30 Important Distinguish Between (Audit & Assurance of CAP II) Prepared by Kisan Joshi,

CA FINAL (CAP III)

1. Criteria Test Checking Routine Checking

Concept Test checking involves selecting a Routine checking involves checking of books
few transactions on the basis of and records on regular basis.
auditor‘s judgment and examining
them.
User Generally Auditor (Internal/external) Generally Accountants (Lower & Middle
etc. level).
Objectives The main object of test checking is to The main object of routine checking is
form an opinion on the financial ensuring arithmetical accuracy of the entries
statements on the basis of examination in the original books and ledgers and posting
of to correct ledgers accounts.
selected sample.
Scope Limited Wide
Time Lesser time consuming Higher time consuming
Reliance Certain reliance can be taken on Reliance cannot be taken on test checking
routine checking
Risk Higher risk of improper result if Lesser risk of improper result if internal
internal control system is weak. control system is strong.

2. Basis Audit Report Audit Certificate

Meaning An Audit Report is an expression of Certificate is a written confirmation
opinion on the true and fair view of the accuracy of the fact stated
presented by financial statements therein and does
not involve any estimate of opinion.

Utility The term audit report is used when the The term certificate is used when the
auditor expresses his opinion on the auditor verifies certain exact fact e.g.
financial statements Royalty payment made to foreign
collaborators, value of
import/exports of a company during a
financial year.
Implication Audit report implies that the auditor A certificate implies that the Auditor
- Has examined relevant records in - Has verified certain precise figures;
accordance with generally accepted and
auditing standards; and - Is in a position to vouch their
- Is expressing an opinion whether or not accuracy as per the examination of
the financial statements representing a documents and books of account
true and fair view of the state of affairs
produced before him.
and of the working results of the
enterprise.
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30 Important Distinguish Between (Audit & Assurance of CAP II) Prepared by Kisan Joshi,
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Accuracy The Auditor is responsible for The Auditor is responsible for the
ensuring that the report is based on factual accuracy of what is stated
factual data that therein.
his opinion is in accordance with
facts, and that it is
arrived at by application of due care &
Skill.

3.
Basis Audit Investigation
 To Judge truthfulness and  To establish a fact
Objective fairness offinancial statements
Scope  Determined by laws and  By term of engagement
Auditing Standards
Period  Generally yearly  As per requirements
Nature  General  Detailed
Inherent  More because of test checking  Less because of detailed checking
limitation
Evidence  Persuasive  Conclusive
Reporting  General purpose i.e. to all  Confidential i.e. only to needful
user of statements person
Approval  No doubtful approach  Doubtful approach
By whom  CA-Chartered Accountants  Expert team
 RA- Registered Auditors

4.
Particulars Auditing Accounting
An independent examination of financial Accounting is the art of recording,
information of any entity when such classifying and summarizing
Meaning financial information, transaction
an examination is conducted with a view and events and preparation of
of expressing an opinion thereon reports thereon.
Verification of underlying vouchers and Recording of the transaction from
records and obtaining evidence on the underlying vouchers and
Objective true and fair view presented by financial preparation of financial statement.
Statement
Responsibility Auditor is appointed by the owners of It the responsibility of the
the entity. The responsibility is to be management to maintain and
reviewed the accounting and other implement an effective accounting
control and express the opinion system.
Independent examination of the financial Measurement and communication of
Deals with information prepared by the information to shareholders and
management of the entity others user of the financial
statement
Aspects of Auditing review the efficacy of Accounting involves recording
transaction recording financial information aspects of the financial information

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Aspects of Auditing review the efficacy of Accounting involves recording

transaction recording financial information aspects of the financial information

5. Errors and Fraud.

Fraud Error
It is the deception or artifice with the It is inaccuracy or incompleteness in the
intention of cheating or injuring another. measurement or presentation of an act
It is intentional It is accidental and unintentional.
The person committing the fraud does so It may arise due to negligence or a
knowingly, willfully and with the motive genuine misunderstanding on the part of
of gaining advantage or benefit by cheating the persons committing them.
or causing loss or injury to
another person.

6. Reserve & Provision

 Reserve is an appropriation of profit whereas provision is a charge against Profit.

