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1. Test Checking & Routine Checking

Criteria Test Checking Routine Checking
Concept Test checking involves selecting Routine checking involves checking of
a few transactions on the basis of books and records on regular basis.
auditor‘s judgment and
examining them.
User Generally Auditor Generally Accountants (Lower &
(Internal/external) etc. Middle level).
Objectives The main object of test The main object of routine checking is
checking is to ensuring arithmetical accuracy of the
form an opinion entries in the original books and
on the financial
statements on the basis of ledgers and posting to correct ledgers
examination of accounts.
selected sample.
Scope Limited Wide
Time Lesser time consuming Higher time consuming
Reliance Certain reliance can be taken on Reliance cannot be taken on test
routine checking checking
Risk Higher risk of improper result if Lesser risk of improper result if internal
internal control system is weak. control system is strong.

2. Audit Report & Audit Certificate

Basis Audit Report Audit Certificate

Meaning An Audit Report is an Certificate is a written
expression of confirmation
opinion on the true and fair view of the accuracy of the fact
presented by financial statements stated therein and does not
involve any estimate of
opinion.
Utility The term audit report is used The term certificate is used
when the auditor expresses his when the auditor verifies
opinion on the financial certain exact fact e.g. Royalty
statements payment made to foreign
collaborators, value of
import/exports of a company
during a
financial year.

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Audit report implies that the A certificate implies that the

Implicat auditor Auditor
ion - Has ex am in ed relevant
records in accordance with - Has verified certain precise
generally accepted auditing figures; and
standards; and - Is in a position to vouch their
- Is expressing an opinion
whether or not the financial accuracy as per the
statements representing a true and examination of documents and
fair view of the state of affairs books of account produced
and of the working results of
the before him.
enterprise.
Accurac The Auditor is responsible for The Auditor is responsible for
y ensuring that the report is based on the factual accuracy of what is
factual data that stated therein.
his opinion is in accordance with
facts, and that it is
arrived at by application of due
care &
Skill.

3. Audit & Investgation

Basis Audit Investigation
 To Judge truthfulness and  To establish a fact
Objective fairness of financial statements
Scope  Determined by laws and  By term of engagement
Auditing Standards
Period  Generally yearly  As per requirements
Nature  General  Detailed
Inherent  More because of test checking  Less because of detailed
limitation checking
Evidence  Persuasive  Conclusive
Reportin  General purpose i.e. to all user  Confidential i.e. only to needful
g of statements person
Approval  No doubtful approach  Doubtful approach
By whom  CA-Chartered Accountants  Expert team
 RA- Registered Auditors

4. Auditing & Accounting

Particulars Auditing Accounting
An independent examination of Accounting is the art of
financial information of any entity recording, classifying and
summarizing financial
Meaning when such information, transaction and
an examination is conducted with a events and preparation of reports
thereon.
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view
of expressing an opinion thereon

Verification of underlying vouchers Recording of the transaction

and records and obtaining evidence from underlying vouchers and
Objective on the true and fair view presented preparation of financial
by financial statement.
Statement
Responsibi Auditor is appointed by the owners It the responsibility of the
lity of the entity. The responsibility is management to maintain and
to be reviewed the accounting and implement an effective
other control and express the accounting system.
opinion
Independent examination of the Measurement and
Deals with financial communication of
information prepared by the information to shareholders and
management of the entity others user of the financial
statement
Aspects of Auditing review the efficacy of Accounting involves recording
transaction recording financial information aspects of the financial
information
Aspects of Auditing review the efficacy of Accounting involves recording
transaction recording financial information aspects of the financial
information

5. Errors and Fraud.

Fraud Error
It is the deception or artifice It is inaccuracy or incompleteness
with the in the
intention of cheating or injuring measurement or presentation of an
another. act
It is intentional It is accidental and unintentional.
The person committing the fraud It may arise due to negligence or a
does so knowingly, willfully and genuine misunderstanding on the
with the motive of gaining part of the persons committing
advantage or benefit by cheating or them.
causing loss or injury to
another person.

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6. Reserve & Provision

 Reserve is an appropriation of profit whereas provision is a charge against Profit.

