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Distinguish between Auditing and Investigation

Particulars 1. Meaning Investigation Investigation implies systematic, critical and special examination of the records of a business for a specific purpose. Voluntar Any person, who may not be a Chartered Accountant. Owners or Management or even third parties may appoint the investigator. Work is carried out from the viewpoint of the appointing agency. Specific ­ Seeks to answer only those questions laid down in the engagement letter. Not necessarily restricted to a financial year. It can extend for a period consisting of a number of years. Its essence lies in going into the matter with some pre-conceived notion suited to the objective. Seeks conclusive and corroborative evidence. There is no statutory form of investigation report. Auditing An audit is independent examination of financial information of any entity, when such an examination is conducted with a view to expressing an opinion thereon. Mandatory for Companies. For others, it is voluntary. A Chartered Accountant within the meaning of the Chartered Accountants Act 1949. Owners/Shareholders of the enterprise. Work is carred out on behalf of the owners, even if the power of appointment is delegated to say, Board of Directors. General ­ when compared to investigation ­ seeks to form an opinion on the Financial Statements. Generally a period of one financial year.

2. Mandator y Nature 3. Conducted by 4. Appointing agency 5. Pro tec tion of interests 6. Scope and Coverage 7. Period covered 8. Pre conceptions 9. Evidence 10. Form of reporting

Audit is not based on suspicion unless circumstances exist to arouse suspicion. Much of audit evidence is persuasive rather than conclusive. The matters to be covered in the audit report are sometimes prescribed by law.

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F:Amit Sir/2nd Book/Manish Raj Aplomb

Differentiate between Financial Audit and Cost Audit

Particulars 1. Applicability Financial Audit Mandatory to all enterprises governed by the statute. Cost Audit Applicable only to those companies specified under law.

2. Aspect of verification

Ture and Fair view of Financial Statements.

Propriety and efficiency of transactions having an effect on cost of goods produced. Primarily covers the cost aspects of the enterprise.

3. Coverage

Covers all items forming part of the Financial Statements.

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F:Amit Sir/2nd Book/Manish Raj Aplomb

After the statutory audit has been completed a fraud has been detected at the office of the auditee. What is your defence as an Auditor? The Auditor is responsible for failure to disclose the affairs of the Company kept out of books and concealed from him. comment. Some material misstatements remained unreported by Auditors. Comment. Responsibility of Auditor : 1. In the instant case, if a fraud has been detected after the completion of the statutory audit, it cannot by itself mean that the Auditor did not perform his duty properly. 2. If the Auditor can prove with the help of his working papers (documentation) that he has followed adequate procedures necessary for the proper conduct of an audit, he cannot be held responsible for the same. 3. If however, the same cannot be proved and he is found negligent in the discharge of his audit function, he would be held responsible.

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F:Amit Sir/2nd Book/Manish Raj Aplomb

Distinguish between Internal Check and Internal Control

Particulars 1. Definition Internal Check Checks on day-to-day transactions which operate continuously as part of the routine system whereby the work of one person is proved independently or complimentary to the work of another, the object being the prevention or earlier detection of error or fraud. Internal Control Plan of organization and all the methods and procedures adopted by the Management to assist in ensuring ­ (a) orderly and efficient conduct of business, (b) adherence to Management policies, (c) safeguarding of assets, (d) prevention and detection of fraud and error, (e) accuracy and completeness of the accounting records and (f ) timely preparation of reliable financial information. Governance ­ oriented It includes administrative controls e.g. safeguarding of fixed assets, periodic physical verification etc. Broader concept and includes administrative controls, internal audit, etc.

2. Orientation 3. Matters covered 4. Scope

Procedure ­ oriented. It is merely an arrangement of book keeping and clerical duties. Limited in scope.

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F:Amit Sir/2nd Book/Manish Raj Aplomb

Distinguish between Internal Check and Internal Audit

Particulars 1. Definition Internal Check Checks on day-to-day transactions which operate continuously as part of the routine system whereby the work of one person is proved independently or complimentary to the work of another, the object being the prevention or earlier detection of error or fraud. Minimising and detecting errors and frauds It is a routine line function. Separate staff is not necessary. It is an integral part of the regular operations. It operates as a built-in device as far as staff organization and job allocation aspects of the control system are concerned. Procedure Oriented. Internal Control Independent appraisal activity within an organization, for the review of operations as a service to the organization. It is a managerial control which functions by measuring and evaluating the effectiveness of other controls. Evaluating the effectiveness organizational controls. It is a specialized staff function. Separete Staff of the Internal Audit Department is necessary. It involves review of the adequacy and operations of Internal Control on a regular basis to ensure that all significant controls are operating effectively. Control Oriented. of

2. Air 3. Function 4. Separate staff 5. Scope

6. Orientation

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F:Amit Sir/2nd Book/Manish Raj Aplomb

Distinguish between Vouching and Verification

Particulars 1. Meaning Vouching The examination of documentary evidence in support of transactions contained in the books of account is referred to as Vouching. Verification Verification refers to examination whether assets and liabilities are properly stated in the Balance Sheet. It may also apply to items of Profit and Loss Account, for checking of the account balances and their presentation. To inquire and confirm the ownership, valuation, existence and presentation of assets and liabilities.

2. Objective

To establish authenticity of the transactions recorded in the primary books of accounts

3. Point of review 4. Aspects under review

Examination of transactions at their points of origin. (a) (b) (c) (d) (e) Date of the voucher. Proper Authorisation of the voucher. Supporting evidence i.e. bill, challans. Completeness ­ in all respects. Proper Accounting ­ recorded in the correct account and properly disclosed.

Balances contained in the Balance Sheet and P&L A/c. i.e. at Financial Statements stage. (a) Assets : Ownership, Valuation, Existence, Charge, Lien etc., and proper presentation and disclosure in Financial Statements. (b) Liabilities : That these are owed by the Firm and are disclosed in the proper amounts.

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F:Amit Sir/2nd Book/Manish Raj Aplomb

Distinguish between Confirmation and Verification

Particulars 1. Meaning Confirmation It is an auditing technique that involves response to an inquiry to corroborate information contained in the accounting records. Verification It is an auditing procedure in which the Auditor examines by appropriate manner whether assets and liabilities are properly stated in the Balance Sheet or whether incomes and expenditure are properly stated in the P & L Account. Broader scope when compared to Confirmation. Verfication of Assets includes confirmation e.g. Debtors Balances. To inquire into ownership, valuation, existence, presentation of assets & liabilities.

2. Scope

Applicable to specific cases e.g. confirmation of account balances from Debtors, Creditors, Bankers, Lenders, etc.

3. Objective

To obtain corroborative evidence which provide further assurance of the internal evidence.

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F:Amit Sir/2nd Book/Manish Raj Aplomb

Distinguish between Capital Reserve and Reserve Capital

Particulars 1. Meaning Confirmation Capital Reserve is created out of profits of a capital nature e.g. Surplus on Shares Forfeited, sale of Fixed Asset over and above historical cost, Securities Premium etc. Verification Reserve Capital represents that portion of the Share Capital determined by the Company which has not already been called up or shall not be capable of being called up except in the event and for the purposes of the Company being wound up. A Limited Company may, be special resolution, call such an amount in that event (i.e. liquidation) and for those purposes as Reserve Capital (Section 99)

2. Provisions of Companies Act

"Capital Reserve" shall not include any amount regarded as free for distribution as dividend through the profit and Loss Account. (Part III of Schedule VI)

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F:Amit Sir/2nd Book/Manish Raj Aplomb

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