BBA IIAuditingSyllabus

Unit – I Meaning , Objectives & Advantages of Audits. Types & Conduct of Audit – Various types of Audit ,

Audit Program me .

Unit – II Internal Check System – Meaning Definition , Objects , duties of auditor in regard internal check internal control , Internal Audit , Difference between internal check , internal control & internal

audit . Internal check in regard cash tractions . Vouching of cash transactions – Meaning & Importance of Vouching , Voucher , Vouching of Opening Balance , Cash receipts , Cash

payments , Capital Expenditure & Trading Transactions .

Unit – IIIVerification & Valuation of Assets & Liabilities , Audit of Final Accounts .

Unit – IVAudit of Limited Company – Qualification of Company Auditor , Appointment of Auditor , A

Qualification , duties & Audit Report.

Unit – VAudit of Banking , Insurance Company & Co-operative Society.

Meaning of Auditing

The word 'Audit' is originated from the Latin word 'audire' which means 'to hear'. In the earlier days, whenever there is suspected fraud in a business organization, the owner of the business would appoint a person to check the accounts and hear the

explanations given by the person responsible for keeping the account and funds. In those days, the audit is done to find out whether the payments and receipt are

properly accounted or not.

The objective of modern day accounting is not only for the verification of cash but to report the financial position of the undertaking as disclosed by its Balance sheet and

Profit and Loss account.

Definition of Auditing

A precise definition of the term 'Auditing' is difficult to give. Some of the definitions given by different authors are as follows:

According to Montgomery, a well known author, "auditing is a systematic examination of the books and records of a business or the organization in order to ascertain or

verify and to report upon the facts regarding the financial operation and the result thereof. “

Spicer and Pegler expanded the above definition as follows:

"An audit may be said to be such an examination of the books, accounts and vouchers of a business as well enable the auditor to satisfy that the Balance Sheet is properly

drawn up, so as to give a true and fair view of the state of affairs of the business and whether the Profit or Loss for the financial period according to the best of his

information and the explanations given to him and as shown by the books, and if not, in what respect he is not satisfied."

Definition of Auditing

According to Lawrence R. Dicksee, "an audit is an examination of accounting records undertaken with a view to establishing whether they correctly and completely reflect

the transactions to which they relate. In some instances, it may be necessary to ascertain whether the transactions themselves are supported by authority."

R. K. Mautz defines auditing as being "concerned with the verification of accounting data, with determining the accuracy and reliability accounting statement and reports."

It is clear from the above definitions that auditing is the systematic and scientific examination of the books of a accounts and records of a business so as to enable the auditor to satisfy himself that the Balance Sheet and the Profit and Loss Account are

properly drawn up so as to exhibit a true and fair view of the financial state of affairs of the business and profit or loss for the financial period. The Auditor will have to go

through various books and accounts and related evidence to satisfy himself about the accuracy and authenticity to report the financial health of the business.

Objectives of Audit

For a better understanding we could classify the objective of audit as:

1. Primary Objectives

2. Secondary Objectives.

Primary Objectives: To determine and judge the reliability of the financial statement and the supporting accounting records of a particular financial

period is the main purpose of the audit. As per the Indian Companies Act, 1956 it is mandatory for the organizations to appoint a auditor who, after the examination and verification of the books of account, disclose his opinion that whether the audited books of accounts, Profit and Loss Account and Balance

Sheet are showing the true and fair view of the state of affairs of the company's business. To get a true and fair view of the companies affairs and

express his opinion, he has to throughly check all the transactions and relevant documents of the company made during the audited period. Which will help the auditor to report the financial condition and working result of the organization. While carrying out the process of audit, the auditor may

come across certain errors and frauds. But detection of fraud or errors are not the primary objective of the audit. They are come under the

secondary objectives of audit.

Audit also disclose whether the Accounting system adopted in the organization is adequate and appropriate in recording the various

transactions as well as the setbacks of the system.

Secondary Objectives:

In order to report the financial condition of the business, auditor has to examine the books of accounts and the relevant documents. In that process he may come across some errors and frauds. We may classify these errors

and frauds as below:

1 Detection and prevention of Errors

2. Detection and prevention of Frauds.

Detection and prevention of Errors: Following types of errors can be detected in the process of auditing.

1. Clerical Errors2. Errors of Principle

Clerical Errors: Due to wrong posting such errors may occur. Money received from Microsoft credited to the Semens's account is an example of clerical error. Even though the account was

posted wrongly, the trial balance will agree. We can classify clerical errors as below:i. Errors of Commission

ii. Errors of Omissioniii. Compensating Errors.

i. Errors of Commission: These errors are errors caused due to wrong posting either wholly or partially of in the books of original entry or ledger accounts or wrong totaling, wrong calculations, wrong balancing and wrong casting of subsidiary books. For example Rs. 5000 is paid to Microsoft for the supply of windows program and the same is recorded in the cash book. While posting the

ledger the Microsoft's account is debited by Rs. 500. It may be due to the carelessness of the accountant. Most of these errors of commission are reflected in the trial balance and can be

identified by routine checking of the books.

ii. Errors of Omission: When there is no record of transactions in the books of original entry or omission of posting in the ledger could lead to such errors. Sales not recorded in the sales book or omission to enter invoices in the purchase book are examples of Errors of Omission. Errors due to entire omission will not affect the trial balance. Errors due to partial omission will affect the trial

balance and can be detected.

iii. Compensating Errors are errors committed in such a way that the net result of these errors on the debit side and credit side would be nullify the net effect of the error. For example, Ram's account which was to be debited for Rs. 5000 was credited for Rs. 5000 and similarly, Sita's

Account which was to be credited for Rs. 5000 was debited for Rs. 5000. These two mistakes will nullify the effect of each other. Unless detailed investigation is undertaken such errors are difficult

to locate as both the sides of the trial balance are equally affected.

2. Errors of Principle: While recording a transaction, the fundamental principles of accounting is not properly observed, these types of errors could occur. Over valuation of closing stock or incorrect allocation of expenditure or receipt between capital and revenue are some of the

examples of such errors. Such errors will not affect the trial balance but will affect the Profit and Loss account. It may occur due to lack of knowledge of sound principles of accounting or can be

committed deliberately to falsify the accounts. To detect such errors, the auditor has to do a careful examination of the books of account.

Detection and Prevention of frauds: To get money illegally from the organization or from the proprietor frauds are committed intentionally and deliberately. If it remain undetected, it could

affect the opinion of the auditor on the financial condition and the working results of the organization. Therefore, it is necessary for the auditor to exercise utmost care to detect such frauds. It can be committed by the top management or by the employees of the organization.

Frauds could be of the following types:1. Misappropriation of cash

2. Misappropriation of goods3. Falsification or Manipulation of accounts

4. Window dressing5. Secret Reserves

Misappropriation of Cash: Since the owner has very limited control over the receipt and payments of cash, misappropriation or defalcation of cash is very common specially in big

business organizations. Cash can be misappropriated by various ways as mentioned below:

a. Recording fictitious paymentsb. Recording more amount than the actual amount of payment

c. Suppressing receiptsd. Recording less amount than the actual amount of payment.

There should be strict control over receipts and payments of cash known as "Internal check system" to prevent such frauds. The auditor should check the Cash Book with original records, bills register, invoices, vouchers, counterfoils or receipt books, wage sheets, salesman's diary,

bank statements etc. in order to discover such frauds.

Misappropriation of goods: Companies handling with high value goods are pray to this kind of misappropriation. Without proper records of stock inward and stock outward, it is difficult for the

auditor to find out such fraud. Periodical and surprise checking of stock and maintaining the proper record of inward and outward movement of stock can reduce the possibility of such fraud.

Falsification or manipulation of accounts: In order to achieve certain specific objectives, accounts may be manipulated by those responsible persons who are in the top management of the

organization. They prepare accounts such a manner that they disclosed only a fake picture not the true picture. Some of the ways used in manipulating the accounts are as follows:

1. Inflating or deflating expenses and incomes2. Writing off of excess or less bad debts.

3. Over-valuation or under-valuation of closing stock.4. Charging excess or less depreciation

5. Charging capital expenditures to revenue and vice-versa6. Providing for excess or less doubtful debts.

7. Suppressing sales and purchase or showing fictitious sales and purchases etc.

Window dressing: is the way of presenting the financial data in a much better position than the original position. It is known as window dressing. Some of the reasons for doing window dressing

are as follows:

1. To win the confidence of share holders2. To obtain further credit

3. To raise the price of shares in the market by paying higher dividend so that shares held may be sold

4. To attract prospective parters or shareholders.5. To win the confidence of shareholders.

.

