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Audit 2 Marks QuestionsAuditingThorough & critical examination of all the books of account and records of a business by anindependent person duly qualified for the job , with a view to find out arithmetical & theoreticalaccuracy of the books of account & report to the owners of business whether the statements are fair or

not.

Primary Object of AuditThe primary or main object of audit is to examine the books of accounts and records with a view tofind out whether the balance sheet, at a given date, is properly drawn up, so as to exhibit "a true &fair view of state of affairs of the business".

Management AuditA critical verification of the mgt plans, policies & objectives, appraisal of the performance of the mgtin various functional areas. evaluation of the decisions and managerial techniques adopted by the mgtin a business.

Error of Comission

The error of comission takes place when a transaction is wrongly recorded either in the books oforiginal entry or in the ledger.Ex-wrong calculation,wrong carry forwards,wrong balancing, wrongtotaling ,wrong addition etc

Errors of OmissionAn error of omission occurs when a transaction is not recorded in the books of accounts either whollyor partially.It is very difficult to detect such errors since both the aspects of the transactions areomitted to be recorded.Error of omission may be intentional or unintentional or may be due tocarelessness of the clerical staff.

Errors of PrincipleIt arises when transactions are not recorded in the books of accounts according to the fundamentalprinciples of accountancy.Such errors are very important as they affect the profit and loss account to a

considerable extent.

External AuditIt refers to the audit of a business concern undertaken independently by a professional qualifiedauditor.Such an audit report is quite independent of the business concern by whom he is appointed toaudit.

Internal AuditInternal audit is the audit of accounting, financial and other operations of a business concern which iscarried out by its own staff, specially appointed for the purpose.In other words, internal audit is thecontinuous & systematic examination of books of accounts carried out by the specially appointed staffof the business concern.

Statutory AuditStatutory audit means legally compulsory audit.It is provided under the provisions of a statute or law.Itapplies to those undertakings which have been established by law.It is to be conducted by dulyqualified independent auditor competent under the law applicable to the enterprise.

Interim AuditInterim audit is the audit which is conducted in between two annual or periodical audits.In otherwords, It is conducted in the middle of the year.The primary object of conducting interim audit is toenable the company to ascertain interim profit in order to declare interim dividend.

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Ethical Conduct as a concept of auditThe concept of ethical conduct implies that an auditor is under obligation to conform to a code ofconduct besides several legal requirements.He should remain within the ambit of professional code ofconduct.

ExpandSAP- Standard Auditing Practices

AS- Accounting StandardsICAI- Institute of Chartered Accountants of IndiaLAN- Local Area Network

Accounting StandardAn accounting standard is a selected set of accounting policies or broad guidelines regarding theprinciples and methods to be chosen out of several alternatives.Standards conform to applicable laws,customs, usage & business environment.

Audit Sampling(?)

Audit RiskAudit risk is the risk to be borne by the auditor when he fails to express a correct opinion in an auditingsituation.It is the risk which a monetary error, greater than the tolerable error, exists in the accountsand the auditor fails to detect such error.

Surprise CheckSurprise check means audit verification on non-routine and surprise basis.For carrying out surprisecheck,auditor visits the clients office without prior intimation & verifies certain specific matters theregularity of which is vital for audit.

Audit EvidenceAudit evidence is evidence obtained during a financial audit and recorded in the audit working papers.ReadMore >>

Audit Planning

An important part of the process for managing an audit function involves planning.Planning covers both administration of the audit office as well as administration ofthe audit assignment. For successful audits, we need to know what we want toachieve (audit objectives), determine what procedures we should follow (auditmethodology), and assign qualified staff to the audit (resource allocation).

Permanent Audit FilePermanent audit files are are the working paper files which should be updated currently withinformation of continuing importance to succeeding audits.Some of thepermanent audit files are-Memorandum of Association,Articles of Association, Copies of previous year audited statements,...etc

Current Audit Files

evidence of planning process of the audit & audit program

analysis of transactions and balances

evidence that the work of the assistants was supervised & reviewd

MaterialityAn information is material if its omission or misstatement could influence the economic decision of theusers taken on the basis of the financial statements.

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FraudFraud means false representation or false entry made intentionally or without belief in its truth with aview to defraud somebody.The primary objective of the audit is to detect frauds.Since frauds are madecleverly, auditor needs to examine suspected accounts carefully,

Computer FraudA computer fraud involves gaining or deriving an undue advantage such as embezzlement or defalcationthrough tampering with computer programs, data files, operations, equipment or media.Properinternal control procedures and their constant review will help in preventing computer frauds.

Computer VirusIt is a program which affects the normal functioning of computer system by altering or destroying otherprograms.

Internal ControlInternal control refers to the overall control environment established by the management of theenterprise for efficient & effective monitoring and control of its operations.It aims at safeguardingassets and to secure to a maximum possible extent the accuracy & reliability of its accounting records.

Compliance TestingCompliance test is the second stage in evaluation of internal control.The aim of compliance procedureis to provide reasonable assurance that the internal control system is functioning properly and has beenimplemented throughout the period.

Analytical ProcedureAnalytical procedure refers to systematic study and comparison of relationships among the elements offinancial and non-financial information and the investigation of significant fluctuations and variancesfrom the expected relationships.

Gross Profit RatioThis ratio indicates the relationship between gross profit & net sales.Gross Profit Ratio = Gross Profit / Net Sales

Net Profit RatioThis ratio indicates net profit margin on sales after meeting all the costs except interest on long-termloans.Net Profit Ratio = PBIT / Sales

Capital Turn-over RatioIt measures the effectiveness with which a business firm uses the resources at its disposal.Capital Turn-over Ratio = Sales / Net Capital Employed

Intra-Firm ComparisonIt includes comparison of the information between different periods of time in the past.It is thus thecorresponding information for a prior period.In other words, comparison of the information ratios of

the current year with those of the previous year.

EDP AuditingEDP Auditing is the process of collecting and evaluating evidences to determine whether a computersystem safeguards assets, maintains data integrity, achieves organizational goals effectively andconsumes resources efficiently.

Auditing Through Computer

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Batch Processing SystemThis is the traditional form of processing information. Under this system, transactions of similar naturesuch as purchases, sales,returns inward, wages etc. are accumulated and processed in batches orgroups.For example, daily sales invoices are fed into the computer and the master file may be updatedat the end of the day.

Clean OR Unqualified Audit ReportIf the auditor is completely satisfied with the truth and fairness of the books of accounts and thebalance sheet and Profit and Loss account, he gives a clean report.In other words, he gives his opinionwithout any reservations.

Qualified Audit ReportWhen an auditor gives his opinions subject to certain reservations,he is said to have given a qualifiedreport.In such case, the auditor may include his objections in his reports and state "subject to theabove reservation, we report that the balance sheet exhibits true & fair view".

Negative ReportAn adverse or negative report will be given by the auditor only when he has sufficient and strongground to form such opinion.that the accounts & financial statements, taken as a whole, do notrepresent a true & fair view of the financial position of the company.

Window DressingA company can use window dressing when preparing financial statements to improve the appearance ofits performance or liquidity. In this case, window dressing may consist of changing asset depreciationor valuation policies, making short-term borrowings, or engaging in sales and leaseback transactions atthe end of a period. By doing so, management embellishes the company's results or liquidity andobtains some benefits.