Sundry Debtors
1. Obtain Schedule of Debtors
o Match total with the control account in the general ledger.
2. Examine Subsequent Receipts
o Check if debts outstanding at year-end have been paid after the balance
sheet date — a strong sign they are genuine and recoverable.
3. Direct Confirmations
o Send balance confirmation letters to a sample of debtors (positive or
negative confirmations).
4. Vouch Supporting Documents
o Sales invoices, delivery challans, contracts — to confirm the debt arose from
actual sales.
5. Age Analysis
o Identify old/outstanding debts; assess need for provision for doubtful debts.
6. Check for Related Parties
o Ensure disclosure of debts due from directors, officers, or related concerns.
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7. Examine Adjustments
o Look for year-end adjustments like credit notes, write-offs — ensure they are
genuine.
8. Consider Security
o If debts are secured, verify the nature and adequacy of security.
Auditor’s Duties for Debtors
• Ensure debts are real and recoverable.
• Verify proper classification — good, doubtful, bad.
• Check adequate provision for doubtful debts.
• Report any material misstatements or non-recoverable debts not provided for.
Scene 2: The Creditors’ Ledger
Now the auditor turns to the creditors — the people and firms the company owes money
to.
Steps to Verify Sundry Creditors
1. Obtain Schedule of Creditors
o Match total with the control account in the general ledger.
2. Examine Subsequent Payments
o Payments made after year-end help confirm existence and amount of
liability.
3. Direct Confirmations
o Send balance confirmation requests to a sample of creditors.
4. Vouch Purchase Transactions
o Purchase invoices, goods received notes, contracts — to confirm liabilities are
genuine.
5. Cut-off Testing
o Ensure purchases just before and after year-end are recorded in the correct
period.
6. Identify Unrecorded Liabilities
o Review unmatched goods received notes, unpaid invoices, correspondence
— to detect liabilities not recorded.
7. Check for Related Parties
o Ensure disclosure of amounts due to directors, group companies, etc.
Auditor’s Duties for Creditors
• Ensure liabilities are complete and accurate.
• Verify that no material liability is omitted.
• Check proper classification — trade creditors, expenses payable, advances.
• Report any undisclosed or contingent liabilities.
Bringing It Together — The Auditor’s Balancing Act
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In both stock valuation and verification of debtors/creditors, the auditor’s role is about
verification, not creation:
• Management prepares the figures and valuations.
• Auditor tests, checks, and ensures they are true, fair, and compliant.
Exam-Ready Summary
(i) Valuation of Stock:
• Rule: Cost or NRV, whichever is lower.
• Cost includes: Purchase price + direct expenses + conversion costs.
• Methods: FIFO, Weighted Average, Specific Identification.
• Adjustments: Damaged stock, goods in transit, consignment, WIP.
• Auditor’s role: Verify existence, ownership, valuation method, accuracy, cut-off,
disclosure.
(ii) Verification of Debtors:
• Steps: Obtain schedule, match with ledger, check subsequent receipts, send
confirmations, vouch invoices, age analysis, check related parties, examine
adjustments, consider security.
• Duties: Ensure debts are real, recoverable, properly classified, provisioned.
Verification of Creditors:
• Steps: Obtain schedule, match with ledger, check subsequent payments, send
confirmations, vouch purchases, cut-off testing, search for unrecorded liabilities,
check related parties.
• Duties: Ensure liabilities are complete, accurate, properly classified, disclosed.
Final Takeaway: Think of the auditor as a watchful referee in the financial game — they
don’t play the match (prepare the accounts), but they make sure the score (balance sheet) is
correct, fair, and follows the rules. Whether it’s the stock in the warehouse, the customers
who owe money, or the suppliers to be paid, the auditor’s careful verification keeps the
financial picture honest and reliable.
SECTION-D
7. "Auditor's report should contain adepuate disclosures of the facts but it should not be
too detailed." Discuss the statement and draft a specimen of Audit report.
Ans: The Story Behind the Auditor’s Report
Imagine you are in a big city where thousands of people travel daily in trains. Every evening,
the train driver must give a report about the journey—whether the train reached safely,
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whether signals worked, whether there was any accident or danger, and whether everything
followed the rules.
Now, think about the auditor in the same way. Instead of trains, the auditor checks a
company’s financial statements—its income, expenses, assets, and liabilities. The auditor’s
report is like that train driver’s report to the public, shareholders, government, and other
interested parties.