Secret Reserves: In secret reserves, accounts are prepared in such a way that they disclose worse picture than actually what they are. The objectives of preparing accounts in this way are:

1. To conceal the true position from the competitors.2. To avoid or reduce the tax liability

3. To reduce the price of shares in the market by not paying dividend or paying lower dividend so that the shares may be bought at a much lower price.

It is very difficult to detect such frauds since these frauds are committed by those persons in the organizations who are at the top positions like directors, managers, financial controllers etc. To detect these kind of frauds, the auditor must be vigilant and should make searching inquiries to

arrive at the true position.

Advantages of Auditing

It is compulsory for all the organizations registered under the companies act must be audited. There are advantages in auditing the accounts even when there is no legal obligation for doing

so. Some of the advantages are listed below:

1. Audited accounts are readily accepted in Government authorities like income Tax Dept., Sales Tax dept., Land Revenue departments, banks etc.

2. By auditing the accounts Errors and frauds can be detected and rectified in time.

3. Audited accounts carry greater authority than the accounts which have not been audited.

4. For obtaining loan from financial institutions like Banks, LIC, HUDCO, HDFC, IFCI etc., previous years audited accounts evaluated for determining the capability of returning the loan.

5. Regular audit of account create fear among the employees in the accounts department and exercise a great moral influence on clients staff thereby restraining them from commit frauds and

errors.

6. Audited accounts facilitate settlement of claims on the retirement/death of a partner.

7. In the event of loss of property by fire or on happening of the event insured against, Audited accounts help in the early settlement of claims from the insurance company.

8. In case of joint Stock Company where ownership is separated from management, audit of accounts ensure the shareholders that accounts have been properly maintained, funds are

utilized for the right purpose and the management have not taken any undue advantage of their position.

9. To determine the value of the business in the event of purchase or sales of the business, audited account will be the treated as the base for the evaluation.

.

10. The audit of accounts by a qualified auditor also help the management to understand the financial position of the business and also it will help the management to take decision on various

matters like report in internal control system of the organization or setting up of an internal audit department etc.

11. If the accounts have been audited by an independent person, disputes between the management and labor unions on payment of bonus and higher wages can be settled amicably.

12. In the event of admission of a new partner, audited accounts will facilitate the formation of terms and conditions for joining the new partner. Last 3 years audited accounts and balance

sheet will give a general idea about the growth and financial position of the business to the new partner.

Types of Audit

A) Based on Authority

B) Based on Scope

C) Based on Time

D) Based on Object

E)Based on Object

A) Based on Authority

1. Statutory Audit2. Non – Statutory Audit

3. Internal Audit

B) Based on Scope

1- Complete Audit 2- Partial Audit

C) Based on Time

1. Continuous Audit 2. Final Audit

3. Interim Audit 4. Concurrent Audit

5. B/S Audit

D) Based on Object

1- Special Audit 2. Cost Audit

3. Management Audit 4. Service Audit

E) Other Types

1- Occasional audit2- Audit in Depth

3- Cash Audit4- Operational Audit

5- Tax Audit6- Efficiency Audit

A) Based on Authority

1. Statutory Audit

It is the audit which is compulsory under the law , appointment of auditors , removal , remuneration , rights , duties , liabilities are governed as per the provisions of the respective

law applicable to the organization . Scope of audit work & all other terms are as laid by the law . It can be conducted only by qualified chartered Accountant . Audits are compulsory in the

following cases .

1. Companies registered under the companies act 1956.

2. Banking companies governed by the Banking Companies Act 1949.

3. Insurance Companies governed by the respective insurance act .

4. Cooperative societies registered under the Cooperative societies act.

5. Public & Charitable trusts registered under concerned act .

6. Local authorities , government undertaking s & departments .

7. All business organizations having annual sales over Rs. 40 lakhs .

Essentials of Statutory Audit

1) It is mandatory in nature .

2) The auditor must be qualified C.A. or Cost & Work Accountants .

3) The auditor must not incur any prescribed disqualification during the course of audit .

4) Appointment of auditor is made as per the provisions of the relevant acts .

5) It is always a complete audit .

6) It enables the appointing authority to get full disclosure of all material facts .

2. Non – Statutory Audit

It is a voluntary audit . It is a optional & not compulsory . It is carried at the discretion of the proprietor . There is no specific law which govern the

conduct of such audit . Terms & conditions of audit are determined as per the agreement made between the auditor & the proprietor . For example ,

audit of individuals , firms , private trusts etc.

1) Private Audit

2) Audit of Sole Proprietor

3) Partnership Audit

4) Audit of Trusts

3. Internal Audit

It is an independent management function which involves a continuous & critical appraisal of the function of the entity . This type of audit is also optional . It is conducted by the internal auditor who is appoint by the proprietor . Even the

employee of the organization may be appoint as an internal auditor to examines the books of accounts .

The purpose behind internal audit is to assure the management that the accounts are being properly maintained & the system provide adequate safeguards for detection &

prevention of any frauds .It is more managerial than accounting . It is a part of the system of internal control .

Objectives

1. To verify the accuracy of the records .

2. To ensure that the transactions have a proper authority .

3. To facilitates prevention & detection of frauds & errors .

4. To ensure that purchase & sale of fixed assets is authorized .

5. To improve the system of internal check .

6. To examine the protection given to fixed assets .

7. To make investigation for managements .

8. To review the entire system of working & make it more effective .

B) Based on Scope

1. Complete Audit

2. Partial Audit

1. Complete Audit – In this type of audit , the auditor is required to check each & every transaction recorded in the books of accounts . He has to

examine each & every voucher , documents or correspondence relating to transaction . This type of audit is not possible for large sized organization .

2. Partial Audit – In this type of audit , the auditor is not required to examine all the books of accounts . Only a part of accounts or some transactions as

desired by the clients may be scrutinized . It may be followed in case of non – statutory audit . It can not be followed in case of statutory audit .This audit is

not convenient when the audit is legally required .

C) Based on Time

1) Continuous Audit

2) Final Audit

3) Interim Audit

4) Concurrent Audit

5) B/S Audit

1) Continuous Audit – It is defined by R.C. Williams as “one where the auditor , or his staff , is constantly engaged in

checking the accounts during the whole period or where the auditor or his staff attends at regular or irregular intervals during

the periods.”When audit is carried out during the accounting period with

some interval is called as continuous audit . In continuous audit , the audit staff remains occupied continuously on the accounts during the whole year where they attend at frequent intervals .

Features

1. It carried out throughout the year .

2. It is conducted at regular or irregular intervals .

3. The accounts are subject to scrutiny as & when prepared .

4. Full verification of assets & liabilities is left until the balance sheet is prepared .

5. Trial balance , profit & loss account & balance sheet are audited at the end of the year .

This type of audit is more appropriate in the following situations or organizations .

1) Where the business is large , complex & involves numerous transactions .

2) Where the system of internal control & internal check are not satisfactory .

3) When the interim dividend is to be declared .

4) Sometimes continuous audit becomes necessary for self survival against cut-throat business competition .

5) Where the management requires monthly or quarterly audited statements of accounts or the statements of accounts

are required immediately after the accounting year .

Advantages of Continuous Audit

- Quick Discovery of Errors

- Quick Preparation of Accounts

- Division of Labiur

- Moral Check on Staff

- Knowledge of Technical Details

- Quality of Works

- Preparation of Interim Accounts

- Effectiveness of Internal Check

- Audit Staff Kept Busy

- Valuable Advice

Disadvantages of Continuous Audit

1. Alteration of Figures

2. Costly

3. Dislocation of Clients Staff

4. Tedious

5. Absence of Link

6. Conflict

7. Dependence of Staff on Auditor

8. Likely Collusion between Clients Staff & Audit Staff

2) Final Audit – It is also known as periodical audit . It generally starts after the completion of accounting year when

the books of accounts are balanced & closed . Final audit is carried out continuously until it is completed . It is a past

accounts audit . In case of a final audit , the auditor gets hold of all the books of accounts & the vouchers for the accounting

period . This type of audit is appropriate for smaller business concerns because it is less expensive . It is also suitable where

the chances of frauds are less .This type of audit is generally preferred by the auditor because the chances of alteration of figures are less . Besides the final & continuous audit , there may be two more types of audit , viz.

