Auditing: Essay Topics on Auditing

Here is a compilation of essay topics on ‘Auditing’ especially written for school and college students.

Q. State the circumstances that may moti­vate a sole proprietorship business to get its accounts audited by an auditor.

Ans. The circumstances that may motivate a sole proprietorship concern to get its accounts au­dited are:

1. To ascertain the true and fair view of the state of affairs of the business.

2. To detect and prevent errors, frauds and irregularities that may have been committed by the staff.

3. To secure loans from the Banks and other Financial Institutions who insist on the au­dited accounts.

4. To comply with the requirements of the In­come Tax Act (Tax Audit under Sec. 44AB) particularly when:

(a) The total sales, turnover, or gross receipts exceed Rs. 40 (lakhs in any previous year relevant to the assessment year (In case of a person carrying on business).

(b) The gross receipts exceed Rs. 10 lakhs (in case of a person carrying on a pro­fession).

5. To receive compensation from the Insurance Companies in case of losses sustained by fire, flood or earthquake.

6. To obtain an independent opinion on the maintenance of the books of account.

Q. (A) You have been appointed auditor to a partnership firm under partnership deed. To what special clauses in the part­nership deed would you direct your at­tention during your first audit?

(B) State your decision with reasons in respect of the following transactions: Commission received by Mr. X on the purchase of a property acquired for and in the name of the firm in which he is a partner. Mr. X feels that he is entitled to the commission since he negotiated the transaction.

Ans. (A) Special Clauses in the Partnership Deed:

The auditor, during his first audit, should direct his attention to the following special clauses in the partnership deed:

1. The nature and duration of the business.

2. The capital sum contributed by each part­ner.

3. The maximum amount each partner is allowed to withdraw and the conditions therefor.

4. The provisions in regard to: Interest on the partners’ capital, withdrawals, loans, profit- sharing ratios, salary, commission and rights’,’ duties and powers of each partner.

5. The terms regarding the admission and retirement of partners, the determination of amounts payable to the representative of a deceased partner.

6. The clauses in respect of the accounting period, depreciation and reserve, the valua­tion of goodwill and other assets and the appointment of auditors (if agreed to).

7. Arbitration clause.

(B) The transaction, illustrated here, relates to the purchase of a property acquired for and in the name of the firm. Mr. X, a partner of the firm, negotiated this transaction for and on behalf of the firm and in the interest of the firm. Mere feeling of Mr. X that he is entitled to the commission as he negotiated this transaction is no justification to claim the com­mission. In the absence of any objective clause in the partnership deed regarding the commission pay­able to a partner for negotiation of a particular transaction, Mr. X cannot be entitled to receive such commission.

Q. While auditing the accounts of (a) proprietorship business and (b) part­nership business, you have noticed that certain quantity of controlled materials have been bought without vouchers. Your clients do not want qualified reports. How would you deal with the situation?

Ans. In the instant case, it can be assumed that the clients concerned had to buy some quantities of materials at prices higher than the controlled rates, and that is why, they request the auditor to give unqualified reports. The clients, in order to run the business without any interruption in the activities, purchased the materials from those par­ties who refused issuance of cash memos or invoices to avoid litigations.

In these circumstances, the auditor may do the following before issuing his report:

(a) Proprietorship business:

A certificate should be obtained from the proprietor.

Such certificate should clearly state that:

(i) The materials were purchased with his consent;

(ii) The prices of which bought were within his full knowledge; and

(iii) The cash memos or invoices could not be obtained from the concerned buyers.

(b) Partnership business:

A certificate should be obtained from the firm, stating clearly the points as at (a) above. The auditor should see that the certificate is signed by all the partners signifying their full knowledge of the facts.

Q. (a) What is the statutory provision for the audit of a registered co-operative society?

(b) A creditor of a Co-op­erative society wants to inspect its books. How should he proceed in the matter?

(c) In what manner and from whom can the Government recover moneys due to it from a registered Co­operative Society?

