Essay Topics on Auditing | India

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

1. Essay Topic on Auditing (Proprietor Audit):

Q. What is sole proprietor audit? State its advantages.

Ans. The audit examination of the books of account of a sole trader or proprietor, which aims at:

(i) Ascertaining the true and fair view of the state of affairs of his business, and

(ii) Detecting and preventing the errors and frauds and irregularities committed by his staff, is known as sole proprietor audit.

Here, the agreement or contract between the sole trader and the auditor determines the nature, scope and duties of the auditor. Unlike company audit, this is a private audit. The auditor has to act ac­cording to the instructions of the client. Therefore, it is very essential that an agreement is drawn up defining the scope of work, partial audit or com­plete audit to be performed. This becomes a valid document for the auditor to defend his position, if any charge of negligence under the common law is brought against him.

Whenever auditor is asked by the client to conduct ‘full audit’, he should not only ascertain the purposes of this audit but also be care­ful about the liabilities as his client might use his audit report to take a loan from the financial insti­tutions.

In such a case if the bank later on finds that the balance sheet represents incorrect financial po­sition, the auditor is likely to be liable to the banker to make good the loss in the light of the case law State Street Trust Co. vs. Ernest (1938). Here, the Court held: “A refusal to see the obvious, a failure to investigate doubtful, if sufficiently gross, may furnish evidence leading to an inference of fraud so as to impose liability for losses suffered by those who rely on the balance sheet”.

An individual trader derives the following specific advantages, in addition to the general benefits of audit:

1. Detection and prevention of errors, frauds and irregularities that might be committed by the staff.

2. Audited accounts of the deceased would be of direct assistance to the Executors and Ad­ministrators in the preparation of the Death Duty Accounts.

3. Audited accounts will satisfy the Income Tax Authorities and the Insurance Companies for claims settlements.

4. The position of the business with respect to financial solvency and profitability is known.

5. The audited accounts provide a firm base for assessment of Wealth Tax.

2. Essay Topic on Auditing (Audit of a Partnership Firm):

Q. Messrs. Auto Agencies, a Partnership Firm, approaches you and inquires whether it is necessary for them, under any statute or otherwise, to get their accounts audited.

You are required to advise them, ex­plaining briefly the objects and advan­tages of an audit of a partnership firm.

Ans. The audit of the accounts of Messrs. Auto Agencies, a partnership firm, is not a legal necessity under any statute. But, in view of the following objects and advantages derived, it is advisable to incorporate an ‘audit’ clause in the part­nership deed of the firm.

The objects are:

1. To sort out the differences among the part­ners.

2. To ensure that there exists no fraud.

3. To provide a basis in the valuation of good­will or in the settlement of accounts in case of death or retirement or admission of a part­ner.

The audit of a partnership firm offers the following advantages:

1. Improvement in the management of opera­tions and maintenance of up-to-date records are possible on the basis of recommenda­tions of the auditor.

2. The Income Tax Department relies on the audited accounts for tax assessment pur­poses.

3. The Court of Law considers the audited ac­counts as reliable evidence.

4. Mistrust and differences among the partners are avoided by having the audited accounts.

5. The partners who provide finance but do not take part in the administration feel satisfac­tion that there exists no fraud or irregulari­ties in the accounts.

6. The audited accounts provide a firm basis for the valuation of goodwill or settlement of accounts when any of the partners dies or retires, or an outsider is admitted as a part­ner.

Considerations before audit com­mencement:

1. Ascertaining from the previous auditor (if any) the reason for his non-acceptance.

2. Obtaining instructions in writing about the nature and content of audit examination to be made especially with respect to: work of the nature of accounting or auditing, partial audit or complete audit, etc.

3. Obtaining a copy of the Partnership Deed (if any) with a view to getting the full knowledge about: nature of business, partners and their capi­tal, sharing of profits or losses, partners and their duties, accounting period, names of account books, name(s) of the partner(s) or staff keeping the accounts, etc.

4. Obtaining a written statement (in the absence of a partnership deed) duly signed by all the part­ners incorporating the matters at (3) above.