But here comes the tricky part: how much detail should the report contain?
• If the train driver wrote down every single tiny incident (“Passenger number 38
sneezed at 4:32 p.m., coach C had 1.5% more dust than usual”), the report would be
unbearably long and boring.
• If the driver only wrote “Train reached,” it would be too short and not useful.
The same balance is needed in an auditor’s report. It should give adequate disclosures of
the important facts but should not be overloaded with unnecessary details that confuse
rather than clarify.
Why Adequate Disclosure Is Necessary
To understand why the report must disclose important facts, let’s imagine you are a
shareholder who has invested your hard-earned money in a company. You don’t sit inside
the office every day, nor do you check every ledger. You rely on the auditor’s report to tell
you whether:
1. The accounts are true and fair.
2. The financial statements comply with accounting standards.
3. There are any red flags like fraud, misstatements, or violations.
Here’s why adequate disclosure matters:
• Transparency: Investors, creditors, and stakeholders must know the real position of
the company. If the auditor hides facts, it’s like a doctor hiding a patient’s disease.
• Trust: A report with adequate disclosure builds confidence among shareholders that
their money is safe.
• Legal Requirement: Company laws (like the Indian Companies Act, 2013) and
auditing standards demand that auditors disclose certain matters.
• Decision Making: Shareholders and investors make decisions based on this report.
Wrong or incomplete information may misguide them.
So, an auditor cannot afford to be too secretive.
Why It Should Not Be Too Detailed
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On the other hand, imagine reading a novel where the author describes every single brick of
a house before telling you the story. You would shut the book in frustration.
The same applies to an audit report:
• Overload of Information: Too many details make the report lengthy and boring.
Readers may skip important parts because of excessive data.
• Confusion: Technical and unnecessary explanations may confuse non-expert
readers.
• Defeats the Purpose: The purpose of the audit report is to give a clear, summarized
opinion, not a reproduction of the company’s entire books of accounts.
• Standardization: Auditing standards want audit reports to follow a fixed format. If
every auditor adds unnecessary detail, there will be no uniformity.
Therefore, the auditor’s wisdom lies in finding a balance—like adding the right amount of
salt in food: too little makes it tasteless, too much makes it inedible.
Key Ingredients of a Good Audit Report
Think of the audit report as a recipe that must contain essential ingredients but in the right
proportion:
1. Title and Addressee – It should be clear (e.g., “Independent Auditor’s Report”
addressed to shareholders).
2. Opinion – The heart of the report, stating whether financial statements give a true
and fair view.
3. Basis of Opinion – A short explanation of how the auditor reached that conclusion.
4. Responsibilities – Clarifies the responsibilities of management and auditors.
5. Other Legal and Regulatory Requirements – Any additional matters as required by
law.
6. Signature and Date – Proof that the auditor has completed the report responsibly.
Notice something? All important, nothing excessive.
The Balance: Adequate but Not Excessive
Let’s use a simple example:
Suppose a company took a loan of ₹50 crore. The auditor notices that the company has
defaulted on paying installments. Should this be disclosed? Absolutely yes! It’s significant
and affects the financial health of the company.
But should the auditor also mention:
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• The name of the cashier who processed the loan entry?
• The number of pages in the loan agreement?
• The exact time when the cheque was deposited?
No! Those are excessive details that don’t help the shareholders in decision-making.
Thus, the auditor must exercise judgment—what is material (important) and what is trivial.
Types of Audit Opinions (to Show the Role of Disclosure)
The auditor’s report may take different forms depending on what is found:
1. Unqualified (Clean) Report: Everything is true and fair.
2. Qualified Report: Generally true and fair, except for some specific issues.
3. Adverse Report: Financial statements are not true and fair at all.
4. Disclaimer of Opinion: Auditor cannot form an opinion due to lack of information.
Notice how disclosures vary. In a clean report, fewer disclosures are needed. In a qualified
or adverse report, the auditor must explain the reasons clearly—but still without drowning
the reader in minute technicalities.
Specimen Audit Report
Now, let’s draft a simple specimen of an Independent Auditor’s Report as per general
format (Companies Act, 2013):
Independent Auditor’s Report
To the Members of XYZ Ltd.
Report on the Audit of the Financial Statements
We have audited the accompanying financial statements of XYZ Ltd., which comprise the
Balance Sheet as at 31st March 2025, the Statement of Profit and Loss, and the Cash Flow
Statement for the year ended, and a summary of significant accounting policies and other
explanatory information.