 Reserves are not intended to meet any liability, contingency or diminution in the value of assets.
Provisions are made to provide for depreciation, renewal or a known liability or a disputed claim.
 Reserves cannot be created unless there is a profit except revaluation reserve and capital subsidy.
Provisions must be created whether or not there is profit.
 Reserves are generally optional except in certain situations – Capital Redemption reserve,
Debenture Redemption Reserve, Declaration of dividend higher than 10% etc. Provisions are not
optional and have to be made as per generally accepted accounting principles.
 Reserves are shown on the liability side. Provisions for depreciation and provision for doubtful
debts are shown as deduction from respective assets. Provision for liability is shown on the liability
side.

7. Prepaid Expenses and Preliminary expenditures

Answer
Prepaid Expenses: incurred in the course of regular operation of an enterprise.
Prepaid expenses are also treated as outstanding assets. Expenditure already incurred a part or whole
of which relates to a period subsequent to the date of the Balance Sheet. Some of the example of prepaid
expenses:
 Insurance charges paid in advance;
 Advertisement, etc.
Preliminary expenditure: incurred prior to the operation of an enterprise.
The expenditure incidental to the creation and floating of a company includes stamp duties, registration
fees, legal costs, accountant’s fee cost of printing etc. Preliminary expenses are both incurred by the
company or by the promoters and reimbursed them by the company. Normally, the preliminary

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expenditures are disclosed in the prospectus, statutory report and the balance sheet. Expenditure in
connection with the preliminary expenses and not written off should be separately disclosed under the
head miscellaneous expenditure. Underwriting commission and brokerage paid for shares and
debentures should not be included under the head preliminary expenses.

8. Substance over form and Neutrality.

Substance over form is a qualitative characteristic of financial statements. If information is to represent

faithfully the transactions and other events that it purports, it is necessary that they are accounted for
and presented in accordance with their substance and economics reality i. e. substance over form and
not merely their legal form. The substance of transaction or other events is not always consistent with
that which is apparent from their legal or contrived form.
Similarly, another characteristic of financial statement is neutrality. The information contained in
financial statements must be neutral, that is, free from bias to be reliable. Financial statements are not
neutral if, by the selection or presentation of information, they influence a decision or judgement in
order to achieve a predetermined result or outcome.

9. Continuous and Final Audit

Answer:
Final Audit is commonly understood to be an audit which does not begin until the books have closed at
the end of the accounting period and thereafter is carried on continuously until completed. Whether an audit
ought to be conducted continuously after the close of the financial year should be decided on a consideration
of the size of the business and the extent of detailed checking required.

Continuous Audit is one in which the auditor's staff is engaged continuously in checking the accounts of
the client the whole year round or when for this purpose the staff attends at intervals, fixed or otherwise,
during the currency of the financial period. Strictly speaking, when auditor's staff attends the audit work at
fixed intervals it may be strictly called interim audit. This is when an audit is conducted up to a particular
date within the accounting period. The auditor may attend to audit the figures for a month or for a quarter,
as the work may require. It would differ distinctly from the final audit in the extent of the work carried out;
verification of assets, for example would be left until the final audit. In case of a continuous audit, the work
is conducted throughout the course of the financial year but is not taken to a specific accounting period, as
is an interim audit. It might be that during the course of the continuous work interim figures are being
audited, but the significant factor here is that the auditor will be engaged continuously on the audit
throughout the financial period. Staff may be in residence throughout the period or may come and go at
irregular intervals, but most of the time, the audit staff is present at the location. Thus, in case of continuous
audit, the audit staff is present at the client's premises almost during the entire accounting period.

10. Prior period items and extra ordinary items.

Answers:
Prior period items are incomes or expenses, which arise, in the current period as a result of errors or
commissions in the preparation of the financial statements of one or more prior periods.

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Extraordinary items are incomes or expenses that arise from events or transactions that are clearly
distinct from the ordinary activities of the enterprise and, therefore, are not expected to recur frequently
or regularly.

11.Auditing Around the computer & Auditing through the computer

Answer:
The auditor must plan whether to use the computer to assist the audit or whether to audit without using
the computer. The former approach is known as "auditing through the computer", the latter is called
auditing around the computer".

Auditing around the computer involves arriving at an audit opinion through examining internal control
for computer installation and the input and output only for application systems. On the basisof quality
of input and output of application systems, the auditor infers the quality of processing carried out.
Application system processing is not examined directly. The auditor views the computer as a black
box.
Auditing through computer: The auditor can use the computer to test: (a) the logic and controls
existing within the system and (b) the records produced by the system. Depending upon the complexity
of application system being audited, the approach may be fairly simple or require extensive technical
competence on the part of the auditor.

