Q1. Define and explain the term auditing.

Personal qualities of an
auditor are important for the successful conduct of audit.
Comment
Ans: The term audit is derived from the Latin term audire, which means
to hear. In early days an auditor used to listen to the accounts read over
by an accountant in order to check them. Auditing is as old as
accounting. It was in use in all ancient countries such as Mesopotamia,
Greece, Egypt. Rome, U.K. and India. The Vedas contain reference to
accounts and auditing. Arthasashthra by Kautilya detailed rules for
accounting and auditing of public finances.
Strong technical and ethical characteristics are fundamental to audit
success. These are not new to anyone and should be considered a
baseline set of characteristics that is expected of all auditors. A good
auditor continues to build upon these over the course of a career
through what our profession defines as our commitment to lifelong
learning. As important as technical and ethical characters are, these are
only fundamental to success. These characteristics wont set you apart.
Good auditors also possess the following additional characteristics:
VISION AND INSTINCT
As an auditor gains experience in working with numerous clients in
multiple industries, a good auditors gains the ability to instinctively
understand what the clients business is all about. While carrying out the
audit, s/he is able to determine a picture of any issues at the business
and to translate them into what they might mean in the future. There is
an anonymous quote that states that instinct is the nose of the mind.
The good auditor does not settle when a clients answer or transaction
doesnt seem right. Instinct causes him or her to dig deeper to arrive at a
conclusion that fits with the vision of the business. To develop instinct
and vision, the auditor must develop an inquiring mind and strive to learn
from all experiences encountered in client situations throughout his or
her career.
LEADERSHIP
Great leaders have the desire to help others succeed. Henry Ford
said, Dont find fault, find a remedy. This statement is a classic in
the context of leadership; leaders find solutions, they dont place blame.
An auditor that is a leader finds solutions to complex problems at the
client and has the ability and skill to assist in getting the solutions
implemented. A good auditor must strive to become a successful leader.
Leadership characteristics can be taught but leadership must be earned
day in and day out. Leadership is seen by the client as the auditor being
a teacher and/or a trusted confidant. An audit staff member sees a

leader as a mentor and coach. No single audit or audit firm, for that
matter, can rise above the quality of its leadership. A common theme on
every well-run audit or well-run audit firm can be directly linked to
leadership.
SUPERIOR COMMUNICATION SKILLS
Superior communication skills allow auditors to have connection and
rapport with others on the staff, managers, partners, and clients. The
technological world in which we live today can negatively impact the
audit staffs ability to become an effective communicator, especially
when e-mail becomes a substitute for face-to-face communication with
audit clients. A good auditor recognizes the importance of faceto- face
communication and strives to make it the primary mode of
communication. It is essential that all auditors work to make verbal
communication a priority rather than a last resort. In most cases, e-mail
should be the last resort, rather than the first resort. Clients want to talk
to the auditor, and the better the auditor is at effective communication,
the better the conversation is with the client. Effective communication
occurs when the client understands exactly what you are saying.
Achieving this is not easy but once achieved, it will set you apart from
the rest.

ABLE TO SEE THE BIG PICTURE

Auditors need to be able to understand the clients business and
industry. This requires the ability to quickly frame a picture of the clients
business, the organization and key attributes within it. A good auditor is
able to sort out connections and linkages within the organization to focus
the audit approach. The ability to see this big picture is very important to
the planning stages of the audit. Putting the audit plan together requires
an appreciation and an understanding of the organization and what
constitutes a logical approach to the audit.
PEOPLE SKILLS
The audit profession is not all about ticking and tying; its about people.
Auditors need to have exceptional people skills. They need to have the
ability to deal with all types of clients in all types of client situations. In
certain cases, client personnel have a fear of the auditor because they
dont like someone looking over their shoulders. So the auditor must
have the ability to put client personnel at ease and be able to empathize
from the client perspective. It is also important for the auditor to show
respect for the client. After all, it is the client who is paying for the audit.

