COURSE CODE : ECO-12

COURSE TITLE : ELEMENTS OF AUDITING

ASSIGNMENT CODE : ECO-12/TMA/2023-
COVERAGE : ALL BLOCKS

1) Define the term auditing. Differentiate between Auditing and Investigation. What is
continuous audit? Discuss its merits and demerits

Auditing: Auditing is a systematic and independent examination of financial information, transactions,

operations, or systems of an organization to provide assurance regarding the accuracy, completeness, and
reliability of the information being examined. The primary purpose of auditing is to express an opinion on
whether the financial statements of an organization present a true and fair view of its financial position and
performance. Auditing helps stakeholders, such as shareholders, investors, creditors, and regulators, gain
confidence in the integrity of an organization's financial reporting.

Key aspects of auditing include:

1. Independence: Auditors must be independent from the organization they are auditing to ensure
objectivity and impartiality.
2. Compliance: Auditors assess whether the organization's operations and financial transactions
comply with relevant laws, regulations, and accounting standards.
3. Materiality: Auditors focus on material errors or discrepancies that could have a significant impact
on financial statements.

Investigation: Investigation, on the other hand, is a broader term that refers to the process of inquiring,
examining, or probing into a specific issue, event, or matter to gather information, facts, or evidence.
Investigations can be conducted for various reasons, including legal, financial, operational, or regulatory
purposes. While auditing is a structured and systematic process focused on financial information and
reporting, investigations can encompass a wide range of topics, including fraud, misconduct, legal
disputes, operational inefficiencies, and more.

Differences between Auditing and Investigation:

1. Purpose: Auditing aims to provide an independent opinion on the accuracy of financial statements,
while investigations are conducted to gather information or evidence for a specific purpose, which
may not be limited to financial matters.
2. Scope: Auditing typically focuses on financial transactions and reporting, whereas investigations
can cover a broader range of topics, including non-financial issues.
3. Independence: Auditors must maintain independence from the organization being audited, while
investigators may or may not be independent, depending on the nature of the investigation.

Continuous Audit: Continuous audit is an auditing approach in which auditors regularly and frequently
assess an organization's financial transactions, operations, and systems throughout the year, rather than
conducting a single annual audit. This approach involves the use of technology, automation, and data
analytics to continuously monitor and analyze financial data and business processes. Continuous audit
aims to provide real-time or near-real-time insights into an organization's financial health and risk factors.

Merits of Continuous Audit:

 1. Timely Detection of Issues: Continuous audit allows for the early detection of errors, fraud, or
irregularities, enabling prompt corrective action.
2. Improved Risk Management: Continuous monitoring helps organizations identify and mitigate
risks more effectively.
3. Efficiency: Automation reduces the need for manual testing and increases audit efficiency.

Demerits of Continuous Audit:

1. Cost: Setting up and maintaining continuous audit systems can be expensive, particularly for small
organizations.
2. Resource Intensive: Requires skilled personnel and substantial IT resources for implementation.
3. Overreliance on Technology: Overemphasis on automation may lead to a lack of human judgment
and oversight.

In summary, auditing is a systematic examination of financial information for the purpose of expressing an
opinion on its accuracy, while investigation is a broader process of gathering information for specific
purposes. Continuous audit involves ongoing monitoring of an organization's financial data and processes
and has merits like early issue detection and improved risk management but also demerits, including cost
and resource requirements.

2)Point out the difference between ‘Verification’ and ‘Valuation’ of

assets. Discuss the objectives of verification of assets.

1. Verification of Assets:
• Verification of assets refers to the process of physically inspecting and confirming
the existence and ownership of assets listed in an organization's balance sheet. It
ensures that the assets claimed to be owned by the company actually exist and
are under its control.
• This process involves checking physical assets such as inventory, machinery,
buildings, and land to make sure they are where they are supposed to be and
belong to the company.
• The primary objective of asset verification is to establish the physical presence,
ownership, and condition of assets. It helps prevent misstatements in financial
statements due to errors or fraud.
2. Valuation of Assets:
• Valuation of assets, on the other hand, is the process of determining the
monetary value or worth of assets as they are reported in the financial
statements. It involves assigning a specific dollar value to each asset item.
• Assets can be valued based on various methods, such as historical cost, fair
market value, net realizable value, or replacement cost, depending on accounting
standards and the nature of the asset.
• Valuation is essential for accurately representing the financial position of the
organization and calculating metrics like depreciation, net income, and
shareholders' equity.