 Reserves are not intended to meet any liability, contingency or diminution in the value of
assets. Provisions are made to provide for depreciation, renewal or a known liability or a
disputed claim.
 Reserves cannot be created unless there is a profit except revaluation reserve and capital
subsidy. Provisions must be created whether or not there is profit.
 Reserves are generally optional except in certain situations – Capital Redemption
reserve, Debenture Redemption Reserve, Declaration of dividend higher than 10% etc.
Provisions are not optional and have to be made as per generally accepted accounting
principles.
 Reserves are shown on the liability side. Provisions for depreciation and provision for
doubtful debts are shown as deduction from respective assets. Provision for liability is
shown on the liability side.

7. Prepaid Expenses and Preliminary expenditures

Answer
Prepaid Expenses: incurred in the course of regular operation of an enterprise.
Prepaid expenses are also treated as outstanding assets. Expenditure already incurred a part or
whole of which relates to a period subsequent to the date of the Balance Sheet. Some of the
example of prepaid expenses:
 Insurance charges paid in advance;
 Advertisement, etc.
Preliminary expenditure: incurred prior to the operation of an enterprise.
The expenditure incidental to the creation and floating of a company includes stamp duties,
registration fees, legal costs, accountant’s fee cost of printing etc. Preliminary expenses are
both incurred by the company or by the promoters and reimbursed them by the company.
Normally, the preliminary expenditures are disclosed in the prospectus, statutory report and
the balance sheet. Expenditure in connection with the preliminary expenses and not written off
should be separately disclosed under the head miscellaneous expenditure. Underwriting
commission and brokerage paid for shares and debentures should not be included under the
head preliminary expenses.

8. Substance over form and Neutrality.

Substance over form is a qualitative characteristic of financial statements. If information is to

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represent faithfully the transactions and other events that it purports, it is necessary that they
are accounted for and presented in accordance with their substance and economics reality i. e.
substance over form and not merely their legal form. The substance of transaction or other
events is not always consistent with that which is apparent from their legal or contrived form.
Similarly, another characteristic of financial statement is neutrality. The information
contained in financial statements must be neutral, that is, free from bias to be reliable.
Financial statements are not neutral if, by the selection or presentation of information, they
influence a decision or judgement in order to achieve a predetermined result or outcome.

9. Continuous and Final Audit

Answer:
Final Audit is commonly understood to be an audit which does not begin until the books
have closed at the end of the accounting period and thereafter is carried on continuously until
completed. Whether an audit ought to be conducted continuously after the close of the
financial year should be decided on a consideration of the size of the business and the extent of
detailed checking required.

Continuous Audit is one in which the auditor's staff is engaged continuously in checking the
accounts of the client the whole year round or when for this purpose the staff attends at
intervals, fixed or otherwise, during the currency of the financial period. Strictly speaking,
when auditor's staff attends the audit work at fixed intervals it may be strictly called interim
audit. This is when an audit is conducted up to a particular date within the accounting period.
The auditor may attend to audit the figures for a month or for a quarter, as the work may
require. It would differ distinctly from the final audit in the extent of the work carried out;
verification of assets, for example would be left until the final audit. In case of a continuous
audit, the work is conducted throughout the course of the financial year but is not taken to a
specific accounting period, as is an interim audit. It might be that during the course of the
continuous work interim figures are being audited, but the significant factor here is that the
auditor will be engaged continuously on the audit throughout the financial period. Staff may
be in residence throughout the period or may come and go at irregular intervals, but most of
the time, the audit staff is present at the location. Thus, in case of continuous audit, the audit
staff is present at the client's premises almost during the entire accounting period.
10. Prior period items and extra ordinary items.
Answers:
Prior period items are incomes or expenses, which arise, in the current period as a result of
errors or commissions in the preparation of the financial statements of one or more prior

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periods.
Extraordinary items are incomes or expenses that arise from events or transactions that are
clearly distinct from the ordinary activities of the enterprise and, therefore, are not expected to
recur frequently or regularly.

11.Auditing Around the computer & Auditing through the computer

Answer:
The auditor must plan whether to use the computer to assist the audit or whether to audit
without using the computer. The former approach is known as "auditing through the
computer", the latter is called auditing around the computer".

Auditing around the computer involves arriving at an audit opinion through examining
internal control for computer installation and the input and output only for application
systems. On the basis of quality of input and output of application systems, the auditor infers
the quality of processing carried out. Application system processing is not examined directly.
The auditor views the computer as a black box.
Auditing through computer: The auditor can use the computer to test: (a) the logic and
controls existing within the system and (b) the records produced by the system. Depending
upon the complexity of application system being audited, the approach may be fairly simple or
require extensive technical competence on the part of the auditor.

