Audit
Audit
Audit
Evolution of Auditing:
The term audit is derived from the Latin term ‘audited,’ which means to hear. In early days a
person used to listen to the accounts read over by an accountant in order to check them. He
was known as auditor.
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SCOPE OF AUDIT:
The following points merit consideration in regard to scope of audit:
1. The audit should be organized to cover adequately all aspects of the enterprise
relevant to the financial statements being audited.
3. In forming his opinion, the auditor should also decide whether the relevant
information is properly disclosed in the financial statements subject to statutory
requirements, where applicable.
4. The auditor assesses the reliability and sufficiency of the information contained in
the underlying accounting records and other source data by:
(a) Making a study and evaluation of accounting systems and internal controls
and
(b) Carrying out such other tests, enquiries and other verification procedures of
accounting transactions and account balances as he considers appropriate in
the particular circumstances.
5. The auditor determines whether the relevant information is properly disclosed in the
financial statements by:
2. OBJECTIVE OF AUDIT:
II. Expression of opinion: The main purpose of audit is to express opinion by the
auditor about the reliability and fairness of financial statements. The auditor can
never give absolute assurance about the sanctity of financial statements.
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III. Determination of proportions: Audit starts with the determination of proportions to
be examined for achieving the audit objective. Haphazard examination without a
clear idea about propositions leads the auditor nowhere.
IV. Application of logic: The modern audit has its principal roots in logic and judgement.
It is now analytical and investigative. The auditor now pushes pencil less and pushes
brain more.
VI. Formation of opinion: The audit requires the auditor to form an unbiased opinion on
the assertions made by the management in the financial statements.
VII. Communication of opinion: The process of audit ends with the communication of
opinion by the auditor through the audit report to client or shareholders.
3. ADVANTAGES OF AUDIT:
Advantages of Auditing:
(i)Satisfaction of Owner: It is because of audit that the owner will be satisfied about the
business operations and working of its various departments.
(ii)Detection and Prevention of Errors and Frauds: The errors whether committed innocently
or deliberately are discovered by the process of audit and its presence prevents their
occurrence in the future. No one will try to commit an error or fraud as the accounts are
subject to audit and hence, they will have a fear of being detected. Just like errors, frauds
are discovered by audit and its presence minimizes future possibility if not eliminated
totally.
(iv)Independent Opinion: Auditing is very useful in obtaining the independent opinion of the
auditor about business condition. If the accounts are audited by an independent auditor,
the report of the auditor will be true and fair in all respects and it will be of extreme
importance for the management of the company.
(v)Moral Check: The process of audit will establish a check on the minds of the staff working
in the business and they will not be able to commit any irregularity, as they will have a fear
and will also be aware that the accounts will be examined in the near future and
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that action would be taken against them if any irregularity is discovered. Thus, the audit
prevents the happening of any irregularity before it starts and the staff hence becomes
more active and responsible. The fear of their getting caught act as a moral check on the
staff of the company.
(vi)Protection of the Rights and Interests of Shareholders: Audit helps in protecting the
interests of shareholders in case of joint stock company. Audit gives assurance to the
shareholders that the accounts of the company are being maintained properly and their
interest will not suffer under any circumstances.
(vii)Reliance by Outsiders: Outsiders like creditors, debenture holders and banks etc. will rely
on the books of accounts and financial statements of the business if they are audited by an
independent authority (external auditor).
(ix)Reinforce and Strengthen Internal Control: Since auditing exercise involves the review of
internal control system, an auditor will identify the gaps in internal control system and can
suggest the necessary changes in the internal control system.
(x)Loan Facility: Money can be borrowed easily on the basis of audited balance sheet from
financial institutions. If accounts are audited the true picture will be visible to banks and it
will be easy for them to issue loans as early as possible.
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certificated by the institute of
charted accountment of India.
5.Report An accountant is not required to Auditor should submit the
submit the annual report on the report certifying the truth and
financial statement prepared by fairness of the financial
him. statement.
6.Remuneration An accountant is remunerated in And auditor remunerated in the
the form of salary. form of professional fees.
7.Commencement Accountancy stated where book- Auditing starts where
of work. keeping ends. accountancy ends.
A question often arises in the minds of businessmen whether audit is luxury or not. They say
accounting is necessity and auditing is a wastage of time and money. Auditing may be luxury
from the point of view of an ordinary businessman because of following reasons: -
Thus, auditing for a small business may be luxury but it is a necessity for a large business
organization for the following reasons: -
Thus, keeping in view the above, one cannot say that auditing is luxury. Auditing is necessity
of big organizations. Auditing is compulsory in case of Private Limited Companies, Limited
Companies, Charitable Trusts, Societies, Banks etc. The partnership firms or proprietorship
firms can also engage the auditors to have the fair view of accounts. Auditing is not wastage
of money because so many frauds can be detected from auditing and the money paid to the
auditors looks very petty amount in comparison of the frauds detected. Auditing is not the
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wastage of time also. Normally, auditors do not disturb the accounting staff. The do their
own work. Very few interferences are done by them with the accounting staff. The findings
or benefits of audit are more precious than wastage of little time of accounting staff. In my
view, every business firm whether it is small or big, must avail the services of the auditors.
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7. Difference between Auditing & Investigation:
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8. MEANING OF S.A DISCUSS THE IMPORTANCE OF S.A:
Standard audit, according to Irish, an Australian author, is “a complete check and analysis of
certain items and, contingent upon effective internal check, appropriate test checks on
remaining items, the whole work being in accordance with general auditing standards quite
adequate to justify an unqualified opinion.”
(i) Audit programme can be suitably designed based on standard audit principle.
(ii)It influences the nature and extent of documents and evidences to be obtained through
audit procedure.