Interim Audit & Balance Sheet Audit .

Advantages of Final Audit

1. No disturbance of routine work .

2. It is less expensive .

3. Proper planning of audit work is facilitated .

4. Maintenance of link in work becomes easy .

5. Elimination of all limitations of continuous audit work can be completed without any break .

6. There are no chances of alteration of figures .

Disadvantages of Final Audit

1) Consequences of errors are experienced by clients first .

2) Difficult to detect frauds committed with proper planning .

3) Delay in finalization of accounts .

4) Less moral force on the clients staff .

5) Not convenient for large sized business concerns .

6) It becomes difficult for the auditor to arrange audit when many clients have the same financial year .

3) Interim Audit – It is kind of audit which is conducted between two annual completed or

final audits . It is conducted to find out the interim profit & know the financial position at

the end of a part of the accounting year . Interim audit should not be confused with

continuous audit . The scope of interim audit falls within the purview of final audit or the

annual audit which is carried out later .

Advantages of Interim Audit

- Publication of interim figures

- Speedy final audit

- Moral check

- Detection of errors & frauds

- Interim dividend

- Removal of defects

- Up-to-date A/C

- Utilization of audit staff

- Reducing risk of missing material facts

Disadvantages of Interim Audit

- Alteration of figures

- Additional work

- Detailed notes

- Missing query

- Expensive

- Dislocation of work

4) Concurrent Audit – It is a system of audit which is prevalent in large banks . It is an examination which is contemporaneous with the occurrence of transactions

or examination which is carried out at the earliest .

Object

The object is to ensure adherence to prescribed systems & procedures & timely detection of

irregularities .

Scope

1 Checking daily cash transaction with special reference to abnormal receipts & payments if any .

2 Ensuring appropriate accounting of cash receipts & payments .

3 Verifying the purchase & sale of investments & that hey are within the powers of the central office .

4 Verifying that advances are in accordance with the guidelines of central office & R.B.I.

5 Verification of stock declaration statement & timely payment of installment .

6 Verification of timely reconciliation & confirmation of accounts .

Auditor

Any bank officer or external auditor can be appointed as concurrent auditor . He has to report services

irregularities to the head office . Minor cases should be brought to the notice of the branch manager .

5) B/S Audit – It is an American term which means verification of the items appearing in the balance sheet . It includes verification & valuation of assets & liabilities appearing in the balance sheet .

Profit & loss account is given much importance in this type of audit . Balance sheet audit is also referred as ‘Limited Audit’. In

this type of audit balance sheet accounts are verified & tests are imposed only on those items in Profit & Loss Account which are

directly related to assets such as depreciation , repairs , bad debts etc.

Procedure to Conduct Balance Sheet Audit

1) Before commencing the audit see that the system of internal control is effective & qualified staff is appointed .

2) Examine the minute book & consider those items which have bearing on final accounts .

3) Compare the profit & loss account & balance sheet of the current year with that of the previous year & find out any material difference .

4) Compare the increase & decrease in each item appearing in profit & loss account & balance sheet .

5) Investigate into the causes of any variations in gross profit & consider the valuation of stock .

6) Examine reconciliation of material consumed & Stock .

7) Examines the details of material consumed & find out its ratio to production .

8) Find out whether there is any change in depreciation & see its effects on the profit & loss account & balance sheet .

9) Investigate into the terms of non-recurring nature & see that profit or loss on sale of fixed asset is properly ascertained .

10) Get the details of assets & liabilities as on the date of balance sheet .

11) Verify the statement of fixed assets addition made & deduction made . Also verify changes if any .

12) Pay attention to the valuation of fixed assets .

13) Consider the details of current assets & enquire into the variations in currents assets .

14) Consider , in detail , any substantial changes in items of balance sheet from the normal figure.

15) Verify the assets & properties held & liabilities arising .

16) See that adequate provision is made for all the known liabilities .

17) Ascertain any capital commitment .

18) Scrutinize contingent liabilities .

19) See that adequate provision is made for actual liability .

20) Collect a list of contingent liabilities from the officer of the company .

21) See the resolution regarding transfers .

22) Obtain a copy of all units filed by the company or against the company .

23) Evaluate the system of internal control & see how far it is effective .

24) See whether the presentation of financial statements is done properly as per the provisions of law .

25) Check the statement of sources & application of funds .

Suitability

Balance sheet audit is suitable under the following circumstances

1) Where the volume of transaction's is very large .

2) Where the system of internal check / internal control is very effective .

3) Where qualified accountants are employed to record the transactions .

4) Where mechanized system of accounting is in operation .

Position of Auditor In balance sheet audit ,the auditor checks the items appearing in balance sheet . He does not

follow the normal procedure of audit . He does not check all the transactions taken place . U/S 227 (3) the auditor is required to state in his report , “whether the balance sheet & the profit & loss account dealt with by the report are in agreement with the books of accounts & returns.”

Now the question arises as to when the auditor can say so when he has not check all the transactions . It may be informed that he has not done his duty honestly . However , the law does

not prescribe any procedure to conduct the audit . If the auditor is satisfied with the books of accounts , he may say so . According to Mr. Irish , the Australian Accountant , balance sheet audit

is an American term which conveys two things .i) It means limited audit since it is confined to the items connected with balance sheet .

Ii) In such audit tests are imposed on internal control . The test include scrutiny of records , comparison of income & expenses , investigation of material information & analysis of

appropriations .

D) Based on Object

1. Special Audit

2. Cost Audit

3. Management Audit

4. Service Audit

1. Special Audit – Under section 233 A of the Companies Act , 1956 , the central Government has power to direct special audit

under the following circumstances .1. When affairs of any company are not managed as per the

sound business principles .2. When company is being managed in a manner which is likely

to cause serious injury or damage to the interest of trade or industry .

3) When financial position of the company is such as to endanger its solvency .

The Central Government decides the terms & conditions & scope of the audit work . The auditor appointed by the Government is

required to report to the government . The government gives directives to the company on the basis of the auditors report .

2. Cost Audit – It is a type of audit which involves verification of cost records maintained by the organization . The Companies Amendment Act , 1965 introduced cost audit a statutory

requirement for specific companies . U/S 233 (B) of the Companies Act 1956, the Central Government may direct an audit of cost records by a person who is qualified . Appointment of

auditor is done by the board of directors subject to approval of the Central Government .The auditor reports to the government , the copy of the report is sent to the company . Cost

audit is prescribed for certain types of industries with a view to achieve the following objects .

1. To grant price concession to the company .

2. To fix up selling price .

3. To safeguard interest of customers .

4. To consider the question of protection to granted to the company .

5. To ascertain the causes of loss suffered by the company .

3. Management Audit – It is the most modern technique of audit . It is a type of audit which involves examination of plans , policies , procedure , methods & strategies of the organization with a view to improve

organizational effectiveness . This type of audit is a done with a view to find out the weaknesses &

inefficiencies of the management . It does not look into the past , present but also in the future .Management

audit is not a statutory audit . It is necessary to improve the profitability of the business . This is also known as

performance audit or value added audit .

Management audit is useful in the following situations 1) when incentive system is linked up with manager performance .

2) It is highly useful in result oriented input output analysis .

3) An outside agency may go for management audit in order to examine the efficiency of management in a particular industrialization

.

4) Financial institution may conduct management audit before giving a loan .

5) Foreign collaborators may resort to management audit in order to assess the managerial abilities to their associates .

6) It is an effective tool of control .

4. Social Audit – A business organization has a social responsibilities to perform . Social audit is done to

evaluate the total performance in relation to society like human resources contribution , public

contribution , environmental contribution , product or service contribution & net income of the

enterprises . Such audit is required for public reporting & for management purposes .

The following principle factors are to be considered for assessing the social performance of the organizations .

i) Contribution to national economic growth through expansion , employment generation .

Ii) Relation with people including cordial industrial relations , training & employment of handicapped backward & minority people .

Iii) Product relations including quantity , quality & price of product supplied .

Iv) Environmental relations including improvement of ecology , control of environmental pollution etc.

v) Quality of life including social & family welfare schemes , employees self reliance schemes , adoption villages ,upkeep of gardens & parks .

vi) Social or national development i.e. promotion of sports , music , games , art & culture , social audit enables the managers to keep in mind their social obligations .

This would help to improve the image of the organizations .