Ans. (a) Statutory provisions are:

(i) The audit of accounts of a registered Co­operative Society is to be conducted by the State Co-operative department at least once a year.

(ii) The Registrar of Societies should get the accounts audited by a chartered accountant or a retired official of the co-operative de­partment enlisted in the panel approved by him.

(iii) The auditor shall have right of access to the books of account and documents.

(iv) Every officer of the Society must furnish all information required by the auditor.

(b) The creditors, desirous of inspecting the books of a Society, should make an application to the Registrar. The Registrar, on being satisfied, shall inspect or direct some other person to inspect the books of the Society.

(c) The Government can recover moneys due to it from a registered Co-operative Society in the fol­lowing manner and from the following persons:

(i) Firstly, from the Society’s property.

(ii) Secondly, from the members subject to the limit of their liability in case of a li­mited liability Society.

(iii) Thirdly, from the members in the case of other Societies.

Q. State the Concept of Internal Control System.

Ans. Definition of Internal Control System: 

The plan of organisation and all the methods and procedures adopted by the management’s objec­tive of ensuring, as far as possible, the orderly and efficient conduct of its business, including adher­ence to management policies, the safeguarding of assets, the prevention and detection of fraud and error, the accuracy and completeness of the account­ing records, and the timely preparation of reliable financial information.

The system of internal con­trol extends beyond those matters which relate di­rectly to the function of the accounting system. The elements of the system of internal control are re­ferred to as internal controls and are collectively known as internal control. (IAG)

Concept of Internal Control System:

The above definition amply explains the concept in a broader sense keeping in view the changing socio-economic conditions now-a-days where the society expects to get more from the Accounting and Auditing profession. The concept includes the systems of adminis­trative nature of control in addition to the tradi­tional area of accounting control.

This can be charted as under:

Internal Control System Chart:

(i) Accounting controls:

comprise the plan of organisation and all methods, procedures and records that are concerned mainly with, and relate directly to, safeguarding of assets and .reliability of the financial records. They generally include such controls as the system of authorisation and approval, separation of duties concerned with record-keep­ing and accounting reports from those concerned with operations or asset custody, physical controls over assets, and internal auditing.

(ii) Administrative controls:

Comprise the plan of organisation and all methods and procedures that are concerned mainly with operational efficiency and adherence to managerial policies. They usu­ally relate only indirectly to the financial records via decision processes leading to management’s authorisation of transactions.

They generally include such controls as statistical analysis, time and mo­tion studies, performance reports, employee train­ing programmes and quality controls, etc. On most statutory cost financial audits, accounting controls are more important than administrative controls.

Q. Are routine checking and vouching complementary to each other?

Ans. The concepts of vouching and routine checking are not similar. Vouching incorporates in it the concept of routine checking.

Routine checking and vouching are not complementary to each other on the basis of the following main considerations:

1. Vouching establishes that the transactions recorded in the books are in order, have been authenticated and are correctly accounted for, but mere routine checking does not ensure them.

2. Substantiation of propriety results from vouching: which is not achieved by routine checking?

3. Routine checking establishes the reliability of entries in the books of original entry, but it can never establish the truthfulness, fairness, and completeness of the recorded transactions to which vouching aims at.

4. The aim of the auditor is:

(i) To ascertain the real state of affairs by examining internal and external evidences,

(ii) To ensure the confidence of third parties,

(iii) To guard against all frauds, errors and irregularities,

(iv) To have a greater precision in audit, etc. These are achieved by vouching and not by means of simple routine checking.

Q. State the important points to be considered while examining the vouchers (or while vouching).

Ans. While vouching transactions or examining the vouchers, the points to be considered are:

(1) Satisfaction as to three basic requirements of a voucher genuineness of transaction, accuracy of amount, accounts classification;

(2) Consecutive numbering and orderliness in filing of vouchers;

(3) Agreement of the date and number of vouchers with those entered in the books;

(4) Clear explanation of the transaction as to party’s name, amount, account classification, etc. in a voucher so that it is capable of verification from the books of account;

(5) Recording of amount both in figures and words so as to eliminate the possibilities of alterations or frauds at later date.

