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GNDU Question Paper-2024
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. Discuss assurance standards and techniques under Auditing in detail.
2. Describe the various qualities of an Auditor in detail.
SECTION-B
3. Differentiate between Internal Check and Internal Control.
4. Explain the fundamental principles of Internal Check in detail.
SECTION-C
5. Explain the Audit procedure in detail.
6. Discuss Vouching vs. Verification in detail.
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SECTION-D
7. Write a brief note on Audit of Limited Companies.
8. Discuss the appointment and removal of Company Auditor in detail.
GNDU Answer Paper-2024
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. Discuss assurance standards and techniques under Auditing in detail.
Ans: Imagine you are a detective in a bustling city, not investigating crimes, but instead, you
are investigating numbers, documents, and business operations. Your mission is to ensure
that the information provided by a company is reliable, accurate, and trustworthy. In the
world of auditing, this is exactly the role of an auditor. But even the best detectives can’t
work randomly—they need standards, guidelines, and techniques. This is where assurance
standards and auditing techniques come into play.
1. Understanding Assurance in Auditing
Before diving into standards and techniques, let’s understand what “assurance” means.
Assurance is like a promise of reliability. Imagine a company’s financial statements as a map
of a treasure island. Investors, creditors, and other stakeholders rely on this map to make
decisions. But how can they be sure the map isn’t misleading?
Auditors provide assurance services—they check and validate the map (financial
statements) so that users can trust it. Assurance can vary in intensity:
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• High-level assurance (reasonable assurance) – like an experienced detective who
ensures every clue is checked before concluding.
• Moderate assurance – like a detective who checks most clues but leaves some minor
ones unchecked.
• Limited assurance – only superficial checks, providing a basic comfort level.
2. Assurance Standards
Just like a detective follows legal and ethical codes, auditors follow assurance standards,
which are formal rules and guidelines that ensure audits are performed consistently and
reliably. These standards are issued by professional bodies such as:
• International Auditing and Assurance Standards Board (IAASB) – provides
International Standards on Auditing (ISA).
• Institute of Chartered Accountants of India (ICAI) – issues Standards on Auditing
(SAs).
• American Institute of Certified Public Accountants (AICPA) – issues Statements on
Auditing Standards (SAS).
The main goal of assurance standards is to guide auditors to perform their work with
accuracy, integrity, and professionalism. They help in:
1. Planning the audit carefully – deciding where to focus efforts.
2. Gathering evidence systematically – ensuring information is reliable.
3. Reporting findings clearly – so users can make informed decisions.
Let’s break down the key components of assurance standards in a story-like way:
a) General Standards
Think of these as auditor’s personal qualities:
• Competence and Training – An auditor must be well-trained, like a detective
knowing law and criminology. Without knowledge, the investigation is meaningless.
• Independence and Objectivity – Just as a detective can’t be biased towards a
suspect, an auditor must be independent of the company. Conflicts of interest can
ruin credibility.
• Due Care – Auditors must perform their work with diligence and attention, not
cutting corners.
b) Fieldwork Standards
These are how the investigation is conducted:
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• Planning and Supervision – Audits must be carefully planned. Imagine a detective
creating a strategy before investigating a mansion—every room, every clue is
accounted for.
• Understanding the Entity – Knowing the company’s operations, industry, and
internal controls is essential. It’s like knowing the habits of the suspects.
• Evidence Gathering – Collecting sufficient and competent evidence. Without
evidence, findings are just opinions.
c) Reporting Standards
Finally, once the investigation is done, you need a report:
• The auditor must clearly state whether financial statements are true and fair.
• Any discrepancies, violations, or irregularities must be reported.
• The report should communicate findings objectively, without ambiguity, ensuring
users understand the situation.
In simple words, assurance standards are like the rulebook for the detective, guiding them
from planning to final reporting.
3. Techniques Used in Auditing
Now that we know the “rules of the game,” let’s see how auditors play the game. Auditing
techniques are the tools and methods auditors use to examine financial statements and
gather assurance.
Think of auditing techniques as a detective’s toolkit: magnifying glass, fingerprint powder,
and investigation software—all helping to uncover the truth.
Here are the major auditing techniques:
a) Inspection of Records and Documents
This is the most basic technique. Auditors carefully examine documents like invoices,
contracts, and receipts.
• Purpose: To verify transactions are properly recorded.
• Story analogy: Like a detective reading letters and diaries to understand what
happened.
b) Observation
Auditors may watch processes being performed. For example, they may observe how stock
is counted in a warehouse.
• Purpose: To ensure procedures are correctly followed.
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• Story analogy: Like a detective secretly observing a suspect to confirm their actions.
c) Inquiry
Auditors ask questions of company personnel.
• Purpose: To understand procedures, clarify discrepancies, and gather insights.
• Story analogy: Like a detective interviewing witnesses or suspects.
d) Confirmation
This technique involves getting verification from external parties, such as banks or
customers.
• Purpose: To confirm balances or transactions independently.
• Story analogy: Like a detective contacting neighbors to verify alibis.
e) Recalculation
Auditors recalculate figures to check for mathematical accuracy.
• Purpose: Ensures numbers are correct, not just accepted blindly.
• Story analogy: Like a detective double-checking the timeline of events to make sure
everything adds up.
f) Reperformance
Auditors redo processes to see if the results are consistent.
• Purpose: Verifies internal procedures work properly.
• Story analogy: Like a detective reconstructing a crime scene to test the theory.
g) Analytical Review
Auditors use ratios, trends, and comparisons to analyze financial statements.
• Purpose: Detect unusual fluctuations or anomalies.
• Story analogy: Like a detective noticing inconsistencies in alibis, spotting patterns
that don’t make sense.
h) Physical Examination
Auditors inspect tangible assets, like cash, inventory, or equipment.
• Purpose: To verify existence and condition.
• Story analogy: Like a detective physically checking the crime scene for clues.
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4. Assurance Standards vs. Techniques
It’s important to note the difference:
• Assurance standards = The rules and guidelines auditors must follow.
• Auditing techniques = The practical tools and methods used to follow those rules.
Standards provide the “why” and “what,” while techniques provide the “how.”
For example:
• Standard: Auditor must gather sufficient evidence.
• Technique: Inspect records, observe processes, confirm balances, and perform
analytical reviews.
Together, they ensure audits are credible, reliable, and defensible.
5. Importance of Assurance Standards and Techniques
Let’s tie it back to our story. Imagine if a detective ignored rules or didn’t use proper
techniques—chaos, confusion, and wrong conclusions would follow. Similarly, in auditing:
1. Builds Trust – Stakeholders can rely on financial statements.
2. Detects Errors and Fraud – Proper techniques help uncover mistakes or deliberate
manipulation.