5. Obtaining the Minute Book of the meetings of the partners.

6. Getting the copy of the previous auditor’s report along with the last audited accounts (if any), and noting down the points which require special consideration.

During audit:

The auditor should pay particu­lar attention to the following essential points:

1. The system of internal checks and internal controls in operation.

2. The valuation of current assets and account­ing.

3. The valuation of goodwill.

4. The recording of transactions in the books of original entry and the related evidences.

5. The agreements relating to the contracts that have been entered into with the third par­ties and connected evidences of the work / services executed.

6. The classification of expenses between the capital expenditure and revenue expendi­ture.

7. The division of profits or losses among the partners.

3. Essay Topic on Auditing (Audit of Trust Accounts):

Q. Write a note on ‘the audit of Trust Accounts’ and the advantages derived therefrom.

Ans. The word: ‘Trust’ means the property held and managed by one or more persons (trus­tees) for another’s benefit (beneficiaries). The ben­eficiaries may be minors, widows, and other insti­tutions created under the Indian Trust Act.

Thus, a Trust is created or formed with the following ob­jectives:

1. To protect the interest of the beneficiaries,

2. To look after the assets and properties cov­ered under a testament,

3. To determine the mode and manner about the collection of property rents, share divi­dends, crop procurements from landed pro­perties and the incomes of other tangible as­sets, and

4. To distribute the net income to the benefici­aries in terms of the provisions laid down in a trust deed. Thus, trust accounts refer to the maintenance of the books of account so as to encompass the objectives indicated above.

As the beneficiaries of the trusts are innocent, they do not understand the accounts. This leaves a scope for the trustees to manipulate the accounts with an ulterior motive of defrauding the benefici­aries. Herein lays the importance of trusts audit by an independent auditor. A Trust Deed should, there­fore, incorporate a clause for the appointment of an auditor to verify the trust accounts.

Trust audit can satisfy two-fold main objectives, such as:

(i) Safeguarding the interests of beneficiaries, e.g., proper maintenance of accounts, avoidance of fraud or misappropriation of trust income, equitable dis­tribution of income as per the trust deeds etc.

(ii) Guiding the trustees in the observance of the for­malities of the trust laws and of the fundamentals of book keeping and avoiding the undesirable criti­cisms generally levelled against the trustees. Thus, this audit offers the above-noted advan­tages.

The audit of trust accounts is not mandatory under any of the Central Govt. Legislations. But it is interesting to note that the Bombay Public Trust Act 1950 and certain state laws have made the trusts audit compulsory and contain well defined powers and duties of an auditor.

4. Essay Topic on Auditing (Co-Operative Society Auditor):

Q. You are appointed the auditor of the Central Government Employees Co­operative Society Ltd. State the mat­ters, apart from verification of its trading transactions, which would receive your attention, or,

State in brief the rights and duties of a Co-operative Society’s auditor.

Ans. The following matters should receive the attention of the auditor of the Central Government Employees Co-operative Society Limited:

1. The bye-laws of the Society in the context of Co-operative Societies Act, 1912.

2. The share capital amounts held by members to see that an individual does not hold more than 10% of the capital.

3. Vouching of transactions like:

(a) Cash re­ceipts, deposits and on hand;

(b) Borrow­ings from Central Co-operative Bank, their interest rates, etc. with reference to the reso­lutions passed;

(c) Loans to members and non-members, interest rates, agreements and the relevant resolutions;

(d) Over-due debts and all expenses;

(e) Investments and sur­plus funds to see whether these have been invested in accordance with the rules e.g., with the Savings Banks as per the approved list, in Securities under Sec. 20 of the In­dian Trust Act, etc.

(f) Sales, purchases, stocks and their valuation, if it has a Con­sumers department.

4. Verification of:

(a) Ledger accounts;

(b) Stock register;

(c) Asset records;

(d) Liabilities, etc.

5. Cash reserve, and the transfer of profits of the Society to the Reserve fund and the Welfare fund.

6. Whether the accounts have been maintained according the Co-operative Societies Act.

7. Whether the Balance Sheet and the Profit & Loss Account have been drawn up in accordance with the preformed prescribed by the State Authorities.