While vouching transactions the auditor should ensure that:

(1) The payments relate to the business;

(2) The payments are authorised by responsible official;

(3) The signatures of passing authorities are genuine;

(4) The vouchers exceeding Rs. 500 bear a revenue stamp;

(5) The vouchers, after audit, bear initials or are cancelled;

(6) A list of missing vouchers is prepared for further inquiry or explanation;

(7) A special ‘tick’ mark is always used; and

(8) The vouching of a particular account or for a particular period is completed at one continuous process.

Q. What are the special points that the auditor will consider while vouching the following items in connection with the audit of a public limited company?

(1) Mortgages and Charges,

(2) Fixed and Floating Charge,

(3) Redemption of Debentures,

(4) Preliminary expenses,

(5) Interest paid out of Capital,

(6) Profit or loss prior to incorporation, and

(7) Directors’ Fees.

Ans. (1) Mortgages and Charges:

(i) Inspecting Directors’ Minute Book which contain authorisation for raising loans,

(ii) Referring the Articles and Memorandum of Association authorising the company to raise loans against mortgages and charges, and

(iii) Vouching the Registrar’s Certificate, receipt of loans, and that the loan has been shown as liabilities in the balance sheet of the company.

(2) Fixed and Floating Charges:

(i) Examining the conditions for creation of fixed charge and verifying as to whether the company deals with the property pledged as securities to the debenture- holders subject to the provision of a prior right of the shareholders;

(ii) Examining the conditions for creating a floating charge, i.e., whether:

(a) The charge is based on the property in the ordinary course of business,

(b) The debenture-holders have a right to be paid out of the assets’ sale proceeds and

(c) The preference shareholders have been given priority before the right of debenture holders.

(3) Redemption of Debentures:

(i) Referring the Directors’ Minute Book to ascertain the terms, viz., whether the debentures are redeemed by periodic withdrawals or by paying off on a predetermined rate;

(ii) Referring the Articles for authorisation for redemption; and

(iii) Vouching and verifying the creation of redemption reserve, periodical pay­ments, and the cancelled debentures.

(4) Preliminary expenses:

(i) Identifying the expenses incidental to the Articles, Memorandum, Prospectus and preliminary contracts (i.e., costs of stamp duty, registration, company’s seal, printing documents, legal charges, etc.) and capitalisation thereof;

(ii) Vouching by reference to the documentary evidences, such as bills, receipts, agreements, etc.;

(iii) Comparing the actual expenses with the estimates specified in the prospectus;

(iv) Verifying as to whether these expenses have been written off from the future profits, etc.

(5) Interest paid out of Capital:

(i) Examining the compliance of the provisions of Section 208 of the Companies Act, 1956;

(ii) Verification with respect to the Govt’s sanction, Board’s resolution, authorisation by the Articles, period of interest payment determined by the Central Government, rate of interest ; and

(iii) Vouching the interest amounts and their accounting treatment (e.g., showing the expenditure as ‘Miscellaneous Expenditure’ under the asset side of the balance sheet).

(6) Profit or loss prior to incorporation:

(i) Examining the treatment of profits earned, i.e., whether:

(a) It is capitalized as reserve,

(b) It is used for payment of interest to vendors on the purchase consideration, and/or

(c) It is used for writing off goodwill or other fixed assets;

(ii) Examining the treatment of losses incurred, i.e., whether:

(a) It is charged to Goodwill Account, or

(b) It is transferred to Suspense Account for adjustment against the Capital profit.

(7) Directors’ Fees:

These refer to the amounts to be paid to the directors for the services rendered and for attending the board meetings. The directors themselves fix up the fees normally and include the same in the Articles of Association. Sometimes, these are fixed by the Shareholders in a general meeting. However, vouching involves the verification of related documents, like Articles of association, shareholders’ resolution, directors’ minute book, directors’ attendance register, and the payment vouchers.