E) Other Types

1- Occasional audit

2- Audit in Depth

3- Cash Audit

4- Operational Audit

5- Tax Audit

6- Efficiency Audit

1- Occasional audit – This type of audit is carried out occasionally as per the need of such business . This is applicable to the proprietary concerns such as sole

trader & partnership s. It is just a need based audit . It is conducted at the desire of the owner of the business .

2) Audit in Depth – Taylor & Perry define auditing in depth as it implies the examination of the system applied within a business entailing the tracing of certain transactions from their origin to their conclusion , investigating at each stage the

records created & their appropriate authorization .

3- Cash Audit – It is a partial audit & not a complete audit . In this type of audit , the auditor examines only the cash transaction . He examines cash & payment receipts . The receipts & payments may be capital or revenue in nature . Cash

transaction are checked with the help of receipts & vouchers & other evidence ..

4- Operational Audit – It is conducted to see that the business operations are improved in future . Operational audit goes beyond

financial audit . It is conducted for the following purposes .

1. To improve the profitability

2. To guide the management in achievement of organizational objectives .

3. To examine the efficiency of the management in conducting various operations

4. To evaluate the management policies & procedures .

5. To advice the management on business operations

5- Tax Audit – It is the audit done for assessing the correctness of calculation of taxable profits . It is done to ensure compliance with provisions of the income tax act 1961 . The income tax act

has made tax audit compulsory for special persons under section 44 AB . The assessing officer is empowered to direct the assesse to get his accounts audited by an accountant nominated by the

Commissioner of Income Tax .

6- Efficiency Audit – It is a pert of performance audit . It is concerned with evaluation of performance . The auditor may

give suggestion for improvement of the performance . Performed audit is closely related to management audit .

Audit Programme“An audit programme is a flexibly planned procedure of examination .”

Holmes .

“An audit programme is an outline of all procedures to be followed in order to arrive at an opinion concerning a clients financial statements.”

Howed Stettler .

“An audit programme is a detailed plan of applying the audit procedure if the given circumstances with instructions for the appropriate techniques to be adopted for accomplishing

one audit objectives .” The preparation of such a programme involves mainly three things .

i) How much work is to be done ?ii) Who is going to do a particular portion of the work ?

Iii) What is the duration of time by which the work is to be finished ?

Thus , idea behind preparation of audit programme is to insure the auditor of a complete grip over his staff , over the procedure & over the portion of work to be performed by his staff .

Prior to the commencement of the Audit Work the Auditor has to take the following steps :

1) To decide the scope of work

2) To obtain appointment letter

3) To obtain information about business

4) Staff list

5) Documents

6) Study of rules

7) Internal check

8) Examination of books

9) Retiring auditor

10) Audit programmes

11) Consider all possibilities of error

12) Determine the evidence reasonable available & identify the best evidence for deriving the necessary satisfaction .

13) Co-ordinate the procedures to be applied to related items .

1) To decide the scope of work :- At first , he should decide what he is required to do .

2) To obtain appointment letter :- He should obtain the formal appointment letter & see that his appointment has been made according to law .

3) To obtain information about business :- He should obtain the detailed information about the nature & routine working of the company .

4) Staff list :- He should obtain the list of the clients staff & their distribution in the various section .

5) Documents :- He should obtain the copies of the annual accounts & the audit reports of the previous year .

6) Study of rules :- He should study the memorandum of association & article of association in case of the companies & partnership deed in case of partnership firms .

7) Internal check :- He should examine the system of internal check which is in force .

8) Examination of books :- He should obtain the complete list of all the books & examine the system of accounting followed

by his clients .

9) Retiring auditor :- If an auditor is appointed to take place of another auditor he should be known reasons for the

change .

10) Audit programmes :- He should draw up an audit programme .

Features of an Audit Programme

1. It should contain full details of the work to be conducted .

2. It should be in writing .

3. It should be drawn by the auditor .

4. It should be flexible .

5. It should state the responsibility of the clients staff .

6. It should refer to the distribution of work with the staff .

Contents of an Audit Programme

1. Name of the company / client / place of business .

2. Objects of the undertakings .

3. Date of the commencement of the audit .

4. Duration of audit .

5. System of Accounting adopted by the client .

6. System of internal check & its effectiveness .

7. Reports of the previous auditor & the remarks .

8. Date-wise-schedule of the Examination of the various books .

Advantages of Audit Programme

1) Progress of audit work

2) Increase the efficiency of his Staff

3) Determines the responsibility

4) Serves as an evidence

5) Smooth work of an Audit Work

6) Serves as guide

7) Uniformity in Audit Work

8) Saves the time of Chief Auditor

Disadvantages of Audit Programme

i) Unnecessary for a small business

ii) Uneconomical for the auditor

iii) It may not cover everything

iv) Not useful for all business concern

v) No chance for suggestions

vi) Mechanical work

Unit – IIInternal Check System

Internal Check System – Meaning Definition , Objects , duties of auditor in regard internal check internal control , Internal Audit , Difference between internal check , internal control & internal audit . Internal

check in regard cash tractions . Vouching of cash transactions – Meaning & Importance of Vouching , Voucher , Vouching of Opening Balance ,

Cash receipts , Cash payments , Capital Expenditure & Trading Transactions .

Introduction Internal check is a part of internal control . It is arrangement

of routine book-keeping where the work of one person is automatically checked by another without any financial

burden . Similarly no employees is allowed to do a job from the beginning to the end & also not allowed to deal with one book through out the year . Internal check enjoys the version of labour & it is a built in part of the accounting system & it

is mechanical .

Definitions

1 “Internal check may be define as such arrangement of the accounting routine that errors & frauds are automatically prevented or discovered by the very operation of

book-keeping itself.”

2 “An internal check means practically a continuous internal audit carried on by the staff itself , by means of which the work each individual is independently check by the

other members of the staff.”

From the above definitions , the internal check involves four things :

a) The work is properly divided in such a way that all the duties are assigned to different clerks .

b) The clerks get the work load according to their capabilities & qualifications .

c) One person does not perform any single task from the beginning to the end .

d) The work done by one clerk is checked independently & automatically by another .

Difference between Internal Check & Internal AuditInternal Check Internal Audit

Nature Of Work

Internal check is the process of checking the work of each individual by the other members .

Internal audit is related with the examination of account books by the employees of the concern .

Time

Internal check is done in operation during the course of transaction .

Internal audit starts after the entry of the transaction in the account book .

Appointment of the employees

Internal check is done by the same set of employees .

Internal audit is a separate set of employees .

Objects of Internal Check

1. Determination of Employees Responsibilities

2. Giving Completeness to Accounts

3. Reliability of Books of Accounts

4. Minimization of Errors & Frauds

5. Increase in Efficiency

6. Quick Operation of Final Accounts

7. Facility in Auditing

8. Moral Check

1. Determination of Employees Responsibilities :- To allocate duties & responsibilities in such a way so that every clerk may be held responsible for a particular error or fraud .

2. Giving Completeness to Accounts :- To distribute the work in such a way so that no business transaction is left from recoding .

3. Reliability of Books of Accounts :- If an enterprise operating an effective system of internal check, its books of accounts & other records are readily relied upon by interested parties .

4. Minimization of Errors & Frauds :- To minimize the possibilities of errors , frauds or irregularities because of effective check on the tendency of one who is careless at his work .

5. Increase in Efficiency :- To increase the efficiency of accounting staff as internal check system is based on the principle of division of labour i.e. work .

6. Quick Operation of Final Accounts :- To help in the preparation of the final accounts .

7. Facility in Auditing :- To simpilify the work of the auditor .

8. Moral Check :- To exercise moral check on staff .

Essentials of An Effective system of Internal Check

1. Fixed Responsibility

2. Rotation of Employees

3. Mechanized System

4. Safeguards

5. Standard Forms

6. Strict Supervision

7. Review

1. Fixed Responsibility :- In internal check system , the responsibility of each individual should be fixed properly .

2. Rotation of Employees :- In case of a large concern , the auditor should suggest the rotation of duties of the various employees without prior notice .

3. Mechanized System:- Mechanized system of accounting should be adopted so that the eraser or over-writing can be avoided .

4. Safeguards :- Adequate safeguards should be prescribed to keep up used receipts , cheque books , files & securities ,etc. .

5. Standard Forms :- There should be standard forms & accounting records with proper numbering be maintained by the client .

