Auditing – Semester 4 – Solved Question Paper 2018 – Dibrugarh University

2018

COMMERCE

(General/Specialty)

Course: 403

(Auditing)

 (NEW COURSE)

Full Marks: 80

Pass Marks: 24

1. Choose the correct answer from the alternatives given below:                              1×8=8

a)         The object of internal check is to

1)      Verify the cash receipts and payments.

2)      Facilitate quick decision by the management.

3)      Prevent errors and frauds.

4)      Control wastage of resources.

b)         Interim audit refers to

1)      Examination of accounts continuously.

2)      Examination of accounts intermittently.

3)      Audit work to find out and check interim profits of a company.

4)      Conduct of audit for bonus purposes at the end of the year.

c)          Which one of the following examples is not contingent asset?

1)      Claim from the acceptor of bill receivable which has been discounted by the client from the bank but might be dishonored.

3)      Income received in advance.

4)      Claim for refund of sales tax.

d)         The amount of securities premium reserve may be used only for some specific purposes as per provisions of the Companies Act, 2013 under the

1)      Section 50(1)

2)      Section 52(2)

3)      Section 55(2)

4)      Section 56

e)         Auditor under management audit is accountable to the

1)      Shareholders.

2)      Annual General Meeting.

3)      Board of Directors.

4)      Board of Directors and Shareholders.

f)          According to Table F of Schedule I of the Companies Act, 2013, interest on calls in advance may be paid at a rate not exceeding.

1)      5%

2)      10%

3)      12%

4)      14%

g)         Profit on redemption of debenture is transferred to which Account?

1)      Capital Reserve Account.

2)      General Reserve Account.

3)      Sinking Fund Account.

4)      Statement of Profit and Loss.

h)         Loss on issue of debentures is written off.

1)      In the year of issue of debentures.

2)      During the life of debentures.

3)      Within 3 years of the issue of debentures.

4)      In the year of redemption of debentures.

2. (a) Write short notes on any two of the following:                                       4×2=8

1)      Auditing in depth.

2)      Advantages of cost audit.

3)      Necessity of qualified audit report.

4)      Disadvantages of continuous audit.

Ans: 1) Auditing in depth:

Auditing in depth is a new concept and is gaining ground in the sphere of auditing. It implies the assessment of the prevailing systems and the regulation of work in accordance therewith. “the techniques used for such an assessment of system in called auditing in depth”. It is expected that such an examination would enable the auditor to satisfy himself as to the efficacy or otherwise of the system of internal control being operated.

2. Advantages of cost audit:

1. It gives the management of the company a detailed insight into the costing of the various operation of the company. Through various valuable advises and suggestions available from the cost auditor, the management may be in a better position  to control the affairs, specially cost of production, of the company.

2. It may give a definite clue to the productivity or efficiency of the different factors of production and corrective measures may be taken timely if there is some lacuna in this respect.

3. Necessity of qualified audit report:

1. He cannot conduct audit satisfactorily due to non availability of certain books of accounts or records, information or explanations necessary for conduct of his audit.

2.He finds that the balance sheet and profit & loss account have not been prepared in accordance with accepted accounting principles.

4. Disadvantages of continuous audit:

1. Alteration of Figures:

In case of continuous audit, the auditor checks the books of accounts in several visits. There is a possibility that the figures may be altered and client’s  staff may temper books of accounts after the auditor has checked them on previous days.

2. Dislocation of Client’s Work:

The frequent visits of the auditor may cause inconvenience to the staff of the business and the office routine may be dislocated.

(b)Distinguish between any two of the following:                                            4×2=8

1)      Vouching and verification.

2)      Continuous Audit and Periodic Audit.

3)      Standard Audit Report and Qualified Audit Report.

Ans:1) Vouching and verification.