Q. (a) What is teeming and lading?

(b) The cashier of a company of which you are the auditor has control of financial books. Besides he is authorised to open letters and acknowledge receipt of letters and cheques. Enumerate the possible frauds likely to be committed by a delinquent cashier in respect of both receipts and payments and the checks you would exercise to detect such malpractices.

Ans. (a) Also termed ‘Lapping’, it is a procedure in which the individual handling the money withholds some portion of the day’s receipts and also fails to record proper credit to certain customers’ accounts. When subsequent receipts come in, some portion of these receipts is issued to credit the previous customers’ accounts.

This process continues on a day-to-day basis. It is difficult for such an irregularity to be carried out successfully unless the custody and recording of cash are handled by the same person or there is collusion between the people performing these two functions.

(b) Possible frauds by cashier checks to detect them:

(1) Cash receipts misappropriation:

A delinquent Cashier, having control of all the financial books, may misappropriate cash by falsely cre­diting the customer’s account without co­rresponding entry in the cash book. He may issue a forged receipt for the money received from the customer.

(2) Cash Sales mis­appropriation:

A delinquent cashier, in absence of any good internal check system regarding the cash sales, may misappro­priate cash.

(3) Misappropriation of cash proceeds of sales of assets, etc.:

(4) Discounts manipu­lation.

Checks to detect them:

(1) Careful Scrutiny of counterfoils of receipts, cash book entries and counterfoils of pay-in-slip for deposit of money to the bank. This way, any evidence of ‘teeming and lading’ would be brought to light.

(2) Judging the efficiency of the system of internal checks and careful scrutiny of: cash summaries, Salesmen’s statements and Gate­keeper’s statements in the case of a depart­mental store.

(3) Careful scrutiny of the correspondence, broker’s note, auctioneer’s statement and the bank pass book.

(4) Scrutiny of correspondence, rate and amount of discount, counterfoils of receipts, etc.,

Q. Indicate the nature and type of duties cast upon the statutory auditor under the following sections of the Companies Act, 1956 : 227(1A), 227(4A), 229, 56, 165 and 58A.

Ans. (1) Under Section 227(1A):

It is the statutory auditor’s duty to enquire into:

“(a) Whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are not prejudicial to the company and its members; (b) Whether transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company; (c) Where the company is not an investment company within the meaning of Section 372 or a banking company, whether so much of the assets of the company as consist of shares, debentures, and other securities have been sold at a price less than at which they were purchased by the company; (d) Whether the loans and advances made by the company have been shown as deposits; (e) Whether personal expenses have been charged to revenue account; (f) Where it is stated in the books and papers of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading.”

On enquiry into the above cases, it is the statutory auditor’s duty to report only when there is an unfavorable reply. This duty on the part of the auditor is designed to curb specific malpractices that are generally committed by the persons at the helm of affairs of a company.

(2) Under Section 227(4A):

It is the statutory auditor’s duty to submit a report describing the position as favourable or otherwise in respect of the matters specified in the Companies (Auditor’s Report) order of 2003.

(3) Under Section 229:

It is the statutory auditor’s duty to sign the audit report, and to sign or authenticate any other document of the company required by law to be signed or authenticated by the auditor.

(4) Under Section 56:

It is the statutory auditor’s duty to certify:

(a) The statement of profits and losses for the last five years showing the rate of dividends paid each year,

(b) The statement of assets and liabilities of the company,

(c) The provisions and adjustments made or to be made, and

(d) The similar information about the subsidiaries, if any, which are stated and set out in the prospectus issued by a company.

(5) Under Section 165:

It is the statutory auditor’s duty to certify as to the accuracy of the statutory report relating to:

(a) The allotment of the shares by a company,

(b) The cash receipts against such shares, and

(c) The receipts and payments account up to the date within seven days of the date of report.