The most often overlooked people skill is listening. Listening seems like
a simple concept, but few do it well. Many auditors listen to hear the
answer they want to hear rather than to listen for understanding. Most
audit checklists ask closed-ended questions which prevent the client
form elaborating on a situation. When the client does expand their
answer, the auditor must hear the clients answer completely; missing
one small piece of the answer can cause them to miss the message
entirely. Lastly, people skills are also very important within your firm and
on your audit team. Auditors need to be team players as the entire team
is working toward a common goal.
DECISION-MAKING ABILITY
Once the audit evidence is accumulated, the auditor needs to determine
what is relevant and what is not. Making these decisions is, at times, not
easy as there is so much information is accumulated and tying it all
together can be a challenge. Decision making can be hard. Most every
decision involves some conflict or tradeoff. The challenging part is to
select the best decision given the information that you have gathered to
assist with the decision. There is a tendency to put off the decision by
concluding that you need more information, only to again later conclude
that you need even more information. This decision paralysis can cause
the audit to drag on and on and can ultimately cause the auditor to feel
pushed to the wall as they now must make a decision because the client
needs their financial statements immediately. Clients want their auditor
to be strong and effective decision makers. Waffling around on a
decision causes the client to lose confidence in their auditor.
Q2. Write the key objectives of a good internal audit system.
Narrate the points of dissimilarities between external audit and
internal audit.
Ans: Internal auditing is an independent, objective assurance and
consulting activity designed to add value and improve an organization's
operations. It helps an organization accomplish its objectives by bringing
a systematic, disciplined approach to evaluate and improve the
effectiveness of risk management, control, and governance processes.
Internal auditing is a catalyst for improving an organization's
governance, risk management and management controls by providing
insight and recommendations based on analyses and assessments of
data and business processes. With commitment to integrity and
accountability, internal auditing provides value to governing bodies and
senior management as an objective source of independent advice.
Professionals called internal auditors are employed by organizations to
perform the internal auditing activity.
Key Objectives of internal audit

Each internal auditor should have an objective attitude of mind and be in

a sufficiently independent position to be able to exercise judgment,
express opinions and present recommendations with impartiality.
(a) The internal auditor, notwithstanding his employment by the
organization, should be free from any conflict of interest arising either
from professional or personal relationships or from pecuniary or other
interests in an organization or activity which is subject to audit.
(b) The internal auditor should be free from undue influences which
either restrict or modify the scope or conduct of his work or over-rule or
significantly affect judgment as to the content of the internal audit report.
(c) The internal auditor should not allow his objectivity to be impaired
when auditing an activity for which he has had authority or responsibility.
(d) An internal auditor should be consulted about significant proposed
changes in the internal control system and the implementation of new
systems and make recommendations on the standards of control to be
applied. This need not prejudice the auditor's objectivity in reviewing
those systems subsequently.
(e) An internal auditor should not normally undertake non-audit duties
but where he does so, exceptionally, he should ensure that management
understands that he is not then functioning as an internal auditor.
INTERNAL AUDIT:-Internal audit means a continuous critical review of
financial and operating matters of a business. In other words, we can
say that the audit of a business conducted by the business for a
continuous basis. Internal audit is done by the internal staff appointed
particularly for the audit purposes. These are called internal auditors.
EXTERNAL AUDITOR or STATUTORY AUDITOR:-If an independent
auditor examines the books and records of the company on the behalf of
the shareholders, it is called external audit. While auditor is called
statutory or external auditor.

DIFFERENCE BETWEEN INTERNAL AUDIT AND

EXTERNAL AUDIT
1. Appointment:Internal auditor: Internal auditor is appointed by the management of the
company.
External auditor: External auditor is appointed by the shareholders of the
company.
2. Legal Position:Internal auditor: Legally internal audit is not compulsory.
External auditor: External audit is compulsory by law.
3. Status of Auditor:Internal auditor: Internal auditor is employee of the company.
External auditor: External auditor is an independent person.

4. Qualification:Internal auditor: For internal auditor any specific qualification is not

compulsory.
External auditor: For external auditor specific qualification is compulsory.
5. Submission of Report:Internal auditor: Internal auditor has not to submit any report.
External auditor: External auditor submits report to the shareholders.
6. Fixation of Remuneration:Internal auditor: Internal auditor remuneration is fixed by the
management of the company.
External auditor: External auditor remuneration is fixed by the
shareholders of the company.
7. Name of Remuneration:Internal auditor: Internal auditor receives salary.
External auditor: External auditor receives audit fee.
8. Nature of Checking:Internal auditor: Internal auditor checks all the transactions.
External auditor: External auditor may apply test check.
9. Right Of Attending Meeting:Internal auditor: Internal auditor has no right to attend the meetings of
the company's shareholders.
External auditor: External auditor has a right to attend the meetings.