Objectives of Verification of Assets: The main objectives of asset verification are as follows:

1. Confirm Existence: Ensure that assets listed in the balance sheet actually exist and are not
fictitious.
 2. Confirm Ownership: Verify that the assets are owned by the organization and not held by
third parties or subject to liens or encumbrances.
3. Check Physical Condition: Assess the physical condition of assets to determine if they are
in good working order or if there is any impairment.
4. Prevent Misappropriation: Detect any potential misappropriation or theft of assets.
5. Comply with Regulations: Comply with legal and regulatory requirements that mandate
the verification of assets.
6. Accurate Financial Reporting: Ensure that the financial statements provide a true and fair
view of the organization's financial position.
7. Evaluate Depreciation: Determine the accuracy of depreciation and amortization charges
by verifying the condition and useful life of assets.
8. Assess Risk: Identify risks related to asset management, such as inadequate insurance
coverage, and take appropriate actions to mitigate them.

Overall, asset verification is a critical step in the audit process and financial reporting to ensure
the reliability and integrity of an organization's financial statements. It helps stakeholders,
including shareholders, investors, and creditors, have confidence in the accuracy of the reported
financial information.

The position of an auditor in a company under the provisions of the Companies Act varies
depending on the jurisdiction and the specific regulations in place. However, I can provide a
general overview of the role of an auditor, as well as the qualifications and disqualifications for
auditors in many jurisdictions:

Role of an Auditor: The primary role of an auditor in a company is to examine and report on the
financial statements of the company to provide assurance to stakeholders that the financial
information is accurate, complete, and prepared in accordance with applicable accounting
standards and regulations. Auditors are responsible for conducting an independent and impartial
review of the company's financial records, transactions, and internal controls.

Here are some key aspects of an auditor's position:

1. Independence: Auditors must maintain independence from the company they are
auditing to ensure objectivity and impartiality in their assessments.
2. Audit Opinion: After conducting their audit, auditors issue an audit report that expresses
their opinion on the fairness of the financial statements. The report may include an
unqualified opinion (no material misstatements), a qualified opinion (some material
misstatements), or an adverse opinion (significant material misstatements).

Qualifications of an Auditor: Qualifications for auditors can vary by jurisdiction, but some
common qualifications and requirements typically include:

1. Professional Certification: Most jurisdictions require auditors to be certified or

chartered accountants, such as Certified Public Accountants (CPA), Chartered Accountants
(CA), or similar designations.
2. Experience: Auditors usually need to have a certain amount of relevant professional
experience, often several years, to be eligible to perform audits.
 3. Continuing Education: Auditors are often required to participate in ongoing
professional education to stay up-to-date with accounting standards and audit
methodologies.
4. Compliance with Ethical Standards: Auditors must adhere to ethical standards and
codes of conduct established by professional organizations and regulatory bodies.

Disqualifications of an Auditor: Disqualifications typically pertain to factors that would

compromise an auditor's independence, objectivity, or integrity. Common disqualifications may
include:

1. Financial Interest: Auditors may be disqualified if they or their firm have a direct
financial interest in the company being audited.
2. Close Family Ties: If an auditor or their close family members have significant financial
interests in the company or are involved in its management, this could lead to
disqualification.
3. Previous Involvement: An auditor may be disqualified if they were previously involved in
providing certain non-audit services to the company, as it could compromise their
independence.
4. Legal Issues: Convictions for certain criminal offenses or violations of professional ethics
can disqualify an individual or firm from performing audits.