(iii)New auditing standards compatible with the changing socio-economic condition of the
country can be developed after the scrutiny of the existing auditing standard.
(iv)The criticism that collusion often exists between the management and the auditor
leading to distortion of financial statements can be stopped through the application of
standard audit procedure.
9. Can we say that ‘Detection and prevention of errors are the main
objects of auditing’ – Discuss:
(ii) When control account does not agree with subsidiary books.
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(iii) When the difference in trial balance is difficult to locate.
(v)When there is difference between the balance and the confirmation of the balance by
the parties.
(vi)When there is difference between the stock as per records and the stock physically
counted.
(i) Check the opening balances from the balance sheet of the last year.
(v) Ensure that the list of debtors and creditors tally with the ledger accounts.
(vi) Make sure that all accounts from the ledger are taken into accounts.
(viii) Compare the various items from the trial balance with that of the previous year.
(ix)Find out the amount of difference and see whether an item of half or such amount is
entered wrongly.
(x) Check differences involving round figures as Rs. 1,000; Rs. 100 etc.
(xi)See where there is misplacement or transposition of figures that is 45 for 54; or 81 for 18
etc.
(xii)Ultimately careful scrutiny is the only remedy for detection of errors. 13. See that no
entry of the original book has remained unposted.
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THE AUDITOR SHOULD PERFORM THE FOLLOWING DUTIES IN RESPECT OF
FRAUD:
Book-Keeping, Accountancy and Auditing are the three aspects of the term `Accountancy'
itself in its widest sense.
Book-keeping: Book-keeping is the art of recording the daily transactions in a set of financial
books. It is concerned with systematic recording of transaction in the books of original entry
and their posting into ledger.
Auditing: It is said, "where accountancy ends, auditing begins." It is slightly said. An auditor
has to verify the entries passed by the accountant and the final accounts prepared by him.
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Thus, auditing is the checking of the accounts of a business with the help of vouchers,
documents and the information given to him and the explanations submitted to him. An
auditor has to satisfy himself after due verification and complete. Checking of accounts as to
whether the transactions entered into the books are accurate. An auditor is required to
submit his report to the effect whether or not the balance sheet is a true and fair
representation of the existing state of affairs of a business concern. Thus, an auditor should
have the proper knowledge of accounting principles. That is why he should be a chartered
Accountant. He has to express his impartial opinion in his report which he cannot give
unless he satisfies himself completely with the proper recording of transactions.
Thus, auditing is based on accountancy and not accountancy on auditing. An auditor must
be well familiar with the principles and practical aspects of accountancy but it is not
necessary for an accountant to be an expert in the audit work.
The following table makes the distinction clear among book-keeping accountancy and
Auditing:
(a) Book-keeping:
(i) Journalizing.
(ii) Posting into Ledger.
(iii) Totalling of different accounts in the Ledger.
(iv) Balancing.
(v) Checking the work of the Book-keeper.
(vi) Preparation of Trial Balance.
(b) Accountancy:
© Auditing:
11. What is the meaning of system audit? State the advantages and
disadvantages?
The audit which is conducted to examine the suitability of various systems of accounting
prevailing in the firm is called system audit. It assesses the existing systems of accounting to
determine whether they work efficiently or not so that appropriate opinion can be formed
on financial statements. It is an audit to explore inside the systems and discover whether
they produce desired results. System audit is a kind of investigation of the system of
accounts. Its purpose is to design appropriate system of accounts suitable for the business
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or revise the existing system suitably. It is no denying the fact that the business world is
dynamic in nature. The information requirement of different stakeholders is constantly
changing. So, the accounting systems frequently need to be revised so that they provide the
information desired by the stakeholders as an aid to decision making. Therefore, companies
should employ auditors to analyse their accounting systems and business methods to
ascertain whether accounting records and practices are up to date and economical; and
whether such records and practices may be changed so as to do the work better, quicker
and at less cost under the changing conditions.
Advantages:
(i)The accounting procedure can be revised or designed according to the changing business
environment.
(ii)The users of financial statements are immensely benefited as the accounting system
newly revised or designed by this kind of audit can generate information useful to decision
making.
(iii) The system does not allow opportunity to commit errors and fraud.
(iv) The profitability of the business is increased due to the introduction of system audit.
(v)The system audit is dynamic in the sense that old concepts and systems are subject to
review in the light of changing demand of the society.
Disadvantages:
(i) The introduction of system audit is likely to increase the overhead cost.
(ii)The introduction of system audit may be resisted by the accounting staff who may be
prone to orthodox ideas.
(iii)If the system fails to attain desired result, it will entail wastage of money, time and
energy.
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SHRUTI CHAMARIA CLASSES 7992469019
COMPANY
AUDIT
Sec 139: - Appointment of Auditor
Sec 140: -Removal, Resignation, Retirement
Sec 141: - Eligibility, Qualifications and
Disqualifications of Auditor
Sec 142: - Remuneration of Auditor
Sec 143: - Power and duties of Auditor
Sec 144: - Auditor not to render Certain
Services
Sec 145: - Duty to Sign report
Sec 146: - Attend AGM
Sec 147: - Punishment for contravention
Sec 148: - Cost Audit
1
SHRUTI CHAMARIA CLASSES
SEC139
2
SHRUTI CHAMARIA CLASSES 7992469019
(Due to death, illness, Resignation etc)
CASUAL VACANCY
1. By CAG 1. By BOD
(Within 30 days) (Within 30 days )
2. If not , If vacancy due to Resignation
then BOD
(Within meet 30 days) then Recommendation of BOD, shall be
A Approved in GM convened within 3 months.
