Name of the Course:Principles and Practice of Auditing

V SEMESTER –NEP
2 Marks questions and answers

Unit 1- Introduction to Auditing

1. What is internal audit?
Internal audit 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.

2. What is Audit Strategy?

Audit strategy is a plan that outlines the scope, objectives, and methods of an audit. It
provides a framework for conducting the audit and helps ensure that the audit is
conducted efficiently and effectively.

3. What is Audit Engagement?

Audit engagement refers to the process of conducting an audit. It involves planning,
performing fieldwork, gathering evidence, evaluating evidence, and reporting the
results of the audit.

4. What is Cost Audit?

Cost audit is an examination of cost accounting records to verify their accuracy and
compliance with accounting standards. It is conducted to ensure that the cost
accounting system is functioning effectively and efficiently.

5. State the meaning of Tax Audit.

Tax audit is an examination of a taxpayer's financial records to verify that they have
been accurately reported for tax purposes. It is conducted by tax authorities to ensure
compliance with tax laws.

6. State the meaning of Audit Working Papers.

Audit working papers are documents used by auditors to record their findings during
an audit. They provide evidence of the auditor's work and support the conclusions
reached in the audit report.

7. What is Audit Planning?

Audit planning involves developing a plan for conducting an audit. It includes
identifying the scope of the audit, determining the objectives of the audit, and
developing a strategy for conducting the audit .
8. What is Tax Audit?
Tax audit is an examination of a taxpayer's financial records to verify that they have
been accurately reported for tax purposes. It is conducted by tax authorities to ensure
compliance with tax laws.

9. What is Environmental Audit?

Environmental audit is an examination of an organization's environmental
performance to identify areas where improvements can be made. It helps
organizations comply with environmental regulations and reduce their impact on the
environment .

10. State the meaning of Audit Note Book.

Audit note book is a book used by auditors to record their observations during an
audit. It contains detailed notes on the auditor's work and provides evidence of their
findings.

11. What is Audit Program?

Audit program is a plan for conducting an audit that outlines the procedures to be
followed during the audit. It includes a list of tasks to be performed, the order in which
they will be performed, and who will perform them.

12. What is Audit Evidence?

Audit evidence refers to information used by auditors to support their findings during
an audit. It includes documents, records, observations, and other information obtained
during the course of the audit.

13. What is written representation?

Written representation refers to a statement made by management or other
responsible parties in response to specific inquiries made by auditors during an audit.
It provides evidence about certain assertions made in financial statements.

14. What is Audit Documentation?

Audit documentation refers to all records prepared by auditors during an audit,
including working papers, notes, memoranda, letters of confirmation, schedules,
analyses, and other documents related to the audit .

Module No. 2 Risk Assessment and Internal Control

1. What is internal control?
Internal control is a process designed to provide reasonable assurance regarding the
achievement of objectives in the following categories: effectiveness and efficiency of
operations, reliability of financial reporting, and compliance with applicable laws and
regulations.
2. State the meaning of internal check system.
Internal check system is a continuous process of the accounting system to check for
errors or fraud in bookkeeping operations for early detection and prevention. It
involves an arrangement of staff duties in such a way that another automatically
checks the work performed by a person.

3. What are Fraud risk factors? Give examples.

Fraud risk factors are conditions or events that indicate an increased susceptibility to
fraud. Some examples of fraud risk factors include large amounts of cash or other
valuable inventory items on hand without adequate security measures in place,
employees with conflicts of interest, lack of segregation of duties, inadequate
documentation or record-keeping practices, lack of management oversight or
involvement in key processes, and inadequate training or supervision of employees.

4. What is Audit Risk?

Audit risk is the risk that an auditor expresses an inappropriate opinion when the
financial statements are materially incorrect, even though the audit opinion states that
the financial reports are free of any material misstatements. Audit risk may carry legal
liability for a certified public accountancy (CPA) firm performing audit work.

Module No. 3 Verification and valuation of Assets and Liabilities.

1. State the meaning of verification and valuation of Assets.
Verification of assets refers to the process of checking whether the assets shown in
the balance sheet are in the name of the business, whether they exist or not, and
whether there is any charge on them. Valuation of assets refers to determining the
proper values of assets and liabilities shown in the balance sheet.

Module No. 4 Company Audit and Audit of other Entities

1. State any two disqualifications of an auditor.
An auditor is disqualified from being appointed as an auditor of a company if he/she:
- is a body corporate, except a limited liability partnership (LLP).
- is an officer or employee of the company.

2. What is professional ethics?

Professional ethics are the personal and corporate standards of behaviour expected of
professionals. It encompasses the moral principles and values that guide the conduct
of individuals and organizations in a particular profession. Professional ethics help
ensure that professionals act in the best interests of their clients, maintain public
trust, and uphold the integrity of their profession.

3. What is professional misconduct?

Professional misconduct refers to unacceptable or improper behaviour by
professionals in their field of work. It includes actions that violate ethical standards,
codes of conduct, or laws and regulations governing the profession. Professional
misconduct can result in disciplinary action, loss of license, or legal consequences.

Module 5 Audit Report & Professional Ethics

1. Define Audit report
Lancaster has defined a report as “a report is a statement of collected and considered
facts, so drawn up as to give clear and concise information to persons who are not
already in possession of the full facts of subject matter of the report.”
According to Cambridge Business English Dictionary, Audit report is defined as a
formal document that states an auditor’s judgment of a company’s accounts.

2. What is Clean Audit Report?

Clean audit report, also known as an unqualified report, shows that the company's
financial statements present a true and fair view and do not contain any reservations.
It reflects fair and transparent financial statements in compliance with generally
accepted accounting principles (GAAP) and statutory requirements.

3. What is unqualified Audit Report?

Unqualified audit report reflects business financial statements that are transparent
and compliant with generally accepted accounting principles (GAAP). It is given after
thorough research considering all accompanying financial documents. Any possible
remaining discrepancies with the audit would stem from information that could not be
obtained by the auditor.

4. What is qualified Audit Report?

Qualified audit report is issued when auditors find material misstatements in the
financial statements that are not pervasive. The misstatements affect only the items
themselves, not other items in the financial statements. The auditor expresses a
qualified opinion and states the reason why the qualified opinion is expressed.

5. State the meaning of Code of Ethics

Code of ethics refers to a set of principles or values that guide the conduct of
individuals or organizations in a particular profession. It encompasses moral principles
and values that help ensure professionals act in the best interests of their clients,
maintain public trust, and uphold the integrity of their profession.

Prepared by:
Reshmith.K