2) Continuous Audit  and Periodic Audit:

3.(a) What are the advantages of having the accounts audited by an independent professional auditor? Explain the advantages of audit to the different users.                                          6+8=14

Ans: The fact that audit is compulsory by law, in certain cases by itself should show that there must be some positive utility in it. The chief utility of audit lies in reliable financial statements on the basis of which the state of affairs may be easy to understand. Apart from this obvious utility, there are other advantages of

audit. Some or all of these are of considerable value even to those enterprises and organisations where audit is not compulsory, these advantages are given below :

(a) It safeguards the financial interest of persons who are not associated with the management of the entity, whether they are partners or shareholders.

(b) It acts as a moral check on the employees from committing defalcations or embezzlement.

(c) Audited statements of account are helpful in settling liability for taxes, negotiating loans and for

determining the purchase consideration for a business.
(d) These are also useful for settling trade disputes for higher wages or bonus as well as claims in
respect of damage suffered by property, by fire or some other calamity.

(e) An audit can also help in the detection of wastages and losses to show the different ways by
which these might be checked, especially those that occur due to the absence or inadequacy of
internal checks or internal control measures.

(g) Audit ascertains whether the necessary books of account and allied records have been properly kept and helps the client in making good deficiencies or inadequacies in this respect.

(h) As an appraisal function, audit reviews the existence and operations of various controls in the
organizations and reports weaknesses, inadequacies, etc., in them.

(i) Audited accounts are of great help in the settlement of accounts at the time of admission or death of partner.

Advantages of Audit:

To the business in General:

1. Ensures correctness of Accounts:

As the auditor examines and verifies the accounts, the audited accounts and statements are considered as correct.

• Detection and prevention of Frauds and Errors:

Frauds and Errors are detected during this course of examination of accounts and thereby it exercises a moral check upon the employees.

• Making the staff Vigilant and Alert:

Regular audit makes the staff alert and vigilant and compels them to make the accounts up to date.

• Increase Reliability on Accounts:

As accounts are audited by an independent auditor, audited accounts are more reliable to bankers and outside creditors and thus loan can be secured on the basis of such audited accounts.

• Makes Settlement of Claims and other disputes easier:

Insurance claims can be settled on the basis of audit accounts as audit accounts are acceptable to the insurance companies.

• Helps in the valuation of poverty and Goodwill.

In case of sale of a business, the value of the business and goodwill can be ascertained from the audit accounts.

• Helps in settlement of Taxes:

Audited accounts are accepted by various tax authorities as a basis for settlement of tax.

• Enables Comparison of Accounts of Different periods:

If the accounts are maintained on uniform basis and are audited by an independent auditor, such accounts can be compared from year to year and discrepancies can be enquired and corrective measures can be taken.

• Enables the suggestion to get Suggestion for Improvement:

As the author is a technically sound person, the management can seek advice for improvement in the system of accounting and internal control and other technical points

regarding to accounts. 

                                        Or

(b) Discuss the advantages of conducting audit in accordance with a fixed audit programme.  State the contents recorded in an audit notebook.                                           7+7=14

Ans:

AUDIT PROGRAMME

During the course of audit the audit clerk experiences several difficulties. He cannot remember everything at all time. So he maintains a book with him in which he makes note of important points and queries, which he has to refer to the client’s staff or clarify with the chief auditor. Such a book is called Audit Note Book. It is an essential book used to note important points that shall be included in the Auditor’s report. It is a complete record of doubts and their clarification. It helps the auditor in his subsequent audits. It is also used as a guide to the other audit clerks.

Advantages of Fixed Audit Programme:
1. Supervision Of Work :-
The auditor can judge the efficiency of his audit team by holding of an audit programme. He is in a position to know the progress of the work. He can see at any time that what part of the work has been completed and what remains to be done.

2. Distribution Of Work :-
Audit programme is very useful in distributing the audit work properly among the members f the audit team according to their talent.

3. Uniformity Of Work :-
Audit programme helps in settling all the things in advance, so the uniformity of work can be achieved.

4. Basic Instrument For Training :-
Audit programme is very useful for the new auditor. It provides training and guidance to him. So it is rightly called the basic instrument for training.