12. Distinguish between Concurrent audit and Annual audit.

Answer
A continuous or concurrent audit is one in which the auditor's staff is engaged continuously
in checking the accounts of the client the whole year round or when for this purpose the staff
attends at intervals, fixed or otherwise, during the currency of the financial period.
A final or annual audit on the other hand is commonly understood to be an audit which does
not begin until the books have been closed at the end of the accounting period and thereafter is
carried on continuously until completed.
Whether an audit ought to be conducted continuously or after the close of the financial year
should be decided on a consideration of the size of the business and the extent of detailed
checking required.

13. Principles of auditing and Techniques of auditing.

Answer
Auditing principles are the basic principles, which underlie every audit. An auditor has to
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ensure compliance with these principles in carrying out any audit. To comply with these
principles, he has to design his audit procedures and reporting practices in an auditing
situation. These principles provide the benchmark against which an auditor's performance is
evaluated. These principles are:
 Integrity, objectivity and independence
 Confidentiality
 Skills and competence
 Work performed by others
 Documentation
 Planning
 Audit evidence
 Accounting system and internal control
 Audit conclusion and reporting

Whereas, the techniques by which an auditor collects evidence are known as techniques
of auditing. These techniques are:
 Inspection of documents and records
 Physical inspection of tangible assets
 Observation
 Inquiry
 Confirmation
 Computation and re-tracing book-keeping procedures
 Analytical procedures

Thus, auditing principles are of fundamental nature which underlie the conduct of the audit.
These principles are not liable to change frequently while audit techniques may vary according
to the nature of propositions to be tested. For instance, audit technique to test the existence of
cash in hand will be different from the method to verify recover ability of sundry debtors.
Further audit techniques may vary from organization to organization depending upon the
nature of business but the principles of auditing will remain the same irrespective of the nature
of the organization.

14. Permanent Audit Files and Current audit files.

Answer
Permanent audit files, in case of recurring audits, are working paper file which are updated
with new information of continuing importance to succeeding audits. The permanent audit file
normally includes:
 Information concerning the legal and organizational structure of the clients. In the case of a

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company, this includes the Memorandum and Articles of Association. In case of statutory
corporation, this includes the Act and Regulation under which the corporation functions.
 Extracts or copies of important legal documents, agreements and minutes relevant to the audit.
 A record of the study and evaluation of the internal controls related to the accounting system.
 Copies of audited financial statements of prior years.
 Analysis of significant ratios and trends.
 Copies of management letters issued by the auditor, if any.
 Record of communication with the retiring auditor, if any, before acceptance of the
appointment as auditor.
 Notes regarding significant accounting policies.
 Significant audit observation or earlier years, etc.

Current audit files contain information relevant for the audit of a single period.
A current audit file normally includes.
Correspondence relating to acceptance of annual re-appointment.
Extracts or important matters in the minutes of Board Meetings and General Meetings, as
are relevant to audit.
Evidence of planning process of audit and audit programme.
Analysis of transaction and balances.
A record of the nature, timing and extent of auditing procedures performed and the results of
such procedures.
Evidence that work performed by assistants was supervised and reviewed.

Copies of letters or notes concerning audit matters communicated to or discussed with the
client, including the terms of the engagement and material weaknesses in relevant internal
controls.
Letters of representations or confirmation received from the client.
Conclusions reached by the auditor concerning significant aspects of the audit, including the
manner in which expectations and unusual matters, if any, disclosed by auditor‟s procedure
where resolved or treated.
Copies of the financial information being reported on and the related audit reports, etc.

15. Reasonable Assurance & limited Assurance

Basis Reasonable Assurance Limited Assurance
Level of A high (but not absolute A moderate level of assurance
Assurance 100%) level of assurance

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Work  Understanding of entities  Understanding of entities business

Environme business and environment by and environment by General
nt General enquiries enquiries
 Basic and substantive  Basic analytical procedure
analytical procedure  Test of control and substantive test
 Test of control of details generally not required in
 Substantive test of details Limited assurance
engagement
Type of Positive form of Opinion Negative form of opinion
Opinion
Risk Risk is less than Limited Risk is more than the Limited
Assurance Assurance.