6. Strict Supervision :- Auditor should ensure that the internal check system & its procedures are fully operative .

7. Review:- The system of internal check should be reviewed from time to time to suggest some improvements .

Advantages of Internal Check System

1) Proper division of work

2) Efficiency & Economy

3) Early detection of errors & frauds

4) Prevention of errors & frauds due to moral check

5) Early preparation of final accounts

6) Increased profitability for owners

7) Convenience to auditor

1) Proper division of work:- Work is allocated among the members of staff keeping in view their qualification & experience .

2) Efficiency & Economy :- Division of work based on expertise promoters efficiency of the staff & leads to overall economy in operations .

3) Early detection of errors & frauds :- As the work of each worker is in the ordinary course checked by the another , errors & frauds are detected early .

4) Prevention of errors & frauds due to moral check :- Assurance as to subsequent checking of each employees work by another , act as an effective

impediment to commission of errors & fraud .

5) Early preparation of final accounts :- It is easy to place reliance on the books & accounts or an enterprise with a strict system of internal checks . Consequently if can prepare its final accounts , without going into the veracity of the data all over

again .

6) Increased profitability for owners :- Overall efficiency & economy of operations leads to increased earnings for the owner of the enterprise .

7) Convenience to auditor :- Where an enterprise operators an effective system of internal check , the external auditor can safely undertake test checking of selected

number of representative transaction & documents to determine the type & extent of audit tests & procedures to be applied on the basis of his findings .

Disadvantages of Internal check System

a) Slackness in the employees

b) Slackness among employer

c) Slackness in the auditor

d) Not suitable for small business

e) Fraud possible by collusion

f) Duplication of work

a) Slackness in the employees :- The employees may also become careless when they feel that the employers depend upon them & does

not go through the books himself .

b) Slackness among employer :- The owner of the firm may become careless . He may depend on his staff for the accuracy of the account

books . He does not feel to go through the account books himself . Thus , frauds & errors are remained undetected .

c) Slackness in the auditor :- The auditor may also become careless in his work . He may rely on this system only .

d) Not suitable for small business :- This system is quite expensive & time consuming & hence not suitable for small business houses .

e) Fraud possible by collusion :- There may be a possibility of collusion among the employee it decreases the utility of this system .

f) Duplication of work :- In this system , the work of an employee is again examined by other employees . It means that there is a

duplication of work .

Principles Or Characteristics of Internal Check System

1. Appointment of Employees

2. Determination of Work

3. Control on Important Work

4. Control on Letters

5. Use of Machines

6. Safe Custody of Vouchers

7. Compulsory Leaves

8. Control on Cash

9. Contacts with Debtors & Creditors

10. Division of Work

11. Use of self Balancing Ledger

12. Strict Supervision

1. Appointment of Employees :- Employees should be appointed to carry on different work according to their abilities & there should be no room left for

interference .

2. Determination of Work :- Every employee should be aware of his own responsibility how his work is related to other work .

3. Control on Important Work :- There should not be control of a single person only , on the important work .

4. Control on Letters :- Letter , registered envelops & money orders should be

entered in a proper register & received by responsible person .

5. Use of Machines :- Labour saving devises as cash register , calculating machines , time recording clocks etc. should be used in the internal check system .

6. Safe Custody of Vouchers :- There should be a proper system of filing vouchers correspondence , etc. in the business concern .

7. Compulsory Leaves :- Person dealing with cash , securities , cheques etc. should

be compelled to take annual holidays in unbroken periods .

8. Control on Cash :- All the cash received should be sent daily to the bank to deposit in the bank account .

9. Contacts with Debtors & Creditors :- The task of dealing & corresponding with debtors & creditors should be assigned to the responsible person .

10. Division of Work :- The distribution of work should be such that no single person is allowed to do a job solely himself from the beginning to the end . The

division of work should not be too expensive .

11. Use of self Balancing Ledger :- Self balancing system should be used to make the system of internal check very effective .

12. Strict Supervision :- Important work like payment of wages , valuation of stock , sale , bad debts & receipts of goods etc. should be done under strict supervision &

control .

Routine Checking

It is a part of vouching & it includes check of totals , sub-totals , posting into ledgers & checking of ledger accounts regularly . Routine checking is

done by junior clerk only .

Objects of Routine Checking

1. It helps in ascertaining the arithmetic accuracy of the account books .

2. It helps to prevent the situations of altering figures of audited accounts .

3. It helps to see that the transactions are recorded in the books properly or not .

4. It helps to ascertain that the accounts are opened with the help of journals & the balance of accounts are drawn up properly .

5. Routine checking makes the work of vouching satisfactory .

Vouching

“Vouching refers to the examination of entries made in the authority & authenticity of transactions as recorded in the books of accounts .”

Dicksee

Vouching means the verification of the authority & authenticity of transactions as recorded in the books of accounts . In short , vouching

means testing the truthness of items appearing in the books of accounts .

Objects of Vouching

a) To verify that all transactions recorded in the books of accounts are supported by documentary evidence .

b) To see that no fraud or errors has been committed while recording the transactions .

c) No transaction has been recorded which does not relate to the business .

d) Every transaction recorded has been adequately authenticated by a responsible person .

e) To see that the transactions are recorded on the proper date .

f) While recording transactions proper distinction is made between capital & revenue items .

Importance of Vouching

1) Vouching is Essence of Auditing

2) If Checking is Backbone of an Audit Vouching is its Brain

1) Vouching is Essence of Auditing :- Vouching tests the truthness of the transaction recorded in the account books . Therefore , it is said

to the essence of the auditing .

2) If Checking is Backbone of an Audit Vouching is its Brain:- Without a vouching , audit will be like a man without brain . If vouching ,

the auditor may not only see arithmetical accuracy but also ascertain that the transactions entered in the books are for the purpose of the

business ,

Voucher

“A voucher has been defined as any documentary evidence in support of a transaction.”A.W.Holmes

“A voucher is a documentary evidence by which the accuracy of the entire book may be substantiated.”

Lancaster

In simple words , A voucher is a written document to used in support of an entry made in the account books .

Types of Voucher

a) Receipt

b) Invoice

c) Agreement

d) Explanations

e) Reports

f) Minutes

g) Prospectus

a) Receipt :- A receipt is a written acknowledgment that a specified article or sum of money has been received. A receipt records the purchase of goods or service obtained in an exchange. A receipt, obtained in a Swiss mountain restaurant on the top of the Grosse Scheidegg. Includes a list of meals with prices, Tisch (table) number (7/01), total price information in two currencies (Swiss Francs and Euros), a note about the

7.6% tax, contact information and name of the cashier (Ursula).In English speaking countries the term most frequently applies to the printed record given to a consumer at checkout that lists the purchases made, the total amount of the transaction including taxes, discounts and

other adjustments, the amount paid and the method of payment. Increasingly, these receipts may also include messages from the retailer, warranty or return details, special offers, advertisements or coupons. Receipts may also be provided for non-retail operations such as banking transactions. A receipt is a legal

document. In many countries, notably the United States of America, it is mandatory by law for retailers, and individuals, have to show receipts and store information about every receipt, so that the tax authority, or IRS

can check that sales are not hidden.

http://en.wikipedia.org/wiki/File:ReceiptSwiss.jpg

Thermal paper

Gift receipts

Barcodes

Non-printed

Related industries

Thermal paperWherever credit cards and most purchases are accepted, receipts are printed using thermal printing on

narrow rolls of thermal paper. Recent innovationshave led to multi-colored thermal printing technology and the ability to print double-sided receipts.

Gift receiptsReceipts may be presented as proof of a transaction for the purpose of exchanging or returning

merchandise. Some retailers provide special "gift receipts" specifically for this purpose. Unlike a standard purchase receipt, the gift receipt omits certain information, most notably the price that was paid for an item.

The receipt usually has a barcode along the bottom so that the retailer can call up the transaction information from a database of previous purchases, authenticating a return.