5. Legal Evidence :-
Audit programme is a legal evidence of work done by every assistant of the audit team. It can be presented in the court of law if any client is taken against the auditor for negligence.

6. Fixation Of Responsibility :-
If any error or fraud remains undetected the responsibility of negligence will fall on the particular assistant who has performed that job.

7. Several Audits may Be Controlled :-
The auditor controls the audit of various companies at the same time. In the absence of audit programme he can not supervise them effectively.

8. Easy Transfer :-
If one assistant is unable to continue the work given to him, it can be given to another person. Audit programme guides him that what is done and what is remaining.

9. Final Review :-
Before signing the report, final review is made and for this purpose also auditing programme is very useful.

10. Useful For Future :-
On completion of an audit, it serves the purpose of audit record which may be useful for future reference.

Contents of Audit Note Book

An audit notebook generally consists of the following information:

1. The nature of the business and summary of important documents relating to the constitution of the business such as Memorandum of Association, Articles of Association or Partnership Deed, etc.

2. A list of the books of accounts maintained.

3. Particulars as to the system of accounts followed and the system of internal check in force.

4. Names of principal officers, their duties and responsibilities.

5. Progress of audit work together with the dates on which the work was undertaken and completed.

6. Extracts from correspondence with different authorities.

7. Audit programme.

8. Allocation of work among different audit staff.

9. All queries which have not been clarified so far.

10. Lists of missing receipts, vouchers, bills, etc.

11. Any special point arising during the course of audit to which the attention of the auditor must be drawn.

12. Particulars of cash balances, investments, fixed deposits, and the reconciliation statements of principal bank accounts.

13. Extracts of the minutes and contracts affecting the accounts.

14. Record of audit work done with dates of commencement and of completion.

4.(a) (1) Explain the characteristics of sound system of internal check.                                   6

Ans:

 Internal check:

An internal check means practically a continuous internal audit carried on by the staff itself, by means of which the work of each individual is independently checked by the other members of the staff.   

 Characteristic of sound internal check :

1. There should be proper division of responsibilities of the members of staff. The basic guiding principle of such division for carrying on the transactions and recording the same.
2. The duties, instructions and procedures of each jobs should be started in a written from to ensure that everybody understands his duty very clearly and, if need be, one may be able to fix definite responsibility on a particular person for the errors or frauds committed by him.
3. Receipts and payments of cash should be controlled very carefully. It is in this area that chances of frauds etc. are greater. Therefore, the cashier must be under proper control.
4. In a large concern where personal contact between the management and the staff is not practical, efforts should be made to keep management well-informed. Proper reporting to the management is also a necessary adjunct of a good internal check system.
5. However, the whole system should be devised in such a manner that it can be economical for the concern and at the same time may ensure greater efficiency as a whole.  

(2) Explain the general and specific considerations which the auditor should keep in mind while vouching cash sales and receipts from debtors.                                                                                                                                  8

Ans: In auditing ‘vouching’ means the act of establishing the accuracy and authenticity of entries in the account book. It means the examination of the transactions with sufficient underlying of evidences to satisfy an auditor about the validity, accuracy, authority and authenticity of the records entered in the books of accounts. The underlying evidences which auditor examinees to substantiate an entry in the books are cash-memos, receipts, invoices, minutes; contracts, correspondence etc. The following are the some of the authoritative definitions of vouching.

General and specific considerations which the auditor should keep in mind while vouching cash sales and receipts from debtors:

The vouching of receipts of cash is more difficult than that of its payment of auditor gets indirect and less reliable evidence and in cash of former. For example: if some amount is received from debtor, the receipts should be issued from the office itself.

General consideration:

To prevent this the auditor should advice the client to take the following precaution:

1. A responsible officials should keep the counterfoil receipt books under lock and key and issue them cautiously.
2. All the receipts in a book a book should be consecutively numbered and no number should be missing.
3. Instruction should be given that no spoilt receipts is destroyed and should be kept attached to the counterfoil. It should be initialed as canceled by some officials.