3. Ensures Compliance – Companies follow accounting laws and regulations.
4. Enhances Decision-Making – Investors and creditors make informed choices.
Without assurance standards and techniques, auditing would be guesswork, not science.
6. Conclusion
In the end, assurance standards and auditing techniques are two sides of the same coin.
Standards are the guiding principles ensuring the audit is ethical, objective, and thorough.
Techniques are the practical tools auditors use to collect evidence, verify information, and
provide assurance.
Think of auditors as detectives, assurance standards as the detective handbook, and
auditing techniques as their kit of investigative tools. Only by combining both can they
deliver reliable, truthful, and meaningful reports that stakeholders trust.
This story-like approach helps us remember: audit without standards is reckless,
techniques without standards are meaningless, but together, they reveal the truth behind
the numbers.
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2. Describe the various qualities of an Auditor in detail.
Ans: The Story of the Auditor: Guardian of Truth in Numbers
Long ago, when trade first began to flourish, merchants would hire scribes to keep records
of their gold, goods, and debts. But soon, a problem arose: who would check if the scribe’s
records were accurate? Who would ensure that the merchant wasn’t being cheated, or that
the accounts weren’t hiding fraud?
This is how the role of the auditor was born—not just as a number-checker, but as a
guardian of trust. Even today, in the modern corporate world, the auditor plays the same
role: ensuring that financial statements tell the truth, that businesses remain accountable,
and that investors, governments, and the public can rely on what they see.
But to play this role well, an auditor must possess certain qualities—a unique blend of
technical skill, moral strength, and human judgment. Let’s walk through these qualities, one
by one, as though we are describing the character of a wise hero in a story.
1. Integrity: The Backbone of an Auditor
Imagine a knight without a sword, or a doctor without honesty. That’s what an auditor
without integrity would be.
• Integrity means truthfulness, uprightness, and moral courage.
• An auditor must never twist facts to please management or hide irregularities to
protect clients.
• If the accounts are wrong, he must say so—even if it costs him the client’s goodwill.
Example: Suppose a company inflates its profits to attract investors. A weak auditor
might ignore it to keep the client happy. But a true auditor, guided by integrity, will report
the truth, because his loyalty is to the public, not to the company.
2. Independence: The Shield of Objectivity
An auditor must be like a judge—fair, impartial, and free from bias.
• Independence means freedom from influence.
• He should not have financial interests in the company he audits.
• He should not be swayed by friendships, gifts, or pressure from management.
Think of it like this: if a referee in a cricket match is secretly friends with one team’s
captain, can he give fair decisions? Similarly, an auditor must remain independent to ensure
his opinion is trustworthy.
3. Professional Competence: The Sword of Knowledge
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Numbers are tricky. Laws change. Accounting standards evolve. Without deep knowledge,
an auditor cannot do justice to his role.
• He must be well-versed in accounting principles, auditing standards, company law,
taxation, and financial regulations.
• He must also keep updating his knowledge, because financial practices change
rapidly.
Example: If a new accounting standard on revenue recognition is introduced, the auditor
must study it and apply it correctly. Otherwise, his audit report will be outdated and
misleading.
4. Confidentiality: The Silent Guardian
An auditor often sees the company’s deepest secrets—its profits, losses, trade strategies,
even pending lawsuits.
• Confidentiality means keeping this information safe.
• He must not disclose it to outsiders, unless required by law.
• He must not misuse it for personal gain.
Imagine if an auditor leaked a company’s merger plan to a friend who then bought
shares and made a fortune. That would destroy trust in the profession.
5. Skepticism: The Detective’s Eye
An auditor is not a blind believer. He must always ask: “Is this true? Can I trust this
evidence?”
• Professional skepticism means having a questioning mind.
• He should not accept documents at face value.
• He should look for inconsistencies, unusual transactions, or signs of fraud.
Example: If a company shows huge sales in the last week of March, the auditor should
ask: “Were these real sales, or just fake invoices to boost year-end profits?”
6. Patience and Perseverance: The Long March
Auditing is not glamorous. It involves checking vouchers, verifying ledgers, reconciling
accounts—often thousands of entries.
• An auditor must have patience to go through details carefully.
• He must have perseverance to continue even when the work is monotonous.
Like a miner digging through rocks to find gold, the auditor must keep searching until he
uncovers the truth.
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7. Communication Skills: The Voice of Clarity
At the end of the audit, the auditor must prepare a report. This report is read by
shareholders, directors, regulators, and sometimes the public.
• He must write clearly, without jargon, so that non-experts can understand.
• He must also communicate orally with management, explaining weaknesses in
internal controls or risks in financial practices.
A brilliant auditor who cannot explain his findings is like a doctor who diagnoses a
disease but cannot tell the patient what it is.
8. Tact and Diplomacy: The Balancing Act
Auditors often face difficult situations. They may need to point out mistakes to senior
managers or highlight frauds committed by powerful people.
• Tact means handling such situations without unnecessary conflict.
• He must be firm, but also polite and professional.
Example: If the accounts manager has made errors, the auditor should not humiliate
him. Instead, he should explain the issue respectfully, while ensuring corrections are made.
9. Analytical Ability: The Mind of a Scientist
Auditing is not just about checking totals. It’s about analyzing patterns.
• The auditor must detect unusual trends—like sudden jumps in expenses, or declining
cash flows despite rising profits.
• He must connect numbers with business reality.
Example: If a company shows high profits but has no cash in the bank, the auditor
should ask: “Are these profits real, or just on paper?”
10. Responsibility and Accountability: The Weight of Trust
An auditor’s signature on a report is not just ink—it is a seal of trust.
• If he signs carelessly, investors may lose money, banks may give wrong loans, and
the economy may suffer.
• Therefore, he must feel the weight of responsibility every time he issues an opinion.
11. Ethical Courage: Standing Tall in Storms
Sometimes, auditors face pressure:
• “Please overlook this mistake.”
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• “If you qualify the report, we’ll lose investors.”
• “If you don’t cooperate, we’ll hire another auditor.”
In such moments, the auditor must have courage to stand by ethics, even if it means losing
the client.
History has shown that when auditors compromise, scandals erupt—like Enron and
Satyam. But when auditors stand firm, they protect society.
The Auditor as a Hero in the Corporate World
If we put all these qualities together, the auditor looks like a hero in a story:
• Integrity is his backbone.
• Independence is his shield.
• Knowledge is his sword.
• Confidentiality is his silent armor.