BarcodesIncreasingly, retailers are using barcodes on receipts that allow them to identify the transaction in their system later on. This is helpful for proving the authenticity of the receipt, especially when a customer is

returning or exchanging goods. Some retailers' point-of-sale systems allow the salesperson to see a complete record of the customer's buying history, including information about other store locations the customer has

visited, what they purchased or returned, and total accumulated spendings, among other things- all by scanning a receipt barcode. This kind of monitoring has led to considerable savings among retailers by

helping to prevent fraudulent

Non-printedHand-written or hand-completed receipts are more often used for infrequent or irregular transactions, or for transactions conducted in the absence of a terminal, cash register or point of sale (for example, as provided

by a landlord to a tenant for receipt of rent money.)Related industries

Organizing receipts and similar financial documents is a multi-million dollar industry in the United States. Consumers can use desktop and online software to organize electronic receipts; sometimes, receipts are sent digitally from point of sale devices to consumers. The growing trend of digital receipts has led to the launch

of new businesses focused on digital receipt management.

b) Invoice:- An invoice or bill is a commercial document issued by a seller to the buyer, indicating the products, quantities, and agreed prices for products or services the seller has provided the buyer. An invoice indicates the buyer must pay the seller, according to the payment terms. The buyer has a maximum amount

of days to pay for these goods and is sometimes offered a discount if paid before the due date.In the rental industry, an invoice must include a specific reference to the duration of the time being billed, so

in addition to quantity, price and discount the invoicing amount is also based on duration. Generally speaking each line of a rental invoice will refer to the actual hours, days, weeks, months, etc. being billed.

From the point of view of a seller, an invoice is a sales invoice. From the point of view of a buyer, an invoice is a purchase invoice. The document indicates the buyer and seller, but the term invoice indicates money is

owed or owing. In English, the context of the term invoice is usually used to clarify its meaning, such as "We sent them an invoice" (they owe us money) or "We received an invoice from them" (we owe them money).

c) Agreement:- Agreement may refer to:Agreement (linguistics) or concord, cross-reference between parts of a phrase

Gentlemen's agreement, not enforceable by lawContract, enforceable in a court of law

Reliability (statistics) in the sense of, for example, inter-rater agreementA pact, convention, or treaty between nations, sub-national entities, organizations, corporations

ConsensusAgreement (1978) – a book of poetry by Peter Seaton

d) Explanations :- An explanation is a set of statements constructed to describe a set of facts which clarifies the causes, context, and consequences of those facts.

This description may establish rules or laws, and may clarify the existing ones in relation to any objects, or phenomena examined. The components of an explanation can be implicit, and be interwoven with one

another.An explanation is often underpinned by an understanding that is represented by different media such as

music, text, and graphics. Thus, an explanation is subjected to interpretation, and discussion.In scientific research, explanation is one of the purposes of research, e.g., exploration and description. Explanation is a way to uncover new knowledge, and to report relationships among different aspects of

studied phenomena. Explanations have varied explanatory power.

e) Reports :- A report is a textual work (usually of writing, speech, television, or film) made with the specific intention of relaying information or recounting certain events in a widely presentable form.

Written reports are documents which present focused, salient content to a specific audience. Reports are often used to display the result of an experiment, investigation, or inquiry. The audience may be public or

private, an individual or the public in general. Reports are used in government, business, education, science, and other fields.

Reports such as graphics, images, voice, or specialized vocabulary in order to persuade that specific audience to undertake an action. One of the most common formats for presenting reports is IMRAD: Introduction,

Methods, Results and Discussion. This structure is standard for the genre because it mirrors the traditional publication of scientific research and summons the ethos and credibility of that discipline. Reports are not

required to follow this pattern, and may use alternative patterns like the problem-solution format.

Additional elements often used to persuade readers include: headings to indicate topics, to more complex formats including charts, tables, figures, pictures, tables of contents, abstracts, summaries, appendices,

footnotes, hyperlinks, and references.Some examples of reports are: scientific reports, recommendation reports, white papers, annual reports, auditor's reports, workplace reports, census reports, trip reports, progress reports, investigative reports, budget reports, policy reports, demographic reports, credit reports, appraisal reports, inspection reports,

military reports, bound reports, etc.

f) Minutes:- Minutes, also known as protocols, are the instant written record of a meeting or hearing. They typically describe the events of the meeting, starting with a list of attendees, a statement of the issues

considered by the participants, and related responses or decisions for the issues.Minutes may be created during the meeting by a typist or court recorder, who may use shorthand notation and then prepare the minutes and issue them to the participants afterwards. Alternatively, the meeting can

be audiorecorded or a group's appointed or informally assigned Secretary may take notes, with minutes prepared later.

It is usually important for the minutes to be terse and only include a summary of discussion and decisions. A verbatim report is typically not useful. The minutes of certain groups, such as a corporate board of directors,

must be kept on file and are important legal documents.

g) Prospectus:- 'Prospectus'A formal legal document, which is required by and filed with the Securities and Exchange Commission,

that provides details about an investment offering for sale to the public. A prospectus should contain the facts that an investor needs to make an informed investment decision.

Also known as an "offer document".

There are two types of prospectuses for stocks and bonds: preliminary and final. The preliminary prospectus is the first offering document provided by a securities issuer and includes most of the details of

the business and transaction in question. Some lettering on the front cover is printed in red, which results in the use of the nickname "red herring" for this document. The final prospectus is printed after the deal has

been made effective and can be offered for sale, and supersedes the preliminary prospectus. It contains finalized background information including such details as the exact number of shares/certificates

issued and the precise offering price.

In the case of mutual funds, which, apart from their initial share offering, continuously offer shares for sale to the public, the prospectus used is a final prospectus. A fund prospectus contains details on its objectives,

investment strategies, risks, performance, distribution policy, fees and expenses, and fund management.

In finance, a prospectus is a document that describes a financial security for potential buyers. A prospectus commonly provides investors with material information about mutual funds, stocks, bonds and other

investments, such as a description of the company's business, financial statements, biographies of officers and directors, detailed information about their compensation, any litigation that is taking place, a list of

material properties and any other material information. In the context of an individual securities offering, such as an initial public offering, a prospectus is distributed by underwriters or brokerages to potential

investors.

Points to be Noted in Vouching

1) Auditor should check date , name of the party to whom the voucher is addressed , the name of the party issuing the voucher & the amounts etc.

2) All vouchers are properly filed , serially numbered & arranged in order of the entries in the various books .

3) The voucher is inspected should be canceled by a stamp or mark so that it can not be produced again .

4) The auditor should also note whether the revenue stamp is affixed on voucher if the amount of the voucher exceeds Rs. 500.

5) The auditor should not take the help of any member of clients staff while vouching receipts .

6) Auditor should see that any alteration in the voucher has been duly signed & approved by the senior officer of the organization .

7) Nature of expenditure must be related to the business concern .

8) Amount paid should be shown in words & figures it will reduce the chances of alterations .

9) The auditor should be careful about the period for which the payment is made .

10) The auditor should see as to which account “Item” is posted . There should be a proper distinction between capital & revenue expenditure .

11) A note should be made of the transactions & items requiring further information & explanations .

12) The auditor should properly scrutinize the duplication voucher so as to avoid chance of fraud .

13) Received invoice should not be accepted as voucher because the chances of double payments are there .

14) The voucher should be signed by the payee .

15) The auditor should note the signatures of the payee is taken on voucher .

Vouch the Cash Receipts

Cash book is very important financial book for every business concern considering the chances of misappropriations , frauds & errors possible in connection with the receipts & payment of cash , the auditor has to be very careful in checking the cash books . The

auditor has to ensure that all the receipts & payments of cash is the recorded in the cash books & no factious entry is made , & also , cash is not misappropriated .

The following points should be noted while vouching cash receipts transactions .

1. Internal Check

2. Comparison of the rough cash book with the cash book

3. Control over cash receipts

1. Internal Check :- As the first step the auditor should study & satisfy himself whether the internal check system in corporation is satisfactory or not

2. Comparison of the rough cash book with the cash book :- Auditor should first examine the rough book or diary where the entries are first made & should compare it with cash book entries .

3. Control over cash receipts :- Following points to be noted in this connection a) All the receipts are on printed form .

b) The system is to be examined to find out whether the counter foil receipts or carbon copies are used as evidence .

c) All the receipts & receipts books should be separately & consecutively numbered .d) Particulars like date , amount , name , etc. on the receipts should be compared with those given in the

cash book .e) All the receipts should be signed by a responsible officer .

f) The opening balance of cash receipts will be closing balance of the last year . So it should be verified with last years audited balance sheet .

Unit – III

Verification & Valuation of Assets & Liabilities , Audit of Final Accounts .

Meaning of Verification

Concept Of Verification

Verification means proving the correctness. One of the main work's of auditor is verification of assets and liabilities. Verification is the act of assuring the correctness of value of assets and liabilities, title and their

existence in the organization. An auditor should be satisfied himself about the actual existence of assets and liabilities appearing in the balance sheet is correct. If balance sheet incorporates the incorrect assets, both

profit and loss account and balance sheet do not present true and fair views.Thus, verification means to confirm the truth or accuracy and to substantiate. It is a process by which the

auditor satisfies himself not only about the actual existence, possession, ownership and the basis of valuation but also ensures that the assets are free from any charge.