5. Essay Topic on Auditing (Internal Control):

Q. State the Objectives and Limitations of Internal Control.

Ans. Objectives of Internal Control:

Internal Controls relating to the accounting sys­tem are concerned with achieving the following objectives:

(a) Transactions are executed in accordance with the management’s general or specific authori­sation.

(b) All transactions are properly recorded in the correct amount in the appropriate accounts and in the accounting period in which executed so as to permit preparation of cost and financial informa­tion within a framework of recognised accounting policies and to maintain accountability for asset.

(c) Access lo asset is permitted only in accordance with management’s authorisation.

(d) The recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with re­gard to any difference.

Special internal control procedures designed to achieve the above objectives could include:

(i) Checking the arithmetical accuracy of the records.

(ii) Introducing the system of reconciliations and drawing up factual statements.

(iii) The institution of Audit Routines, Control Accounts and Trial Balances.

(iv) The approval and control of documents.

(v) Comparison with external sources of infor­mation.

(vi) Comparing the results of cash, security and inventory counts with accounting records.

(vii) Limiting direct physical access to assets and records.

(viii) Comparison of results with the Budgets or standards or other acceptable norms.

To sum up, the introduction of these internal con­trol procedures would aim at:

(a) Safeguarding the assets and resources of the business against losses from any sources, waste, frauds and errors, inefficiency, carelessness and other casualties, viz., accident, fire etc.

(b) Promoting accuracy in the compilation and pres­entation of accounting and operating data; and

(c) Ensuring reliability in accounting, cost and fi­nancial statements and accounts;

Characteristics of Internal Control:

The characteristics of a satisfactory system of Internal Control are two-fold; Personal level and Institutional level.

Personal levels include:

(a) The delegation to specific individuals of powers of the approval, and the institution of checks to see that transactions are approved by individu­als within the scope of their authority.

(b) A division of record-keeping such that one record is checked by another record created inde­pendently.

(c) Proper physical control of assets, including dual custody of negotiable and valuable assets.

(d) Separation of the custody of assets from the recording of the same assets and related transac­tions.

(e) Periodic independent verification of the existence of assets with the recorded accountabil­ity of these assets.

(f) Employment of trained and able personnel.

Institutional levels include:

(a) A plan of organisation which provides seg­regation of functional responsibilities, such that no person is in a position both to perpetrate and con­ceal irregularities in the normal course of his du­ties; to accomplish this, different individuals per­form the functions of (i) authorising a transaction, (ii) recording a transaction, etc.

(b) A system to provide reasonable assurance of accounting control over assets, liabilities, rev­enues and expenses.

(c) Sound practices to be followed in the per­formance of duties and functions of each of the or­ganisational departments, together with managerial supervision and reviews.

In short, adequacy of the procedures and prac­tices and competence of officers, departmental heads and other key personnel are called for.

Limitations of Internal Control:

Internal Control System can only provide rea­sonable assurance that the objectives of the man­agement have been achieved and nothing else.

The inherent limitations are as follows:

(a) The cost of a control procedure should be economic and proportionate to the poten­tial loss due to fraud or error.

(b) The most of the controls tend to direct an anticipated type of transactions and not aimed at controlling unusual transactions.

(c) The potential for human error due to care­lessness, distraction, mistake of judgment or the misunderstanding of instructions.

(d) The possibilities of circumvention of con­trols through collusion with parties outside the entity or with the employees of the en­tity.

(e) The possibility that a person responsible for checking and exercising control could abuse that responsibility, for example, a member of the management overriding a control.

(f) The possibility that procedure may become inadequate due to changes in condition.

6. Essay Topic on Auditing (Routine Checking):

Q. What is ‘Routine Checking’?

Ans. Routine checking is concerned with ascertaining the arithmetical accuracy of:

(i) Castings (of journals and ledgers),

(ii) Postings (of entries in the books of original entry and from these books to ledger accounts),

(iii) Balancing (of ledger accounts),

(iv) Carry forwards,

(v) Drawing up (of the trial balance), and

(vi) Final accounts.