12. Distinguish between Concurrent audit and Annual audit.

Answer
A continuous or concurrent audit is one in which the auditor's staff is engaged continuously in checking
the accounts of the client the whole year round or when for this purpose the staff attends at intervals,
fixed or otherwise, during the currency of the financial period.
A final or annual audit on the other hand is commonly understood to be an audit which does not begin
until the books have been closed at the end of the accounting period and thereafter is carried on
continuously until completed.
Whether an audit ought to be conducted continuously or after the close of the financial year should be
decided on a consideration of the size of the business and the extent of detailed checking required.

13. principles of auditing and techniques of auditing.

Answer
Auditing principles are the basic principles, which underlie every audit. An auditor has to ensure
compliance with these principles in carrying out any audit. To comply with these principles, he has to
design his audit procedures and reporting practices in an auditing situation. These principles provide the
benchmark against which an auditor's performance is evaluated. These principles are:
 Integrity, objectivity and independence
 Confidentiality
 Skills and competence

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 Work performed by others

 Documentation
 Planning
 Audit evidence
 Accounting system and internal control
 Audit conclusion and reporting

Whereas, the techniques by which an auditor collects evidence are known as techniques of
auditing. These techniques are:
 Inspection of documents and records
 Physical inspection of tangible assets
 Observation
 Inquiry
 Confirmation
 Computation and re-tracing book-keeping procedures
 Analytical procedures

Thus, auditing principles are of fundamental nature which underlie the conduct of the audit. These
principles are not liable to change frequently while audit techniques may vary according to the nature of
propositions to be tested. For instance, audit technique to test the existence of cash in hand will be different
from the method to verify recover ability of sundry debtors. Further audit techniques may vary from
organization to organization depending upon the nature of business but the principles of auditing will
remain the same irrespective of the nature of the organization.

14. Permanent Audit Files and Current audit files.

Answer
Permanent audit files, in case of recurring audits, are working paper file which are updated with new
information of continuing importance to succeeding audits. The permanent audit file normally includes:
 Information concerning the legal and organizational structure of the clients. In the case of a
company, this includes the Memorandum and Articles of Association. In case of statutory
corporation, this includes the Act and Regulation under which the corporation functions.
 Extracts or copies of important legal documents, agreements and minutes relevant to the audit.
 A record of the study and evaluation of the internal controls related to the accounting system.
 Copies of audited financial statements of prior years.
 Analysis of significant ratios and trends.
 Copies of management letters issued by the auditor, if any.
 Record of communication with the retiring auditor, if any, before acceptance of the appointment
as auditor.
 Notes regarding significant accounting policies.
 Significant audit observation or earlier years, etc.

Current audit files contain information relevant for the audit of a single period.

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A current audit file normally includes.

Correspondence relating to acceptance of annual re-appointment.
Extracts or important matters in the minutes of Board Meetings and General Meetings, as are
relevant to audit.
Evidence of planning process of audit and audit programme.
Analysis of transaction and balances.
A record of the nature, timing and extent of auditing procedures performed and the results of such
procedures.
Evidence that work performed by assistants was supervised and reviewed.

Copies of letters or notes concerning audit matters communicated to or discussed with the client,
including the terms of the engagement and material weaknesses in relevant internal controls.
Letters of representations or confirmation received from the client.
Conclusions reached by the auditor concerning significant aspects of the audit, including the
manner in which expectations and unusual matters, if any, disclosed by auditor‟s procedure where
resolved or treated.
Copies of the financial information being reported on and the related audit reports, etc.

15.
Basis Reasonable Assurance Limited
Level of A high (but not absolute 100%) A moderate level of assurance
Assurance level of assurance
Work  Understanding of entities  Understanding of entities business and
Environment business and environment by environment by General enquiries
General enquiries  Basic analytical procedure
 Basic and substantive analytical  Test of control and substantive test of
procedure details generally not required in
 Test of control Limited assurance
 Substantive test of details engagement
Type of Positive form of Opinion Negative form of opinion
Opinion

16.
Basis Audit Plan Audit Program
Meaning Audit plan refers to the Audit programme is the list of steps,
strategies or guidelines which that are to be followed by audit staff to
are followed by the auditor obtain sufficient
for audit evidence.
conducting audit.
What is it? Basic principle of audit. Series of examination and
verification steps.
Step Audit plan is initial step of Audit program is setting up of
audit procedures that are needed to
implement the audit plan

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Matters to be Matters to be considered by 1. Specific assessments of inherent

considered the auditor in developing the and control risks and the required
overall audit plan include level of assurance to be
knowledge of business,
understanding the accounting
and internal control systems, provided by substantive
risk and materiality, nature, procedures;
timing and extent of 2) Timing of tests of controls and
procedures, coordination, substantive procedures;
direction supervision and 3) Coordination of any assistance
review process etc. expected from the entity, the
availability of assistants and
the involvement of other
auditors or experts; etc.