Rotation of Auditor
Following Companies shall appoint Auditor either for 5 years or for 10 years: -
(Individual Auditor) (Firm Auditor)
3
SHRUTI CHAMARIA CLASSES 19
SOME IMP
POINTS
1. Individual Auditor + firm Auditor after completion of term,
shall not be eligible for appointment in same company for
five years.
2. If two firm has a common
or partner and one firm
partner
has completed its 10 years term, then another firm shall
also not be able to appoint as auditor in same company
for 5 years.
3. Incoming Auditor or firm shall not be able to eligible if
they are associated with out going Auditor or firm under
the same network of Audit firm.
4. If partner of (Whose tenure has been Completed 10
firm
yrs) retires from that firm &joins another firm, then
another firm shall not be eligible to be appointed as
Auditor for 5 yrs.
5. If Auditor becomes disqualified u/s 141, then it will be
termed as Casual Vacancy.
4
SHRUTI CHAMARIA CLASSES
5
SHRUTI CHAMARIA CLASSES 799
SEC141:- ELIGIBILTY,
QUALIFICATION, DISQUALIFICATION
QUALIFICATIONS: -
Charted Accountants
Firm of CA (Majority of partners practicing in India are qualified)
LLP (only partners who are CA shall be able to act as sign)
DISQUALIFICATION
6
SHRUTI CHAMARIA CLASSES
8. (Person
whose, or
his
relative or
Holding In debted in Given Guarantee or
provided security
security or excess of 5 in excess of 1 lac.
interest. lac Rupees.
IN ITS SUBSIDIARY
In C , A, S, H IN ITS HOLDING
COMPANY
IN ITS ASSOCIATE
7
SHRUTI CHAMARIA CLASSES 690
Relatives ma hold security or Interest upto face
value notexceeding
y 1 lacs.
But, Auditor or his Partner Cannot held the security or interest even
of Small values.
SEC 144
8
SEC143:- POWERS/DUTIES
OF AUDITOR
9
SHRUTI CHAMARIA 7992469019 |
CLASSES
4) Right to Respect to Members:
Auditor shall make a report to member of Co. on the accounts
examined by him & on every F.S.
Report shall take into Account all the AS, all accounting
Provision & all the Provision of this Act.
DUTIES:
Auditor has following Duties while Conducting Audit !
Auditor shall Make a report on the following case only if finds answers to
these matters in advance
10
2) Duty to Report!
Auditor shall make a report to members on the Aks examined by him & on
every F.S
Auditor shall report following matters also!
→ Whether the Co. has disclosed the Impact, If any of Pending loses on its
financing Position.
→ Whether Co. has made. Provision as required Under Law.
→Whether there has been any delay in transferring the amt, required to be
thousand to EPF A/C.
Auditor's Report shall also state-
→Whether he has obtained all the info & explanation which were necessary for
the purpose of his Audit.
→Whether, in his opinion proper BOA have been kept by Co.
→Whether Co’s B/S & P/S are aggreement with BOA.
→Whether F.S. Comply with A.S.
→Whether any director is disqualified from Appointment.
# However, Reporting
→ Whether Co. hasonadequate
(IF6) shall not befinancial
lnternal applicable to Pvtas
Control Co, which
per F.S. is a!
1)OPC
2) Small co.
3)Co. having to less than 50 cr. & having aggregate borrowing from banks of FI
less than 25 cr.
11
SHRUTI CHAMARIA 992469019 |8910631299
3)CLASSES
Duty to sign the Audit Report!
Auditor of Co. Shall sign the Auditor's report.
Where a firm or LLP is auditor !
↓
Only the Partners who are CA shall be sell authorised to conduct the
Audit
+
Sign on behalf of firm
12
SHRUTI CHAMARIA 79924690191299
6)Duty
CLASSESto Report on frauds : →
↓
↓ ↓
If Any of Fraud is If Amt. of fraud is less than 1 cr.
1 Cr. or above ↓
Auditor shall report the Auditor shall report the matter to BOD
Matter to BOD or Audit or Audit committee of Co.
committee of Co. ↓
BOD shall disclose this into their
↓
Wait for their to response report:-
↓
Auditor shall along with those
Comment send his
own observation to CA
13
SHRUTI CHAMARIA 79924690131299
CLASSES
Sec 145:- Auditors to sign Audit Report:-
Auditor of a Co. shall sign her Respect (same as duty to Report).
→He will be heard if Co. consider any Audit matter in the meeting.
Sec 147: Punishment for Contravention!
If Co. Contravenes Sec 139 to 146
↓
Fine: not less than 25000, may extend to 5 lakh
+
Imprisonment: Every officer in default upto 1 year
OR
Fine = 10000 to 1 lakh
OR
Both
If Auditors Contravenes Sec 139, 143, 144 & 145
↓
Fine: 25000 to 5 lakh Whichever is less.
OR
4 times of Remuneration
14
SHRUTI CHAMARIA CLASSES 7992469019 |
If Auditors has Contravened Knowingly or willfully with Intension to
deceive the CO, SH of Cr.
↓
Imprisonment = 1 year
Whichever
+ Fine= 50000 to 25,00,000
is less
OR
8 Times of Remuneration
15
VOUCHING, VERIFICATION & VALUATION
Verification means `proving the truth' or `confirmation'. One of the most important duties of
an auditor in connection with the audit of the accounts of a concern is to verify the assets
and liabilities appearing in the balance sheet. The fact that there is an entry regarding the
purchase of an asset and has been be correctly recorded, is not a proof that the asset is in
the possession of the concern at the date of the balance sheet. It is possible that after
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purchase and passing the entries, the asset might have been disposed of or pledged and no
entry has been made concerning this before the closing of these books. Therefore, he has to
see whether a particular asset as recorded in the balance sheet on the day of the closing of
the books of account exists or not. If he fails to verify the asset, he will be liable for any
damage suffered by the client as it was decided in the case of London Oil Storage Co. Ltd.
