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SOLUTION 5: - [b]

TEST CHECKING:

Test Checking means to select and examine a representative sample from a largenumber of similar items.

Test Checking is an accepted auditing procedure wherein instead of checking alltransactions, only a part of it is checked in detail to form an opinion overall.

It is a mathematical truth that a scientifically selected sample would reveal thefeatures and characteristics of the population. The statistical theory of sampling is

based on a scientific law. Hence, it can be relied upon largely than any arbitrary

technique, which lacks basis and acceptability.

Test Checking and Sampling can never bring complete reliability; it cannot giveaccurate results. It is a process of estimation. What error is tolerable for a particular

matter under examination is a matter of the individual's judgment in that particular.

Entries involving large amounts or relating to material accounts are seen exhaustivelyand other entries are picked up for verification from the remainder according to a

certain plan. Sometimes entries are checked for a few specified months exhaustively

and the rest go unchecked.

Test Check is normally planned in such a way that the audit programmes for 3 to 5years cover all types of transactions in case of a medium or large sized Company.

The staff and management of the Auditee Company should not be able to anticipatethe pattern of test checking; otherwise, they will predict the areas and periods to be

covered in any one year and will be careful regarding the same.

If test checking becomes routine, predictable and mechanical, it loses its value.Hence, the Auditor should keep changing the methods of test checking at reasonably

frequent intervals.

The extent of test checking would primarily depend on the Auditor's judgment of aparticular situation. This judgement in turn depends on the previous experience of the

Auditor, current developments and the efficacy of Internal Control System.

DEPTH CHECKING:

Taylor and Perry have defined Auditing in Depth as: the examination of the systemapplied within a business entailing the tracing of certain transactions from their origin

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to their conclusion, investigating at each stage the records created and their

authorization.

Audit in depth does not mean 100% checking. It is a detailed examination of theselected transactions from the beginning to the end. Thus, it is used along with test

checking. For example, if the auditor has decided to check 25% of purchase

transactions, these transactions should be checked in depth.

Auditor should check the Purchase Requisition, Tenders, Purchase Orders, PurchaseBills, Goods Received Note, Inspection Note, Purchase Journal, Stock Register, Bin

Card and so on.

Thus, the auditor should check the purchase transaction right from the beginning tothe end. This enables him to evaluate the accounting system and internal controls.

A smaller number of transactionsare checked at each successive stage with a in-depthtest, on statistical grounds (based on probability theory) that the optimum sample size

decreases as the Auditor's "level of confidence" concerning the functioning of the

system increases.

Examination in depthreconstructs the audit trail and reveals more about thefunctioning (or malfunctioning) of the client's system in practice than the haphazard

and mechanical approach to testing.

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SOLUTION: - 5 [c]

When you find misstatements as you perform an audit, you are responsible for making an

assessment. You alone must determine whether the misstatement represents an error or fraud.

Errors are not deliberate. Fraud takes place when you find evidence of intent to mislead.

Keep in mind that the dollar amount of the misstatement does not make a difference when

assigning a badge of fraud. It does not make any difference if the intentional misstatement is

material or immaterial: Fraud is fraud.

Here are some difference between fraud and error in terms of an audit:

Fraud is intentional; error is accidental. An auditor can discover items, which are not correct, usually financial matters. The

incorrect items may be matters of omission, or figures, which are incorrect, or reports

of things, which did not occur at all.

As an example, consider a person's expense report. The person reporting might haveomitted that he received cash from people sharing a meal, for their portion, and stated

only that he paid the entire cost of the meal. That would be fraud, deliberately seeking

reimbursement for an expenditure that was already reimbursed by others. Or a person

may report that he spent $25.00 for a meal, when in fact the cost was only $15.00.

(Both of these are called "padding" one's expense account.) That would also be fraud,

the deliberate misrepresentation of expenditure to get an unwarranted reimbursement.

The expense report might also include, say, claim for a taxi fare when in fact theindividual walked, or took a bus, or rode in taxi with another person who actually paid

the fare. That would be fraud, by claiming an expenditure, which did not occur at all.

Suppose instead that the individual attached a credit card receipt to his expense form,showing a charge of $35.00; but instead he transposed the figure to $53.00 by making

a typing error. Alternatively, suppose he added a column of figures incorrectly,

inadvertently increasing his total expenses by $20.00. Those are simple errors, which

an auditor will readily spot, and make the appropriate changes.

In the first set of examples, the individual filing an expense report was intentionallytrying to be reimbursed more than he was entitled to. That is fraud. When fraud is

detected, the company may demand reimbursement, or may penalize the offender

(e.g., by a temporary suspension), or may seek criminal prosecution of the offender

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(for very large amounts). On the other hand, if a pattern of repeated though small

frauds are discovered, the individual may be reprimanded, demoted, transferred, or

even fired.

Some people either show a pattern of repeated errors, because they have somehandicap (e.g., dyslexia) or are merely inattentive or sloppy. When an auditor

discovers such a pattern, the individual may receive a remonstration

("be more careful"), or his reports may be more carefully scrutinized in the future.

One who repeatedly makes errors, regardless of intent, may be transferred to another

type of work.

Obviously, fraud and/or errors are not limited to expense reports. They may occur inany type of reporting, not just financial. For example, inventory reports, time

reporting, and attendance reporting, and so on.

For the company, either fraud or errors can be very costly. One of the main purposesof audits is to protect the company from such unwarranted costs, and to lead the

company toward obtaining reimbursement when possible.

For the individual, errors are simply unwise. They can make a person more subject toscrutiny or rebuke, and can reduce the confidence that management has in that person

or his work. Fraud, however, is not only unwise (and unethical), but is downright

dangerous. It can lead to loss of position, loss of employment, and loss of freedom.

Errors and fraud are not limited to employees, of course. They can involve customers,or customers (or other outsiders) can exclusively do them. For example, a clerk can

make an error by giving a customer the wrong change; or the clerk can commit fraud,

by intentionally giving a customer (his friend) too much change. Alternatively, a

customer can attempt to return a product to a store different from where he bought it

(an error) or he can switch price tags between two products (a fraud).

Auditing is very difficult, because there are virtually infinite types of errors, andvirtually infinite types of frauds. Some can be quite subtle, and difficult to detect. In

addition, there are many "grey areas", where an incorrect statement may be either

error or fraud. It may not be important to determine which, but it is always important

that an auditor finds the mistake, and corrects it.