17.

Criteria Audit Assurance

Assurance is the process of
analyzing and used in the
assessment of accounting entries
The audit is the process of evaluating
and financial records. Assurance is
the accounting entries present in the
a process of verifying the records
Definition financial statement of the company.
available in the company’s
The audit checks the accuracy of the
accounting record is as per
financial reports.
accounting standard and principle,
and it also verifies that accounting
record is accurate or not.
Step The audit is the first step. Assurance if followed by the
audit.
An audit firm does assurance.
An internal auditor or external
auditor does the audit.
Done by

Aim The audit tells about any Assurance specializes in assessing

misrepresentation done in financial the improving the quality of the
records, any misuse of funds, any information in a company. It helps
fraud, and any fraudulent activities in decision making in an
done in a company or done by the organization.
company.
Uses Auditing includes making sure The use of Assurance is to check
ethically presentation, fairly the accuracy of financial reports. It
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presented, accurate, and it also also assures all the stakeholders

checks whether financial reports are that there is no misrepresentation
as per accounting standard and done in financial records, no
accounting principle. misuse of funds, no fraud, and no
fraudulent activities done in a
company or done by the company.

18.
Batch Processing On-Line Real Time (OLRT) system
♦ Transactions are accumulated ♦ Transactions are processed as on
and processed in group when they occur
♦ Two types of files are maintained
♦ Only master file is maintained. It
master file is updated when batch keeps updating
processing is
run
♦ Updating does not take place as
♦ Though updating takes place
quickly as in On-Line Real immediately the processing
time becomes complex.
system
♦ Not useful when instant and
updated results are required ♦ Useful for immediate reporting system

♦ Generally, does not provide audit

♦ Generally provides Audit trail trail and hence requires more
attention of auditor

19.
Particulars Internal Evidence External Evidence
Meaning Internal Evidence i s o n e t h a t h a s External Evidence originates
been created, used and retained within outside the Client’s organization
the Client’s organization
Examples Duplicate copy of Sales Invoices, Payee’s Receipt, Purchase Invoice of
Employees’ Time Reports, Supplier, Lease Agreement, Bank
Inventory Reports, Wage Sheets, Statements, Insurance Policies,
Counterfoils of Receipts, Purchase Agreements, etc.
Requisitions,
Minutes Books, etc.
Use for These may not always constitute a These documents are generally prepared
accounting direct accounting source document, in the ordinary course of business
e.g. purchase Requisitions, Minutes activities and form part of its records,
Books whether of accounting or
non- accounting nature.

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Auditor’s It is provided to the Auditor by It may sometimes be obtained directly

Role the sources internal to the by the Auditor, e.g. certificate regarding
organization. bank balance, possession of securities,
confirmation of balances of Debtors,
Creditors, Lenders,
Borrowers, etc.
Reliability It is not as reliable as external It is considered more reliable
evidence than internal evidence.

20.
SN Internal Check SN Internal Audit
1 Internal check is not a specific check, 1 Internal audit is specifically done to
but the duties of different persons are check that the accounts are properly
so arranged that a person‘s work is maintained and the systems are in
automatically checked by another control.
person while carrying out the normal
duty.
2 Internal check does the preventive job 2 Internal audit does the detective job
i.e. internal check is derived so that of identifying frauds and errors and
frauds and errors are prevented. rectifying them.
3 It is more of process in a day to day 3 It is specific defined job.
functioning of the business.
4 All the persons in the organization are 4 Specific persons are appointed to the
involved to maintain the internal internal audit.
check system.
5 It is required in all organization in 5 Carrying out internal audit is not
formal or informal. compulsory.
It is done based on management
decision.
6 It does not include internal audit. 6 It includes internal check.

21.
Particulars Internal Audit External Audit
Appointing Management of the entity Owner of the entity
Authority
Scope Defined by the appointing authority Defined by the law
Approach To ensure adherence to management, To collect sufficient and
safeguard ofassets, completeness and reliable audit evidence as to
accuracy of accounting records express, “true and fair” view on
financial statement
Independence Less independent Complete independent
Reporting To management or to Audit committee To shareholder of the owner
Responsibility
Conducted by Employee or outsourced consultancy firm Member holding Certificate
of practice

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Coverage All categories of risk, their management, Financial reports,

including reporting on them financial reporting risks.
Responsibility for Improvement is fundamental to the purpose None, however there is a duty
improvement of internal auditing. But it is done by to report problems
advising, coaching and facilitating in order
to not undermine the responsibility of
management.