• Skepticism is his detective’s eye.
• Patience is his endurance.
• Communication is his voice.
• Tact is his diplomacy.
• Analytical ability is his scientific mind.
• Responsibility is his burden.
• Ethical courage is his crown.
Together, these qualities make him not just a professional, but a guardian of truth in the
world of finance.
Conclusion
The auditor is more than a checker of accounts—he is a protector of trust, a defender of
fairness, and a guide for businesses. His qualities are not just technical skills, but moral
virtues and human strengths.
When an examiner reads this answer, they should feel that the auditor is not a dry figure
lost in ledgers, but a living character with integrity, courage, and wisdom.
Thus, the various qualities of an auditor—integrity, independence, competence,
confidentiality, skepticism, patience, communication, tact, analytical ability, responsibility,
and ethical courage—together form the foundation of the auditing profession.
And just like the merchants of old relied on auditors to protect their wealth, today’s world
relies on auditors to protect its trust in numbers.
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SECTION-B
3. Differentiate between Internal Check and Internal Control.
Ans: Imagine you are the manager of a big, busy hotel. Every day, dozens of tasks need to
be completed: chefs cooking meals, waiters serving tables, accountants recording sales, and
housekeeping keeping rooms clean. As the manager, your main goal is to ensure everything
runs smoothly, nothing is lost, and everyone does their job honestly. Now, to achieve this,
you need a system that prevents mistakes and frauds. This is where the concepts of Internal
Check and Internal Control come into play.
Think of them as two layers of protection for your hotel business. But while they seem
similar, they are different in purpose, scope, and application.
1. Internal Control: The Broad Shield
Let’s start with Internal Control. Imagine it as a broad shield that protects your hotel from
all risks—financial, operational, and even human errors. Internal control is like an umbrella
that covers the entire organization to ensure things happen as they should.
Definition: Internal control refers to the policies, procedures, and practices put in place by
management to safeguard assets, ensure accurate records, promote efficiency, and
encourage adherence to rules. In simple terms, it’s everything a business does to make sure
that operations are safe, reliable, and efficient.
Example in our hotel:
• You have a rule that cash from the restaurant should be counted by the cashier and
then verified by the manager.
• Only senior chefs can approve expensive ingredient purchases.
• There’s a system for recording every guest check-in and check-out, so no room goes
unaccounted.
Internal control is proactive. It prevents problems before they happen. It’s not just about
catching errors—it’s about designing the system so errors and frauds are unlikely to
happen in the first place.
Characteristics of Internal Control:
1. Comprehensive: It covers every department—sales, purchase, accounting, HR, and
operations.
2. Continuous: It is ongoing and never stops; every action in the organization is part of
it.
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3. Preventive and Corrective: It prevents mistakes and can detect them when they
happen.
4. Policies and Procedures: It relies on formal guidelines, e.g., requiring dual signatures
for cash payments.
Story analogy: Imagine your hotel has cameras in all key areas, automated cash registers,
and strict purchase approval rules. That is your internal control system—a safety net over
the whole hotel.
2. Internal Check: The Daily Detective Work
Now, let’s zoom in on Internal Check. This is more like having little detectives at every step,
making sure no one makes a mistake and that everything is recorded correctly. Internal
check is part of internal control, but it focuses on the detailed day-to-day checking of work.
Definition: Internal check is a system where the work of one person is automatically
checked by another person as part of normal operations. It ensures errors and frauds are
detected immediately, often unintentionally by employees themselves, because each
person’s work overlaps with someone else’s.
Example in our hotel:
• The cashier counts the cash at the end of the day, and the assistant manager checks
the same cash.
• The purchase clerk prepares an order, but the accounts officer verifies the amount
before payment.
• Waiters record room service charges, but the front desk verifies them before billing.
Internal check is automatic and ongoing. Employees are not actively looking to catch
mistakes, but the way work is distributed ensures checks happen naturally.
Characteristics of Internal Check:
1. Built-in Verification: Work is divided so that every task is checked by someone else.
2. Detection-Oriented: It helps in detecting mistakes and frauds quickly.
3. Continuous: It happens every day, in the routine flow of operations.
4. Focused: Unlike internal control, it usually focuses on accounting and financial
transactions.
Story analogy: Think of a hotel where the cashier and manager never collude. Each action
automatically checks the other—like having invisible detectives making sure no one steals,
miscounts, or misreports.
3. Key Differences Between Internal Check and Internal Control
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Now that we understand them individually, let’s put them side by side as if we are
comparing two superheroes protecting the hotel.
Feature
Internal Control
Internal Check
Scope
Broad and comprehensive—
applies to the whole organization
Narrower—mainly focused on
routine accounting and operational
checks
Objective
Safeguard assets, ensure
efficiency, prevent errors, and
enforce policies
Detect errors and frauds
automatically in day-to-day work
Nature
Preventive and corrective
Mainly detective
Application
Includes policies, procedures,
rules, and supervision
Work is divided so that employees
check each other’s work
Coverage
Encompasses all departments:
finance, operations, HR, etc.
Primarily financial transactions and
accounting operations
Responsibility
Top management is responsible for
designing and maintaining it
Day-to-day employees’ routine
work creates the check
automatically
Example
Approval rules for purchases, cash
handling policies, security systems
Cashier’s work being checked by
the manager, clerk’s work verified
by accountant
Analogy:
• Internal control is like a strong umbrella covering the whole hotel to protect from
storms (risks and frauds).
• Internal check is like small nets inside the hotel, ensuring that if anything slips
through the umbrella, it’s immediately caught.
4. How They Work Together
Internal check and internal control don’t compete; they complement each other. Think of
them as two layers of defense:
1. Internal control sets the rules and safety measures, like having security cameras,
proper locks, and clear operational procedures.
2. Internal check ensures the daily operations follow those rules, catching errors as
they happen.
Example in our hotel:
• Internal control: Only the manager can approve purchase of expensive items above a
certain amount.
• Internal check: Every purchase order is checked by the accounts clerk to make sure it
matches the approved amount before payment.
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Together, they reduce risk to almost zero. Mistakes are minimized, and fraud becomes very
difficult.
5. Importance of Internal Check and Internal Control
1. Prevent Financial Losses: Mismanagement of money is one of the biggest risks for
any business. Both internal control and internal check protect against it.
2. Ensure Accuracy of Records: Managers can make decisions confidently when they
know records are correct.
3. Promote Efficiency: Workflows are smooth and employees know exactly what they
should do and who checks them.
4. Encourage Accountability: Everyone is responsible for their work, knowing it will be
checked.
5. Build Trust: Investors, customers, and employees trust an organization with a strong
internal system.