Vs. Sear Haslock and Co. (1904).
Thus, we can say that verification is a process by which the auditor satisfies himself not only
about the actual existence, possession, ownership and valuation but also ensures that the
assets are free from any charge or lien.
(a) Comparing the ledger accounts on the date of the balance sheet.
(b) Verifying the existence of the assets on the date of the balance sheet.
(c) Satisfying that they are free from any charge of mortgage.
(d) Verifying their proper value.
(e) Assets were acquired for the business.
4. Vouching of expenses:
How do you vouch the following items?
Director’s remuneration:
This refers to the amount paid to directors for their services rendered to the company and
for attending Board meeting. While checking this term of expense, the auditor should have
the following information:
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i. Articles of Association to know the details of remuneration payable to Directors.
ii. Agreement with directors or appointment letters,
iii. Directors’ minute book or attendance register to vouch the director fees.
iv. Statement showing details of calculation of commission.
v. Directors’ receipts etc.
Travelling Expenses:
For vouching of traveling expenses, the auditor should have followed information:
To satisfy himself with the above information, the auditor should go through following
documents:
a. Business Travel Rules of the company.
b. Business Travel Vouchers as submitted by employees.
c. Personal accounts of employees.
d. Board’s Resolution etc.
Payment of dividend:
The following points must be considered while vouching the payment of dividend in case
of a public company and private company which is a subsidiary of a public company:
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(e) Verify the shareholders’ register and ensure that the names of all shareholders who are
entitled to receive dividends have been included.
(f)Check the computation of dividends with reference to rate of dividends and number of
shares held.
(g) See counterfoils of cheques for amounts paid to shareholders.
(h)Examine, whether all the conditions for payment and source of dividend as specified on
section 205, 205A and 205B, have been complied with. It may be noted that the Institute
has issued a Guidance Note on Audit of Payment of Dividends.
Preliminary Expenses:
Expenses incurred in connection with the promotion of a new company are known as
preliminary expenses. This expenditure includes stamp duties, registration fees, legal cost,
accountant’s fees, cost of printing, etc. while vouching these expenses, the auditor should
require following information:
a. Whether the expenses shown as preliminary expenses are actually connected with
the formation of the company.
b. Whether the expenses incurred have got due sanction from the competent
authority.
c. Whether the amount of expenses is justified from propriety angle. In other words,
the auditor should enquire into the rightness of the amount of expenses.
d. Whether the amount of expenses is within the sanctioned limit. If it exceeds the
limit, the auditor should enquire into whether approval from shareholders has been
obtained in this regard.
e. Whether preliminary expenses have been written off in the year in which they are
incurred as required under AS 26, Accounting for Intangible Assets.
In order to gather the above information, the auditor should go through following
documents:
(a) Invoices, bills etc. to ensure that expenses pertain to formation of the company,
(b) Contracts, agreement, purchase order etc. to ensure authorisation of expenses.
(c)Correspondence with various suppliers, their quotations, price comparative statement
etc. to ensure Tightness of expenses,
(d) Board's Resolution, Prospectus etc. to see that amount is within limit,
(e)Agreement with promoters to see the terms and conditions of reimbursement of
expenses to them.
Vouching of income:
Rent received:
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The following points must be considered while vouching the rent received:
(a)Before proceeding to vouch rental receipts, copies of bills issued to tenants should be test
checked by reference to copies of tenancy agreements and bills of charges paid by the
landlord on behalf of the tenants, i.e., house tax, water tax, electricity consumed, etc.
(b)The entries in the Rental Register in respect of rents accrued afterwards should be
verified by reference to copies of rental bills.
(c)The amounts collected from tenants on account of rent should be checked by reference to
receipts issued to them. These afterwards should be traced into the Rental Register.
(d) At the end, the register should be scrutinized to find amount or rents which have not
been recovered and are considered bad or irrecoverable, for deciding whether these should
be written off or as provision against the same should be made.
(e) An overall check over rental receipts are also necessary. For this purpose, particulars of
total accommodation available for being let out, in different buildings, belonging to the
client, should be ascertained.
(f)It should be verified that every available accommodation has been let out and rental
income has been duly accounted for.
(g)If it is reported that one or more tenements have remained vacant a certificate in
respect thereof should be obtained from the client.
The following points must be considered while vouching the receipt of interest & dividend
in case of a public company and private company which is a subsidiary of a public
company:
(a)The auditor should examine the separate ledger accounts kept for each investment or
loan given.
(b)The dates on which dividends or interest payments generally fall due should also be
noted.
(c)The counterfoil of dividend warrants should be seen. These should be tallied with the
records of investment.
(d)Where investments are sold ex-dividend, it should be seen that the dividends are
subsequently received.
(e)Similarly, when a purchase is on cum dividend basis, the receipt of dividend should be
checked.
(f) In case of interest on deposit with banks, verification should be done by reference to the
bank’s statement and the agreed rate of interest.
(g)The receipts of dividends and interest should be addressed to the bank statement for
encashment.
(h) It should be ensured that the interest and dividend received are credited to the
respective account in full i.e., before deduction of tax at source and the tax deducted at
source should be debited to an appropriate account.
(i)It should be further seen that the certificate for tax deducted at source exists in each
case.
6|Page
(a) Documents to be verified:
a. The documents to be verified for interest received are (a) Loan agreement
b. Fixed deposit or debenture certificate
c. Interest warrant for debenture
d. Mortgage deed
e. Bank pass book etc.