It's essential to note that specific qualifications and disqualifications can vary depending on local
laws, regulations, and the nature of the audit engagement. Companies should consult the
Companies Act and relevant regulatory authorities in their jurisdiction for precise requirements
related to auditors.

3) Discuss the position of an auditor in a company under the

provisions of the Companies Act. State the qualifications and
disqualifications of the auditor for a company.
In the context of the Companies Act, auditors play a crucial role in ensuring transparency,
accountability, and compliance within a company. The provisions regarding auditors are typically
outlined in the Companies Act or similar corporate laws, and these provisions may vary from one
jurisdiction to another. However, I can provide a general overview of the position of an auditor,
as well as the qualifications and disqualifications commonly found in such laws:

Position of an Auditor in a Company:

1. Appointment: Under the Companies Act, auditors are typically appointed by the
shareholders of the company at the annual general meeting (AGM) or, in some cases, by
the board of directors.
2. Independence: Auditors are expected to maintain independence from the company they
are auditing to ensure impartiality and objectivity in their work. This independence is
crucial to maintaining the integrity of the audit process.
3. Duties and Responsibilities: Auditors are responsible for examining the company's
financial statements, accounting records, and internal control systems to provide an
 independent opinion on whether the financial statements present a true and fair view of
the company's financial position and performance.
4. Reporting: Auditors are required to prepare an audit report that includes their opinion
on the financial statements. If they find any irregularities or issues, they are obligated to
report these in their report to the shareholders.

Qualifications of an Auditor:

1. Professional Qualifications: Typically, auditors must be qualified professionals, such as

Certified Public Accountants (CPAs), Chartered Accountants (CAs), or members of a
recognized accounting or auditing body. The specific qualifications may vary by
jurisdiction.
2. Experience: Many Companies Acts require auditors to have a certain level of professional
experience in auditing and accounting.
3. Independence: Auditors must not have any financial or personal interest in the company
they are auditing that could compromise their independence.
4. Good Standing: Auditors should not be disqualified or have a history of professional
misconduct or negligence.

Disqualifications of an Auditor:

1. Conflict of Interest: An auditor is typically disqualified if they have any financial or

personal interest in the company, its subsidiaries, or associated entities that could
compromise their independence.
2. Professional Misconduct: Past instances of professional misconduct, such as fraudulent
activities or unethical behavior, may lead to disqualification.
3. Lack of Qualifications: If an individual does not possess the required professional
qualifications or experience, they may be disqualified from serving as an auditor.
4. Insolvency: In some cases, an auditor who is declared insolvent or bankrupt may be
disqualified.
5. Age Limitations: Some jurisdictions may impose age limitations on auditors,
disqualifying individuals who have reached a certain age from serving as auditors.

It's important to note that the specific qualifications and disqualifications can vary significantly
depending on the jurisdiction and the legal framework in place. Therefore, it is essential for
auditors and companies to be aware of the Companies Act and related regulations applicable to
their specific jurisdiction to ensure compliance with the law. Additionally, many countries have
their own regulatory bodies that oversee auditing standards and practices, adding an additional
layer of oversight to the auditing profession.

4) State the matters upon which the auditors must form an opinion while preparing
their report as laid down in the Companies Act. What do you understand by the
concept of ‘true and fair’ in an auditor’s report?