Story analogy: In our hotel, if a guest sees that every room is clean, every bill is correct, and
payments are secure, they trust the hotel. Similarly, strong internal systems make the
organization trustworthy.
6. A Simple Story to Remember
Imagine the hotel’s daily routine:
• Chef A prepares food. Chef B tastes it before serving. (Internal check)
• Cashier collects payments. Manager approves cash deposits. (Internal check)
• Purchase requests are submitted to the manager, who verifies and signs.
(Internal control)
• Security cameras monitor entrances, exits, and cash counters. (Internal control)
Here, internal check is like the little safety steps in daily tasks, while internal control is like
the bigger safety system designed by management.
Conclusion
In simple words:
• Internal Control = the big safety net for the entire organization. It sets rules,
protects assets, and ensures efficiency.
• Internal Check = the automatic checking system in daily operations, ensuring
mistakes or frauds are detected quickly.
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Both are essential for a business to function safely and efficiently. One cannot completely
replace the other—they work hand in hand, like a shield and a net, protecting the
organization from errors, frauds, and losses.
If you remember the hotel story, it’s easy to recall:
• Internal Control = Management’s rules and policies
• Internal Check = Employees checking each other automatically in routine work
With these two in place, your hotel—and any business—can run smoothly, safely, and
successfully.
4. Explain the fundamental principles of Internal Check in detail.
Ans: The Story of Internal Check: The Invisible Watchman of Business
Picture a grand palace. Inside, hundreds of workers are busy—some carry gold coins, some
record entries in ledgers, some guard the gates, and others distribute food. Now imagine if
one person alone was responsible for collecting the coins, recording them, and guarding
them. Temptation would be high, mistakes would go unnoticed, and the king’s treasury
would soon be in danger.
To prevent this, the wise king introduces a system: no single person should handle
everything. One collects the coins, another records them, a third checks the record, and a
fourth guards the treasury. Each worker’s duty overlaps with another’s, so that errors or
fraud are quickly detected.
This ancient palace system is exactly what we call in modern business Internal Check—a
system of dividing work in such a way that the chances of fraud, error, or manipulation are
minimized, and efficiency is maximized.
What is Internal Check?
In simple words: Internal Check is an arrangement of duties among employees of an
organization in such a way that the work of one person is automatically checked by
another, without any extra effort.
It is not a separate department or a special audit—it is a built-in system of control within the
daily routine of business.
Think of it as an invisible watchman: always present, always alert, ensuring that no
single person has complete control over a transaction.
Objectives of Internal Check
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Before we dive into the principles, let’s understand why businesses adopt internal check
systems:
• To prevent fraud: By dividing responsibilities, no single person can manipulate
records without being noticed.
• To detect errors quickly: Mistakes are caught early because another person’s work
overlaps.
• To ensure accuracy: Continuous checking improves reliability of accounts.
• To increase efficiency: Employees specialize in their tasks, making processes
smoother.
• To build trust: Owners, investors, and auditors gain confidence in the accounts.
Fundamental Principles of Internal Check
Now, let’s unfold the fundamental principles—the golden rules that make internal check
effective. I’ll explain each principle with a story-like example so it feels natural and easy to
remember.
1. Division of Work
No single person should handle a transaction from start to finish.
• Example: In a shop, one employee collects cash, another issues receipts, and a third
records it in the books.
• Why? Because if one person does all three, he could pocket the money and cover it
up.
Division of work ensures that responsibility is shared, and fraud becomes difficult.
2. Rotation of Duties
Employees should not be stuck with the same job forever.
• Example: In a bank, the cashier today may become the ledger clerk tomorrow.
• Why? Because if the same person handles the same duty for years, he may develop
tricks to hide fraud. Rotation keeps everyone alert.
It’s like changing the guards at the palace gates—fresh eyes spot what old eyes may
miss.
3. Automatic Checking
The system should be designed so that one person’s work is naturally checked by another.
• Example: The person who prepares a payment voucher is different from the one who
authorizes it, and yet another person makes the payment.
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• Why? Because this overlapping ensures that errors or frauds are caught without
needing a separate inspector.
It’s like gears in a machine—each gear turns the next, ensuring smooth movement.
4. Clear Definition of Authority and Responsibility
Every employee must know exactly what he is responsible for.
• Example: If a purchase order is wrongly approved, it should be clear whether the
fault lies with the purchase officer or the approving manager.
• Why? Because confusion in responsibility creates loopholes.
In the palace, the coin collector knows he is responsible only for collecting, not for
recording.
5. Separation of Custody and Recording
The person who has physical custody of assets should not be the one recording them.
• Example: The storekeeper keeps the goods, but the accounts clerk records them.
• Why? Because if the same person both keeps and records, he could steal goods and
adjust the records.
It’s like having one person guard the treasure and another person write down how
much treasure is inside.
6. Regular Rotation and Surprise Checks
Even with division of work, employees may collude. So, surprise checks are essential.
• Example: A sudden cash count by a supervisor ensures that the cashier is honest.
• Why? Because the possibility of surprise checks keeps employees disciplined.
Just like the king occasionally inspects the treasury unannounced.
7. Proper Documentation and Evidence
Every transaction should be supported by proper documents—receipts, vouchers, invoices.
• Example: A payment without a voucher is suspicious.
• Why? Because documents act as evidence and make it harder to manipulate records.
In the palace, every coin collected is recorded on a scroll, signed by the collector.
8. Use of Mechanical and Technological Aids
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Modern businesses use machines and software to strengthen internal check.
• Example: Barcode scanners in supermarkets reduce the chance of billing errors.
• Why? Because machines are less prone to human bias or manipulation.
In today’s world, the invisible watchman is often a computer program.
9. Segregation of Incompatible Functions
Certain functions should never be combined.
• Example: The person who approves purchases should not also approve payments.
• Why? Because combining such powers creates opportunities for fraud.
In the palace, the person who orders food is not the same person who pays the supplier.
10. Prompt Reporting of Irregularities
If an error or fraud is detected, it should be reported immediately.
• Example: If a cashier’s balance doesn’t tally, the supervisor must report it at once.
• Why? Because delays allow fraud to grow bigger.
Just like a guard immediately reporting a broken lock to the king.
Advantages of Internal Check
• Prevents fraud and errors
• Ensures accuracy of accounts
• Reduces auditor’s workload (since accounts are already reliable)
• Improves efficiency and discipline
• Builds confidence among owners and investors
Limitations of Internal Check
But no system is perfect. Internal check also has limitations:
• Collusion among employees: If two or more employees conspire, they can bypass
the system.