Auditor’s Opinion
In our opinion and to the best of our information and according to the explanations given to
us, the financial statements give the information required by the Companies Act, 2013 in the
manner so required and give a true and fair view in conformity with the accounting
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principles generally accepted in India, of the state of affairs of the company as at 31st March
2025, and its profit/loss and its cash flows for the year ended on that date.
Basis for Opinion
We conducted our audit in accordance with the Standards on Auditing (SAs). Our
responsibilities under those standards are further described in the Auditor’s Responsibilities
section. We are independent of the company and believe that the audit evidence obtained
is sufficient and appropriate to provide a basis for our opinion.
Responsibilities of Management and Those Charged with Governance
The company’s management is responsible for preparation of these financial statements in
accordance with the Companies Act, 2013, and for maintaining adequate accounting
records.
Auditor’s Responsibilities
Our objective is to obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error.
Report on Other Legal and Regulatory Requirements
As required by the Companies Act, 2013, we report that:
• We have sought and obtained all the information and explanations necessary for the
audit.
• In our opinion, proper books of account have been kept.
• The Balance Sheet and Profit and Loss Statement are in agreement with the books.
Signature
For ABC & Co.
Chartered Accountants
(Registration No. xxxx)
[Auditor’s Name]
Partner
Place: [City]
Date: [dd/mm/yyyy]
Conclusion: The Golden Middle Path
So, the statement—“Auditor’s report should contain adequate disclosures of the facts but it
should not be too detailed”—is like advice from an experienced traveler. Don’t carry so little
that you starve on the way, and don’t carry so much that you cannot walk.
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The auditor’s report must:
• Tell the truth (adequate disclosures).
• Avoid unnecessary noise (not too detailed).
• Serve the stakeholders by being clear, concise, and reliable.
Just like a good teacher’s feedback on a student’s performance—pointing out the key
strengths and weaknesses without narrating every single event of the classroom—the
auditor’s report must strike the right balance.
8.(i) What do you understand by 'Management Audit'? Discuss, in detail, the scope of such
an audit and the benefits management can derive from such an audit.
(ii) Write a detailed note on Tax Audit.
Ans: Chapter 1: Management Audit — The “Health Check” of the Whole Organisation
A Story to Begin
Picture “Evergreen Industries Ltd.” — a large manufacturing company. Sales are steady, but
profits aren’t growing as expected. The board suspects that the problem isn’t just in the
accounts — it might be in the way the company is being managed.
So, they call in a team of experts to conduct a Management Audit. These auditors aren’t
here to check if the balance sheet adds up — they’re here to see if the management itself is
doing the right things, in the right way, at the right time.
What is Management Audit?
In simple words:
A management audit is an independent examination and evaluation of the overall
management process of an organisation, with the aim of assessing its efficiency,
effectiveness, and ability to achieve objectives.
It’s like a full-body health check for the organisation — not just checking the “blood
pressure” of finances, but also the “fitness” of planning, decision-making, leadership,
communication, and control systems.
Scope of Management Audit
The scope is broad and flexible, depending on the organisation’s needs. It can cover:
1. Organisational Objectives and Policies
o Are the goals clear, realistic, and aligned with the company’s mission?
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o Are policies consistent with these goals?
2. Planning and Forecasting
o Quality of strategic and operational plans.
o Accuracy of forecasts and adaptability to change.
3. Organisation Structure
o Is the structure clear, with defined authority and responsibility?
o Are reporting lines efficient?
4. Decision-Making Process
o Are decisions timely, data-driven, and participative where needed?
o Is there a system for reviewing past decisions?
5. Control Systems
o Are there effective internal controls to monitor performance?
o Are deviations identified and corrected promptly?
6. Human Resource Management
o Recruitment, training, motivation, and retention policies.
o Leadership quality and succession planning.
7. Communication Systems
o Flow of information between departments and levels.
o Use of technology for communication.
8. Financial Management
o Capital structure, budgeting, cost control, and investment decisions.
9. Marketing and Production Efficiency
o Effectiveness of marketing strategies.
o Productivity, quality control, and innovation in production.
10. Corporate Social Responsibility (CSR) and Ethics
o Compliance with ethical standards and social obligations.
Benefits Management Can Derive from a Management Audit
1. Objective Evaluation
o Provides an unbiased view of management performance.