Auditors are required to form an opinion on various matters while preparing their report under
the Companies Act or similar corporate laws. The specific matters upon which auditors must form
an opinion may vary by jurisdiction, but generally, they include the following key aspects:
 1. Financial Statements: Auditors must form an opinion on whether the financial
statements of the company give a true and fair view of its financial position and
performance. This involves assessing the accuracy, completeness, and fairness of the
information presented in the balance sheet, income statement, cash flow statement, and
related notes.
2. Compliance with Accounting Standards: Auditors need to determine whether the
financial statements comply with the applicable accounting standards or generally
accepted accounting principles (GAAP) in the jurisdiction. They ensure that the company
has followed the prescribed accounting rules and conventions.
3. Consistency: Auditors assess whether the company has consistently applied accounting
policies from one period to another. Inconsistencies can lead to misinterpretation of
financial results.
4. Going Concern: Auditors evaluate whether the company is a going concern, meaning it
is expected to continue its operations for the foreseeable future. If there are doubts
about the company's ability to continue as a going concern, the auditors must disclose
this in their report.
5. Internal Control Systems: Auditors review the effectiveness of the company's internal
control systems, including its financial and operational controls. They assess whether
these systems are adequate in preventing and detecting errors and fraud.
6. Compliance with Legal and Regulatory Requirements: Auditors ensure that the
company has complied with all applicable laws and regulations, both in terms of financial
reporting and business operations. They report any non-compliance in their report.
7. Audit Evidence: Auditors collect and evaluate audit evidence to support their opinions.
They must be satisfied that the evidence they've gathered is sufficient and appropriate to
support their conclusions.

The concept of 'true and fair' in an auditor's report is a critical element. It implies that the
financial statements present a faithful representation of the company's financial position and
performance. Here's a deeper understanding of this concept:

• True: This means that the financial statements are accurate and free from material
misstatements. Auditors ensure that the financial data presented is factual and not
misleading.
• Fair: Fairness implies that the financial statements are unbiased and transparent. They
reflect the financial reality of the company without any intentional manipulation or
distortion of information.

In essence, when auditors state that the financial statements give a "true and fair view," they are
expressing their professional judgment that the financial information is both accurate and
impartial. This judgment is based on their examination of the company's accounting records,
internal controls, and other audit procedures. It provides assurance to stakeholders, such as
shareholders, creditors, and the public, that they can rely on the financial statements for making
informed decisions about the company.

5) Write short notes on the following:

a) Cost audit

b) Redemption of preference shares

 c) Vouching

d) Internal check

a) Cost Audit:

• Cost audit is a systematic examination of a company's cost accounting records,

procedures, and practices to ensure they are accurate and in compliance with relevant
laws and regulations.
• It primarily focuses on verifying the accuracy of cost data used for pricing, cost control,
and decision-making.
• Cost auditors, who are typically qualified professionals, review the company's cost
allocation, allocation methods, and cost accounting system to ensure they adhere to
established standards.
• Cost audit is mandatory in many countries for certain types of companies, especially
those in industries where cost control is critical, such as manufacturing and mining.

b) Redemption of Preference Shares:

• Redemption of preference shares refers to the process by which a company buys back its
preference shares from shareholders at a predetermined price or upon certain conditions
being met.
• This process allows a company to return capital to shareholders and reduce its share
capital.
• The terms and conditions for redemption are usually outlined in the company's Articles of
Association and may include specific redemption dates, redemption prices, and
procedures.
• Companies typically use accumulated profits, a fresh issue of shares, or a sinking fund to
finance the redemption of preference shares.

c) Vouching:

• Vouching is an auditing procedure that involves examining documentary evidence to

verify the authenticity and validity of financial transactions recorded in the company's
books of accounts.
• The auditor selects a sample of transactions and checks the supporting documents, such
as invoices, receipts, contracts, and purchase orders, to ensure that the transactions
actually occurred and were accurately recorded.
• Vouching helps detect errors, irregularities, or fraud by confirming that transactions are
legitimate and supported by appropriate documentation.
• It is a fundamental part of the audit process to establish the reliability of the financial
statements.

d) Internal Check:

• Internal check is an internal control mechanism implemented by a company to safeguard

its assets, prevent errors and fraud, and ensure the accuracy and reliability of financial
information.
 • It involves the segregation of duties and responsibilities within the organization so that
no single individual has complete control over a critical financial process.
• For example, in a well-designed internal check system, the person responsible for
authorizing payments should be different from the person responsible for approving
invoices, issuing checks, and reconciling bank statements.
• Internal check measures are essential for maintaining the integrity of financial operations
and reducing the risk of financial mismanagement or irregularities within the company.

These short notes provide an overview of each concept, but each topic can be quite extensive
and detailed in practice, especially when applied in the context of auditing, finance, or corporate
governance.