• Costly for small businesses: Requires more staff and resources.
• Over-reliance: Management may become careless, assuming the system will catch
everything.
• Rigidity: Too many checks may slow down work.
Internal Check vs. Internal Control vs. Internal Audit
To avoid confusion, let’s compare:
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Aspect
Internal Check
Internal Control
Internal Audit
Meaning
Division of work so one
checks another
Overall system of policies
and procedures
Independent review of
operations
Nature
Built into daily routine
Broader framework
Separate evaluation
Objective
Prevent fraud/errors
Ensure efficiency and
compliance
Verify effectiveness of
controls
The Narrative Angle
Think of Internal Check as a well-choreographed dance. Each dancer (employee) has a role,
their movements overlap, and together they create harmony. If one dancer makes a
mistake, another’s movement corrects it.
Without this choreography, the dance would collapse into chaos. Similarly, without internal
check, business accounts would collapse into confusion, fraud, and inefficiency.
Conclusion
The fundamental principles of Internal Check—division of work, rotation of duties,
automatic checking, separation of custody and recording, clear responsibility, surprise
checks, proper documentation, use of technology, segregation of incompatible functions,
and prompt reporting—together form the backbone of a reliable accounting system.
They transform an organization into a palace with invisible watchmen, where every coin,
every record, and every transaction is safeguarded.
SECTION-C
5. Explain the Audit procedure in detail.
Ans: Imagine you are the captain of a ship sailing on the vast ocean of a company’s financial
world. Your job is to make sure that the ship—representing the organization—is sailing
safely, efficiently, and in compliance with all the rules. In this journey, the auditor is like a
lighthouse guiding the ship, ensuring that the captain and the crew are following the right
path. The process that guides this journey is called the audit procedure.
At its core, an audit procedure is a systematic process that an auditor follows to examine,
verify, and evaluate the financial records, statements, and operations of an organization. It
is not just about checking numbers; it is about building trust, ensuring accuracy, and
maintaining transparency.
Step 1: Planning the Audit
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Every successful journey starts with planning. Before auditors even touch a ledger, they
spend time understanding the organization. This step is like mapping the ocean before
sailing.
• Understanding the business: The auditor studies the company’s nature, industry,
and operations. For example, auditing a manufacturing firm is different from
auditing a software company. Each has unique risks and records.
• Identifying risks: The auditor identifies areas where errors, fraud, or misstatements
are likely. These high-risk areas need special attention.
• Setting objectives: The auditor defines what they aim to achieve, such as verifying
the accuracy of financial statements, checking compliance with laws, and detecting
potential fraud.
• Resource allocation: Just as a captain assigns crew to different tasks, auditors decide
who will handle which part of the audit and how much time is needed.
Step 2: Understanding Internal Control
Next, the auditor becomes a detective. Before diving into every transaction, they first
examine the organization’s internal control system. Think of internal controls as the ship’s
safety equipment, ensuring everything functions properly.
• Internal controls include: Approval systems for expenses, segregation of duties,
inventory management procedures, and authorization of transactions.
• Testing controls: The auditor tests if these controls are effective. For instance, if
every invoice needs approval from the finance manager, the auditor checks whether
this rule is consistently followed.
• Purpose: By understanding internal controls, the auditor can decide the level of
reliance on these controls. Strong internal controls reduce the need for extensive
verification of every transaction.
Step 3: Verification of Transactions
Once the planning and control assessment are complete, the auditor starts the core work:
verification of transactions. This is where the auditor plays the role of a meticulous
inspector, examining each key part of the business.
1. Vouching: This is the heart of the audit. Every transaction recorded in the books
must be supported by evidence. For example, if a company claims to have purchased
raw materials worth ₹50,000, the auditor checks the purchase invoices, payment
receipts, and delivery challans.
2. Checking authorization: The auditor ensures that transactions are properly
approved. Unauthorized payments or unusual expenses are red flags.
3. Cross-verification: The auditor often compares records from different departments.
For example, the accounts department’s purchase record is matched with the
inventory department’s stock report.
Step 4: Examination of Account Balances
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After verifying individual transactions, the auditor examines account balances. This is like
checking the ship’s cargo to ensure that what is recorded in the log matches what is
physically present.
• Assets verification: Auditors physically inspect tangible assets like machinery, stock,
and cash. They also verify intangible assets like patents, trademarks, and
investments.
• Liabilities verification: They review the company’s obligations, such as loans, bills
payable, and accrued expenses, to ensure nothing is hidden.
• Bank reconciliation: Auditors check whether the cash and bank balances in the
books match the bank statements. This helps detect errors or frauds in banking
transactions.
Step 5: Analytical Procedures
While numbers tell a story, patterns reveal the hidden truth. Auditors use analytical
procedures to examine trends and relationships in financial data.
• Trend analysis: For example, if sales increased by 20% but raw material consumption
increased by 50%, the auditor may investigate why efficiency seems low.
• Ratio analysis: Financial ratios like current ratio, debt-equity ratio, and gross profit
margin help identify unusual fluctuations or inconsistencies.
• Comparative analysis: Comparing current financial data with previous years or
industry averages helps detect anomalies.
Step 6: Confirmation and External Verification
Sometimes, the best way to be sure is to hear it from a third party. Auditors send
confirmation requests to banks, customers, and suppliers.
• Bank confirmations: The auditor writes to banks to verify the company’s balances
and loan details.
• Debtors and creditors: Letters are sent to customers (debtors) and suppliers
(creditors) to confirm amounts owed or due.
• Purpose: This step ensures that the recorded balances are not fabricated or
misrepresented.
Step 7: Detection of Fraud and Errors
Auditors are also detectives looking for hidden errors and frauds.
• Fraud detection: Unusual transactions, forged signatures, and unrecorded liabilities
may indicate fraud.
• Error detection: Mistakes like double entries, incorrect calculations, or
misclassification of accounts are identified and corrected.
• Professional skepticism: Auditors must remain alert and question suspicious items
rather than accepting records at face value.
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Step 8: Documentation of Findings
Every good auditor maintains detailed records of their journey. This is called audit
documentation.
• Working papers: These include all evidence collected, procedures followed, and
conclusions drawn.
• Audit trail: This allows anyone reviewing the audit to understand how the auditor
arrived at their conclusions.
• Importance: Proper documentation is essential for accountability and supports the
auditor’s final report.
Step 9: Evaluation and Reporting
Finally, the auditor prepares the audit report, the most important deliverable. Think of it as
a lighthouse signaling to stakeholders whether the company is on a safe course.
• Opinion on financial statements: The auditor expresses whether the statements
present a true and fair view of the company’s financial position.