Fraud frequently occurs in the areas of cash sales. So, the auditor should be very careful
while vouching cash sales. He will adopt following procedures for this purpose:
5. Verification of assets:
Investment:
Investment may be a share certificate, government bond certificate, government loan
certificate, debenture certificate, etc. For verification of such securities, the following
procedure is adopted.
(a) Obtain a schedule of investments in hand at the beginning of the audit period. Obtain
the details of description of investments together with distinctive number of face value,
date of purchase, book value, market value, rate of interest, date of payment of interest or,
7|Page
date around which dividend is declared, etc., with also the details of interest or dividend
received along with tax deducted at source.
(b)Add to the above list, purchase made during the year and delete the investments sold
during the year with all the above details.
(c) Balance this schedule and compare the balance with general ledger and Balance sheet.
(d)Check the market value of investments with reference to stock exchange quotations or
other suitable method, on Balance Sheet date and see that the values are disclosed in the
Balance sheet.
(e) Inspect the certificates or securities physically on the Balance Sheet date.
(f) Compare the income received with amount due and adjust the accrued income.
(g)Confirm the uncalled liability on partly paid shares held as investment shown as
contingent liability by way of a note to the Balance Sheet.
(h)See that adequate provision is made for any shortfall in the book value of investment
shown in the Balance Sheet.
(i) See that, regarding the investment in subsidiaries, disclosure requirement of the
Companies Act, 2013 are complied with.
(j)For investment in the capital of partnership, the partnership deed and copy of accounts
of partnership firms, is to be verified. Also adjust the share of profit and loss for the
partnership period.
(k)Investments which stand in the name of persons other than that of the company are to
be confirmed with appropriate sanction.
(l)For investment lodged with others as security or lying with banks or share brokers, obtain a
certificate from the parties concerned.
(m) In case of application money paid for shares which are still to be allotted, that fact is to
be specially disclosed in the Balance Sheet.
Stock:
As the correctness of the profit of a business depends to a great extent on the accuracy of
the valuation placed on the closing stock, it will be readily appreciated that the verification
of this asset forms one of the most important parts of an auditor’s duty. While verifying the
stock-in-trade the auditor has the following duties –
(l) See that the goods sold on approval basis are properly included in closing stock.
(m) See that the stock held does not include goods held on consignment as an agent.
(n)Examine carefully the stock sheets and ensure that the stock includes only the goods
dealt with by the client and does not include any asset purchased.
(o) Confirm that stock has been valued at cost or market price, whichever is less.
(p)Obtain from a responsible officer of the organization a certificate regarding the
procedure followed in valuation of stock.
(q) Obtain a certificate from client certifying that:
Leasehold Property:
Normally the lease or right to use the property is granted for certain number of years. At the
expiry of the period of lease, the rights go back to the original lessor. Various steps involved
in the verification of leasehold rights are stated below.
(b)Inspect the lease agreement to ascertain the amount of premium paid, period of lease,
other terms and conditions, like maintenance, insurance, etc.
(c)See that the lease is properly registered with the Registrar because a lease for a period
exceeding one year is not valid unless it has been granted by a registered document.
(d)Ascertain those conditions, the failure of which might result in the forfeiture or
cancellation of lease, and see whether they have been properly complied with.
(e)See whether sub-lease is valid as per lease agreement, in case if it is granted, by referring to
sub-lease agreement.
(f)See that the premium paid and acquisition expenses of lease are being amortised
(written off) over the period of lease adopting a suitable basis.
(g)In case, any provision is to be made under the dilapidation clause for payment on the
expiry of the term of lease, see that the same is properly and continuously provided.
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(g) In case of leasehold land, if any building is constructed by the lessee, see the position
and ascertain the correct method of presentation of such expenditure for disclosure in the
Balance Sheet.
Goodwill:
(a)Whenever the company has purchased or acquired a running business and has paid for it an
amount, in excess of the book value of its net assets, the excess is called `Goodwill’. It can be
verified from the vendor’s agreement and the auditor has to see whether there is a specific
sum which is paid or whether it is the excess of price paid over the tangible assets and see
that it is properly recorded.
(b)When the company has written up the values of all its assets on a revaluation and has
raised a Goodwill Account in the books, the Goodwill appears in the Balance Sheet. In this
case, the auditor has to see the basis of valuation and get satisfied about the same. If he is
not satisfied, the fact should be reported to the shareholders.
10 | P a g e
(c)He has to see that such excess is credited to a Capital Reserve or Revaluation Reserve
and no dividend is being declared from it.
(d)He has also to see the disclosure requirement of Schedule VI and ensure that the fact is
disclosed for 5 years subsequent to the date of revaluation.
(e)Sometimes, Goodwill which is written off earlier may be brought back in the books of
account to adjust the debit balance of Profit and Loss account. In this case, the auditor
should investigate the fact and satisfy in full before approving such method of creating
Goodwill. He should also refer to the board resolution. In case he is not satisfied, the fact
should be reported to the shareholders.
(f)If Goodwill has been created by any other means, the auditor should see that all relevant
facts are properly disclosed and are supported by documentary evidence.
Copyright:
(a)The auditor has to examine the written agreement of assignment along with the royalty
paid to the authors etc., for such copyrights.
(b) He has to see that such assignments are properly registered.
(c)If the client is the owner of many copyrights, the auditor should ask the client to prepare a
schedule of copyrights and get the detailed information to confirm that the same is shown
in the Balance Sheet.
(d)Regarding the value of copyrights, it should be remembered that this asset has no value in
the long run. Hence, value is determined on revaluation basis and period of copyrights.
(e) If any copyrights do not command the sale of any books, then the same should be
written off in such year. The auditor has to verify the same in detail.
(a)The ownership of patent rights is verified by inspection of certificate issued for grant of
patent, by the prescribed authority.
