CHAPTER 1 INTRODUCTORY

1.1 The object of the book* is to give a broad outline of the system of accounts of Government transactions and their audit. Before going into details, it is desirable to understand the purpose of accounts and audits.

Accounts and Transactions

1.2 Accounts are ‘Statements of facts relating to money or things having money value”. The ‘facts’ that are incorporated in accounting records are described as transactions.

💜Statements of facts relating to money or things having money value are

(A) Transactions

(B) Records

(D) Account

💜The facts that are incorporated in accounting records are described as

(A) Transactions

(B) Facts

(D) Accounts

💜Statement of facts relating to money on _________________ are called accounts

A:-Government

B:-Profit

C:-Things having money value

D:-Balance sheet

Correct Answer:- Option-C

Accounting

1.3 A mere chronological listing of monetary pecuniary transactions in the form of Cash Accounts does not bring out the significance of the transactions and their aggregate effects. From such cash accounts a man cannot tell, without going through every item, how he stands in relation to his various customers and whether his business is profitable or not. It becomes necessary that his transactions should also be classified under various heads, as for example the names of various customers dealt with or of various articles dealt in; and that the results of the transactions under these heads should be arranged in such a form as to show clearly not merely the significance of each separate transaction but also the combined effect of any desired series of transactions. The process through which these ends are effected is called accounting.

Compilation of Accounts

1.4 The initial accounts of Government transactions in India are prepared by the authorities through whom the transactions occur, such as treasuries, the various departmental offices, pay and accounts organizations, etc. From these initial accounts the Indian Audit & Accounts Department as well as the Central Accounting organizations of the Union Government compile, under different heads prescribed for Government accounts, and bring out, monthly and annually, the combined result of all the transactions which occur during that period. From the accounts so compiled by the Indian Audit and Accounts Department and other agencies, the Union and the States Governments are prepared by the Comptroller and Audit General. These accounts incorporate the results of the total Government transactions arising both in and outside India.

💜The initial accounts of Govt. transactions in India are prepared by the authorities through whom the transactions occur, such as :

(A) Nationalised Banks

(B) Reserve Bank of India

(D) Audit Department

Audit

1.5 In the early stages of civilization, the methods of accounting were so crude and the number or transactions to be recorded so small that each individual was able to check for himself all his transactions; but as soon as the ancient States and Empires acquired any coherent organization, records are found of systems of check being applied to their public accounts. The person whose duty it was to check such accounts became known as the auditor, the word being derived from the Latin word ‘Audire’ meaning to hear, as originally the accounting parties were required to come before the auditor who heard their accounts. The enormous increase in trade in the 19th Century led to the formation of numerous Joint Stock Companies involving the use of large sums of capital under the management of a few individuals. Under these conditions the advantages to be obtained from utilizing the services of auditors became apparent to the Commercial world generally.

💜The word being derived from Audire meaning to hear is the :

(A) Auditor

(B) Accountant

(D) Audit

💜The word 'Auditor', is derived from the word:

(A) Audit

(B) Account

(D) Authority

💜The person whose duty, it was, to check accounts became known as the :

(A) Doctor

(B) Auditor

(D) None of the above

💜The Latin word “ Audire” means:

(A) To see

(B) To watch

(D) None of the above

1.6 Audit was originally confined to ascertaining whether the accounting party had properly accounted for all receipts and payments on behalf of his principal, and was in fact merely a cash audit; but the object of modern audit, although it includes the examination of cash transactions, has as its ultimate aim, the verification of the financial position of the undertaking.

💜The ultimate aim of the object of modern audit, is ::
(A) The examination of cash transactions
(B) The verification of the financial position of the undertaking:
(C) Both (A) and (B) above
(D) None of the above

1.7 Audit is, therefore, an examination of accounting records undertaken with a view to establishing whether they correctly and completely reflect the transactions to which they purport to relate. The difference between accounting and auditing is not clearly understood by many, it being thought that if accounts are prepared by a professional accountant he necessarily guarantees their accuracy. This however, is far from the case. If an accountant is instructed merely to prepare accounts from a set of books, he would be acting simply as an expert accountant and not in any way as an auditor. He would not check the books himself.