10. Kinds of Audit:Internal auditor: Internal audit is kind of continuous audit.

External auditor: External audit is conducted after the preparation of final
accounts.
11. Guidance:Internal auditor: Internal auditor gives suggestions to the management
for the betterment of the business.
External auditor: External auditor has no need to give suggestions
unless he is asked.
12. Duties:Internal auditor: Internal auditor primary duty is to find the frauds and
errors.

External auditor: External auditor has to report about final accounts

whether these are true or false.
13. Removal:Internal auditor: Internal auditor can removed by the management.
External auditor: External auditor can be removed by the shareholders.
14. Case of Misconduct:Internal auditor: Internal auditor cannot be prosecuted for professional
misconduct except (C.A).
External auditor: External auditor can be prosecuted.
IMPORTANCE OF MUTUAL CO-OPERATION:External auditor may get much assistance from the internal auditors
about the accounting system and technical knowledge of the business.
To reduce his work he may rely on the work of internal auditor. But if any
error or fraud remains undetected then external auditor will he held
responsible. In some cases internal auditor may also restrict his work in
that section where external auditor has made detailed checking. So by
mutual co-operation both the auditors may help each other and may
reduce their work. Anyhow external auditor cannot shift his
responsibilities on the internal auditor.

Q3. Give the role of internal auditor in the Companys

Management. List down the duties of auditor Under
Section 581ZG.
Ans: Internal audits provide a number of important services to company
management. These include detecting and preventing fraud, testing
internal control, and monitoring compliance with company policy and
government regulation. Smaller companies may require these functions
even more than large companies. A small business simply cannot afford
employee fraud, waste, or a government fine. Establishing an internal
audit function provides a vital step in the growth of a small business.
Internal Audit has been defined by
Institute of Internal Auditor (IIA) as an independent, objective assurance
and consulting activity designed to add value and improve an
organization's operations. It helps an organization accomplish its
objectives by bringing a systematic, disciplined approach to evaluate
and improve the effectiveness of risk management, control, and
governance processes.
Major roles and responsibilities of internal audit function are:
Meeting with the Auditee
Before starting the internal audit, Internal Auditor should have a meeting
with the auditee where he should explain the objectives of Internal audit.

He should also discuss the internal audit plan with the auditee and get
their consent for the schedule. Internal Auditor should be in constant
touch of the auditee and if he found something grave, he should take
management representation before reporting it out to the top
management. Before finalizing his report, it is important for an internal
auditor to discuss all his findings with the concerned auditee and take
their representation on the findings.
Study of Company system, Policies, Procedures, processes,
techniques
For carrying out the internal audit assignment in a meaningful manner, it
is necessary for the internal auditor to study the company policies,
procedures and processes. He should make thorough study about the
company Internal Control system, risk management practices and
policies. This will give him an insight about companys policies,
procedures and possible areas of improvements.

Support the findings with objective and conclusive evidences

It is very important for an auditor to be objective in his approach. An
internal auditor should collect objective and corroborative evidences for
supporting his findings.
Be polite, cooperative and humble
A successful Internal Auditor is one who is popular among the auditee. It
is very necessary for an internal auditor to have good interpersonal
skills. While dealing with auditee he should be humble, polite and cooperative. Here it is important aspect that being humble does not mean
that he is to surrender his independency and objectivity; he needs to be
humble while maintaining the two.
Internal Auditor and Management both are the two wheels of a mills.
Internal audit is successful in achieving its objectively only when both of
them work in tandem. The management of the organization should show
its high commitment towards its successful execution and internal
auditor too carry out the internal audit assignment objectively.
Section 581ZG - Duties of auditor under this Part
Without prejudice to the provisions contained in section 227, the auditor
shall report on the following additional matters relating to the Producer
Company, namely:
(a) the amount of debts due along with particulars of bad debts if any:
(b) the verification of cash balance and securities;

(c) the details of assets and liabilities;

(d) all transactions which appear to be contrary to the provisions of this
Part;
(e) the loans given by the Producer Company to the directors;
(f) the donations or subscriptions given by the Producer Company;
(g) any other matter as may be considered necessary by the auditor.