(b)If it has been purchased, the agreement surrendering it in favour of the client should be
examined.
(c)If there are a number of patents held by the client, obtain a schedule giving the full
details thereof or verify with reference to the register maintained by the client.
(d)It must be verified that patent rights are alive and legally enforceable and renewal fees
have been paid on due dates and charged to Revenue Account. The last renewal receipt
should be examined to ascertain that the patent has not lapsed.
(e) See that the patents are properly registered in the name of the client only.
(f) See that the cost of patent is being written off over its useful period of life.
(g)In case the patent is acquired, cost paid for the same and all relevant expenses are to be
capitalized.
(h)If the patent is created by the client by the research experiments and laboratory work,
only the actual expenses incurred for it in the process are to be capitalised.
11 | P a g e
Cash in hand:
(a)Special care is necessary with regard to verification of cash balances. There can be no
certainty that the cash produced for inspection was in fact held by the custodian.
(b)For this reason, the cash should be checked not only on the last day of the year, but also
checked again sometime after the close of the year without giving notice of the auditor’s
visit either to the client or to his staff.
(c)If there is more than one figure for cash balance e.g., when there is a cashier, a petty
cashier, a branch cashier and in addition, there are impress balance with employees, all of
them should be checked simultaneously, as far as practicable, so that the shortage in one
balance is not made good by transfer of amount from the other.
(d)It is desirable for the cashier to be present while cash is being counted and he should be
made to sign the statement prepared, containing details and the cash balance counted. If he
is absent at the time the cash is being verified, he may subsequently refute the amount of
actual cash on hand which may put the auditor in an embarrassing position.
(e)If the auditor is unable to check balance on the date of the Balance Sheet, he should
arrange with his client for all the balance to be banked and where this cannot conveniently
be done on the eve of the close of the financial year, it should be deposited the following
morning. The practice should also be adopted in the case of balance at the factory, depot or
branch where cash cannot be checked at close of the year.
(f)Should this not be possible, the auditor should verify the receipts and payments of cash up
to the date he counts the cash. This should be done soon after the cash balances have been
counted. The cash book of the day on which the balance is verified should be signed by the
auditor to indicate the stage at which the cash balance was checked.
(g)If any cheques, or drafts are included in cash balance the total there of should be
disclosed.
(h) If there is any rough Cash Book or detail of daily balance are separately kept, the auditor
should test entries from the rough Cash Book with those in the Cash Book, to prove that,
entries in the Cash Book are correct.
(i)If the auditor finds any slip, chit or I.O. Us in respect of temporary advances paid to the
employees, included as part of the cash balance, he should have them initialled by a
responsible official and debited to appropriate accounts.
Verification of Liabilities:
Secured loan:
Verification of secured loan may be carried out by employing the following procedures:
12 | P a g e
3) The auditor should enquire into the purpose of taking loan and whether the amount
of loan has been utilized for that purpose.
4) The loan agreement entered into between the client and borrower should be
examined to know whether terms and conditions are in the interest of the company.
5) The auditor will see whether there is fixed charge or floating charge on assets for
taking secured loan. In case of fixed charge, the particular asset placed as security for
loan should be clearly stated in the balance sheet.
6) He will verify whether terms and conditions of taking loan have been duly complied
with.
7) The auditor will obtain certificate from lenders to confirm the validity of the amount
of loan standing on the balance sheet data and any outstanding interest thereon.
8) He will see that secured loan has been properly disclosed in the balance sheet as per
Schedule III of the Companies Act, 2013.
Contingent liability:
Contingent liabilities are those liabilities which may or may not arise in the future for
payment. The auditor’s duty is to see that all known and unknown liabilities have been
brought into the accounts at the date of the Balance Sheet and have been shown in the
Balance Sheet separately as such.
Examples:
(a) Liabilities on Bills Receivable discounted and not matured
(b) Liabilities for calls on partly paid shares:
(c) Liability under a guarantee:
(d) Liability for cases against the company not acknowledged as debts:
(e) Liability in respect of arrears of Dividend on Cumulative preference Shares:
Auditor’s duty:
(a)The auditor should very carefully check the various contingent liabilities named above.
There may be some such liabilities for which no provision has been made in the books but
merely a note has been made at the foot of the Balance Sheet, e.g., Bills Receivable which
have been discounted and which have not matured at the date of the Balance Sheet, arrears
of fixed cumulative dividends, etc.
(b) For liabilities in respect of which provision has to be made in the Balance Sheet, viz a
suit, etc., the auditor should examine such cases and ascertain the amount to be specifically
reserved for the purpose.
(c) The auditor should examine the Director’s Minute Book, correspondence made with the
legal advisers and the information obtained from the officials of the business.
(d)He has to ensure that proper provision has been made for all such liabilities and if he is
not satisfied, he should mention the fact in his report.
(e)It is to be remembered that the requirements of the Companies Act regarding the
contingent liability should be complied with in the Balance Sheet on the liabilities side.
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Creditors
(a)The auditor should ask for a schedule of creditors and check the same with the purchase
ledger as that is already examined by him.
(b)He should ensure that all purchase made during the year especially at the end of the
year are included in the accounts of the creditors.
(c)In case of suspicion about any creditors, the auditor with the consent of the client can ask
the statement of account to be sent and verify the same by scrutinizing ledger accounts.
(d)He should see the various debits given for discount, goods returned etc, and confirm that
the same are genuine.
(e) The auditor should ask for the reason for not paying any overdue creditors.