The objectives of routine checking are:

(1) To ensure arithmetical accuracy of entries in the books of original entry;

(2) To ensure correctness of postings in the ledger accounts and their balancing;

(3) To ensure, by the use of special ‘ticks’, that no figure has been altered after it has been checked.

The main distinguishing features between routine checking and vouching are:

(1) Vouching is much wider in concept and application than routine checking;

(2) Routine checking is limited to the entries as they appear in the books of account, whereas vouching must trace the source of information even beyond the books of account;

(3) Routine checking is a part of the total concept of vouching as the latter includes the former as one of the auditing procedures;

(4) While routine checking is done by junior-level audit staff, vouching is carried out by senior ones.

7. Essay Topic on Auditing (Limited Company):

Q. Discuss the circumstances in which an auditor of a limited company is appointed by: (i) Annual general meeting, (ii) Board meeting and (iii) Central Government.

Ans. (i) Annual General Meeting:

Except in the case of the first auditor, every company shall, at each annual general meeting, appoint an auditor or auditors to hold office from the conclusion of that meeting until the conclusion of the next annual general meeting [Sec. 224(1) of Companies Act].

At any annual general meeting, a retiring auditor, by whatsoever authority appointed, shall be reappointed unless:

(a) He is not qualified for appointment;

(b) He has given the company a notice in writing of his unwillingness to be reappointed;

(c) A resolution has been passed at that meeting appointing somebody instead of him or providing expressly that he shall not be reappointed; or

(d) Where notice has been given of an intended resolution to appoint some person or persons in the place of a retiring auditor, and by reason of death, incapacity of disqualification of that person or all of those persons, as the case may be, the resolution cannot be proceeded with [Sec. 224(2) of Companies Act].

If there is a casual vacancy by the resignation of an auditor, such vacancy shall not be filled by the Company in general meeting. [Sec. 224(6.a)]. Such auditor shall hold office until the conclusion of the next annual general meeting. [Sec. 224(6.b)].

In the case of a company holding subscribed share capital of 25% or more whether singly or jointly by public financial institutions, government, banks, insurance companies, etc., the auditor(s) shall be appointed or reappointed at each annual general meeting only by passing a special resolution. [Sec. 224A].

(ii) Board Meeting:

[Add the following to the answer at (A) above]s

If the Board fails to make the appointment within the stipulated period, the company in general meeting may appoint the first auditor. In addition, the Board, under Section 224 (6.a), may fill any casual vacancy in the office of an auditor. Where such vacancy is caused by the resignation of the auditor, the Board is not empowered to fill such vacancy, and in this case, the power to fill up such vacancy vests with the company in general meeting.

(iii) Central Government:

Where no auditors are appointed or reappointed at an annual general meeting, the Central Government may appoint a person to fill’ the vacancy. [Section 224 (3)]. The company must notify to the Central Government the fact of non-appointment of auditor within seven days of the date of annual general meeting.

Besides, if the company fails to appoint an auditor by special resolution under Section 224A, it shall be deemed that the auditor had not been appointed by the company in an annual general meeting. The Central Government in such circumstances may appoint a person to act as the auditor of that company.

8. Essay Topic on Auditing (Statutory Auditor):

Q. Discuss how a statutory auditor can be removed before the expiry of his term in the light of the provisions and restrictions contained in the Companies Act and the Chartered Accountants Act.

Ans. The matter of removal of an Auditor may be governed by the Companies Act, 1956 and the Chartered Accountants Act, 1949.

(a) Companies Act:

According to sections 224 and 225, once a chartered accountant in practice has been appointed as a statutory first auditor by the Board of Directors of a company he cannot be removed before the expiry of his term unless a due notice is served on him and unless the previous approval of the Central Government in that behalf is obtained. It should be noted in this context that a special notice shall be required for a resolution at an annual general meeting appointing as auditor a person other than the auditor appointed previously.

On receipt of such a resolution, the company must forthwith send a copy thereof to the existing auditor. The special resolution regarding the removal of the auditor cannot be brought to the effective implementation if such notice has not been served. The existing auditor, on receipt of the notice for his proposed removal, may submit his representation within a reasonable time with a request to circulate the same to the members of the company.