Receipts from Debtors :

1. The documentary evidence available to the auditor of vouching the receipts from debtors are copies or counterfoils of the receipt book.

2. He should vouch counterfoil receipts with the cash book thoroughly. In large business he may vouch a certain but a substantial number of counterfoil with the cash book, as he cannot check all the counterfoil receipts.

3. He should see that dates in the counterfoils correspond with those in the cash book.

4. He should pay special attention to the discount allowed, allowances and bad debts. The discount rates should be allowed to exceed the usual percentage.

5.  If any special discount has been given it should be noted down and verified. He should make through enquiry, if he suspects fictitious discount which may been entered to conceal some fraud.

Cash Sales:

For vouching cash sales, the auditor has to depend upon the effectiveness of the internal checks system, since the opportunities for fraud in the cash are many.

1. He must check all the available evidences exhaustively.
2. He should check substantially the carbon duplicates of cash sales memo’s with the cash sales summaries and the cashier’s abstracts.
3. He should check the daily totals of receiving cashier’s cash book with the general cash book.
4. In case the cash registers are in the use in the concern, they ensure greater accuracy and the authors should check the daily totals recorded in the cash book with the till rolls.

Or

(b) Discuss the objects of verification and valuation of assets. State the duties of an auditor regarding verification of stock-in-trade.                                              8+6=14

Ans: Verification and valuation of assets:

Verification of assets is an important audit technique. Conventionally, the scope of these technique is limited to inspection of assets and collecting of information about the assets. Though verification, the auditor should conform himself:

1. That the assets are in existence on the date of the Balance Sheet .
2. That the concerned asset has been acquired for the use in the business.
3. That the assets has been purchased under a proper authority,
4. That the concern has right of ownership of the asset,
5. That the asset is free from any charge not disclosed in a Balance Sheet,
6. That the assets is correctly valued, and
7. That the assets is correctly presented in a Balance Sheet.

Verification of assets is primarily the responsibility of the management. They are expected to have a much greater knowledge of the assets of the business as regards their conditions, location etc. than that which an outsider might be able to acquire on their inspection. They are competent to determine the value of the assets at which they should be included in the Balance Sheet. The auditor is only expected to apply his skill and expertise  consideration the value of each assets with a view to confirm that they are truly and fairly disclosed in the Balance Sheet.

For the purpose of applying verification techniques, we may divide the assets into the following four categories:

1. Intangible assets, viz. goodwill, patent, trade mark, copyright etc.
2. Fixed assets, viz. land and building, plant and machinery, furniture and fixtures, motor vehicles etc.
3. Current assets, viz. stock-in-trade, sundry debtors, prepaid expenses and accrued incomes, cash and bank balances etc.
4. Fictitious assets, viz. preliminary expenses, discount on issue of shares or debentures etc.

Stock- in-trade:

The valuation of stock is frequently the main factor in determining the results shown by the accounts. Apart from the effect for the Balance Sheet, incorrect stock would affect the profit of the year  that has closed as  well as that of next year.

Auditor’s Duty:

The valuation of the closing stock, therefore, is an important step essential for the determination of the profits of the year and also for truly disclosing the financial position of the organization at the end of the year it is the duty of the auditor, being intimately connected with these aspects of financial statements, to verify the existence of the stock-in-trade possessed by the organization at the end of year and to ascertain that the same has been valued correctly on a consistent basis.

The precise duties in regard to verification of  stock-in-trade are not defined. Under the circumstances, these have to be deduced from an interpretation of the general responsibilities of auditors in regard to the statements of accounts verified by them, especially in regard to stoke-in –trade.