Q4. The effectiveness of the internal control system can be

ensured if the important aspects of the companys
operations are kept in mind. Explain the characteristics of
an effective internal control system. Write the elements of
internal control.
Ans: Internal control, as defined in accounting and auditing, is a
process for assuring achievement of an organization's objectives in
operational effectiveness and efficiency, reliable financial reporting, and
compliance with laws, regulations and policies. A broad concept, internal
control involves everything that controls risks to an organization.
A system of internal control refers to the process by which organizations
maintain environments that encourage incorruptibility and deter
fraudulent activities by management and employees. An organizations
components of internal control are evaluated during the planning phase
of an independent financial statement audit. The results of the evaluation
directly influence the auditors level of detailed testing. To reduce
detailed testing, and perhaps the audit fee, organizations implement
common features of a proper internal control system.
Management Integrity
Management integrity, or the moral character of persons of authority,
sets the overall tone for the organization. Management integrity is
communicated to employees through employee handbooks and
procedural manuals. The Management Library indicates that in addition
to communicating management integrity, policy manuals facilitate
training to employees. However, managements enforcement of policies
is the major indicator of an organizations commitment to a successful
internal control system.
Competent Personnel

An organizations ability to recruit and retain competent personnel

indicates managements intent to properly record accounting
transactions. In addition, the retention of employees increases the
comparability of financial records from year to year. Furthermore, an
auditors confidence in the underlying accounting records increases as
he observes the reliability of the organizations personnel. This in turn
reduces an auditors assessment of the risk of a material misstatement
in the entitys financial statements.
Segregation of Duties
The University of California at Los Angeles notes that a segregation of
duties is critical to effective internal control because it reduces the risk of
mistakes and inappropriate actions. An effective system of internal
control separates authoritative, accounting and custodial functions. For
instance, one employee opens incoming mail, a second employee
prepares deposit slips for daily receipts, while a third employee deposits
receipts in the bank. The previous example prevents the opportunity of
one employee to misappropriate incoming funds.
Records Maintenance
Maintaining appropriate records ensures that proper documentation
exists for each business transaction. Records management involves
storing, safeguarding and eventually destroying tangible or electronic
records. Also, appropriate back-up deters an employee or management
from creating phantom transactions in the underlying accounting
records. The Environmental Protection Agency emphasizes that a good
records management program reduces operating costs, improves
efficiency and minimizes the risk of litigation.
Safeguards
Safeguards prevent unauthorized personnel from accessing valuable
company assets. Safeguards are physical, such as locks on doors, or
intangible, such as computer software passwords. Regardless of the
methods, safeguards are a necessary feature of an organizations
internal control system. Many business owners instinctively protect
inventory, cash and supplies. However, blank checks, company
letterhead and signature stamps are items that require safeguarding that
are commonly overlooked.
Elements of internal Control
Control Environment
The control environment is the company's attitude toward internal
controls. Known as "tone-at-the-top," the control environment is a
necessary condition for effective internal control, because even the bestdesigned systems can be thwarted if management overrides the controls
that are in place. Indicators of an effective control environment include

having a whistleblower hotline or discipline policies that take violations of

internal control seriously. Management override of controls or shortcuts
are signs that the control environment may be deficient.
Risk Assessment
Risk assessment is the identification of points in the company's business
processes where internal control is important. Sometimes this is referred
to as the "what could go wrong?" stage. In completing a formal risk
assessment, a company would examine the business cycles in great
detail. This often includes flow-charting transactions cycles and
describing business processes using narratives.
Information and Communication
The information and communication component of internal control
involves the process of gathering and disseminating information
throughout the organization. Effective information and communication
will include business systems that gather information related to internal
control and management that uses this information to support
employees in doing their job. It should also be apparent through
employee handbooks and orientation processes that employees receive
communications related to ongoing control efforts periodically throughout
their employment.
Monitoring
Monitoring is the ongoing feedback mechanism that ensures that internal
control systems that are effectively designed remain that way. Effective
monitoring includes ongoing testing of existing control activities and
procedures to follow when business processes change. This also
includes a process to communicate ineffective internal control upward so
that company management can understand when changes need to be
made in a timely manner.
Control Activities
Control activities are the specific activities performed by company
personnel to ensure that internal control is effective. These activities are
designed to address issues found in the company's risk assessment,
then implemented and tested for operating effectiveness as part of the
monitoring function. The results of this testing are then communicated to
employees and management. It is important to remember that while
control activities appear to be the hub of effective internal control, if the
control environment is not conducive to effective internal control, even
the well-designed control could be ineffective.