(6) Under Section 58A:

It is the statutory auditor’s duty to:

(a) Inquire whether the company has furnished the necessary statement regarding the acceptance of public deposits,

(b) ascertain whether the company has accepted such deposits, and (c) check whether the company has complied with the RBI’s directives and the rules framed under this section in this regard.

Q. Directors of a limited company desire to appoint as auditor a person other than the retiring auditor. What are the legal necessities to be observed before making such appointment?

Ans. The following legal necessities should be observed by the directors of a limited company before appointing as auditor a person other than the retiring auditor:

1. The directors should ascertain and ensure that the retiring auditor is not qualified for reappointment, or that he has given the company a notice in writing of his unwillingness to be reappointed, or that a resolution has been passed at an annual general meeting of the company to the effect of appointing somebody instead of the retiring auditor or expressed provision for not reappointing the retiring auditor.

2. The directors should note that special notice is required for a resolution at an annual general meeting appointing as auditor a person other than auditor appointed previously.

3. The company shall forthwith send a copy of the special notice to the retiring auditor.

4. The company, on receipt of written representation (if any) from the retiring auditor against such special notice, should circulate such representation to the members.

5. If a copy of the representation is sent to the shareholders either because this was received too late or because of the default of the company, the contents of the representation should be read out at the meeting at the request of the retiring auditor, and the retiring auditor should be allowed to hear orally.

6. The copy of the representation is not needed to be sent out or read out at the meeting if, on the application either of the company or any other person who claims to have been aggrieved, the court is satisfied that the right is being abused to secure needless publicity for defamatory matter.

7. Where a new auditor is appointed in place of the retiring auditor, the company within seven days of the meeting should inform the new auditor about his appointment.

Q. State the matters included in the auditor’s report. 

Ans. In accordance with the Companies (Auditor’s Report) Order, 2003 the following matters should be included in the Auditor’s Report on the accounts of the companies:

1. Whether the company is maintaining proper records to show full particulars, including quanti­tative details and the situation of fixed assets; Whether these fixed assets have been physically verified by the management, and if any serious dis­crepancies were noticed on such verification, whether the same have been properly dealt with in the books of account; If a substantial part of fixed assets have been disposed off during the year, whether it has affected the going concern.

2. Whether physical verification of inventory has been conducted by the company management at reasonable periods;

3. Whether the procedures of physical verifi­cation of inventory followed by the management are reasonable and adequate in relation to the size of the company and the nature of its business. If not, the inadequacies in such procedures should be reported; Whether the company is maintaining proper records of inventory;

4. Has the company either granted or taken any loans, secured or unsecured, to/from companies, firms or other parties covered in the register maintained under Section 301 of the Act. If so, give the number of parties and amount involved in the transactions; Whether the rate of interest and other terms and conditions of loans given or taken by the company, secured or unsecured, are prima facie prejudicial to the interest of the company ;

5. Whether payment of the principal amount and interest are also regular; if overdue amount is more than one lakh, whether reasonable steps have been taken by the company for recovery/payment of the principal and interest.

6. Whether there is an adequate internal con­trol procedure commensurate with the size of the company and the nature of its business for the pur­chase of inventory and fixed assets and for the sale of goods; Whether there is a continuing failure to correct major weaknesses in internal control;

7. Whether transactions that need to be entered into a register in pursuance of Section 301 of the Act have been so entered; Whether each of these transactions has been made at prices which are reasonable having regard to the prevailing market prices at the relevant time. (This information is required only in case of transactions exceeding the value of five lakh rupees in respect of any party and in any one financial year);

8. If the company has accepted deposits from the public, whether the directives of the Reserve Bank of India and the provisions of Sections 58A and 58AA of the Companies Act and the rules framed there under, wherever applicable, have been complied with. If not, the nature of contravention should be stated;

If an order has been passed by the Company Law Board whether the same has been complied with or not?