Steps for verification:

1. Review the procedure and arrangements for maintenance of the stock records.
2. Secure the original rough stock sheet, if available.
3. Check all additions and test fair proportions of extensions.
4. Ascertain the basis and method of valuation adopted and confirms that the same has been followed consistently.
5. Verify the cost of raw materials and stores by references to purchases invoices. 
6. Confirm that stock has been valued at ‘lower of cost or market price’ principle.
7. Ascertain that the goods not belonging to the client have not been included in stock-in-trade.
8. Examine the stock sheets to ascertain that they only contain goods normally dealt in by the business.
9. Find out whether there has been a complete physical stock-taking.
10. See that the stokes sheets have been signed by the responsible person.     

 
5. (a) Discuss the provisions of the Companies Act, 2013 regarding appointment of
auditors. Point out auditors’ duties in the procedure of issue of shares at a premium and at a discount.                                      7+7=14

Ans:  The provisions of the companies act, 2013 regarding appointment of auditors are as follows:

• First appointment:

In case of a new company, the first auditor is appointed by the Board of Directors of the company. In such a case, the auditor should ask the Directors to sent him a copy of the resolution appointing him as an auditor.

• Subsequent appointment:

In case of an existing company- if he is appointed in place of a retiring auditor he should enquire whether due notice was given the retiring auditor or not. It would be a breach of professional  etiquette if does not enquire from him in editing about the circumstances which led to his removal. He should also enquire from the retiring auditor, if he has any objection to his accepting the appointment.

• Appointment to fill Casual Vacancy:

If his appointment to fill a causal vacancy caused by the death, insanity of the previous auditor, he should obtain a copy of the resolution passed by the directors so as to ensure that his appointment is valid.

• Appointment to fill casual vacancy:

If hiss appointment is made by the shareholders at the annual general meeting, he should obtain a copy of the shareholder’s resolution. He should inform the registrar within thirty days of the receipt of the appointment letter in writing that he was accepted or refused the appointment.

• Appointment  in place of an auditor who has resigned:

In case the vacancy was caused by the resignation of the previous auditor, the board has no power to fill that vacancy. In such as  case, a general meeting of the shareholders should be held to appoint a new auditor in place of the auditor who has reigned.

The auditor should see that his appointment is regular under such circumstances and that all the requirements as laid down under sec.224(6) of the companies act have been complied with. He should also make inquiry from the auditor who has reigned, about the circumstances under which he resigned and then decide as to wheatear or not he should accept the appointment.

• Appointment of an auditor in a government company:

In case he is appointed as an auditor of a Government, he must inspect the original copy of such an order. He should also send his acceptance to the Government.

• Auditor not to be appointed except with the approval of the company by special resolution in certain cases:

As per section 224 (a) in the case of company in which not less than twenty five percent of the subscribed share capital is held whether singly or in any combination, by:

1. A public financial institutions or a Government company or Central Government or any State Government, or
2.  Any financial or other institution established by any provincial or State Act in which  a State Government holds not less than fifty-one percent of the subscribed share capital, or
3. A nationalized bank or an insurance company carrying on general insurance business, the appointment or re-appointment at each annual general meeting of an auditor or auditors shall be made by a special resolution.

Issue of Shares at a Premium (sec. 78).

When shares are issued at a price higher than the face value (or at par value) they are said  to be issued at a premium bring the difference between the issue price and the face value. If a share of rupees 10 is issued for rupees 12, rupees 2 is the premium. There are no restrictions on issue of shares at a premium but there are restrictions on its disposal. The amount received as premium has to be credited to a separate account called ‘Shares Premium Account’.

The ‘share premium account’ may be used for the following purposes:

1. To issues fully paid bonus shares to the members ;
2. To write off preliminary expenses ;
3.  To write off the expenses of, or the commission paid or the discount allowed on any issue of shares or debentures of the company.
4. To provide for the premium payable on the redemption of  preference shares or debentures of the company.

If the company wants to utilize the premium for any other purpose, it will have to obtain the consent of the court.

Issue of shares at a Discount (Sec.79)

Ordinarily, shares cannot be issued at a discount.