2. Improved Efficiency
o Identifies bottlenecks and wastage in processes.
3. Better Decision-Making
o Highlights strengths and weaknesses in the decision process.
4. Enhanced Coordination
o Suggests ways to improve inter-departmental cooperation.
5. Risk Identification
o Spots potential risks before they become crises.
6. Strategic Alignment
o Ensures all activities are aligned with organisational goals.
7. Motivation and Morale
o Recommendations can lead to better HR policies and work culture.
8. Stakeholder Confidence
o Shows shareholders and investors that management is committed to
improvement.
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In short: A management audit is like having a seasoned coach watch your entire game —
not just the scoreboard — and then give you a playbook to win more matches in the future.
Chapter 2: Tax Audit — The Compliance Compass
A Story to Begin
Now, let’s leave Evergreen Industries and visit “Mehta & Co.,” a Chartered Accountant’s
office in September. The place is buzzing — it’s tax audit season. Files are stacked high, and
clients are coming in with their books of accounts.
One such client is “Bright Traders,” whose turnover has crossed the threshold set by the
Income-tax Act. Their CA explains:
“Since your turnover is above the limit, you need a Tax Audit under Section 44AB of the
Income-tax Act, 1961.”
What is a Tax Audit?
A tax audit is:
An examination of the books of account of a taxpayer, conducted from the perspective of
the Income-tax Act, to ensure that they are properly maintained and that income,
deductions, and taxes are correctly reported.
It’s not about giving an opinion on “true and fair view” like a statutory audit — it’s about
compliance with tax laws.
Applicability of Tax Audit (Section 44AB)
1. For Businesses
o If total sales/turnover/gross receipts exceed ₹1 crore in a financial year.
o The limit increases to ₹10 crore if cash receipts and payments are each ≤ 5%
of total receipts/payments.
2. For Professions
o If gross receipts exceed ₹50 lakh in a financial year.
3. For Presumptive Taxation Cases
o If a person under Sections 44AD, 44ADA, 44AE, 44BB, or 44BBB declares
income lower than the presumptive rate and total income exceeds the basic
exemption limit.
Who Conducts a Tax Audit?
Only a Chartered Accountant in practice can conduct a tax audit and furnish the report.
Forms Used
• Form 3CA — For those already subject to statutory audit.
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• Form 3CB — For those not subject to statutory audit.
• Form 3CD — Statement of particulars (details of compliance, deductions, etc.).
Objectives of Tax Audit
1. Ensure Proper Maintenance of Books
o Verify that accounts are kept as per law.
2. Reporting of Prescribed Information
o Such as depreciation, compliance with TDS provisions, etc.
3. Facilitate Tax Administration
o Make it easier for the tax department to assess returns.
4. Prevent Tax Evasion
o Identify discrepancies or non-compliance.
5. Assist in Correct Computation of Income
o Ensure deductions and exemptions are correctly claimed.
Scope of Work in a Tax Audit
• Examination of books of account.
• Verification of sales, purchases, expenses.
• Checking compliance with TDS/TCS provisions.
• Verification of depreciation and other deductions.
• Reporting of loans, advances, and related-party transactions.
• Ensuring compliance with various sections of the Income-tax Act.
Benefits of a Tax Audit
1. Accuracy in Return Filing
o Reduces chances of errors and penalties.
2. Early Detection of Non-Compliance
o Helps rectify issues before filing.
3. Credibility with Stakeholders
o Audited figures are trusted by banks, investors, and authorities.
4. Ease for Tax Authorities
o Standardised reporting saves time in assessments.
5. Better Financial Discipline
o Encourages proper record-keeping.
Penalties for Non-Compliance
If a person required to get a tax audit fails to do so:
• Penalty = 0.5% of turnover/gross receipts, subject to a maximum of ₹1,50,000.
• However, no penalty if there’s a reasonable cause (e.g., natural calamity).
Bringing It Together — The Two Audits Compared
Easy2Siksha.com
• Management Audit looks at how well the organisation is managed — it’s about
efficiency, effectiveness, and achieving goals.
• Tax Audit looks at how well the organisation complies with tax laws — it’s about
accuracy, completeness, and legal compliance.
One is strategic and operational; the other is statutory and compliance-driven. Both,
however, help the organisation run better — one by improving management practices, the
other by ensuring tax discipline.
“This paper has been carefully prepared for educational purposes. If you notice any mistakes or
have suggestions, feel free to share your feedback.”