16.Audit plans & audit Programs

Audit Plans Audit Programme
Meaning Audit plan refers to the Audit programme is the list of steps,
strategies or guidelines that are to be followed by audit staff to
which are followed by obtain sufficient
the auditor for audit evidence.
conducting audit.
What is Basic principle of audit. Series of examination and verification
it? steps.
Step Audit plan is initial step Audit program is setting up of
of audit procedures that are needed to
implement the audit plan
Matters Matters to be considered 1. Specific assessments of inherent and
to be by the auditor in control risks and the required level of
considere developing the overall assurance to be
d audit plan include
knowledge of business,
understanding the
accounting
and internal control provided by substantive procedures;
systems, risk and 2) Timing of tests of controls and
materiality, nature, substantive procedures;
timing and extent of 3) Coordination of any assistance
procedures, expected from the entity, the
coordination, direction availability of assistants and
supervision and review the involvement of other
process etc. auditors or experts; etc.

17. Audit & Assurance

Criteria Audit Assurance

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Assurance is the process of

analyzing and used in the
assessment of accounting
The audit is the process of
entries and financial records.
evaluating the accounting entries
Assurance is a process of
Definiti present in the financial statement
verifying the records available
on of the company. The audit checks
in the company’s accounting
the accuracy of the financial
record is as per accounting
reports.
standard and principle, and it
also verifies that accounting
record is accurate or not.
Step The audit is the first step. Assurance if followed by the
audit.
Done by An internal auditor or external An audit firm does assurance.
auditor does the audit.

Aim The audit tells about any Assurance specializes in

misrepresentation done in assessing the improving the
financial records, any misuse of quality of the information in a
funds, any fraud, and any company. It helps in decision
fraudulent activities done in a making in an organization.
company or done by the
company.
Uses Auditing includes making sure The use of Assurance is to
ethically presentation, fairly check the accuracy of financial
presented, accurate, and it also reports. It also assures all the
checks whether financial reports stakeholders that there is no
are as per accounting standard misrepresentation done in
and accounting principle. financial records, no misuse of
funds, no fraud, and no
fraudulent activities done in a
company or done by the
company.

18.Batch Processing & OLRT

Batch Processing On-Line Real Time (OLRT)
system
♦ Transactions are accumulated and ♦ Transactions are processed as on
processed in group when they occur

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♦ Two types of files are maintained ♦ Only master file is maintained. It

master file is updated when batch keeps updating
processing is
run
♦ Updating does not take place as
♦ Though updating takes place
quickly as in On-Line Real time immediately the processing becomes
system complex.
♦ Not useful when instant and
updated results are required ♦ Useful for immediate reporting
system
♦ Generally, does not provide audit
♦ Generally provides Audit trail trail and hence requires more
attention of auditor

19.Internal Evidence & External Evidence

Particul Internal Evidence External Evidence
ars
Meaning Internal Evidence i s o n e External Evidence originates
t h a t h a s been created, used outside the Client’s organization
and retained within the Client’s
organization
Example Duplicate copy of Sales Payee’s Receipt, Purchase Invoice
s Invoices, Employees’ Time of Supplier, Lease Agreement,
Reports, Inventory Reports, Bank Statements, Insurance
Wage Sheets, Counterfoils of Policies, Agreements, etc.
Receipts, Purchase
Requisitions,
Minutes Books, etc.
Use for These may not always These documents are generally
accounti constitute a direct accounting prepared in the ordinary course of
ng source document, business activities and form part
e.g. purchase Requisitions, of its records, whether of
Minutes Books accounting or
non- accounting nature.
Auditor’ It is provided to the Auditor It may sometimes be obtained
s Role by the sources internal to the directly by the Auditor, e.g.
organization. certificate regarding bank balance,
possession of securities,
confirmation of balances of
Debtors, Creditors, Lenders,

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Borrowers, etc.

Reliabili It is not as reliable as external It is considered more reliable

ty evidence than internal evidence.