Verification

It means to prove the fact and confirmation about the both sides of the balance sheet as the assets and liabilities. The auditor not only checks the accuracy of the accounts in the arithmetic way but also check

the existence of the actual items and their actual possession.

While verifying the assets, an auditor should consider the following points:

* Ensuring the existence of assets.* Acquiring the assets for business.

* Ensuring the proper valuation of assets.* Ensuring that the assets are free from any charge.

Verification of assets implies a careful checking of the value, ownership and title of an asset. It also includes finding out its actual possession and

existence and presence of any charge on it.

Definition of Verification

According to Spicer and Pegler, “Verification of assets means an inquiry into the value, ownership and title; existence and possession, the

presence of any charge on the assets.”

Objects of Verification of Assets & Liabilities1. Valuation of assets & liabilities2. Finding out existence of assets3. Finding out the ownership & title of the assets 4. Detection of errors & frauds 5. Certification of the arithmetical accuracy in account books6. Whether balance sheet exhibits a true & fair financial position of the concern 7. Finding out the existence of liabilities

1. Valuation of assets & liabilities :- The auditor has to ensure that the assets & liabilities have been shown at their correct value .

2. Finding out existence of assets :- The auditor has to satisfy that the assets shown in the balance sheet are in existence or if audit is carried out after the balance

sheet date he should insure that assets existed at the balance sheet date .

3. Finding out the ownership & title of the assets :- Verification certifies the ownership & the title of the assets shown in balance sheet .

4. Detection of errors & frauds :- Verification helps in detecting the frauds & errors in the account books of the undertaking .

5. Certification of the arithmetical accuracy in account books :- Verification certifies the arithmetical accuracy of the accounts books .

6. Whether balance sheet exhibits a true & fair financial position of the concern :- Verification helps the auditor to certify the fact whether the

balance sheet exhibits a true & fair financial position .

7. Finding out the existence of liabilities :- The auditor has to satisfy himself that the credit balance appearing in the books are really

liabilities .

Difference between Verification & Vouching

A) Nature of Work :- Verification examines the assets & liabilities shown in balance sheet , while Vouching examines the entries relating to the

transactions recorded in the account book .

B) Time :- Verification is made at the end of the financial year , while Vouching is done for the whole years transactions .

C) Basis :- Verification is based on physical as well as documentary examination , while Vouching is based only on documentary

examination .

Difference between Verification & Vouching

D) Personnel :- Verification is done by auditor himself or his assistant , whereas Vouching is done by juniors like audit – clerk .

E) Valuation :- Verification includes the valuation while Vouching does not mainly concern with valuation .

F) Utility :- Verification certifies the existence of the assets & liabilities while Vouching indicates that an asset must be possessed by the

concern .

valuation

The process of determining the value of an asset or company. There are many techniques for valuation, and it is often partially objective and

partially subjective.

The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product. The term most commonly refers to audits in accounting, but similar concepts also exist in project management, quality management, water management,

and energy conservation.

Definition of Valuation

“The valuation of assets is therefore an attempt to ensure the equitable distribution of the original outlay over the period of the assets

usefulness.”

Objects or Points to be kept in mind at the Time of Valuation

a) To know the actual financial position of the company .

b) To know about the goodwill of the concern .

c) To know the difference in the value of assets at the time of purchase & at the date of Balance Sheet .

d) To satisfy the auditor about the accuracy of the Balance Sheet .

Objects of Valuation

e) To know the expected working life of the assets .

F) To know the original cost of the assets .

g) To know the mode of investment of the capital of the company .

Difference between Verification & Valuation

A) Meaning

Verification proves the existence , ownership & title of the owner of the assets , while Valuation certifies the correct value of assets & liabilities at the date of valuation of

assets & liabilities respectively .

B) Personnel

Verification is done by the auditor himself or by his assistant , while Valuation is done by the owners or by their staff .

C) Basis

Verification is made on the basis of evidence , while Valuation does not have sufficient proofs .

Methods of Valuation of Assets1. Cost Price

2. Replacement Value 3. Market Value

4. Book Value5. Realizable Value

6. Scrap Value

1. Cost Price :- It is a price paid for the acquision of an asset including installation charges & any other cost incurred to bring the asset to its working condition for its

intended use .

2. Replacement Value :- It is a price at which a particular asset can be replaced in the market .

3. Market Value :- It is a price at which a particular asset can be sold .

4. Book Value :- Cost price less depreciation .

5. Realizable Value :- Market price less expenses incurred solely for the purpose of selling such product such as commission , brokerage etc. given on the sales of that

assets .

6. Scrap Value :- The amount that can be realized from the sale of scrap is called as scrap value .

Classification of Assets

1) Fixed Assets

2) Floating Assets

3) Fictitious Assets

4) Wasting Assets

1) Fixed Assets :- The assets which are purchased for permanent use by means of which business is carried on with object of earning revenue & not for the purpose of

sale are called fixed assets .

2) Floating Assets :- The assets which can not put to constant uses are floating or current assets .

3) Fictitious Assets :- The assets which have income producing ability but can not be seen or touched are known as fictitious assets or intangible assets .

4) Wasting Assets :- These assets are of fixed nature & loose a part of their value in the process of working eg. Mines , quarries , oil wells , etc. .

Verification & Valuation of Assets

A) Goodwill

B) Freehold Property

C) Plant & Machinery

D) Investments

E) Patent Right

F) Trade Marks

G) Bills Receivable

H) Debtors

I) Stock in Trade

J) Cash in Hand at Bank

A) Goodwill :- Good will is an intangible assets , therefore it can be verified from records only & it can not be verified physically , as per

accounting standard 10 , goodwill shall be recorded in the books only when some consideration in money or moneys worth has been paid for

it .The auditor should see that goodwill is shown at cost less the amount

written off . The amount of goodwill is calculated at the time of admission , retirement & death of a partner in the partnership firm .

B) Freehold Property :- Auditor should examine the title deeds & he should see that the property is mortgage in the name of client . If property is mortgage , the auditor is obtain a certificate from the mortgage regarding the possession . If the

owner of the freehold property has created a leasehold interest therein , in which he reserves to himself for right to receive the annual ground rent during lease period & reversion of the property to himself at the end thereof , the auditor should examine the title deed or land registry certificates of the property together with the counter part of the lease which has been granted . Freehold property should appear in the

Balance Sheet at cost subject to any provision necessary in respect of depreciation on building . It is not usual to write up or reduce the cost of this asset even if its market value is increased or decreased respectively . Fall in the value is generally considered

at the time of realization of asset.

C) Plant & Machinery :- The auditor should examine the plant & machinery from plant register . It gives full information about the description , cost ,

provision for depreciation etc. If the machines are purchased in the current year , the agreement with the vouchers should be verified . He should see that

plant & machinery are shown in Balance Sheet are cost less depreciation .

D) Investments :- He should compare the schedule of each investment & securities with the register of investments maintained by the client . If the

investment are made & registered in the name of any other person as a nominee of the company . Auditor should verify the deed of trust or if no such

is prepared then he should obtain a letter from such person that they are holding the investment of the company & they are free from any charges . He should see that the investment is over valued at a higher price than the cost .

E) Patent Right :- The patent rights should be verified with the certificates granting such rights . The auditor should also examine the last renewal payment certificate .

F) Trade Marks :- A trade mark is examined with the help of assignment deed & the auditor also see that they are registered in the name of client .

G) Bills Receivable :- The balance of the Bills Receivable Account in impersonal ledger will represent bills in hand at the date of Balance Sheet . During verification auditor should ensure that they are properly drawn , stamped & not overdue . It should be seen that the sufficient provision has been made for any loss likely to be sustained .

H) Debtors :- The auditor should write to the debtors & get balances confirmed by them. He should also see that sufficient provision for doubtful debts has been made or not . As the terms of various businesses are different so it is impossible to lay down any hard & fast rule as to the

valuation of book debts or debtors .

I) Stock in Trade :- Verification of stock in trade is very important party of auditors duty . Various difficulties are involved in the verification of stock because no entries are usually appear in the

financial books . Where stock records are kept evidence is available . This wire assist the auditor to satisfy himself about the correctness of stock figures .