Section 79 of the Indian companies act, 1956, allows a company to issue shares at a discount, subject to the following conditions:

1. The issue of the shares at a discount is authorized by a resolution passed by the company in general meeting, and sanctioned by the Company Law Board.
2. The resolution must specify he maximum rate of discount at which the shares are to be issued. The rate must not exceed 10 percent, unless the Company Law Board is of the opinion that a higher percentage of discount may be allowed in the special circumstances of the case.
3. There must have been an interval of at least one year between the date upon which the company was entitled to commence business and the issues of the shares.
4. The shares are of class which has already been issued. Thus, if a company has only Equity Capital, it cannot issue preference shares at a discount.
5. The shares are issued within two months of the date on which the issue is sanctioned by the Company Law Board or within  such extended time as the Board may allow.

                                                           Or

(b) State how you will examine the following items while auditing the accounts of a limited company:                4+5+5=14

1)      Share Capital.

2)      Dividends.

3)      Managerial Remuneration.

Ans: 1) Share Capital

           same as question no. 4(a) 2017

         2)Dividends:

1. He should refer to the provisions of the memorandum of Association of the company, and see that all those provisions have been duly complied with. He should also consult them to ascertain the respective rights of the different types of shares, if any
2. He must see that the various provisions of the Companies Act, 1956 have been duly observed while declaring or making payment of dividends.
3. He should check the director’s and the Shareholders’ Minute books carefully to ascertain the rate of dividends declared and that it has been properly recommended by the directors. He should also see that the Shareholders also passed the resolution to this effect in general meeting of the country.
4. He should check the Dividend List with the Register of Members to see that dividends have been correctly calculated.
5. He should vouch the payment of dividends to the shareholders with the help of the receipts from the shareholders.
6. If the dividends have been paid through the company’s bank he should check the Bank Pass Book with the returned and cancelled dividend Warrants.

         3) Managerial Remunerations:

       A company auditor has to perform a very important duty while auditing the remuneration paid to various managerial personnel. He has not only to exercise caution, vigilance and apply his tools of auditing but also to keep in mind the various statutory provisions.

We give bellow the steps to be taken by him in auditing the remuneration paid to various managerial personal of the company.

Directors :

• The auditor should refer to the Register of Directors and Managers to find out who the directors are. He should examine carefully the Articles of the company for their remuneration. For the remuneration not specified in the articles, he should examine the resolutions passed by the company in its general meeting.
• He should check the calculation of the remuneration payable to them and should specially see that the net profits have been computed in specified manner.
• For the payment of directors’ fees, should refer to the Articles of the company or the resolution passed sanctioning such payment.
• For travelling expenses paid to them, he should see the Articles and the resolution passed in the general meeting of the company entitling them for such expenses.

Manager:

Audit of remuneration paid to managers should be carefully carried on by the auditor. While doing so, he should keep in mind the relevant statutory provisions which have already been mentioned earlier. He should follow the similar procedure as mentioned above in connection with the audit of remuneration of directors.

 
6.(a) Discuss in brief about different types of audit reports. State the characteristics of an ideal audit report. What are the differences between clean and qualified audit reports?                                                6+4+4=14

Ans: Types of audit reports:

• Clean report:

If the auditor has no reservation in respect of matters presented in the financial statements, he gives a clean report. He states that the financial statements give a true and fair view of the state of affairs and profit and loss account during the period.

• Qualified report:

If the auditor has any reservation in respect of the certain mattes mentioned in the financial statements , he may qualify his report. The auditor may qualify his report only when the subject matter of qualification affects the truthfulness and fairness of the financial statement materially.

1. All the qualification shall be started by the auditor in clear and in unambiguous manner in his report.
2. Even if the subject matter of qualification is included in the notes presented by the management, which form a part of the financial statement, auditor has to repeat the subject matter of qualification again in his report Cleary.
3. He shall use the word ‘Subject to’ before stating his qualifications.
4. He shall quantify the effect of the qualifications on the financial statements as well as on individual items.
5. If the effects of qualification could not be quantified with accuracy, auditor may make an estimate on reasonable basis.