20.Internal Check & Internal Audit

S Internal Check S Internal Audit
N N
1 Internal check is not a specific 1 Internal audit is specifically
check, but the duties of different done to check that the accounts
persons are are properly maintained and
so arranged that a person ‘s the systems are in control.
work is
automatically checked by
another person while
carrying out the normal duty.
2 Internal check does the preventive 2 Internal audit does the detective
job job of identifying frauds and
i.e. internal check is derived so errors and rectifying
that frauds and errors are them.
prevented.
3 It is more of process in a day to 3 It is specific defined job.
day
functioning of the business.
4 All the persons in the 4 Specific persons are appointed
organization are to the internal audit.
involved to maintain the
internal check system.
5 It is required in all organization in 5 Carrying out internal audit is
formal or informal. not compulsory.
It is done based on management
decision.
6 It does not include internal audit. 6 It includes internal check.

21.Internal Audit & External Audit

Particulars Internal Audit External Audit

Appointing Management of the entity Owner of the entity
Authority

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Scope Defined by the appointing authority Defined by the law

Approach To ensure adherence to management, To collect sufficient and
safeguard of assets, completeness and reliable audit evidence as
accuracy of accounting records to express, “true and fair”
view on financial
statement
Independence Less independent Complete independent
Reporting To management or to Audit To shareholder of the
Responsibility committee owner
Conducted by Employee or outsourced consultancy Member holding
firm Certificate of practice
Coverage All categories of risk, their Financial reports,
management, including reporting on financial reporting risks.
them
Responsibility Improvement is fundamental to the None, however there is a
for purpose of internal auditing. But it is duty to report problems
done by advising, coaching and
improvement facilitating in order to not undermine
the responsibility of management.

22.Vouching & Verification

Vouching and Verification:

. Meaning: The act of examining the vouchers is known as vouching. A voucher is

any documentary evidence in support of a TRANSACTION entered in the books
of account. Verification and be explained as establishing the truth or securing some
kind of confirmation with respect to the ASSETS AND LIABILITIES appearing in
the balance Sheet of a concern.
2. Nature & Purpose: Vouching involves establishing the arithmetical accuracy and
the authenticity of the transactions of a concern. Vouching proves that an asset ought
to exist. Verification goes beyond vouching. It seeks to establish that assets as stated
in the Balance Sheet of a concern exist in fact and that the liabilities are properly
disclosed. Verification proves that an asset does exist.
3. Time: Vouching is done during the whole year Verification is done on specific
date mostly at the end of the year.
4. Utility: Vouching Certifies correctness of records whereas Verification Certifies
correctness of assets and liabilities.

5. Personnel: Vouching is done by the junior staff of the auditor under the
supervision of a senior person. Verification is done by the auditor himself assisted

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by senior.

23. Judgmental sampling and Statistical sampling

Judgmental Sampling Statistical Sampling
Traditionally, auditors have Whereas, Statistical sampling
carried out means any
selective checking by what is approach having characteristics of
popularly random
called the test checking or selection of a sample
judgmental and use of
sampling approach. It consists of probability theory to evaluate
selecting sample
and checking a predetermined results, including measurement
proportion of
of transactions on the basis of sampling risk.
the
Auditor’s own judgement and
without
using statistical procedures. Any
sampling
method that does not measure the
sampling risk can be termed as
judgmental sampling.
It is not used mechanically. This It helps the auditor in determining
approach should involve a careful the size of the sample scientifically,
consideration of the circumstances reduces the chance of biasness in
of each case, on the basis of which selection of the sample and can give
the auditor should determine the results with a calculated degree of
items to be test checked, select risk.
sample, examine them and evaluate
the results in the light of his
knowledge of the business of the
enterprise.

24. Audit program and Audit note book

Audit Program Audit Notebook

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This is a list of the audit procedures Audit note book is a bound

to be book
applied in an audit in the containing the audit program,
given significant
circumstances along with audit observations, objections,
proper queries etc.
instructions. Thus, an
audit program
contains the description of the
specific
audit procedures to be
performed in
respect of different aspects to be
covered,
the extent to which those tests
will be
performed and timing of such tests.
It also
lays down the responsibilities of
various
members of the audit team for
carrying

25. Computerized and Manual Accounting System:

i. Faster and efficient in processing of information in computerized system and no such faster
and efficient in processing of information in manual system
ii. Automatic generation of accounting documents like invoices, cheques and statement of
account which manual system cannot produce.
iii. With the larger reductions in the cost of hardware and software and availability of user-
friendly accounting software package, it is relatively cheaper like maintaining a manual
accounting system;
iv. More timely information can be produced than manual system
v. No more manual processing of the data- all automatically posted to the various
ledgers/accounts and many types of useful reports can be automatically generated for
management to make decisions where as such reports cannot generated on manual system
vi. Power failure, computer viruses and hackers are the inherent problems of using computerized

