Some of the most frequently asked exam questions on audit of different institutions are as follows:
Q.1. Why Balance Sheet Audit carried out in banks only?
Ans. The Banking Company Regulation Act, 1949 provides that a banking company cannot engage in any business other than banking business. Banking business is entirely different from other business which may involve purchase and sale of traded goods or manufacture and sale of goods produced. In the latter types of business, the scope and extent of audit cover the examination of the trading or merchandising or manufacturing expenses and also of the cost of stocks in trade.
These audits are altogether absent in a banking audit. In the case of banks the business involves “the accepting, for purposes of lending or investment, of deposits of money from the public repayable on demand or otherwise, and withdraw able by cheque, draft, order or otherwise” and that is why a balance sheet ‘audit’ is done.
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Q.2. What are the special points that you would usually take into consideration in the audit of accounts of an insurance business.
Ans. The auditor should take into consideration the following special points while auditing the accounts of an insurance business:
1. The nature and type of business; whether the company is engaged in one or more of the classes of insurance business, viz. Fire, Marine and other insurance.
2. Compliance by an insurance company with the provisions of the General Insurance Business (Nationalisation) Act, 1972, the applicable provisions of the Insurance Act, 1938, and some of provisions of the Companies Act, 1956 which are applicable to certain insurance business under Section 117 of the Insurance Act, 1938.
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3. The certificate of registration issued by the Controller of Insurance and its renewal on an annual basis.
4. The maintenance of accounts and funds for all receipts and payments separately in respect of each class of insurance business (fire, marine, and miscellaneous, etc.) and also for each sub-class of insurance business in case miscellaneous insurance business is also carried on, unless compliance with such provisions is waived by the Controller of Insurance.
5. Internal accounting and administrative controls in operation relating to the receipts and payments of cash.
6. Examination of the items of income (e.g., insurance premium, interests on deposits and securities lodged with the R.B.I., Commission on reinsurance) and of expenses (e.g., claims, commission and management expenses) and assets, such as investments, cash and bank balance, loans and advances, etc.
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7. Verification of the items in the Financial statements (i.e., Balance Sheet, Profit and Loss Account, Revenue Account, etc.) and their disclosure and presentation in accordance with the Regulations prescribed to obtain an assurance that they exhibit ‘true and fair’ view of the financial position of the company and the results of its operations and the changes in its financial position for the year, in conformity with generally accepted accounting principles applied on a consistent basis.
Q.3. Specify the special points to be considered in the audit of an educational institution.
Ans. The auditor should look into the following special points:
1. The nature of institution; that is, whether it is established under the Trust deeds or the Acts of Parliament/State Legislature, as the case may be.
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2. The rules and regulations relating to administration, accounts and audit.
3. The resolutions concerning the management of affairs including accounts that have been recorded in the minutes of the governing body or council or syndicate or committee.
4. The nature and extent of internal checks and of accounting controls in respect of receipts and payments, grants-in-aid (from the University Grants Commission, Government), donations, caution money and library deposits, stipends and scholarships, annual sports, annual prizes and purchases of books and laboratory instruments, etc.
5. The scale of fees to be collected, outstanding fees and liabilities, proper use of the research grants, and the allocation of funds to seminars/professional development/educational projects/publications, etc.
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6. Physical verification of assets (e.g., laboratory equipment, furniture, vehicles, etc.) and stores including laboratory chemicals and re-agents.
7. Examination of the items appearing in the Income and Expenditure statement and in the balance sheet of the institution.