• Types of opinions:
o Unqualified opinion: Everything is in order.
o Qualified opinion: Minor issues exist but do not affect the overall view.
o Adverse opinion: Major problems exist; financial statements are misleading.
o Disclaimer: Auditor cannot express an opinion due to insufficient evidence.
• Management letter: Besides the report, auditors often provide suggestions for
improving internal controls, efficiency, and compliance.
Step 10: Follow-up
Some audits require follow-up to ensure corrective actions are implemented. Auditors may
revisit certain areas in subsequent audits to confirm improvements.
Summary
The audit procedure is like a carefully choreographed journey. From planning and
understanding internal controls to verifying transactions, examining balances, performing
analytical procedures, detecting fraud, documenting findings, and finally reporting—the
process is thorough and systematic.
• Planning ensures direction.
• Internal control assessment ensures safety.
• Verification ensures accuracy.
• Analytical procedures ensure insight.
• Confirmation ensures reliability.
• Documentation ensures accountability.
• Reporting ensures communication.
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An audit is not just a technical exercise; it is a story of trust, transparency, and responsibility.
Auditors act as guardians of truth, ensuring that the financial world operates honestly and
efficiently.
6. Discuss Vouching vs. Verification in detail.
Ans: The Tale of Two Guardians: Vouching and Verification
Imagine a grand library filled with thousands of books. Each book represents a financial
transaction of a company. Now, the king of this land appoints two guardians to protect the
truth hidden in these books.
• The first guardian is Vouching—sharp-eyed, detail-oriented, always checking the
pages, dates, and signatures of every book.
• The second guardian is Verification—calm, thoughtful, and focused on the bigger
picture, ensuring that the books themselves are real, safe, and in good condition.
Together, they form the backbone of auditing. But though they work side by side, their roles
are very different. Let’s walk through their story in detail.
What is Vouching?
Vouching is like detective work. The auditor examines the documentary evidence
(vouchers, receipts, invoices, bills, contracts) that support each transaction recorded in the
books of accounts.
In simple words: Vouching means checking the truth of entries in the books of
accounts with the help of documentary evidence.
• If the cash book shows ₹10,000 paid for rent, the auditor asks: “Where is the rent
receipt?”
• If sales are recorded, he checks: “Where is the sales invoice?”
Thus, vouching is about authenticating transactions.
What is Verification?
Verification goes one step further. It is not about checking documents—it is about checking
the existence, ownership, valuation, and presentation of assets and liabilities in the
balance sheet.
In simple words: Verification means ensuring that the assets and liabilities shown in
the balance sheet are real, correctly valued, and properly disclosed.
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• If the balance sheet shows “Machinery ₹5,00,000,” the auditor doesn’t just look at
the purchase invoice. He physically inspects the machinery, checks depreciation, and
ensures it belongs to the company.
• If “Debtors ₹2,00,000” are shown, he verifies whether these debtors are real and
recoverable.
Thus, verification is about authenticating assets and liabilities.
The Core Difference in Their Nature
Let’s pause and compare their personalities:
Aspect
Vouching
Verification
Focus
Transactions in books
Assets & liabilities in balance sheet
Evidence
Vouchers, invoices, receipts
Physical inspection, valuation, ownership
documents
Objective
To check accuracy of entries
To check existence, ownership, valuation,
disclosure
Nature
Routine, continuous
Periodic, usually at year-end
Scope
Narrow (limited to
transactions)
Broad (covers entire financial position)
Why Both Are Needed
Think of a house:
• Vouching is like checking the bricks—are they genuine, strong, and properly placed?
• Verification is like checking the entire house—does it stand firm, is it safe, and is it
worth the value claimed?
Without vouching, the foundation is weak. Without verification, the structure may collapse.
Both are essential for a reliable audit.
Detailed Discussion of Vouching
1. Objectives of Vouching
• To ensure that transactions are genuine.
• To confirm that entries are properly authorized.
• To check that transactions are recorded in the correct period.
• To detect frauds and errors.
2. Types of Vouching
• Cash Transactions: Checking cash receipts and payments with vouchers.
• Credit Transactions: Checking sales and purchases on credit.
• Journal Entries: Checking adjustments, provisions, transfers.
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3. Principles of Vouching
• Examine the documentary evidence carefully.
• Ensure vouchers are properly authorized.
• Check that transactions relate to the business, not personal use.
• Ensure entries are in the correct account and period.
4. Limitations of Vouching
• If vouchers are forged, the auditor may be misled.
• Collusion among employees can hide fraud.
• Vouching cannot confirm the existence of assets—it only confirms the transaction.
Detailed Discussion of Verification
1. Objectives of Verification
• To confirm the existence of assets and liabilities.
• To ensure ownership and rights over assets.
• To check correct valuation as per accounting standards.
• To ensure proper disclosure in the balance sheet.
2. Methods of Verification
• Physical Inspection: Counting cash, stock, machinery.
• Documentary Evidence: Title deeds, share certificates, loan agreements.
• Confirmation from Third Parties: Bank confirmations, debtor balances.
• Valuation: Checking depreciation, market value, realizable value.
3. Principles of Verification
• Verify existence by physical inspection.
• Verify ownership by legal documents.
• Verify valuation by accounting standards.
• Verify disclosure by comparing with legal requirements.
4. Limitations of Verification
• Physical inspection may not reveal quality (e.g., obsolete stock).
• Valuation often involves estimates.
• Auditor relies on management representations for some items.
Story Example: Cash in Hand
Let’s take a simple example to see how vouching and verification differ.
• The cash book shows ₹50,000 as closing balance.
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• Vouching: The auditor checks the cash receipts and payment vouchers to confirm
that entries are genuine.
• Verification: On the balance sheet date, the auditor physically counts the cash in the
cash box to ensure ₹50,000 actually exists.
Vouching checks the record. Verification checks the reality.
Story Example: Machinery
• The books show machinery worth ₹10,00,000.
• Vouching: The auditor checks the purchase invoice, payment voucher, and
authorization.
• Verification: The auditor inspects the machinery physically, ensures it is in working
condition, checks depreciation, and confirms ownership.
Vouching proves the machinery was purchased. Verification proves the machinery still
exists and is correctly valued.
Why Examiners Love This Question
Because it tests whether the student can distinguish between two closely related but
fundamentally different concepts. Many confuse vouching with verification, but the
examiner wants to see:
• Clear definitions.
• Detailed objectives, principles, and methods.
• Practical examples.
• A comparative table.
• A crisp conclusion.