The representation may be considered by the Board of Directors, and if found necessary, the auditor may be asked to appear before the Board for his clarification. The auditor’s rights to make a representation, get it circulated among shareholders, and of being orally heard at an annual general meeting are enjoined in Section 225 of the Act. As soon as the existing auditor is removed, a new auditor should be appointed by the Board within seven days from the date of removal of the auditor.

(b) Chartered Accountants Act:

An auditor may be removed from his office before the expiry of his term, if he is found guilty or deemed to be guilty of ‘professional misconduct’ in relation to chartered accountants in practice requiring the action by the High Court and ‘professional misconduct, in relation to members of the Institute generally requiring actions by the High Court.

Some of the main clauses which constitute professional misconduct on the part of a statutory auditor are cited below:

(1) If a chartered accountant in practice accepts the position as an auditor of a company which was previously held by another chartered accountant, without first communicating with him in writing.

(2) If a chartered accountant in practice engages in any business other than the profession of accountancy unless permitted by the council of the institute so to engage.

(3) If a chartered accountant is grossly negligent in the conduct of his professional duties.

(4) If a chartered accountant fails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity.

(5) If a chartered accountant expresses his opinion on financial statements of any business or any enterprise in which he, his firm or a partner in his firm has a substantial interest unless he discloses the interest also in his report, and

(6) If a chartered accountant contravenes any of the provisions of the Act and regulations made there under.

9. Essay Topic on Auditing (Shares of a Company):

Q. State the auditing steps for shares of a company.

Ans. The following are the steps for shares of a company:

Share Transfer:

While the audit of the accounts of a company is statutory, the audit of shares transfer is not statutory; it is optional.

The essential auditing steps are to:

1. Refer the Articles of Association to ascertain the procedures followed to transfer shares;

2. Refer the statutory provisions (Sec. 108A) of the Companies Act and inquire about the applicability of the restrictions to the company where such audit is undertaken;

3. Evaluate the systems of internal accounting and administrative controls to decide the extent of checks, and then to verify:

(a) Whether the transfer forms are duly stamped and completed,

(b) Whether the transfer forms bear the signatures of the genuine transferors,

(c) Whether due intimation was given to the transferors including joint shareholders and any objection received against share transfer,

(d) Whether the transfer fees have been received and recorded in the cash book by reference to the duplicate copies of the receipt book,

(e) Whether the shares to be transferred are on lien or mortgaged and if so, whether a notice given to the mortgagees, etc.

4. Ascertain whether the transfer/transmission of shares is on account of death or bankruptcy of member, and in that case, it is necessary to examine:

(a) the Articles of Association for compliance with the regulations,

(b) The succession certificate, or the will, or the power of attorney, and/or the certificate issued by the Controller of Estate Duty (to confirm the estate duty payment), and

(c) The executor’s application that the shares may be issued.

5. Verify the books and records, such as:

(a) Directors’ Minute Book (for approval of transfers),

(b) Share transfer registers, and

(c) Register of Members.

As this audit is separately taken up, it is the responsibility of the auditor to issue a report, after the completion of the audit, to the management of the company highlighting the cases of errors and frauds and irregularities, if any.

Alteration of Share Capital:

Sections 94 and 95 of the Companies Act deal with this item.

Thus, the auditing steps should be to:

1. Refer the Articles of Association for authorisation regarding the alteration of share capital;

2. Refer the Memorandum of Association as to the fulfillment of the conditions as per Section 94, such as:

(a) Increase of share capital amount by new shares issue,

(b) Consolidation and division of share capital into share of large amount,

(c) Conversion of fully paid shares into stock and reconversion of that stock into fully paid shares of any denomination,

(d) Subdivision or substitution of shares into shares of smaller amount so that the proportion between the amount paid and the amount unpaid (if any) on each reduced share remains the same as before,

(e) Cancellation of the unissued shares for diminishing the share capital amount.