22.
Vouching and Verification:

1. Meaning: The act of examining the vouchers is known as vouching. A voucher is any
documentary evidence in support of a TRANSACTION entered in the books of account.
Verification and be explained as establishing the truth or securing some kind of confirmation
with respect to the ASSETS AND LIABILITIES appearing in the balance Sheet of a concern.

2. Nature & Purpose: Vouching involves establishing the arithmetical accuracy and the
authenticity of the transactions of a concern. Vouching proves that an asset ought to exist.
Verification goes beyond vouching. It seeks to establish that assets as stated in the Balance
Sheet of a concern exist in fact and that the liabilities are properly disclosed. Verification
proves that an asset does exist.
3. Time: Vouching is done during the whole year Verification is done on specific date
mostly at the end of the year.
4. Utility: Vouching Certifies correctness of records whereas Verification Certifies
correctness of assets and liabilities.

5. Personnel: Vouching is done by the junior staff of the auditor under the supervision of
a senior person. Verification is done by the auditor himself assisted by senior.

23. Judgmental sampling and Statistical sampling

Judgmental Sampling Statistical Sampling

Traditionally, auditors have carried out Whereas, Statistical sampling means any
selective checking by what is popularly approach having characteristics of random
called the test checking or judgmental selection of a sample and use of
sampling approach. It consists of selecting probability theory to evaluate sample
and checking a predetermined proportion results, including measurement of
of transactions on the basis of the sampling risk.
Auditor’s own judgement and without
using statistical procedures. Any sampling

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30 Important Distinguish Between (Audit & Assurance of CAP II) Prepared by Kisan Joshi,
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method that does not measure the

sampling risk can be termed as judgmental
sampling.

It is not used mechanically. This approach It helps the auditor in determining the size
should involve a careful consideration of of the sample scientifically, reduces the
the circumstances of each case, on the basis chance of biasness in selection of the
of which the auditor shoulddetermine the sample and can give results with a
items to be test checked, select sample, calculated degree of risk.
examine them and evaluate the results in
the light of his knowledge ofthe business of
the enterprise.

24. Audit program and Audit note book

Audit Program Audit Notebook

This is a list of the audit procedures to be Audit note book is a bound book
applied in an audit in the given containing the audit program, significant
circumstances along with proper audit observations, objections, queries etc.
instructions. Thus, an audit program
contains the description of the specific
audit procedures to be performed in
respect of different aspects to be covered,
the extent to which those tests will be
performed and timing of such tests. It also
lays down the responsibilities of various
members of the audit team for carrying

25. Computerized and Manual Accounting System:

i. Faster and efficient in processing of information in computerized system and no such faster
and efficient in processing of information in manual system
ii. Automatic generation of accounting documents like invoices, cheques and statement of
account which manual system cannot produce.
iii. With the larger reductions in the cost of hardware and software and availability of user-
friendly accounting software package, it is relatively cheaper like maintaining a manual
accounting system;
iv. More timely information can be produced than manual system
v. No more manual processing of the data- all automatically posted to the various
ledgers/accounts and many types of useful reports can be automatically generated for
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management to make decisions where as such reports cannot generated on manual system
vi. Power failure, computer viruses and hackers are the inherent problems of using computerized
systems, such risk not remain in manual system
vii. Once data been input into the system, automatically the output are obtained hence the data
being input needs to be validated for accuracy and completeness, we should not forget concept
of GIGO (Garbage In (Input) Garbage out (Output) where validation in manual system can be
checked on inception
viii. Accounting system not properly set up to meet the requirement of the business due to badly
programmed or inappropriate software or hardware or personnel problems can caused more
havoc, where manual system does not have such problem.
ix. Danger of computer fraud if proper level of control and security whether internal and external.

26. compliance procedure and substantial procedures as Audit methods of collectingevidences for forming an
audit opinion.
Answer:
Auditor should obtain sufficient and appropriate audit evidences and test them beforeframing an opinion about
the assertions the financial statements reveal. For this, the auditor checks evidences through

 Compliance procedure and

 Substantial procedure.

Compliance procedures are tests designed to obtain reasonable assurance that those internal
controlon which audit reliance is to be placed are in effect. It seeks to test that
 there exists internal control,
 the existing internal control is effective and
 the internal control is working without break or lacunae during the period under review.