9. In the case of listed companies and / or other companies having a paid-up capital and reserves exceeding to Rs. 50 lakhs, as at the commencement of the financial year concerned, or having an average annual turnover exceeding 5 crore rupees for a period of three consecutive financial years immediately preceding the financial year concerned, whether the company has an internal audit system commensurate with its size and nature of its business.

10. If the maintenance of cost records has been prescribed by the Central Government under Sec­tion 209(1) (d) of the Companies Act, 1956, whether such accounts and records have been made and maintained;

11. Whether the company is regular in depositing undisputed statutory dues including Provident Fund, Investor Education and Protection Fund, Employees’ State Insurance, Income tax, Sales tax, Wealth tax, Customs Duty, Excise duty, Cess and any other statutory dues with the appropriate authorities, and if not , the extent of the arrears of outstanding statutory dues as at the last day of the financial year concerned for a period of more than six months from the date they became payable, shall be indicated by the auditor ;

In case dues of sales tax/income tax/customs duty/wealth tax/excise duty/cess have not been deposited on account of any dispute, then the amounts involved and the forum where dispute is pending may please be mentioned. (A mere representation to the department shall not constitute the dispute).

12. Whether in case of a company which has been registered for a period not less than five years, its accumulated losses at the end of the financial year are not less than fifty per cent of its net worth and whether it has incurred cash losses in such financial year and in the financial year immediately preceding such financial year also;

13. Whether the company has defaulted in repayment of dues to a financial institution or bank or debenture holders? If yes, the period and amount of default to be reported.

14. Whether adequate documents and records are maintained in cases where the company has granted loans and advances on the basis of security by way of pledge of shares, debentures and other securities ; If not, the deficiencies to be pointed out.

15. Whether the provisions of any special statute applicable to chit fund, nidhi or mutual benefit fund society have been duly complied with;

16. Whether the net-owned funds to deposit liability ratio is more than 1:20 as on the date of balance sheet;

Whether the company has complied with the prudential norms on income recognition and provisioning against substandard/default/lost assets; Whether the company has adequate procedures for appraisal of credit proposals/requests, assessment of credit needs and repayment capacity of the borrowers; Whether repayment schedules of various loans granted by the nidhi is based on the repayment capacity of the borrower and would be conducive to recovery of the loan amount;

17. If the company is dealing or trading in shares, securities, debentures and other investments, whether proper records have been maintained of the transactions and contracts and whether timely entries have been made therein; Also whether the shares, securities, debentures and other investments have been held by the company in its own name except to the extent of the exemption, if any, granted under Section 49 of the Companies Act, 1956;

18. Whether the company has given any guarantee for loans taken by others from banks or financial institutions, the terms and conditions whereof is prejudicial to the interest of the company;

19. Whether term loans were applied for the purpose for which the loans were obtained;

20. Whether the funds raised on short-term basis have been used for long-term investment and vice versa; if yes, the nature and amount is to be indicated;

21. Whether the company has made any preferential allotment of shares to parties and companies covered in the register maintained under section 301 of the Act and if so, whether the price at which shares have been issued is prejudicial to the interest of the company;

22. Whether securities have been created in respect of debentures issued;

23. Whether the management has disclosed on the end-use of money raised by public issues and the same has been verified; and

24. Whether any fraud on or by the company has been noticed or reported during the year; If yes, the nature and amount involved is to be indicated.

Q. What precautions will you take to cer­tify as ‘true and fair’ Balance Sheet and Profit & Loss Account of a Limited Company?

Or, State the general guidelines for consideration of ‘true and fair view’ of the Financial accounting state­ments of a limited company.

Ans. The following precautions should be taken by an auditor before he certifies the Profit and Loss Account and the Balance Sheet of a company as ‘true and fair’:

1. That the P & L account discloses the results of the working of the company clearly and correctly.

2. That there was no manipulation of accounts.

3. That the company has not resorted to any means which may have the effect of creating a secret re­serve—which is entirely inadmissible.