J) Cash in Hand at Bank :- The auditor should , if possible , attend on the day of closing the accounts & verify the balances in hand by actual inspection where this is not possible then he

should check the entries in cash book up to the date of his attendance & verify the existence of the balance in hand in hand as at that date .

Verification & Valuation of Liabilities

i) Capital

ii) Debentures

iii) Loans

a) Secured & Unsecured

b) Loans on Mortgage of Property

iv) Creditors

v) Bills Payable

vi) Contingent Liabilities

i) Capital :- The auditor should verify the memorandum of association , articles of association , cash books , pass book & directors minutes book to find out the amount received from

shareholders .

ii) Debentures :- The auditor should see the debenture trust deed & if necessary can obtain a certificate from the debenture holders .

iii) Loans :-a) Secured & Unsecured :- The auditor should refer to loan agreement & satisfy that the

conditions on which loan has been obtained have been dully complied with it possible he should obtain the balance confirmation betters from the parties . The auditor should examine the right

of borrowing authority to confirm that the loan has been raised in the proper exercise of the authority . It loan is obtained by a charge on the assets of the company then document of

charge should be inspected . It should be conformed that sufficient disclosure of the charge have been made in Balance Sheet . In case of company one auditor should ensure that the

provision of Sec. I (A) have been complied with .

b) Loans on Mortgage of Property :- Mortgage is a charge on immovable property to secure a debt . The auditor , where loan is obtained by mortgaging the property , should examine the mortgage deed to verify the amount of loan raised , rate of

interest , terms of payments & rights created in the property by the mortgage deed . Auditor should ensure the proper disclosure of mortgage on an asset is properly

disclosed in Balance Sheet .

iv) Creditors :- The auditor should obtain a schedule of creditors from the client & check the purchase ledger , credit notes etc. Certificate should obtained from the

responsible official that all the liabilities accrued at the end of the year , have been accounted for .

v) Bills Payable :- The auditor should vouch the bills with the entries in the cash book . He should reconcile the total of the schedule of bolls payable outstanding with the balance in the Bills Payable Account .

vi) Contingent Liabilities :- A contingent liability is possible liability of a presently determinable or undeterminable which has arisen from past

dealings that may not become a legal obligation in the future . An obligation may be a contingent liability when the very basis of the

obligation is contested .

Audit of Final Accounts and Capital & Revenue Expenditure

Final accounts includes Trading and Profit & Loss Account and Balance Sheet .

Duties of Auditor Regarding the Audit of Final Accounts :

1. Auditor has to ascertain that items shown in final accounts are classified properly .

2. Auditor has to see that final accounts show actual financial position of the company .

3. In case of companies , auditor has to see that Balance Sheet is prepared as per the standard format given in part I of schedule VI and Trading and Profit & Loss Account discloses all the information as per the

requirement of part II of schedule VI .

4. In case of companies , which are governed by special acts such as Banking Companies , Insurance Companies , Auditor should see that final accounts are prepared as per the requirement by the special acts

.

Audit of Trading and Profit & Loss Account

Items on Debit Side of Trading Account

1. Opening Stock2. Purchases

3. Rent & Carriage-Inwards4. Productive Wages

5. Import & Excise Duty6. Royalty

Items on Credit Side shown in Trading Account

1. SalesClosing Stock

1. Opening Stock :- The closing stock of previous year is the opening stock of the current year . There is no opening stock in the first year of the new business concern . This is the first item shown in this account .

2. Purchases :- The auditor should see that actual purchases are shown after deducting the purchases returns & it includes cash as well as credit

purchases .

3. Rent & Carriage-Inwards :- He should see that rent & carriage expenses relating to purchases of raw materials are shown on the debit

side of trading account .

4. Productive Wages :- he should ensure that manufacturing wages are shown in trading account and salaries & wages are shown in profit &

loss account .

5. Import & Excise Duty :- He should see that import duty paid by importer or exporter and excise duty paid by producer are shown in this

account .

6. Royalty :- Royalty which is paid for production should be shown in this account .

Items on Credit Side shown in Trading Account

1. Sales :- The auditor should ensure that the amount of sales return is deducted from total credit as well as cash sales .

2. Closing Stock :- He should see that the stock is valued on the basis of cost or market value which ever is less .

Audit of Profit & Loss Account

While auditing the profit & loss account , the auditor should take to consideration the following points

a) Expenses & incomes shown in profit & loss account are related to current year or not .

b) Provision is made for unpaid expenses & un-received income in profit & loss account or not .

c) Provision is made for prepaid expenses & pre-received income in the profit & loss account or not .

d) Provision is made for doubtful debts & bad debts is written off or not .

e) Sufficient amount of depreciation is charged on fixed assets or not .

f) No capital expenditure is shown in this account .

g) Amount of receipts shown on credit side of this account is the actual receipts of the company or not .

h) The expenses shown on the debit side of this account are actual expenses of the company or not

Audit of Balance Sheet

The auditor should take into consideration the following items at the time of auditing the Balance Sheet .

i) Valuation of assets & liabilities of the balance sheet is made properly or not .

Ii) The assets & liabilities shown in balance sheet are in existence or not .

Iii) The assets & liabilities are shown in balance sheet according to company's act or not .

Audit of Capital & Revenue Expenditure

Classification of Revenue & Capital Items

1. Capital & Revenue Expenditure2. Deferred Revenue Expenditure

Items of Revenue Expenditure becoming Capital ExpenditureI) Raw Materials

II) Wages & SalariesIII) Repairs IV) Interest V) Freight

1. Capital & Revenue Expenditure :- Expenditure incurred on the purchase of fixed assets increasing the earning capacity of business ,

reducing cost of production etc. , capital expenditure where as an expenditure , the benefit of which is immediately exhausted in the

process of earning revenue is a revenue expenditure .

2. Deferred Revenue Expenditure :- Deferred Expenditure is the expenditure of which the benefit will be enjoyed in the succeeding

year .

I) Raw Materials :- Expenditure on the purchase of raw materials is revenue expenditure . But , if we are purchasing raw materials on the production of industrial

goods , it is called capital expenditure .

II) Wages & Salaries:- If wages & salaries are gives to produce industrial goods (fixed assets) it is called capital expenditure .

III) Repairs :- If expenses are incurred on repairs of old purchased machine they are called capital expenditure .

IV) Interest :- Interest on loan taken to start the business , is a capital expenditure .

V) Freight :- Expenses incurred on to bring fixed assets are capital expenditure .

Duties of Auditor while Auditing Capital & Revenue Expenditure

1. He should acquaint himself with the nature of the business .

2. He should check each item of expenditure .

3. He should see that the remaining part of the deferred expenditure is carried forward to the balance sheet .

4. He should make a proper distinction between deferred revenue expenditure & the exceptional losses due to earthquake , flood , riots etc.

5. He should examine the items of revenue expenditure becoming capital expenditure .

Unit – IV

Audit of Limited Company – Qualification of Company Auditor , Appointment of Auditor , A Qualification , duties & Audit Report.

As per section 224 of companies act , 1956 , every company must appoint an auditor or auditors to audit its final accounts . There are also certain specific provisions

regarding qualifications , disqualifications , rights , duties , liabilities & appointments in section 224 & 233 of

Companies Act , 1956.

First Auditor:

However, the first auditors of the Company are appointed by the Board of Directors within one month from the date of incorporation of a company. The auditors, so appointed, hold the office

until the conclusion of the first annual general meeting of the Company. If the Board fails to appoint the first auditor, the company may do so at a general meeting. The first proviso of

Section 224 (5) of the Companies Act, 1956, states that the company may, at a general meeting, remove the first auditor appointed by the board and appoint in its place other auditor of whose nomination a special notice has been given. As the auditor is appointed from the conclusion of

one annual general meeting until the conclusion of the next annual general meeting, the auditor shall not cease to hold the office in case the next annual general meeting is not held in each

calendar year as required by Section 166 of the Companies Act, 1956. Thus, he will continue in office until the next annual general meeting is actually held and concluded. He cannot be

deemed to have retired on the date when the meeting ought to have been held.

Annual Appointment

The members or shareholders are the real owners of the company . Hence , the appointment of regular auditor is considered every year in

the Annual General Meeting of the Shareholders . Every company at each annual general meeting appoints an auditor to hold office from the

conclusion of that meeting until the conclusion of the next annual general meeting . It means that at each annual general meeting ,

auditors are appointed . The retiring auditor is not reappointed at the annual general meeting if ………………

A) He is not qualified for reappointment .B) He has given the company a notice in writing for his unwillingness to be re