• Disclaimer:

While conducting the audit, the auditor may fail to obtain the required information and explanation or the books of accounts may not be available due to various reasons, or there may arise various situations, which shall restrict the scope of the duties of the auditor.

Under such situations, he may not be in a position to form an opinion, then the auditor shall disclaim to give an opinion.

• Negative report:

If the auditor is of the opinion that the financial statement does not show the true and fair view of the state of affairs of the business, he shall give an Negative Report.

Characteristic of a Ideal Audit Report are as follows:

• An auditor should state in his report whether:-
• in his opinion and to the best of his information and according to the explanation given to him, the accounts give the information required by the Act:
• the balance sheet and the profit and the profit and loss account give a true and fair view of the state of company’s affairs as at the end of its financial year:
• he has obtained all the informations and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit:
• in his opinion , proper books of accounts as required by law have been kept by the company so far as appears from his examination of those books, and proper returns adequate for purpose of his audit have been received from branches not visited by him:
• the report on the accounts of any branch office audited under section 228 by a person other than the company’s auditor has been forwarded to him and hoe he has dealt with it in preparing the report:  

Difference between

Qualified Report:

Sometimes the auditor comes across certain objectionable matter record in the accounts of the company. He finds that the Balance Sheet of the company does not exhibit the true and fair view of the financial state of affairs of the concern and at the same time the profit and loss account does not give a true and fair view of the profits and losses of the year under audit. Under such circumstances, the auditor should request the management to make the desired changes; but if they do not concede to his request, he must qualify his report accordingly. He should also state the reasons for the qualifications mentioned in his report.

Clean Report:

The auditor gives a clean report when he is completely satisfied that there is noting objectionable in the books of accounts and the Balance Sheet and the profit and loss accounts exhibit the true and fair view of the state of the financial affairs and earnings of the concern. He gives his opinion without and reservations.

In India, most of the audit reports, submitted by the auditors, are clean or qualified. They simply give statutory affirmations without any objection or reservation.   

                                                                   Or

(b) What is management audit? State the objects, advantages and disadvantages of management audit.                       4+10=14

Ans: Meaning of management audit:

Management audit involves an enquiry in to the management policies and actions in order to find out whether the available resources have been properly utilized and if there is any wasteful or uneconomic use of resources. Management audit attempts to evaluate managerial performance and for this reason, it is also termed as performance audit.

Objectives of Managerial Audit :

• Increase in profitability:

One of the major objective of management audit is to increase organizational profitability.

• Identification of objectives:

Management audit helps in identification of objectives of various levels of management.

• Pinpoint irregularities:

Another  major objectives of management audit is to pinpoint the irregularities in the process of management and suggest remedial measures.

Advantages of management audit:

• Planning :

Management auditor may be useful to the management in establishing and reviewing the system of planning.

• Decisions making:

The management auditor is helpful for the management in bringing more objectivity in decision making as well as reviewing the mechanism of decision making.

• Communication :

He can help the  management in strengthening its communication system within and outside the business.

• Evaluation of performance:

Management audit helps the management in evaluating its performance as well as improving it.

• Organizational improvement:

By suggesting changes management auditor may help in bringing better efficiency and overall improvement in the organization.

• Human resource development:

Human resource can be developed by improving the performance appraisal system through management system through management audit.

• Effective designing of authority structure:

By strengthen the flow of information between responsibility centers management audit may help in the process of effective designing of authority structure.

Disadvantages of management audit:

• Expensive:

The conduct of management audit involves huge expenditures; therefore, all business organization cannot afford it.

• Vague concept:

Another major criticism put forward against management audit by the accounts and managers is that it is a vague concept which serves no material purpose.

• Irregular in nature:

Management audit is not regular in nature and it is conduct only when need arise and as a result constant upgrading of the system is not possible.

• Mental block:

The conduct of management audit may bring into light some shortcomings  in action by the manager. So, manager may not be interested in conducting management audit.

• Desired results:

Very often desired results may not be obtained because of casual recommendation put forward by the management auditor.