4. That there was neither over-valuation nor un­dervaluation of assets or liabilities.

5. That he has obtained all the information and explanation which were necessary for the purpose of his audit.

6. That the financial statements are in agreement with the books of account and returns.

7. That the books of account and returns and the financial statements are not only arithmetically cor­rect but they are substantially accurate.

8. That the systems of internal controls and checks in operation are reliable and if not, the tests of com­pliance and substantive nature do not reveal any discrepancies.

Q. Write a brief note on the concept of ‘True and Fair View’.

Ans. The Companies Act, 1956 requires that financial statements of a company should give a ‘true and fair view’ and every auditor has to make a report on the financial statements stating whether the said accounts, among other things, give a ‘true and fair view’. But the golden rule of ‘true and fair view’ is not a legally defined term.

In this respect, the Accounting Standards Committee in U.K. states that “accounts will not be true and fair unless the information they contain is sufficient in quantity and quality to satisfy the reasonable expectations of the readers (users) to whom they are addressed. On this question, the accountants can express in­formed professional opinion as to what, in current circumstances, the accounts should reasonably contain”. This concept, thus, refers not only to infor­mation that is quantitatively and qualitatively suf­ficient but also requires accounting and auditing profession to specify the criteria or standards for the same.

The significance of the phrase ‘true and fair’ as used in an audit cer­tificate:

A typical Financial Au­dit certificate contains— “In our opinion and to the best of our information and according to the expla­nations given to us the accounts subject to notes ‘ thereon give the information required by the Com­panies Act, 1956, in the manner so required and give a true and fair view of……….. “. This phrase has not been defined either by the Companies Act, 1956 or by the Council of the In­stitute of Chartered Accountants of India.

Accord­ing to dictionary meaning, the word ‘true’ is “agreement with reality; that which is true or ac­cording to the facts of the case; the true state of things or facts, etc.” and the word ‘fair’ is “free from blemish; impartial; just; equitable; etc.”

Ac­cording to some auditors, the pair of words ‘true and fair view’ should be dropped from the audit certificate as the expression fails to reflect the characteristics relating to the balance sheet.

But it ap­pears that the expression has been correctly cho­sen, should we try to understand it from the mean­ing attached. By the use of the words ‘true and fair view of………’, the underlying idea is definitely to put emphasis on the following two basic aspects in so far as the audit certificate is concerned:

(i) ‘True’-view, i.e., whether the true state of things of facts is revealed—the revelation may be true of truth or untruth, and

(ii) ‘Fair’-view, i.e., whether the attributes of im­partiality, equitability and reasonability are re­vealed.

Let us assume that a Balance Sheet and Profit and Loss Account, which have been prepared on the basis of false vouchers and documents, are au­thenticated by the Auditor in his audit certificate stating ‘true and fair view’ of the state of affairs of the business. In this case, the audit certificate is definitely false and issued perfunctorily as it has not revealed the true state of things or facts.

To cite another example, two firms P and Q ope­rate under same conditions having the same amount of capital initially. It is assumed that the incomes and real expenses are identical, but the reported profits by them are different as because different methods of valuation of closing stocks have been adopted. In both cases, the audit certificate stating ‘true and fair view’ holds good as it has taken into account the concept of ‘truth’ under the doctrine of ‘disclosure’ relating to the choice of valuation method chosen.

As regards the meaning of the word, ‘fair’, Settler observes it as “a pervasive concept— which extends to every phase of financial statement covers such matters as the adequacy of the provi­sions made the propriety with which items have been classified…………. and the appropriateness of the descriptions of the various amounts shown in the statements.”

Regarding the significance of the phrase ‘true and fair’ in the audit certificate, the following judg­ment in the case of Deputy Secretary, Ministry of Finance, Govt. of India vs. S. N. Dasgupta is quite relevant:

“It is the duty of the auditor to verify not merely the arithmetical accuracy of the balance sheet, but it is substantially accurate and to see that it includes the particulars required by the Articles and the Stat­ute and contains the correct representation of the state of the company affairs”.