The Narrative Angle
Think of Vouching and Verification as two detectives investigating a case:
• Vouching is the detective who checks the alibis and documents—tickets, receipts,
CCTV footage.
• Verification is the detective who goes to the crime scene—touches the evidence,
inspects the weapon, confirms the reality.
Both detectives are essential. One without the other leaves the case incomplete.
Conclusion
Vouching and Verification are the twin pillars of auditing.
• Vouching ensures that every transaction recorded in the books is supported by
proper evidence, authorized, and genuine.
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• Verification ensures that the assets and liabilities shown in the balance sheet
actually exist, belong to the business, are correctly valued, and properly disclosed.
Together, they transform financial statements from mere numbers on paper into a
trustworthy reflection of reality.
SECTION-D
7. Write a brief note on Audit of Limited Companies.
Ans: Imagine a bustling company named Shining Star Ltd.. It’s a limited company, which
means its owners’ liability is limited to the shares they hold, and it has many shareholders
who have invested their hard-earned money with the expectation of getting good returns.
Now, while the business grows, producing goods and earning profits, there’s one big
question that hovers over everyone’s mind: “Is everything in the company’s books true and
fair?” After all, investors, lenders, employees, and even the government all need to know
the real financial health of the company. This is where the audit of a limited company
enters the scene, acting like a wise detective who examines every corner of the company’s
financial story.
Understanding the Concept: What is an Audit?
At its core, an audit is an independent examination of the financial statements of a
company. The goal is simple yet vital: to ensure that the accounts reflect a true and fair
view of the company’s financial position. For limited companies, an audit is mandatory
under the Companies Act (depending on the country, e.g., Companies Act 2013 in India).
This is because shareholders rely on accurate financial information to make decisions, and
the government wants assurance that taxes and regulations are being followed.
Think of an audit like a health checkup for Shining Star Ltd. Just like a doctor examines the
body to find out if it is healthy, an auditor examines the financial records to ensure that the
company’s finances are in good shape.
Who Conducts the Audit?
The audit is conducted by a qualified and independent professional called an auditor.
Independence is key here because no one should audit their own work; that would be like a
student grading their own exam. The auditor is typically a Chartered Accountant or an
equivalent professional certified by the regulatory body in the country.
Objectives of Auditing a Limited Company
Let’s break down the objectives of auditing into a story that’s easy to remember:
1. Ensuring Truth and Fairness – Imagine Shining Star Ltd. showing a glittering financial
report to the shareholders. The auditor’s role is to check if the glitter hides any dirt.
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Are the profits real, or have expenses been hidden? The auditor ensures the financial
statements are true and fair.
2. Detecting Errors and Frauds – Suppose a mischievous employee tries to divert
company money into a personal account. The auditor, with careful examination of
books, vouchers, and receipts, can detect such discrepancies.
3. Compliance with Laws – Limited companies must follow laws like the Companies
Act, tax laws, and accounting standards. The auditor checks that these rules are not
just ignored but carefully followed.
4. Providing Confidence to Stakeholders – Shareholders, banks, and investors need
assurance that their money is safe and wisely used. An audit provides this
confidence.
5. Improving Accounting Practices – The auditor doesn’t just point out mistakes; they
can suggest improvements in accounting and internal control systems, making the
company stronger.
The Audit Process: A Journey Through Financial Records
The audit is not just about looking at a few numbers; it’s a systematic process. Let’s follow
our auditor, Mr. Sharma, as he audits Shining Star Ltd.:
1. Planning and Understanding the Company – Mr. Sharma first learns about the
company, its operations, and its financial systems. Understanding the business helps
him identify areas where errors or frauds might occur.
2. Assessing Risks – Next, he evaluates which parts of the business are risky. For
example, cash handling might be risky, or the company might have large, complex
transactions with suppliers.
3. Examining Internal Controls – Before diving into detailed checking, Mr. Sharma
studies how the company keeps its records, authorizes payments, and monitors
transactions. Strong internal controls reduce the chance of errors and frauds.
4. Gathering Evidence – Here’s where the detective work begins! The auditor examines
invoices, receipts, bank statements, contracts, and other documents to verify the
accuracy of the financial statements.
5. Testing and Verification – Mr. Sharma doesn’t just take numbers at face value. He
tests samples, reconciles accounts, and ensures that the figures in the ledger match
the real-world transactions.
6. Reporting Findings – Finally, after thorough checking, Mr. Sharma prepares the audit
report, which includes his opinion on whether the financial statements give a true
and fair view.
Types of Audit Opinions
The auditor’s report is like the final verdict of a trial. There are several types of opinions that
can be issued:
1. Unqualified Opinion (Clean Report) – This is the best result. It means the company’s
accounts are accurate and comply with all rules.
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2. Qualified Opinion – This is issued when there are some issues, but they are not
serious enough to mislead stakeholders completely.
3. Adverse Opinion – A serious red flag. It indicates that the financial statements are
misleading or incorrect.
4. Disclaimer of Opinion – The auditor couldn’t form an opinion due to insufficient
evidence. This is also a warning for stakeholders.
Special Features of Audit of Limited Companies
Auditing a limited company has unique features compared to other businesses:
• Statutory Requirement – Unlike sole proprietorships, a limited company must have
its accounts audited by law.
• Complex Structure – Limited companies have multiple shareholders, boards of
directors, and varied transactions, making auditing more detailed.
• Accountability to Stakeholders – The audit ensures accountability not just to owners
but to banks, investors, and the government.
• Corporate Governance – The audit strengthens corporate governance, ensuring
ethical and responsible management.
Importance of Audit in Real Life
Imagine if Shining Star Ltd. operated without an audit. What could go wrong? Fraud might
go unnoticed, investors might lose confidence, and legal penalties could arise. Audit
ensures:
• Transparency – Everyone knows the real financial situation.
• Trust – Stakeholders trust the company’s management.
• Risk Reduction – Mistakes and fraud are caught early.
• Better Decisions – Accurate financial data leads to informed business decisions.
Conclusion: The Moral of the Story
Auditing a limited company is like a wise guardian watching over the company’s treasure. It
ensures that the company remains healthy, honest, and compliant with the law. For Shining
Star Ltd., the audit is not just a formality; it’s a critical process that strengthens credibility,
ensures financial integrity, and protects the interests of shareholders and the public.
In today’s business world, where companies are growing faster and transactions are
becoming complex, the role of an auditor has become even more vital. It’s not just about
numbers; it’s about trust, accountability, and transparency. A good auditor doesn’t just
report errors—they guide the company toward better financial practices, ensuring that the
story of the company is not just profitable but also truthful.