(f) That a resolution has been passed in the general meeting for giving effect to the above alterations;

3. Ensure that a notice giving effect to conditions listed at 2 above has been submitted to the Registrar of Companies by the company within 30 days;

4. Refer the Directors’ minute book and Shareholders’ minute book for share capital alteration, and verify the matters, e.g., entries in the register of members, amount of share capital, cancellation of share certificate with the counterfoils of the new certificates issued.

Reduction of Share Capital:

Sections 100,101 and 103 of the Companies Act deal with this item.

The auditing steps, therefore, should be to:

1. Refer the Articles of Association for authorisation regarding reduction of share capital;

2. Refer the special resolution with respect to : reduction of liability on any of the shares in respect of share capital which is lost or is unrepresented by available assets, and/or paying off any paid-up share capital which is in excess of the wants of the company ;

3. Refer the documents, such as: the court’s confirmation order, the scheme of reduction as per the minutes, and the certificate of the Register of Companies;

4. Verify:

(a) The Register of members for the changes made,

(b) The entries in the books of account including the cash book and Bank pass book;

(c) The cancellation of old certificates,

(d) The issue of new certificates,

(e) The extent of participation of the creditors and fixed interest bearing security holders in the scheme, and

(f) The accounting of fresh issue of shares for unpaid call on equity share capital.

Loan from Bank:

The essential audit steps should be to:

1. Refer the Articles and Memorandum of Association of the company for authorisation to make such loans;

2. Refer the Director’s minute book approving the resolution to make loans;

3. Refer the agreement clauses of loans and verify the pertinent matters, e.g., interest on loan, nature and kind of securities lodged, repayment terms, etc.; and

4. Ensure that this item appears on the liabilities side of the balance sheet.

Deposit from Public:

The essential audit steps should be to:

1. Refer the Articles and Memorandum of Association for authorisation to accept such deposits;

2. Ensure that the company has complied with the conditions enumerated in the rules relating to acceptances of Deposits from public, etc.;

3. Examine:

Statement of receipts from the public as ‘fixed deposits’ forwarded to the Reserve Bank of India, rate of interest, amount of appreciation, the limit to which the deposit is sanctioned, etc.

10. Essay Topic on Auditing (Auditor’s Report):

Q. What are the contents of a good Auditor’s Report?

Ans. An independent auditor’s re­port should generally contain the following:

1. A scope paragraph:

This should identify the financial statements (viz. Balance Sheet, Statement of financial position, Statement of income etc.) ex­amined and should state whether the examination was made in accordance with generally accepted auditing standards.

This should also identify whether financial state­ments have been prepared on a basis other than generally accepted accounting standards.

The auditor should ensure that proper titles are used for financial statements.

For example, cash-basis financial statements might be titled as follows:

(a) Statement of assets and liabilities arising from cash transactions.

(b) Statement of increases or decreases in funds arising from cash transactions. Similarly, a financial statement prepared on a statutory or regulatory basis might be titled ‘State­ment of Income: Statutory Basis’.

2. An opinion paragraph:

This should identify:

(a) The specified elements, accounts, or items examined;

(b) The basis on which these elements are pre­sented, and any agreements, if applicable, specify­ing a basis;

(c) The source of significant interpretations made by the client, if there is an agreement;

(d) The acceptable accounting policies which have been consistently applied for the preparation of the financial information; and

(e) The relevant regulations and statutory re­quirements which have been complied with.

In addition, this paragraph should express an opinion as to:

(a) Whether the specified elements, accounts, or items are presented fairly on the basis indicated;

(b) Whether the financial information as a whole is consistent with that of the preceding period;

(c) Whether there is an adequate disclosure of all relevant material matters.

The auditor’s report should in­clude the following basic elements:

(a) Title,

(b) Addressee,

(c) A paragraph describing the scope of the auditor’s work,

(d) A paragraph expressing his opinion on the financial statements,

(e) Signature,

(f) The auditor’s address, and

(g) The date of the report.

11. Essay Topic on Auditing (Standard Auditing Practices):

Q. (a) What is meant by: ‘Standard Au­diting Practices’ (SAP)? (b) What are their sources? (c) What are their ob­jectives?