When internal control is found to be to an acceptable level, the accounting entries generated in such a
system is more reliable than in one where the control is weak.
Mere satisfaction about the existence of internal control may not be sufficient for auditors to express
opinion about the assertions the financial data in the form of balances and transactions.

These i.e. transactions and balances need to be tested. This is done by audit procedure calledsubstantive
checking. Substantive procedures are designed to obtain audit evidence as to the completeness,
accuracy and validity of the data produced by the accounting system.

The substantive procedures involve

 checking of transactions and balances and
 analytical review.

The checking of transaction and balances involves vouching of sales, purchases, payments, receipts
and scrutiny of ledgers. The analytical procedure involves critically examining the accounts in an
overall manner and it may entail computation of ratios, trend analysis so as to dwell in length for
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examination of unusual or unexplained deviations.

27. Judgmental sampling and Statistical sampling

Judgmental Sampling Statistical Sampling

Traditionally, auditors have carried out Whereas, Statistical sampling means any
selective checking by what is popularly approach having characteristics of random
called the test checking or judgmental selection of a sample and use of
sampling approach. It consists of selecting probability theory to evaluate sample
and checking a predetermined proportion results, including measurement of
of transactions on the basis of the sampling risk.
Auditor’s own judgement and without
using statistical procedures. Any sampling

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method that does not measure the

sampling risk can be termed as judgmental
sampling.

It is not used mechanically. This approach It helps the auditor in determining the size
should involve a careful consideration of of the sample scientifically, reduces the
the circumstances of each case, on the basis chance of biasness in selection of the
of which the auditor shoulddetermine the sample and can give results with a
items to be test checked, select sample, calculated degree of risk.
examine them and evaluate the results in
the light of his knowledge ofthe business of
the enterprise.

28.Control Risk and Detection Risk

Answer:
Control risk is the risk that misstatement that could occur in an account balance or class of
transactions and that could be material, individually or when aggregated with mis-statements in other
balances or classes, will not be prevented or detected on a timely basis by the system of internal
control There will always be some control risk because of the intrinsic limitation of any system of
internal control To assesscontrol risk, the auditor should consider the adequacy of control design,
as well as test adherence to control procedures. In the absence of such an assessment, the auditor
should assume that control risk is high.

Detection risk is the risk that an auditor's procedures will not detect a misstatement that exists in an
account balance or class of transactions that could be material, individually or when aggregated with
misstatements in other balances or classes. The level of detection risk relates directly to the auditor's
procedures. Some detection risk would always be present even if an auditor were to examine 100
percent of the account balance or class of transaction because, for example, the auditor may select an
inappropriate audit procedure, misapply an appropriate audit procedure or misinterpret the audit
results.

29. Test Check & Internal Check

Sn. Particulars Test Check Internal check
1 Meaning It stands for the method oIt refers to a system of
Auditing when instead of fbook-keeping and
a
complete examination ofall the arrangement of staff
transaction recorded duties in the organization in
in the books of account only some of such a manner that no one
the transaction is selected person can

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and verified. completely carry through a

transaction and record
every aspect thereof.
2 Institutedby It is an audit procedure performed by It is a series of procedures laid
the auditor in respect of only down by the management.
selected
group of transactions.
3 Objectives The purpose is to aid auditors to Its objective is to facilitate
check and draw conclusions management functions.
aboutthe voluminous
transactions.
4 Fraud & It helps the auditor to unearth It is instituted to prevent
Errors frauds and errors without checking frauds and errors.
all the
transactions.
5 Management Management has no Internal controls are
Control control over the test checks subject to review,
carried out by the appraisal and changed by the
auditors. management.

30.Capital and Revenue Expenditures

Answer
A capital expenditure is that which is incurred for the under mentioned purpose:

a. Acquiring fixed assets

b. Making additions to the existing fixed assets
c. Increasing earning capacity of the business
d. Reducing the cost of production.
e. Acquiring a benefit of enduring nature of a valuable right.

Revenue expenditure is the expenditure, the benefit of which is immediately (within one year)
expended or exhausted in the process of earning revenue. For example, expenditure on purchase
of goods for sale, on their movement from one place to another, on maintaining assets, on
keeping a business organization going etc.

If any expenditure of a revenue nature is treated as capital, it would have the effect of inflating
the profit of the year. If the expenditure of a capital nature is charged to a revenue head, the
amount of profit would be reduced.

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