Audit 2 Marks Questions

Auditing
Thorough & critical examination of all the books of account and records of a business by an
independent person duly qualified for the job , with a view to find out arithmetical & theoretical
accuracy of the books of account & report to the owners of business whether the statements are fair or
not.

Primary Object of Audit
The primary or main object of audit is to examine the books of accounts and records with a view to
find out whether the balance sheet, at a given date, is properly drawn up, so as to exhibit "a true &
fair view of state of affairs of the business".

Management Audit
A critical verification of the mgt plans, policies & objectives, appraisal of the performance of the mgt
in various functional areas. evaluation of the decisions and managerial techniques adopted by the mgt
in a business.

Error of Comission
The error of comission takes place when a transaction is wrongly recorded either in the books of
original entry or in the ledger.Ex-wrong calculation,wrong carry forwards,wrong balancing, wrong
totaling ,wrong addition etc

Errors of Omission
An error of omission occurs when a transaction is not recorded in the books of accounts either wholly
or partially.It is very difficult to detect such errors since both the aspects of the transactions are
omitted to be recorded.Error of omission may be intentional or unintentional or may be due to
carelessness of the clerical staff.

Errors of Principle
It arises when transactions are not recorded in the books of accounts according to the fundamental
principles of accountancy.Such errors are very important as they affect the profit and loss account to a
considerable extent.

External Audit
It refers to the audit of a business concern undertaken independently by a professional qualified
auditor.Such an audit report is quite independent of the business concern by whom he is appointed to
audit.

Internal Audit
Internal audit is the audit of accounting, financial and other operations of a business concern which is
carried out by its own staff, specially appointed for the purpose.In other words, internal audit is the
continuous & systematic examination of books of accounts carried out by the specially appointed staff
of the business concern.

Statutory Audit
Statutory audit means legally compulsory audit.It is provided under the provisions of a statute or law.It
applies to those undertakings which have been established by law.It is to be conducted by duly
qualified independent auditor competent under the law applicable to the enterprise.

Interim Audit
Interim audit is the audit which is conducted in between two annual or periodical audits.In other
words, It is conducted in the middle of the year.The primary object of conducting interim audit is to
enable the company to ascertain interim profit in order to declare interim dividend.

Ethical Conduct as a concept of audit
The concept of ethical conduct implies that an auditor is under obligation to conform to a code of
conduct besides several legal requirements.He should remain within the ambit of professional code of
conduct.

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SAP- Standard Auditing Practices
AS- Accounting Standards
ICAI- Institute of Chartered Accountants of India
LAN- Local Area Network

Accounting Standard
An accounting standard is a selected set of accounting policies or broad guidelines regarding the
principles and methods to be chosen out of several alternatives.Standards conform to applicable laws,
customs, usage & business environment.

Audit Sampling(?)

Audit Risk
Audit risk is the risk to be borne by the auditor when he fails to express a correct opinion in an auditing
situation.It is the risk which a monetary error, greater than the tolerable error, exists in the accounts
and the auditor fails to detect such error.

Surprise Check
Surprise check means audit verification on non-routine and surprise basis.For carrying out surprise
check,auditor visits the clients office without prior intimation & verifies certain specific matters the
regularity of which is vital for audit.

Audit Evidence
Audit evidence is evidence obtained during a financial audit and recorded in the audit working papers.
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Audit Planning
An important part of the process for managing an audit function involves planning.
Planning covers both administration of the audit office as well as administration of
the audit assignment. For successful audits, we need to know what we want to
achieve (audit objectives), determine what procedures we should follow (audit
methodology), and assign qualified staff to the audit (resource allocation).

Permanent Audit File
Permanent audit files are are the working paper files which should be updated currently with
information of continuing importance to succeeding audits.Some of the permanent audit files are-
Memorandum of Association,Articles of Association, Copies of previous year audited statements,...etc

Current Audit Files
evidence of planning process of the audit & audit program
analysis of transactions and balances
evidence that the work of the assistants was supervised & reviewd

Materiality
An information is material if its omission or misstatement could influence the economic decision of the
users taken on the basis of the financial statements.

Fraud
Fraud means false representation or false entry made intentionally or without belief in its truth with a
view to defraud somebody.The primary objective of the audit is to detect frauds.Since frauds are made
cleverly, auditor needs to examine suspected accounts carefully,

Computer Fraud
A computer fraud involves gaining or deriving an undue advantage such as embezzlement or defalcation
through tampering with computer programs, data files, operations, equipment or media.Proper
internal control procedures and their constant review will help in preventing computer frauds.


Computer Virus
It is a program which affects the normal functioning of computer system by altering or destroying other
programs.

Internal Control
Internal control refers to the overall control environment established by the management of the
enterprise for efficient & effective monitoring and control of its operations.It aims at safeguarding
assets and to secure to a maximum possible extent the accuracy & reliability of its accounting records.

Compliance Testing
Compliance test is the second stage in evaluation of internal control.The aim of compliance procedure
is to provide reasonable assurance that the internal control system is functioning properly and has been
implemented throughout the period.

Analytical Procedure
Analytical procedure refers to systematic study and comparison of relationships among the elements of
financial and non-financial information and the investigation of significant fluctuations and variances
from the expected relationships.

Gross Profit Ratio
This ratio indicates the relationship between gross profit & net sales.
Gross Profit Ratio = Gross Profit / Net Sales

Net Profit Ratio
This ratio indicates net profit margin on sales after meeting all the costs except interest on long-term
loans.
Net Profit Ratio = PBIT / Sales

Capital Turn-over Ratio
It measures the effectiveness with which a business firm uses the resources at its disposal.
Capital Turn-over Ratio = Sales / Net Capital Employed

Intra-Firm Comparison
It includes comparison of the information between different periods of time in the past.It is thus the
corresponding information for a prior period.In other words, comparison of the information ratios of
the current year with those of the previous year.

EDP Auditing
EDP Auditing is the process of collecting and evaluating evidences to determine whether a computer
system safeguards assets, maintains data integrity, achieves organizational goals effectively and
consumes resources efficiently.

Auditing Through Computer

Batch Processing System
This is the traditional form of processing information. Under this system, transactions of similar nature
such as purchases, sales,returns inward, wages etc. are accumulated and processed in batches or
groups.For example, daily sales invoices are fed into the computer and the master file may be updated
at the end of the day.

Clean OR Unqualified Audit Report
If the auditor is completely satisfied with the truth and fairness of the books of accounts and the
balance sheet and Profit and Loss account, he gives a clean report.In other words, he gives his opinion
without any reservations.

Qualified Audit Report
When an auditor gives his opinions subject to certain reservations,he is said to have given a qualified
report.In such case, the auditor may include his objections in his reports and state "subject to the
above reservation, we report that the balance sheet exhibits true & fair view".

Negative Report
An adverse or negative report will be given by the auditor only when he has sufficient and strong
ground to form such opinion.that the accounts & financial statements, taken as a whole, do not
represent a true & fair view of the financial position of the company.

Window Dressing
A company can use window dressing when preparing financial statements to improve the appearance of
its performance or liquidity. In this case, window dressing may consist of changing asset depreciation
or valuation policies, making short-term borrowings, or engaging in sales and leaseback transactions at
the end of a period. By doing so, management embellishes the company's results or liquidity and
obtains some benefits.