Q. (a) What is meant by Tax Audit? (b) Mention the main categories of Tax Audit, (c) Who can be a Tax Auditor?

Ans. (a) Tax Audit:

Various Sections of the In­come Tax Act of 1961 make it obligatory for assesses to have their accounts prepared for tax purposes, duly audited by chartered Accountants.

(b) Main categories:

(1) Compulsory Tax Audit:

Section 44AB of the Income Tax Act of 1961 regulates this audit. This audit is compulsory for accounts (relating to a pre­vious year) in case of every person carrying on business or profession and having sales turnover or gross receipts of Rs. 40 lakhs for business, Rs. 10 lakhs for profession, as the case may be.

(2) Special Tax Audit:

Sections 142 (2A) and 142(2D) of the Income Tax Act of 1961 regulate this audit. If an income tax officer, in course of any proceedings before him, is of the view having re­gard to the nature and complexity of the assesses accounts and the interests of revenue that is necessary to do so, he may, with the prior approval of the Commissioner of Income Tax, direct the assessee to get his accounts audited by a chartered accountant nominated by the Commissioner of Income Tax and furnish a report of such audit. This is in addition to the compulsory tax audit under section 44AB.

(3) Other Tax Audits:

Various Sections of the In­come Tax Act provide for such audits.

Some of them are given below:

Detailed rules prescribed under the I.T. Act guide these audits.

(c) Tax Auditor:

A chartered accountant in prac­tice or persons qualified under Sec. 226(2) of the Companies Act can act as auditors of companies for tax audit purposes.

Q. Briefly state the statutory/legal provisions regarding formulation and enforcement of Accounting Standards.

Ans. According to the Section 211 of the Companies Act of 1956, ‘Accounting Standards’ mean stand­ards recommended by the Institute of Chartered Ac­countant of India (ICAI) and as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards (NACAS) set up under Section 210 A of the said Act.

Till such prescription by the NACAS, the standards issued by the ICAI shall be deemed to be the prescribed Accounting Standards. The NACAS will give advice and recommendations to the Central Government on formulation of accounting standards for adoption by the companies or class of companies.

The NACAS shall comprise a chairperson being a person of eminence in the sphere of accountancy, finance, business ad­ministration, business law, economics or similar subjects and Members representing diverse inter­est groups viz., the three Statutory Professional In­stitutes of Chartered Accountants, Cost and Works Accountants, and Company Secretaries of India, Central Government, Reserve Bank of India, Comp­troller and Auditor General of India, present or former Professor of Accountancy, Finance, busi­ness management from an University or deemed University, The Central Board of Direct Taxes, The Securities and Exchange Board of India (SEBI), and Chambers of Commerce and Industry.

Section 211 of the Companies Act also stipu­lates that every Profit & Loss Account and every Balance Sheet of a company has to comply with prescribed Accounting Standards and any deviation there from has to be disclosed together with rea­sons and financial effects, if any.

Q. Explain the Role of Securities and Ex­change Board of India (SEBI) in re­gard to ‘Accounting Standards’.

Ans. The Malegaon Committee of the SEBI, after due consideration of the subject of account­ing standards, has advised that in many areas Indian Accounting Standards were comparable with the International Accounting Standards in both cover­age and content. Yet, there was urgent need for additional accounting standards in some areas.

The SEBI Committee recommended the follow­ing additional accounting standards:

(1) Consolidated Financial Statements for all Sub­sidiaries:

This is for a company holding 51% or more of share capital.

(2) Segment Reporting: This is with respect to multiple business and/or product lines.

(3) Disclosure and Treatment of related party trans­actions.

(4) Treatment and disclosure of deferred taxation.

The Malegaon ‘Committee further recommends that there should be uniform accounting norms or standards for (a) the Capital Market and its inter­mediaries, and (b) valuation methods on Net As­sets Value (NAV) of Mutual Funds.