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systems, such risk not remain in manual system

vii. Once data been input into the system, automatically the output are obtained hence the data
being input needs to be validated for accuracy and completeness, we should not forget concept
of GIGO (Garbage In (Input) Garbage out (Output) where validation in manual system can be
checked on inception
viii. Accounting system not properly set up to meet the requirement of the business due to badly
programmed or inappropriate software or hardware or personnel problems can caused more
havoc, where manual system does not have such problem.
ix. Danger of computer fraud if proper level of control and security whether internal and
external.

26. compliance procedure and substantial procedures as Audit methods of collecting

evidences for forming an audit opinion.
Answer:
Auditor should obtain sufficient and appropriate audit evidences and test them before framing
an opinion about the assertions the financial statements reveal. For this, the auditor checks
evidences through
 Compliance procedure and
 Substantial procedure.

Compliance procedures are tests designed to obtain reasonable assurance that those
internal control on which audit reliance is to be placed are in effect. It seeks to test that
 there exists internal control,
 the existing internal control is effective and
 the internal control is working without break or lacunae during the period under review.

When internal control is found to be to an acceptable level, the accounting entries generated in
such a system is more reliable than in one where the control is weak.
Mere satisfaction about the existence of internal control may not be sufficient for auditors to
express opinion about the assertions the financial data in the form of balances and transactions.

These i.e. transactions and balances need to be tested. This is done by audit procedure called
substantive checking. Substantive procedures are designed to obtain audit evidence as to the
completeness, accuracy and validity of the data produced by the accounting system.

The substantive procedures involve

 checking of transactions and balances and

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 analytical review.

The checking of transaction and balances involves vouching of sales, purchases, payments,
receipts and scrutiny of ledgers. The analytical procedure involves critically examining the
accounts in an overall manner and it may entail computation of ratios, trend analysis so as to
dwell in length for examination of unusual or unexplained deviations.

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27. Judgmental sampling and Statistical sampling

Judgmental Sampling Statistical Sampling

raditionally, auditors have carried
out
selective checking by what is
popularly
called the test checking or Whereas, Statistical sampling
judgmental means any
sampling approach. It consists of approach having characteristics of
selecting random
and checking a predetermined selection of a sample
proportion and use of
of transactions on the basis of probability theory to evaluate
the sample
Auditor’s own judgement and results, including measurement
without of
using statistical procedures. Any sampling risk.
sampling
method that does not measure the
‘ sampling risk can be termed as
judgmental sampling.
It is not used mechanically. This It helps the auditor in determining
approach should involve a careful the size of the sample scientifically,
consideration of the circumstances of reduces the chance of biasness in
each case, on the basis of which the selection of the sample and can give
auditor should determine the items to results with a calculated degree of
be test checked, select sample, risk.
examine them and evaluate the
results in the light of his knowledge
of the business of the enterprise.

28. Control Risk & Detection Risk

Answer:
Control risk is the risk that misstatement that could occur in an account balance or class of
transactions and that could be material, individually or when aggregated with mis-statements
in other balances or classes, will not be prevented or detected on a timely basis by the system
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of internal control There will always be some control risk because of the intrinsic limitation of
any system of internal control To assess control risk, the auditor should consider the
adequacy of control design, as well as test adherence to control procedures. In the absence
of such an assessment, the auditor should assume that control risk is high.

Detection risk is the risk that an auditor's procedures will not detect a misstatement that exists
in an account balance or class of transactions that could be material, individually or when
aggregated with misstatements in other balances or classes. The level of detection risk relates
directly to the auditor's procedures. Some detection risk would always be present even if an
auditor were to examine 100 percent of the account balance or class of transaction because, for
example, the auditor may select an inappropriate audit procedure, misapply an appropriate
audit procedure or misinterpret the audit results.

