Auditing and Corporate Governance - Answers
PART A (Short Answer Questions - 1 Mark Each)
1. What is social audit?
A social audit evaluates a company's impact on society, covering ethics, CSR, and sustainability.
2. Define internal check.
An internal check is a system where employees' work is automatically verified by another to prevent fraud
and errors.
3. What is verification?
Verification is the process of confirming the existence, valuation, and ownership of assets and liabilities.
4. What is auditor's lien?
An auditor's lien allows an auditor to retain client records until outstanding audit fees are paid.
5. Define audit report.
An audit report is an official statement by an auditor expressing an opinion on a company's financial
statements.
6. Define corporate governance.
Corporate governance refers to rules, practices, and processes guiding a company's management and
accountability.
7. Define cost audit.
A cost audit examines a company's cost records to ensure accuracy and compliance with cost accounting
principles.
8. What is outstanding liability?
Outstanding liability is an obligation or debt a company has not yet paid by the balance sheet date.
PART B (Short Explanatory Answers - 3 Marks Each)
9. What are the rights of an auditor? Explain.
An auditor has several legal rights:
1. Right to access books of accounts and records.
2. Right to obtain information and explanations.
3. Right to visit branches.
4. Right to report to shareholders.
5. Right to receive remuneration.
10. Differentiate between vouching and verification.
Vouching checks supporting documents to confirm transactions, while verification ensures the existence,
ownership, and valuation of assets. Vouching involves invoices and bills, while verification focuses on
physical assets like stock and machinery.
11. What are the benefits of corporate governance?
Corporate governance improves transparency, decision-making, fraud prevention, investor confidence, and
ensures legal compliance.
12. What are the advantages of continuous audit?
1. Early fraud detection.
2. Up-to-date financial records.
3. Reduced workload at year-end.
4. Improved internal controls.
13. What type of entries are made in a journal proper?
Journal proper records:
1. Opening entries.
2. Adjustment entries.
3. Transfer entries.
4. Rectification entries.
5. Miscellaneous entries.
14. Differentiate between internal check and internal audit.
Internal check ensures continuous supervision among employees, while internal audit is a systematic review
of internal controls. Internal check is ongoing, whereas internal audit is periodic.
15. What is an audit notebook?
An audit notebook records errors, clarifications from management, pending audit queries, internal control
observations, and compliance issues.
16. What are the advantages and disadvantages of auditing?
Advantages:
1. Ensures accuracy of financial statements.
2. Detects fraud.
3. Boosts investor confidence.
Disadvantages:
1. Time-consuming and costly.
2. May not detect all frauds.
3. Dependent on auditor's competence.
PART C (Long Answer - 8 Marks Each)
17. What is management audit? What are its objectives?
Management audit evaluates the efficiency, decision-making, goal alignment, productivity, and policy
compliance of an organization. Objectives include:
1. Identifying inefficiencies.
2. Assessing policy effectiveness.
3. Ensuring compliance with regulations.
4. Enhancing decision-making processes.
5. Improving resource utilization.
PART C (Long Answer - 8 Marks Each)
18. Discuss various auditing techniques used by an auditor.
Auditors use various techniques:
1. Vouching - Checking invoices and bank statements.
2. Verification - Physically inspecting assets.
3. Observation - Watching stock-taking processes.
4. Inquiry - Interviewing employees.
5. Analytical Review - Comparing financial trends.
6. Sampling - Examining a subset of transactions.
PART C (Long Answer - 8 Marks Each)
19. Explain the procedure for valuation and verification of debtors.
The procedure includes:
1. Reviewing debtor ledger accounts.
2. Confirming balances with customers.
3. Analyzing aging reports to assess bad debts.
4. Checking legal recoverability.
5. Verifying transactions through invoices and receipts.