💜If an Accountant is instructed merely to prepare accounts from a set of books, he would be acting as an Accountant and not in any way as :
(A) An Auditor
(B) A Manager
(C) A Custodian Officer
(D) None of the above

1.8 An audit is quite distinct and apart from accountancy, an audit does not entail the preparation of the accounts at all but deals with something much wider, namely the examination of a Balance Sheet and Profit and Loss Accounts prepared by others, together with the books, accounts and vouchers relating thereto in such a manner that the auditor may be able to satisfy himself and honestly report that, in his opinion, such Balance Sheet is properly drawn up so as to exhibit a true and correct view of the State of affairs of the particular concern according to the information and explanation given to him and as shown by the books.

💜An audit does not entail the preparation of the accounts at all but deals with something much wider, namely the examination of:
(A) Balance Sheet
(B) Profit and Loss Accounts prepared by others
(C) Both (A) and (B) above
(D) None of the above

Audit as an Agency of Financial Control

1.9 Audit is, therefore, an instrument of financial control. In its relation to commercial transactions, it acts as a safeguard on behalf of the proprietor (whether an individual or a group of persons) against extravagance, carelessness or fraud on the part of the proprietors’ agents or servants in the realization and utilization of his money or other assets and it ensures on the proprietor’s behalf that the accounts maintained truly represent facts, and that expenditure has been incurred with due regularity and propriety. The agency employed for this purpose is called an auditor.

💜Audit is an instrument of .......... ..........control

(A) Budgetary

(B) Administrative

(D) Legal

💜Which type of control is exercised by Audit ?

(A) Financial

(B) Administrative

(D) Budgetary

💜Audit is an agency to exercise adequate :

(A) Financial control

(B) Budgetary control

(D) Legislative control

💜Audit in its relation to commercial transactions it acts as a safeguard on behalf of the proprietor (whether an individual or a group of persons) against:
(A) extravagance
(B) carelessness
(C) fraud
(D) all of the above

1.10 It is essential that a similar watch should be maintained over the financial transactions of a Government, and that the agency employed for the purpose should be independent of the agents or servants of Government who are entrusted with the realization and utilization of public money or other assets. This task is entrusted in India to the Department. So far, as its audit duties are concerned, the position of the Indian Audit and Accounts Department in relation to Government transactions is to a large extent similar to that of an auditor. In this context, Parliament/Legislatures may be regarded in this context, Parliament/Legislatures may be regarded as the Shareholders of the Government concern and the Executive Government as its directors. The object of this concern is however not profit making. In India the Indian Audit and Accounts Department audits the transactions of the executive on behalf of Parliament/ Legislatures and submits its audit report to the President/ Governor/ Administrator for being laid before them. The Department must ensure that the accounts maintained truly represent facts; that the rules and orders framed by competent authority in regard to financial matters have been obeyed; that the expenditure has been incurred with due regularity and propriety, and that there is no wasteful expenditure on any scheme.

💜The Indian Audit and Accounts Department audits the transactions of the executive on behalf of the Parliament/ Legislature Assembly and submits its Audit Reports to :

(A) Legislature

(B) Cabinet Secretary / Chief Secretary

(D) President/Governor for being laid before Parliament/ Assembly

💜Periodical stock verification and the check of stock with the accounts is one of the :

(A) Fundamental Principles of Audit

(B) Instruments of Financial Control

(D) None of the above

💜So far, as its audit duties are concerned, the position of the Indian Audit and Accounts Department in relation to Government transactions is to a large extent similar to that of:

(A) A friend

(B) A guide

(D) A philosopher

Fundamental Principles

1.11 Before leaving this introduction to the subject. attention may be drawn how some of the audit tenets followed centuries ago still apply, as will be shown in this compilation. Prompt payment of money into the treasury, the strict following up of arrears, the necessity for accounts accurately portraying the facts, the value of checking the accounts and of conducting local inspections, periodical stock verification and the check of stock with the accounts, where fundamental principles then as they are today and principles which have held good for so long must contain the essence of importance.

💜During the audit of transactions of the executive, the Indian Audit and Accounts Department must ensure that;

(A) The accounts maintained truly represent facts

(B) The rules and orders framed by the competent authority in regard to financial matters have been obeyed.

(C) The expenditure has been incurred with due regularity and propriety and there is no wasteful expenditure on any scheme.

(D) All of the above.

💜Audit tenets followed the Fundamental Principles of Audit centuries ago still apply:

(A) Prompt payment of money into treasury

(B) Strict following up of arrears

(D) All of the above

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01.

CHAPTER 1

INTRODUCTORY

Accounting

Audit