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SHRUTI CHAMARIA CLASSES
AUDITING | SEMESTER V| B.COM
AUDITOR’S REPORT-
a) Audit report is the end of audit work. After completing the Audit of Financial
statements of an organization.
product Auditor prepares the Audit report in which he
expresses his opinion. isNogiven in Audit Report.
guarantee
b) The Audit report should be clear, unambiguous and specific.
c) SA 700 deals with the responsibility of the auditor in forming his/her opinion on
financial statements. This standard also deals with content and form of theauditor’s
report that is issued as an outcome of the audit of the financial statements.
(In this Chapter we shall also discuss about the Type of Audit Report,
Content of Audit Report and Characteristics of Audit Report)
AUDITOR’S CERTIFICATE-
a) Audit Certificate is a document through which the auditor confirms certain facts.
b) It gives the guarantee
of correctness or accuracy of information. It does not involve
any estimate.
c) Certification of the statutory report, certification of share transfer, certification of the
value of imports and exports of a company, etc. are some of the examples of auditor’s
certificate.
2)
3)
CHARACTERISTICS OF AUDIT
REPORT
ACRONYM
(UP M SIRF CABS)
U P M S I R F C A B
S
4)
TYPES OF AUDIT REPORT
1) CLEAN REPORT:-When Auditor gives positive opinion on true and fair view of
Financial Statements, then the Auditor issues Clean Report. When He is satisfied with
following matters, he gives Clean Report-
a) All entries have been passed as per GAAP.
b) Financial statement is in Agreement with Books of account.
c) Information in Financial statements is true, reliable and Relevant.
d) He got all material Evidence.
5)
ELEMENTS OF AUDIT REPORT (AS PER STANDARD ON
AUDITING)
ACRONYM
(TAI MAAR DPS)
M A
T A I A R
D P S
Place
Date Sign
Auditor’s opinion- Should mention the overall impression obtained from the audit of
financial statements.
For Example Modified Opinion, Unmodified Opinion
Reporting Responsibility-If any other reporting responsibility exists the same should
be mentioned.
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OBJECTIVES OF COST
AUDIT
GENERAL
OBJECTIVES
SOCIAL
OBJECTIVES
GENERAL OBJECTIVES-
1. To detect the errors of principle of cost accountancy, and frauds
that are usually made in the cost records.
2. To verify the adequacy of the books of account and
records relating to cost.
EDULAKSHYA CLASSES I 7992469019
SOCIAL OBJECTIVES-
1. Increasing productivity:
Efficient management of material and labour and optimal utilisation
of installed capacities increase productivity. Cost audit brings to light
these factors, and so aids the management and the Government to
bring about improvements of existing economic conditions of the
country.
S O B JE C T IV E O F
A D V A N T A G E S O
C O S T A U DI T
F C O S T A U DIT
Earning
Increasing Decision Foreign
productivity making Exchange
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PROVISION OF COMPANIES
ACT
records.
❖ This means that applicability of maintenance of Cost Records
shall be for those sectors which are mentioned in the tables (Table
A – Regulated sectors and Table B – Non-regulated Sectors).
❖ Every company which is required to get its records audited shall
appoint a cost auditor within 180 days of commencement of every
financial year.
❖ The duty of company shall be to give all assistance and facility to
the cost auditor for auditing the cost records of the company. 5
CA SHRUTI CHAMARIA
AUDITING | SEMESTER V| B.COM
VACANCY APPOINTMENT.
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2)
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3)
MEANING OF SOCIAL
AUDIT
3.The payment of fair wages under the best possible conditions to the
worker.
MEMORY TECHNIQUE –
“PEASE”
Prevention of unfair Establishing the
Assessment of Social
trade practice- justifiability of a
performance
business-
The unfair trade practice will Social audit assess the
be revealed by social audit. With the help of social audit contribution made by firm to
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4)
ADVANTAGES OF ENVIRONMENT
AUDIT
5)
(a)The expenditure should not be prima facie more than what the
occasion demands and that every officer exercises the same
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6)
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C) EXPENSES-
B) INCOME OF HOSPITAL-
E D U LAKSHYA CLASSES|
1) An Auditor should check the bill book, bill register and copy of bills.
2) It should be verified that bills are prepared properly according to visit
charges of doctors, medicine, stay charges, room rent, etc.
3) Bills should be verified with the fees/charges structure.
7992469019
C) EXPENSES OF HOSPITAL-
1) An Auditor should adopt the usual way to vouch purchases and other
expenses of the hospitals.
2) Clear distinction should be made between capital and revenue expenses.
3) Salary of staff should be vouched according to general auditing
principles.
4) Auditor should examine the payment relating to purchase of medicines,
foodstuffs and medical items.
5) Auditor should verify the computation of salary of Doctors, Nurses
and staffs of Hospital and check whether all required deductions are
made out of it.
6) Auditor should compare the expenses of the Current year with the
expenses of last year.
1) Title documents and other records relating to land and building should
be carefully examined by the Auditor.
2) Resolution of Trustees/Managing committee should be verified for sale
and purchase of fixed assets.
7992469019
Managing Committee.
4) Liabilities should be verified in the usual manner.
5) Stock and stores of medicines, clothing, consumables, etc. should be
physically verified at the end of the year. 5
6) Auditor shall physically verify the Cash, Medical equipment and all
other assets of Hospital.
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AUDITING | SEMESTER V| B.COM
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1) MEANING OF AUDIT
PLANNING
An audit is a professional service to a client. Before commencing audit, an
auditor must prepare himself well. Preparation for an audit relates to Audit
engagement, audit planning, audit programme, audit note book, audit
working papers, audit memorandum, Audit File.
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Accomplishment of Objectives
Identification of Problems
Facilitates Coordination
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2) MEANING OF AUDIT
PROGRAMME
An audit program is a set of directions that the auditor and its team members
need to follow for the proper execution of the audit. After preparing an audit
plan, the auditor allocates the work and prepares a program which contains
steps that the audit team needs to follow while conducting an audit.