So, the next time you see a limited company’s financial statements stamped with an
auditor’s seal, remember: behind that seal is a careful, detailed, and thoughtful journey to
make sure everything adds up. Auditing is not just a technical requirement; it’s the moral
compass of corporate responsibility.
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8. Discuss the appointment and removal of Company Auditor in detail.
Ans: The Story of the Company Auditor: From Appointment to Removal
Imagine a great ship setting sail on the high seas of commerce. The ship is the company, its
directors are the captains, and the shareholders are the owners who have invested their
treasure. But who ensures that the captains are honest in reporting how the treasure is
being used? Who checks that the logbooks (the accounts) are accurate and not
manipulated?
That role belongs to the auditor—the independent guardian of truth.
But just as a ship cannot sail without appointing a navigator, a company cannot function
without appointing an auditor. And just as a navigator can be replaced if he fails in his duty,
an auditor too can be removed under certain conditions.
Let’s walk through this story step by step, exploring the appointment and removal of
company auditors under the Companies Act, 2013 (India).
Part I: Appointment of Company Auditor
1. Who Can Be an Auditor?
Before we appoint, we must know who is eligible.
• Only a Chartered Accountant (CA) holding a valid certificate of practice can be
appointed as an auditor.
• A firm of CAs can also be appointed, where only partners who are CAs act as
auditors.
• Certain persons are disqualified: officers or employees of the company, partners of
officers, indebted persons, or those holding securities in the company.
In short: the auditor must be independent and qualified.
2. First Auditor of the Company
Every story begins with a first chapter. For a company, the first auditor is like the first
navigator of the ship.
• In case of a company other than a Government company:
o The Board of Directors appoints the first auditor within 30 days of
incorporation.
o If the Board fails, the members appoint the auditor within 90 days at an
extraordinary general meeting.
o Tenure: Until the conclusion of the first Annual General Meeting (AGM).
• In case of a Government company:
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o The Comptroller and Auditor General of India (CAG) appoints the first
auditor within 60 days of incorporation.
o If CAG fails, the Board appoints within the next 30 days.
o If the Board also fails, the members appoint within the next 60 days.
3. Subsequent Appointment of Auditor
After the first AGM, the company must appoint an auditor for the future.
• Who appoints? The members of the company at the AGM.
• Tenure: From the conclusion of that AGM till the conclusion of the sixth AGM (i.e.,
for 5 years).
• Ratification: Earlier, ratification at every AGM was required, but this provision has
been removed.
Example: If an auditor is appointed at the AGM of 2025, he holds office till the AGM of
2030.
4. Appointment in Case of Government Companies
For government companies, the CAG plays a central role.
• CAG appoints the auditor within 180 days from the start of the financial year.
• The auditor holds office till the conclusion of the AGM.
5. Filling of Casual Vacancy
Sometimes, the auditor’s seat becomes vacant before the term ends—like a navigator
leaving mid-voyage.
• If caused by resignation: The members appoint a new auditor within 3 months at a
general meeting.
• If caused by any other reason (death, disqualification, etc.): The Board of Directors
appoints within 30 days.
6. Reappointment of Retiring Auditor
At every AGM, the retiring auditor is eligible for reappointment unless:
• He is disqualified.
• He has given notice of unwillingness.
• A special resolution has been passed appointing someone else.
7. Rotation of Auditors
To prevent over-familiarity between auditor and management, the law mandates rotation:
• Listed companies and certain large companies must rotate auditors.
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• An individual auditor cannot serve for more than one term of 5 years.
• An audit firm cannot serve for more than two terms of 5 years each.
• After completion, a cooling-off period of 5 years is required before reappointment.
This ensures fresh eyes and independence.
Part II: Removal of Company Auditor
Just as a navigator can be dismissed if he misguides the ship, an auditor can be removed if
he fails in his duty. But since the auditor is an independent watchdog, his removal is not
easy—it requires strict procedures.
1. Removal Before Expiry of Term
• The company may remove an auditor before the expiry of his 5-year term.
• Procedure:
1. Obtain prior approval of the Central Government.
2. Pass a special resolution at the general meeting.
• The auditor must be given a reasonable opportunity to be heard.
This ensures that auditors are not removed casually or for reporting inconvenient truths.
2. Resignation by Auditor
Sometimes, the auditor himself may resign.
• He must file a statement with the company and the Registrar within 30 days, stating
reasons.
• In case of a government company, a copy must also be sent to the CAG.
• The company must file Form ADT-3 with the Registrar.
3. Disqualification of Auditor
If an auditor becomes disqualified (e.g., he takes up employment in the company, or
acquires shares beyond the permitted limit), he is deemed to have vacated office.
4. Removal by Tribunal
If the Tribunal is satisfied that the auditor has acted fraudulently or colluded with
management, it may direct his removal and even debar him from reappointment for 5
years.
Practical Example
Let’s imagine a company, Sunrise Ltd.
• At incorporation, the Board appoints Mr. A as the first auditor.
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• At the first AGM, members appoint Mr. A for 5 years.
• After 3 years, Mr. A resigns due to health issues. The members appoint Ms. B at a
general meeting.
• Later, Ms. B reports fraud by directors. Angered, the directors try to remove her. But
they cannot do so without Central Government approval and a special resolution.
This protects Ms. B’s independence.
Why These Provisions Matter
The appointment and removal rules are not mere formalities—they protect the
independence of auditors.
• If directors could appoint and remove auditors at will, auditors would become
puppets.
• By giving shareholders and the government a role, the law ensures that auditors
remain watchdogs, not lapdogs.
• Rotation prevents over-familiarity.
• Removal procedures prevent misuse of power.
The Narrative Angle
Think of the auditor as a lighthouse keeper guiding ships safely to shore. The company
appoints him carefully, ensures he is qualified, and allows him to serve for a fixed term. If he
fails, he can be removed—but only with due process, so that the lighthouse is not
extinguished just because it shines light on uncomfortable truths.
Conclusion
The appointment and removal of company auditors is a finely balanced system under the
Companies Act, 2013.
• Appointment: First by the Board (or CAG for government companies), then by
members at the AGM for 5 years, with provisions for rotation and filling of casual
vacancies.
• Removal: Only through Central Government approval and special resolution, or by
resignation/disqualification, with safeguards to protect independence.
Thus, the law ensures that auditors are chosen with care, serve with independence, and can
only be removed with fairness.
In the grand voyage of a company, the auditor remains the trusted navigator—appointed
with ceremony, protected by law, and removed only with justice.
“This paper has been carefully prepared for educational purposes. If you notice any mistakes or
have suggestions, feel free to share your feedback.”