29. Test Check & Internal Check

Sn. Particular Test Check Internal check
s
1 Meaning It stands Auditing for when the oIt refers to book-keeping
method instead of complete fA system of an Arrangement
examination of all the aof staff duties in the
transaction recorded in the
books of account only some of the organization in such a
transaction is selected and verified. manner that no one person
cancompletely carry through a
transaction and record
every aspect thereof.
2 Instituted It is an audit procedure It is a series of procedures
by performed by the auditor laid down by the
in respect of only selected management.
group of transactions.
3 Objective The purpose is to aid Its objective is to facilitate
s auditors to check and management functions.
draw conclusions about
the voluminous transactions.
4 Fraud & It helps the auditor to It is instituted to prevent
Errors unearth frauds and errors frauds and errors.
without checking all the
transactions.
5 Managem Management has no control over Internal controls are subject
ent the test checks carried out by the to
revie

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Control auditors. w, appraisal and changed

by the management.

30.Capital and Revenue Expenditures

Answer
A capital expenditure is that which is incurred for the under mentioned purpose:

a. Acquiring fixed assets

b.Making additions to the existing fixed assets
c. Increasing earning capacity of the business
d.Reducing the cost of production.
e. Acquiring a benefit of enduring nature of a valuable right.

Revenue expenditure is the expenditure, the benefit of which is immediately (within one
year) expended or exhausted in the process of earning revenue. For example, expenditure on
purchase of goods for sale, on their movement from one place to another, on maintaining
assets, on keeping a business organization going etc.

If any expenditure of a revenue nature is treated as capital, it would have the effect of inflating
the profit of the year. If the expenditure of a capital nature is charged to a revenue head, the
amount of profit would be reduced.

31. Hot file review & Cold File review

Hot file review: Hot file review or hot review is conducted usually conducted during the audit
and/or audit work is completed but before the auditor’s report is issued. This in nature is a
detailed review that is conducted with an aim to find out if there’s any weakness in application
of audit procedures or if the results have been misinterpreted. Hot reviews are usually carried
out usually by the senior the audit team or someone with the same authority who is not
connected with the engagement. Such reviews mostly include meetings with audit team
personnel and their individual work so that both work and the skills of members are improved
by pointing out discrepancies and providing recommendations.
Cold file review: Cold file review or cold review is an objective evaluation on the date of
auditor’s report and is performed by the auditor i.e. partner himself when all the audit work
has been concluded and the required sufficient appropriate audit evidence has been obtained
and conclusions drawn and reported. This review usually take place when the auditor’s report
is signed off . The purpose of this review is to ensure compliance with relevant auditing
standards and to analyze weaknesses in the way whole audit work is conducted and how it can
be improved for next similar assignments by updating firm’s quality control standards, training
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Important Distinguish between of Audit (CAP II) Prepared by Kisan Joshi,
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the staff etc

32. Propriety Audit & Performance Audit

Propriety Audit
Substance rather than records and documents
Expenditure as per rule, proper provisioning, properly sanctioned BUT such expenditure
may still be highly wasteful. In propriety audit those expenditures are identified
All the improper expenditure is reported. Improper expenditure means any expenditure
providing no benefits
Principles of Financial Propriety:
There should be a genuine requirement to incur the expenditure i.e. If any expenditure can be
avoided, then it should not be incurred.
Public money should not be utilized for the benefit of any particular person or group of
person
 Amount of expenses is
insignificant
 A claim for the amount enforced by court of law
 Expenditure incurred in pursuance of recognized policy
or custom
 When the expenditure are so regularized that It is not a source of profit
There should be no personal profiteering

Performance Audit :
Also known as 3E audit
1. Efficiency Audit (Incur)
 Whether Government programs/schemes/projects are really executed

 Whether such programs/s/p are providing expected results

2. Economy Audit (Cost) In economy audit it is examined that:-

 Whether P/S/P are executed and benefits are achieved at lowest cost.

3. Effectiveness Audit (Results)

In this audit those areas are identified and reported where more efficiency & economy
possible. The auditor should examine:
Whether P/S/P are performed to achieve overall targeted objective.

33. Audit & Review

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BASIS FOR
AUDIT REVIEW
COMPARISON

Meaning An audit refers to the systematic A review refers to an evaluation

and intelligent examination of of the financial books, conducted
the books of accounts of an by the auditor, to determine if
entity to check whether they there are any chances of
present true and fair view or not. modifications or not.

Assurance level Reasonable level of assurance Moderate level of assurance

Report provided Positive Assurance Assertion Negative Assurance Assertion

Cost High Comparatively low

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