“An audit program provides a basic plan for the audit team regarding the
entity’s business, its size, how to conduct the audit, allocation of work among
team members and the estimation of time within which it should complete the
work.”
Supervision of work: The auditor can judge the efficiency of his audit
team, by having a well develop audit program. He is in the position to know
the progress of work. He can see at any time that what part of the work has
been completed and what remains to be done.
Basic instrument for training: Audit program is very useful for the new
auditor. It provides training and guidance to them.
Legal evidence: Audit program is legal evidence for work done by every
assistant of the audit team. Audit program can be presented in the court of law
if any action is taken against the auditor of negligence.
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A notebook that is prepared by the audit staff to note down all the uncleared
queries which he/she may find in the course of the audit and requires further
clarification and explanation is known as an audit notebook.
1. The nature of the business carried on and the important documents relating
to the constitution of the business.
5. Particulars of the accounting and financial system followed and the internal
check-in operation in the business.
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1) Audit Report
The audit notebook helps prepare an audit report. The auditor can record the
weakness of accounting records. The queries not properly answered are started
in the audit report when the auditor is satisfied, he can submit a clear report.
2) Staff Honesty
The audit notebook is used to determine the integrity and honesty of audit
clerks. The moral and ethical values can be examined through audit work.
3) New Auditor
The audit notebook is useful for a new auditor. They can see the weakness of
previous years. The old, weak points may not be repeated this year.
4) Reference
The audit notebook is useful for reference. In the future, it can provide
information to the audit staff. The past data gives an insight into business
matters. The auditor can note the changes.
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4) MEANING OF AUDIT
MEMORANDUM
CONTENT OF AUDIT
MEMORANDUM
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5) MEANING OF AUDIT
FILE
The file in which auditor preserves the Audit Papers is known as AUDIT
FILE. So it is the archive of audit papers which are generated by the auditor
during the audit.
There are basically two main Importance of Audit File-
a) In the subsequent audit of same Client he can use it as reference.
b) He can also use it as proof of defence if any charge of negligence
is levelled against him.
AUDIT
FILE
CURRENT
PERMANENT
AUDIT
AUDIT FILE
FILE
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CONTENT OF PERMANENT AUDIT FILE-
New client questionnaire.
The memorandum and articles.
Other legal documents such as prospectuses, leases, sales agreement.
Details of the history of the client’s business.
Board minutes of continuing relevance.
Previous years’ signed accounts, analytical review, and management letters.
Accounting systems notes, previous years’ control questionnaires.
Accounting policies and financial manual.
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6)
MEANING OF AUDIT WORKING PAPER
Evidence of the planning process including audit programs and any changes thereto.
Analyses of transactions and balances.
Analyses of significant ratios and trends.
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AUDIT RISK & INTERNAL CONTROL
SYSTEM
(10 MARKS)
MEANING OF AUDIT
RISK
Audit risk means the risk that the auditor gives an inappropriate audit opinion
when the financial statement are materially misstated. Thus, it is the risk that the
auditor may fail to express an appropriate opinion in an audit assignment.
Audit Risk could be simply understood as follows:
During the audit of a company if the financial statements of that company are
misstated and those misstatements are material in nature, then there will be a
risk that audit opinion given by the auditor regarding audit of that company
would be incorrect. Then that risk will be known as Audit Risk.
b) Control risk- Control Risk is a risk that internal control in an entity would
not be efficient enough to stop from happening, or find and then rectify in an
appropriate time, any material misstatement. So,in a way it can be said that
there exists an inverse relation between Control Risk and Efficiency of Internal
Control of an Entity. When efficiency of internal control of an entity is high
the control risk is low and vice-versa.
c) Detection risk- The risk that the procedures performed by the auditor to
reduce audit risk to an acceptably low level will not detect a misstatement that
exists andthat could be material, either individually or when aggregated with
othermisstatements.
2)
MEANING OF INTERNAL
CONTROL
The internal control may be defined as “the process designed, implemented and
maintained by those charged with governance, management and other
personnel to provide reasonable assurance that financial statements are reliable
and efficient, assets are safeguarded and entity complies with all law and regulations.
OBJECTIVE OF INTERNAL
CONTROL
O SAFEGUARDING OF
ASSETS
b RELIABE DATA
j FS AS PER RULES
e AUTHORISED
c TRANSACTION
t
i
v
3)
INTERNAL CHECK & ITS OBJECTIVES
OBJECTIVE OF INTERNAL
CHECK
PREVENT
MISAPPROPRIATION OF
CAHS AND GOODS
ALLOCATE DUTIES & RESPONSIBILITIES
IN ENTITY.
Self-balancing System-
An organization can use self-balancing ledger accounts, which help to make the work
of internal checks easier. Its effectiveness depends on its management.
Job Rotation-
Control-
Division of Work-
No one should be allowed to have the right to perform the work from origin
to end.
MEANING OF INTERNAL
AUDIT
PROPER
O CONTROL
b REVIEW OF
BUSINESS
j
DETECTION OF
e FRAUD
c CHECK ON
t ERROR
i ASSET
PROTECTION
v
e
s
PROPER CONTROL- Keep the control over the activities of
Entity. Management needs assurance for financial statement
and efficiency of firm and Internal Audit gives both.
REVIEW OF BUSINESS- Internal audit point out the mistakes,
weak and strong points of entity. This allow reviewing the
business instead of waiting till year end.
DETECTION OF FRAUD- Interna audit is round check on
employees so instances of fraud gets exposed easily.
CHECK ON ERROR- In internal audit mistakes are spotted
and corrected immediately.