Ans. The SAPs are those auditing practices (also termed ‘auditing standards’) that have been issued by the Institute of Chartered Accountants of India (ICAI) for general acceptance and global re­cognition— for being followed by the auditors and accounts examiners, where independent examina­tion of published accounts or financial statements is necessary. These SAPs have to consider the re­cognised policies and principles, relevant legal pro­visions, prevailing custom and usage, business en­vironment and accepted Accounting Standards.

(b) The two primary sources of the SAPs are:

(1) The International Auditing Practices Committee (IAPC), constituted by the International Federation of Accountants (IFAC), of which ICAI is a member to formulate International Auditing Guidelines (IAG).

(2) National level Auditing Practices Committee, formed by the ICAI. It considers IAG’s of the IAPC while formulating the SAPs.

(c) Objectives:

The objectives of SAPs are to ensure general acceptance and uniform application of auditing practices/standards by all independent auditors of published financial statements with a view to assuring users of such statements or reports about results, financial position and changes thereto, if any. Of the twenty two SAPs, SAPs 1 to 20 are all mandatorily to be followed by the practising Char­tered Accountants.

12. Essay Topic on Auditing (Computer-Assisted Audit Techniques):

Q. What do you understand by: Com­puter-Assisted Audit Techniques (CAATs)?

Ans. The overall objectives, scope and standard of an audit do not undergo any change when an audit work is performed in an EDP environment. The standard for evaluation of control procedures for audit purpose is equally applicable to the activities done under EDP equipment as is expected for the activities under the manual or mechanical sys­tems.

The only difference is that the auditor, in the course of the application of his auditing procedures in an EDP environment, should have to consider some methods or techniques (other than those usu­ally adopted in manual or mechanical systems) so as to use the computer as an audit tool. These vari­ous uses of the computer by an auditor for the de­velopment and application of techniques suitable to him and to the circumstances are known as ‘Com­puter-Assisted Audit Techniques’ (CAATs).

In other words, the expression means and concerns itself to those auditing techniques that take assist­ance of a computer for being applied to an audit in an EDP environment. The application of Compu­ter Assisted Audit Techniques assumes its impor­tance especially when there is absence of input documents or the lack of a visible ‘audit trail’ in the performance of compliance and substantive audit procedures.

The uses of CAATs, thus, improve the effectiveness and efficiency of auditing proce­dures that are necessary in an EDP environment. These techniques can be applied to a computer of any type or size although some special considera­tions relating to small business computer environ­ments might be necessary. In other words, audit techniques have to be tailored to suit the particular EDP system in operation.

Although adequate knowledge and training are necessary to apply CAATs in actual audit practice, the concepts can be illustrated in chart and narrative form. The following diagram shows the generalized operational method, although individual systems differ from one audit firm to the other

13. Essay Topic on Auditing (Audit Programme): 

Q. Enumerate the audit functions that are capable of being performed by a generalized computer audit pro­gramme.

Ans. The following audit functions can be performed by a generalized computer audit pro­gramme:

(1) Test of details of transactions and balances for example, the use of audit software to test all (or a sample) of the transactions in a computer file; Scan­ning or examining computer records for exceptional or unusual characteristics and obtaining lists of (say): accounts receivable balances over the credit limit, unusually large inventory balances, unusual payroll situation (i.e., excessive overtime); check­ing Payroll/Interest/Depreciation calculations.

(2) Analytical review procedures for example, the use of audit software to identify unusual fluctuations or items; Comparing data on different records of files and listing unusual or irregular results, such as comparing accounts receivable master file bal­ances between two dates with accounts receivable debits and credits contained in detailed transaction files between the same dates : Selecting and ob­taining various samples, such as fixed assets changes, inventory items, items from the Income Statement; Preparing various analyses and demand­ing certain accounts, viz., trial balances, accounts receivables and inventory turnover, debtor’s aging schedules, etc.

(3) Compliance tests of general EDP controls-for example, the use of test data to test access proce­dures to the programme libraries.

(4) Compliance tests of EDP controls-for example, the use of test data to test the functioning of a pro­grammed procedure.